Ensuring Good Governance Across the GP, Funds and Portfolio Companies
This article first appeared in the EMPEA report “Governance in Emerging Market Private Capital: A Practical Resource for Investors and Fund Managers”. The full report can be found here.
At Mediterrania Capital Partners we are committed to the highest standards of corporate governance. Our governance framework is applied to our own policies and procedures at the GP and fund levels, and those of our portfolio companies, providing rigor, consistency, accountability, and transparency in the way we conduct business. We firmly believe there is a strong correlation between good corporate governance and delivering top-quartile returns.
Firstly, a GP is a regulated entity and so there are several statutory requirements to be fulfilled in order to maintain its licenses. These requirements may differ depending on whether it is domiciled in Mauritius, Spain, Malta, Luxembourg, Cayman Islands, etc., but the fundamentals are similar. In the case of GPs with a small team like Mediterrania Capital Partners, the challenge lies in how you deliver strong governance without incurring an overburden of costs. We have found that using a combination of inside resources and external providers is key in maintaining a good cost-quality balance. As a result, we have inside resources that control the mechanics of the GP and the fund, and external providers delivering highly specialized services at a very reasonable cost. There are good service providers in the PE industry, such as fund administrators, compliance officers, risk officers, accountants, etc., but even so, in order to ensure that our standards of good corporate governance are rightly applied, it is important to always have them overseen by our own team members who have a very strong financial and / or legal background.
We usually employ external auditing firms to conduct independent valuations of our portfolio companies and confirm their market value. Investors always look at returns, but most of the returns in this industry are unrealized, meaning that these portfolio valuations are key information that we give our investors on a regular basis. As part of our corporate governance framework, and in order to maintain the credibility of existing and potential investors, we always ensure that the valuation provided by our team, as well as by the external auditing firm, is a fair market value of our portfolio companies.
At Mediterrania Capital Partners, we have two controllers—an operations controller and a financial controller—for the fund and the GP. These controllers conduct regular checks with the fund administrators, compliance officers, external auditors, etc.
On the other hand, a process we have never externalized are the drawdown facilities—calculating how much each investor must pay into the fund or as management fees, and then making the capital calls to each investor accurately and precisely. We do this internally because this is an area where there is a high risk of potential mistakes.
At the portfolio company level, we see governance as a social operating system that covers all formal and informal touchpoints. Our formal process, therefore, begins with a General Assembly of shareholders to ensure everyone is informed. The second step lies in establishing a Board of Directors to define the company’s vision and strategy. Next, we have several executive committees that ensure the proper implementation of our governance process, which in turn helps to implement our value creation model. We believe in sitting on at least two of these committees: the remuneration committee, which creates alignment for company growth, and the audit committee.
Our governance framework also includes the three enterprise processes common to every company. First, the strategic process, which connects where the company is today with where it is going. Second, the human resources (HR) process—what kind of team we need to deliver on the strategic plan, and how we align this team with the strategy and interests of the PE fund. And finally, the budgeting process, which matches resources with strategy.
Here at Mediterrania Capital Partners, we find that combining these formal operating processes with informal touchpoints with members of the portfolio company helps us achieve our high standards of corporate governance. We often come across highly valuable information through the informal channels.