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  "sourcesContent": ["import{jsx as e,jsxs as t}from\"react/jsx-runtime\";import{Link as a}from\"framer\";import*as n from\"react\";export const richText=/*#__PURE__*/t(n.Fragment,{children:[/*#__PURE__*/e(\"h3\",{children:\"Introduction\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"em\",{children:\"In this interview, we had the privilege to speak with Professor Michael Imerman, an Assistant Professor of Finance at the Paul Merage School of Business, UC Irvine, where he also serves as faculty director of the Master of Finance program.\\xa0\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"em\",{children:\"Our conversation covered a range of topics, from the promise quantum computing holds for improving credit risk management to the competitive position of the US regarding fintech innovation.\\xa0Dr. Imerman\u2019s areas of expertise include banking, risk management, financial regulation, financial data science, and fintech innovation. He is in the final stages of writing The Economics of FinTech, a book to be published later this year by MIT Press. Recently, Dr. Imerman spent a sabbatical with the FinTech Group at the Federal Reserve Bank of San Francisco. Additionally, he regularly advises and consults for companies ranging from startups to large financial institutions.\\xa0\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"em\",{children:\"Professor Imerman currently serves on the editorial advisory board of the Journal of Financial Data Science and was previously an associate editor for the Journal of Risk Finance. His research has been published in numerous journals, including the Journal of Business & Economic Statistics and the Journal of Banking & Finance.\\xa0Prior to UCI, he was Associate Professor of Finance at the Drucker School of Management at Claremont Graduate University, where he also served as Co-Director of the Financial Engineering program.\\xa0\\xa0Before his career in academia, Imerman worked as an analyst on Wall Street supporting high-grade corporate bond and credit deriva\"}),\"tives traders. \",/*#__PURE__*/e(\"em\",{children:\"He received both his PhD in Finance and Economics as well as his BS in Finance from Rutgers University.\\xa0\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Good morning, Michael. Thank you very much for joining us. You recently served as a visiting scholar at the San Francisco Fed. Coming most immediately from academia as well as prior posts in the private sector, did working at a regulator provide a new perspective on issues you had previously explored from other angles?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"MICHAEL IMERMAN\"})}),/*#__PURE__*/e(\"p\",{children:\"My stint at the San Francisco Fed helped me understand challenges that confront regulators in trying to ensure financial stability while also promoting innovation. The challenge is especially acute in the current environment as digital transformation and the advent of fintech overhaul traditional bank business models. It\u2019s a delicate balance.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"One thing I learned there was that financial institutions should not view regulators as adversaries as fintech innovation unfolds, but rather as partners that can help them understand the risks of emerging technologies and prepare them for changes that are beginning to transform the financial system.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"How could a financial institution benefit from a partnership with a regulatory agency?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"MICHAEL IMERMAN\"})}),/*#__PURE__*/e(\"p\",{children:\"The San Francisco Fed has a dedicated fintech group, housed within supervision and credit. It functions as an internal think tank that provides support to bank examiners as well as supervision executives. The group explores the disruptive potential of emerging technologies on traditional bank business models, along with associated risks.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So the way I saw it - and I think many of my colleagues at the Fed shared this view - is that there was a partnership to be forged by also sharing these insights with the banks that the San Francisco Fed supervises in the Twelfth District.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"When you think of the Fed supervising banks, especially the Federal Reserve Board, which is based in Washington DC, you think of these large bank holding companies like JP Morgan and Citi.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"In the Twelfth District, there certainly are some larger banks, such as Wells Fargo. But an overwhelming majority of the banks in the district are smaller regional or community banks. And in recent years, these institutions have felt pressure to adopt new technologies.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Can you expand a bit on some of these new technologies?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"MICHAEL IMERMAN\"})}),/*#__PURE__*/e(\"p\",{children:\"One example is blockchain technology, which was a particular focus of attention a couple of years ago. The banks were asking: \u201CShould we roll out crypto trading platforms? Should we integrate distributed ledger infrastructure?\u201D The examiners would then come back to us at the fintech group and relate these questions that the banks had. At the same time, the examiners themselves conceded that the new technology didn\u2019t fit into the existing risk assessment protocols. So the fintech group would provide guidance - both to the examiners on updating these protocols and to the banks that had these questions.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Another area that I was very involved in was the adoption of AI and machine learning, as well as alternative data. Many fintech startups located in San Francisco were looking to partner with banks or to secure them as clients. But they first wanted to understand the regulatory ground rules for forging these partnerships. Questions they had included ones surrounding the use of alternative data. For example, to what extent can you use someone\u2019s record of payments for cell phone bills and Netflix subscriptions? Can you use that data to evaluate creditworthiness?\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"The easy thing to do is prohibit use of these data sources, right? But that would inhibit both innovation and financial inclusion. People with \u201Cthin credit files\u201D - a short or small credit history - or without a credit score altogether typically don\u2019t get approved for loans. But incorporating alternative data that shows whether they are paying their monthly subscriptions on time might give you enough information to evaluate their creditworthiness. It might also help you identify some other risk factors that traditional models are missing.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"We also considered the problems inherent with evaluating \u201Cblack box\u201D models that derive from AI and machine learning. There is regulatory guidance for model validation and model risk management for traditional models of bank risk but AI/ML models don\u2019t fit comfortably within that guidance. How then can we evaluate the riskiness of these models? And how do we then educate the examiners who must go in and make sure that these models are properly documented and valid?\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Where does the US stand in terms of fintech innovation? Are there areas where the US lags other countries? What types of things can everyday people more easily do overseas compared to the US?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"MICHAEL IMERMAN\"})}),/*#__PURE__*/e(\"p\",{children:\"There are some areas within the FinTech ecosystem that the U.S. has a lead in, and other areas where we seem to lag, or have lagged but are starting to catch up.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"One example where we had fallen behind is payments. Many Asian countries have been successfully using mobile and contactless payments since 2010. As late industrializers, they\u2019ve had less invested in legacy systems.\\xa0\"}),/*#__PURE__*/t(\"p\",{children:[\"However, in the midst and aftermath of COVID, the US has started to catch up, with greater adoption of contactless payment solutions. In my upcoming book, \",/*#__PURE__*/e(\"strong\",{children:\"The Economics of FinTech\"}),\", to be published by MIT Press later this year, there\u2019s a chapter on payments technologies, which my co-author Frank Fabozzi and I discuss in the context of Peter Drucker's framework on the seven sources of innovation. And one of those sources of innovation is the unexpected. Something emerges that nobody predicted but that forces society to innovate.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"And in regards to payments technology and contactless payments, the constraints of the pandemic era definitely served that function. For example, people were no longer dining out and using cash to tip waiters. Instead, delivery drivers were leaving food outside of homes and people were forced to tip in a contactless way. The preference for non-physical forms of payment was also evident when you ventured out to stores or had to manage curbside deliveries and pickups.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"You mentioned that the US has a lead in certain areas. Can you give us an example?\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"In past articles, I\u2019ve examined the extent of innovation across different sub-sectors or functions within the US financial services industry, such as insurtech, risk management, and payments, and mapped the prevalence of emerging technologies, such as AI, big data, and quantum computing in each of those sub-sectors.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Within this matrix, payments has indeed been slow to embrace technology. In contrast, the adoption of digital technologies has been more thoroughgoing in wealth management. Here, robo-advisors construct portfolios after assessing multiple factors, including a client\u2019s level of risk aversion. Traditionally, a human financial advisor would move towards the same goals by asking straightforward questions about the client\u2019s attitudes towards money, savings, and investing. For example: \u201CHow would you react to a 10% loss in your investment portfolio?\u201D The weakness of this approach is that clients are prone to answering in ways they imagine the financial advisor would consider \u201Cright\u201D.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Instead, robo-advisors take a more indirect approach. By leveraging AI and drawing upon principles from behavioral economics, the robo-advisors may ask questions that have nothing to do with finance but that still correlate with the ultimate information needed to build a suitable portfolio for a client. For example, in the middle of the standard questions, the robo-advisor might also ask: \u201CIt\u2019s a clear 70-degree day. What's your ideal way to spend the afternoon?: A) Going for a walk, B) Going on the tallest roller coaster in a theme park, C) Going skydiving, D) Going boating, E) Sitting in a coffee shop.\u201D\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"The question is still trying to uncover a client\u2019s attitude to risk tolerance. But by removing money from the question framing, the robo-advisor can elicit more honest answers. I suppose a human advisor could also ask the same indirect questions. However, differences lie in the scale robo-advisors can exploit to improve their algorithms and the dynamic flow of questions they can pose in response to previous answers. More importantly, as a software-driven tool, robo-advisors can democratize wealth management and offer economical investment guidance to millions of people unable to afford a traditional advisory service.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So, the US has definitely outpaced other countries in applying technology to wealth management. It began with start-ups like Wealthfront and Betterment and has since spread to more established firms \u2013 the so-called incumbents \u2013 such as Fidelity and Vanguard.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"You mentioned quantum computing earlier. As someone that's done a lot of work on risk over the years, what promise does quantum computing have for improving risk modeling at financial institutions?\\xa0\"}),/*#__PURE__*/t(\"p\",{children:[\"Let me preface this by saying that of all the emerging technologies in the \",/*#__PURE__*/e(a,{href:\"https://link.springer.com/article/10.1057/s41260-020-00163-4\",openInNewTab:!0,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"fintech ecosystem\"})}),\", I'm most excited about quantum computing.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"By exploiting properties of quantum mechanics, specifically entanglement, superposition quantum computers can carry out in minutes calculations that would take classical computers decades or centuries.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"I\u2019ll try and describe one practical application of the technology.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Value-at-risk, or VaR, is one of the most important risk models used on Wall Street. To calculate it, you need to build a probability distribution for weekly, monthly, quarterly, or yearly P&L. One approach to doing that is using Monte Carlo simulations. Now, if you have a portfolio that has forty different positions in it, mapping out all the possible Monte Carlo trajectories of the forty assets over the next week, month, quarter, or year can take many hours. So a lot of these models are run overnight and the risk managers and traders come back the next morning to see the VaR. Now, the problem is that by the time the market opens, the risk profile has changed - and will continue to change throughout the rest of the day.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"However, Quantum Monte Carlo could theoretically run all these trajectories in parallel simultaneously in a matter of minutes. The engineers haven't actually done it yet, but a lot of very smart people are working on the problem. And when they succeed, a trader or risk manager could get an updated VaR in real time. No classical computer could hope to accomplish that. However, I should also note that the experts I've spoken with have told me we're probably, at best, five to ten years from widespread commercialization of quantum computing technology.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"When you get called in to evaluate the risk models used by private firms, whether established companies or start-ups, what are some of the fundamental principles you bring to bear in your assessments?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"MICHAEL IMERMAN\"})}),/*#__PURE__*/e(\"p\",{children:\"The British statistician George Box once remarked: \u201CAll models are wrong, but some are useful.\u201D And even though he was a statistician referring to statistical models, the statement very much applies to quantitative finance models.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"\\xa0The models we use in quantitative finance and financial engineering are all abstractions of reality. It\u2019s like looking at a geographic map printed on paper, which lets you see a general spatial representation of the continents, and depending on the map, other information, such as the earth\u2019s topography or the delineation of political entities. You might also then be able to draw certain inferences from the spatial representation. For example, Argentina is located in the southern hemisphere. It therefore experiences summer from around December to February and you could deduce that it\u2019s probably warmer in Buenos Aires now than in New York.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"But a map is just a model. It\u2019s not going to perfectly depict reality. In addition to the problems associated with projecting a sphere onto a 2-D plane, a map cannot capture changing political borders, growing urban areas, or dynamic landscapes, such as the continual expansion of the Big Island in Hawaii. It will also fail to pick up on the sorts of details provided in 3-D renderings or street-level displays like Google Maps. Finally, the presence of microclimates and the fact that New York and Naples, Italy are at the same latitude show that our ability to make inferences related to the weather is quite limited.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Now, let\u2019s return to Box\u2019s quote: \u201CAll models are wrong, but some are useful.\u201D So a financial model can be helpful and gives insights from which we can draw inferences. However, if, for example, you want a model to predict what Microsoft\u2019s stock price is going to be on a certain date next year, it's going to be wrong. It's absolutely going to be wrong. If it gets it right, it's sheer luck.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So, although we can\u2019t expect an exact price prediction, we can still look to it for some insights: Is it, relatively speaking, overvalued or undervalued? Are the expected returns consistent with the level or risk? Then, based on these insights, we can make an informed decision about whether we want to buy, sell, or hold Microsoft stock. This is, of course, an oversimplified example, but it illustrates the fact that a well-researched model can provide insights to the user but that the model will always come with inherent limitations.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"A second principle that should support any assessment is that a model is only as good as its weakest assumption. A model will necessarily rely on assumptions. In trying to forecast Microsoft\u2019s stock price, we might assume that Microsoft is going to keep its debt structure constant over the next year or that it will continue to pay out a certain percent of its income as dividends.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So when we validate a model, whether it's at a startup or a large, incumbent financial institution, we try to test the validity of their assumptions. What if you relax an assumption? What if you replace one assumption with another?\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Just like civil engineers stress test a bridge\u2019s design by multiplying the assumed number of cars that will cross it during a day, we do the same thing when we're validating financial models. What if volatility goes from 20% to 80%, or from 20% to 200%? Does it break the model or does the model still work?\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Finally, the last step in the model validation process after we\u2019ve stressed the model is to see whether the outputs make sense. I call this the \u201Csmell test\u201D. Does it smell funny at the end of the day? If you get negative stock prices as an output, that\u2019s probably a sign that something\u2019s amiss with the model.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Can you talk about some of the evolving trends in risk management?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"MICHAEL IMERMAN\"})}),/*#__PURE__*/e(\"p\",{children:\"There\u2019s a plethora of risk types that financial institutions manage, including credit risk, market risk, liquidity risk, and operational risk. In addition, the models themselves present a risk if they\u2019re poorly constructed, misused, or not well understood. So model risk management is an area that\u2019s grown alongside the traditional risk types.\\xa0\"}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(a,{href:\"https://www.federalreserve.gov/supervisionreg/srletters/sr1107.htm\",openInNewTab:!0,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"SR 11-7\"})}),\" is the regulatory guidance for banks that the Federal Reserve has developed in regards to model risk management. And SR 11-7 has been a pretty well-understood and accepted set of guidelines.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"Emerging technologies however present everyone with a new challenge. The \u201C11\u201D in SR 11-7 stands for the year 2011, the year the guidance was written. That was thirteen years ago, before financial institutions had even begun to anticipate AI and ML-driven risk models. Instead, SR 11-7 was developed with typical bank risk models in mind, such as capital adequacy models and derivative pricing models.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So, how to handle AI/ML risk models is the question that both academic researchers and regulators are heavily invested in right now. Should we tweak the current model risk management guidelines to accommodate AI/ML models? Or should we devise a whole new set of guidelines? Forging solutions to these challenges is something that I'm very much involved in and excited about.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"I was wondering if you could comment on the spate of bank failures that occurred in the first half of 2023. How would you apportion blame among the banks and the regulators? Could you assign a performance grade to the regulators?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"MICHAEL IMERMAN\"})}),/*#__PURE__*/e(\"p\",{children:\"Well, I don't think anybody feels as though the regulators did a good job in the heat of the crisis. However, the later innings were handled a bit better. One could even arguably applaud the US financial regulators, specifically the Fed in partnership with Treasury, for the initiatives they put into place after the failures. By finally providing liquidity to the regional banking system, the panic subsided and a more widespread crisis was averted.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"But in the lead up to and during Silicon Valley Bank\u2019s failure, I don't think anybody would say that the Fed handled it well. In fact, it was a giant mess.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"I should note that I had already left the Fed at this point. So my crisis-related observations do not come from an insider's perspective.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So, again, there were clear shortcomings at the Fed. In the prelude to the breakout of the crisis, the Fed should definitely have been on top of SVB more. Still, I can\u2019t point the finger entirely at the regulators. Much of the blame also surely lies with SVB\u2019s management.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Where exactly did SVB go wrong?\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"For SVB, it was a classic case of mismanagement of interest rate risk. Taking a step back even further, SVB's problems arguably began when the tech sector - the community to which it catered -- slowed down in 2022. The commercial banking business model is to borrow money short term from depositors and lend it out long term to borrowers. SVB was the bank for the innovation economy. On the one hand this was a brilliant and unique market position; one that I had admired throughout my career studying innovation in the finance sector.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:'However, this also exposed them to concentration risk: too much business concentrated in a specific industry. So when the tech sector slowed down after the massive surge during COVID, there was less demand for venture loans from startups. SVB still had to do something with the deposits it was holding to earn a return. The spread between the interest that banks pay on deposits (interest expense) and the interest that it makes on assets such as loans and bonds (interest income) is called the Net Interest Margin. SVB decided to invest those deposits into \"risk-free\" government securities.\\xa0\\xa0\\xa0'}),/*#__PURE__*/e(\"p\",{children:\"However, with interest rates so low they had to go farther out on the yield curve to long-term Treasury bonds, rather than short-term Treasury yields. Aside from having to wait many more years for these bonds to mature, longer-term bonds are more sensitive to interest rate movements.\\xa0 And the relationship is inverse: as interest rates go up, bond prices go down. So when the Fed began raising interest rates in 2022, those long-term bonds into which SVB had just dumped billions of dollars lost a lot of value.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"The other thing, as I mentioned, is it would have had to wait decades to get the principal back. So when the clients of SVB, again due to the tech sector slowdown, started tapping into their deposits \u2013 what we would call deposit burn \u2013 the bank had to sell the Treasury bonds at a loss to meet the cash needs of its clients. They announced in early 2023 that they needed to raise fresh capital to cover the losses. This then triggered a sell-off of SVB stock and - in what proved to be the final death-blow - a run on the bank where depositors withdrew their funds en masse.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"All banks have interest rate risk models which should tell them (a) how much exposure they have, and (b) suggest hedging strategies for excess interest rate exposure.\\xa0 For (b) there are very effective tools \u2013 interest rate derivatives \u2013 to hedge the risk.\\xa0 Many banks use them and when your bonds and loans lose value because of an increase in interest rates, those hedges pay off handsomely.\\xa0 However, with SVB, even when the models were flashing red, saying you're got too much interest rate exposure, they failed to hedge effectively.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Are there lessons from that failure to hedge effectively that other financial institutions could benefit from? What were the specific sources of that failure?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"MICHAEL IMERMAN\"})}),/*#__PURE__*/e(\"p\",{children:\"There\u2019s a very important point here: SVB did not have a chief risk officer in place at the time to make the calls on hedging. Instead, the hedging decisions wound up in the lap of other C-level executives, none of whom had a specific background in risk.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Accounts differ as to whether the CRO was on leave at the time or had already stepped down. Regardless, the crucial point is that in either case, SVB should have had an interim CRO in the role and in a position to say \u201COK, we have an excessive amount of interest rate risk, but tools exist to hedge that and we need to use them.\u201D\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"SVB had excess interest rate exposure due to their large investments in long-term treasury bonds. They used interest rate swaps to hedge that exposure, but they had expired in July the previous year.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"The head of risk management, who was the highest ranking risk-focused staff member in place at the time and who would normally report to the CRO, actually noted this.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Now, when a hedge expires, you routinely roll it over and take out a new policy. It's like with car insurance. When it expires, you pay the premium and take out another six months of insurance. You don't let it expire and drive around without coverage. But that's exactly what SVB did.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"And interest rates indeed went higher. And all their long-term treasury bonds, which they had a lot of, became worth a lot less.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"From what I understand, allegedly, certain C-level executives thought there was nothing to worry about because interest rates were at the highest they had been in almost two decades. Hedging that interest rate exposure also wasn\u2019t cheap. So the head of risk management was outranked and SVB decided not to roll the hedge. Sure enough, two months went by and they lost\u2026 big.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"They were out several billion dollars on those treasury bonds. And so my understanding is that the Fed sent memos to SVB leadership about the issue before the losses occurred. In my opinion, the Fed should have been more aggressive. But, as you can see as I've related this story, most of these mistakes fall on SVB's leadership.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Thank you for your time and insights, Professor Imerman. We're eagerly awaiting the publication of your book and the continued impact of your work. It's been a true privilege to discuss these pivotal topics with you.\"})})]});export const richText1=/*#__PURE__*/t(n.Fragment,{children:[/*#__PURE__*/e(\"h3\",{children:\"Introduction\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"em\",{children:\"As part of our interview series featuring senior leaders with extensive experience in the debt markets, we are delighted to speak with Josh Joshi, Executive Chairman of AtlasEdge and an Operating Partner at DigitalBridge. He has over 20 years of experience building value in the digital infrastructure sector and has held senior positions at several multinational companies.\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"em\",{children:\"Prior to joining DigitalBridge, Josh served for over a decade as CFO of Interxion, a leading provider of carrier- and cloud-neutral data center solutions across EMEA markets, which was acquired by Digital Realty in 2019. He also previously served as CFO of TeleCity plc, a pan European carrier-neutral data center business, and co-founded and served as CFO of Storm Telecommunications Limited, a private-equity-backed U.S. and pan-European voice, data and network service provider. Earlier in his career, he spent eight years in professional practice as an accountant, primarily with Arthur Andersen.\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"em\",{children:\"Josh holds a bachelor\u2019s degree in civil engineering from Imperial College, London and is a Fellow of the Institute of Chartered Accountants in England and Wales.\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"}),\"\\xa0\",/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"Josh, thank you so much for taking the time to speak with us today. I hope we\u2019ll have the chance to examine several topics related to corporate finance, AI, and the rapidly growing data center industry.\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"To start us off, can you please describe your role as executive chairman at AtlasEdge? I suppose the role of executive chairman might be somewhat comparable to the executive producer of a film. It\u2019s not always immediately apparent to those outside the industry what it is they do \u2013 and the role can also vary quite a bit, depending on the film or company.\\xa0\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"The best way to term my role as executive chairman is a general fixer.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"However, before reaching this point, I spent a lot of time in the early days helping shape the company's direction and assemble what, in our case, has turned out to be an extraordinary team. As AtlasEdge grows and progresses, I apply challenges to the team, and we work our way together through the various issues of the day and any roadblocks that might arise when tackling those challenges. The key to the EC role involves acting as both an insider and an outsider, stepping in and engaging in a dynamic way when needed, and at other times serving as a sounding board on more strategic, high-level issues.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Finally, it might help if I quickly contrast the EC and chairman functions, since the two often get confused. The latter is chiefly concerned with board matters, while the former plays a much more hands-on role.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"You just touched upon the strategic aspect of the position. Can you perhaps go into detail about how strategy applies to the data center world? Data centers are generally shoehorned into the infrastructure sector. How or where does strategy come into play in this context?\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"Well, what's interesting is that there are two components to data center businesses. One component is strategic and another which is more concerned with civil engineering and the sorts of issues we might typically associate with infrastructure.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"Strategy in the data center context is focused on understanding developments in the highly dynamic marketplace that our customers operate in. And our customers encompass the big platform companies, network companies, content delivery networks, as well as enterprises trying to move to the cloud and incorporate AI. We really need to understand each customer so we can provide them with a proper, curated physical environment.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Meanwhile, the civil engineering aspect focuses on building power and cooling infrastructure. We have, for example, HVAC engineers - extremely talented people - that have backgrounds in running nuclear facilities.\\xa0\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So, on the one hand, I pay a lot of attention to the strategic aspect of understanding what customers are looking for. However, across the board, I also need to make sure we're staying nimble, allocating capital correctly, installing efficient processes, and helping us to avoid pitfalls that could take place in any business, whether infrastructure or non-infrastructure.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"I'm curious about the transition from your prior CFO roles.\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"As executive chairman, you\u2019re no longer confined to one function, like finance. Instead, you\u2019re exposed to the full set of corporate divisions, including marketing, sales, and HR, among others.\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Was there a certain complexity, or difficulty, about the work involved in these non-finance areas that you gained a new appreciation for?\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"Historically, CFOs are often the ones challenging every area of the business \u2013 in relation to costs or hitting budgets. So, for me, it\u2019s vitally important that CFOs have a good understanding of what they\u2019re challenging - including critical assignments like talking to and engaging with customers.\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"In my experience working at start-ups with smaller teams \u2013 I\u2019ve been fortunate to have had a hand in strategy that involved sales, HR, legal, and other departments. And this background has helped me appreciate that understanding what customers need is critical. It\u2019s taken a while to develop both the appreciation for customer interaction and the aptitude to be able to carry it out. And it certainly wasn\u2019t something I learned overnight but had to learn gradually as I became a more senior CFO and then spent more time here at AtlasEdge.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE \\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"I\u2019d like to turn to the process of raising funds in the capital markets. You\u2019ve helped shepherd through more than a few bond issuances in your career. Can you tell us about some of the challenges you faced?\\xa0\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI \\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"Well, in my previous life at Interxion as CFO, we were repeat issuers of bonds. I had left it to better minds than myself to deal with the more transactional details of bond issuance. But the bit that I found really hard \u2013 and where I devoted most of my energy \u2013 was in educating and spending time with credit investors to help them understand the investment thesis behind data centers.\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"When I started, data centers weren't considered on their unique merits, or as a separate investment category. They were put in a box and lumped together with shopping centers and other components of the real estate sector.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"I believe we issued the very first European data center bond. And so, while they were certainly poorly understood at the time, that lack of understanding persists today to a degree. Although awareness of the market dynamics that support data centers is now growing, many people don\u2019t fully appreciate how fundamentally extraordinary they are \u2013 and how they differ from traditional real estate and infrastructure plays.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Data centers provide investors access to an investment that is at the very foundation of online activity. It allows you to be agnostic regarding the popularity or success of any of the particular apps that operate above the base layer, and instead benefit from the general \u2013 and massive \u2013 growth profile of all things internet.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\"}),\"\\xa0\",/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"It must be getting a bit easier?\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"Well, something important has changed and it\u2019s made my job \u2013 making the case for data centers \u2013 far easier.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"The industry \u2013 and the firms I\u2019ve been involved with \u2013 now have a track record to point to, and we can demonstrate remarkably steadfast returns, in line with the uninterrupted growth in online activity.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Through multiple crises and severe credit issues that have wracked the European and global markets, data centers have continued to deliver consistent, positive results. Just looking at Interxion, we sequentially increased revenue and EBITDA every quarter without fail during my eleven years there. That it was never shaken by wider market turmoil that affected many of the customers who used our facilities speaks to the unique combination of growth and stability that data center investments can provide.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE \\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"I\u2019m hoping you could give us an insider\u2019s view of the finance function and specifically how you think AI might affect internal finance operations. Every department in the enterprise will need to wrestle with AI. What are some of the issues particular to finance? Will the impact vary across the sub-divisions within finance?\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"I'm really excited by what AI can do and the potential ways we can harness it within a finance environment. It will have an impact across the board in audit, and all the way through to tax and treasury. However, because many of those areas are process-oriented, I think we can probably already make out the contours of the benefits, or efficiencies, we can expect to realize.\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"In contrast, FP&A is the area I\u2019m really interested in. It\u2019s where I think AI has greater potential to move the needle in terms of augmenting our strategic thinking and allowing us to approach things differently.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Having said that, we must stay mindful of the dangers or pitfalls AI could open up. One thing I learned early on as an accountant / CFO is to never believe my own spreadsheets; it\u2019s also necessary to step back and apply common sense. We mustn\u2019t defer to AI as the solution to every problem. It won\u2019t be. We will lose something valuable if human intervention and critical thinking are put to the side.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"In terms of AI\u2019s wider impact on AtlasEdge beyond the finance function, can you describe your mood: more apprehensive or excited?\\xa0\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI \\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"Excited off the charts. \\xa0\",/*#__PURE__*/e(\"br\",{}),\"\\xa0\",/*#__PURE__*/e(\"br\",{}),\"There is a tsunami of demand on its way to data centers.\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"While some might argue that AI will compete with data centers, I believe the two are symbiotic and will work together.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Let's go back to first principles and break down what we \u2013 as a data center business \u2013 are trying to do and what AI is doing.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"We ingest inputs from our customers and use silicon and transistors to generate outputs.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"All those bits of silicon need homes - and those homes are data centers.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"AI is creating this massive demand for compute architecture \u2013 and critically, that architecture needs to be on, operating effectively on a 24/7 basis.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"The only home for AI to reside; the only plumbing or engine that will make it work is in a data center.\\xa0\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So, there\u2019s a symbiotic relationship that is going to be very interesting to watch over the next 5 to 10 years.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Of course, we\u2019ve seen this movie before. Back around 2008-11, the concept of the cloud started to emerge in full force. Everyone was thinking about the cloud and what they were going to do with it. As I mentioned earlier, during my time at Interxion, we issued the very first data center bond deal in Europe in 2011 and it was carried out to fund a cloud deployment. Since then, cloud computing has exploded - but I see AI exhibiting exponentially greater demand.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"Well, you\u2019re on the frontlines. Can you give us a bit more perspective on that? Why do you think AI will so markedly outstrip the cloud in terms of the demand it places on distributed computing?\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"There are more than a few reasons, but I\u2019ll point to two quickly.\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"First, as enterprises move to the cloud, it doesn\u2019t necessarily create net new demand for compute architecture. The cloud is about taking existing computer workload that runs in an enterprise\u2019s computer room and transferring it to the cloud. The impetus here is not about creating new workloads, but transferring mostly existing workloads to create greater efficiency. In other words, an outsourcing of workloads from an \u2018in house\u2019 data centre to a cloud scale data centre.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"But with AI coming down the track, we\u2019re seeing something that's quite different. What makes it so exciting is that it\u2019s not simply transferring or cannibalizing existing frameworks. It represents completely net new demand to the compute ecosystem.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Furthermore, AI brings with it far more taxing and time-sensitive demands. When we think of increased computing loads today, we probably think of real-time media and communications, such as video streaming and online group meetings. But, even under the stresses incurred by the whole world going remote in the early days of the pandemic, the existing architecture held up and handled things pretty well. Everyone was able to rely on the in-place infrastructure to run their businesses. The infrastructure of today more than adequately fulfills that need for real-time communication and the overall way people use the internet today.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"But AI changes all of that.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"It's no longer humans talking to humans through a computer interface. In that context, latency up to 500 milliseconds would be acceptable.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Now it's compute talking to compute and here, suddenly, the response times are increasingly measured in single digit milliseconds.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So, these two factors \u2013 net new demand coupled with more urgent technical requirements - will drive an exponential increase in the need for compute architecture.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"You touched earlier upon the view held by some that AI poses a threat to the data center business. Can you talk about that in more detail? What specifically is the risk these people foresee and why don\u2019t you share their view?\\xa0\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI \"}),\"\\xa0\",/*#__PURE__*/e(\"br\",{}),\"Well, let\u2019s use an infrastructure analogy. Let\u2019s say you have an airport. And you then treble the number of planes that can fly into and out of the airport and you also make the planes more intelligent. Those planes, however intelligent and well-manufactured they are, are still going to need to land and take off at an airport.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"Now, coming back to data centers: AI can help manage data center architecture more effectively. But, at the end of the day, you still need a physical structure in place.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Having said that, there are people who argue that AI will one day be able to design a silicon chip that doesn't use as much power as the chips of today. Therefore, a data center that once used a silicon chip that needed a kilowatt of power to manage \u2013 let\u2019s say - a terabit of data, might, post-AI, only need a watt of power to manage the same terabit of data.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Now, if you're a data center operator that's just in the business of selling kilowatts, you have a problem.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"But if you're a data center business that concerns itself with figuring out the required combination of kilowatts, network type, and response times for the workloads that you're managing, then you have something that\u2019s valuable with or without AI.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"And that value compounds when you build an ecosystem around the AI operators, cloud operators, and enterprise and network operators located in the same building.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"The value of that is not measured in kilowatts but in the strength of the community that you\u2019ve assembled in the same environment.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"The evidence suggests that AI will play a critical role in data center management and developing the data centers of the future, but it will not supplant them.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE \\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"Governments are just now starting to consider AI from a regulatory perspective. Media attention mostly focuses on the intellectual property and ethical angles. As an executive at a firm providing the plumbing for AI, which regulatory issues do you think will come to the forefront?\\xa0\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\"}),\" \\xa0\",/*#__PURE__*/e(\"br\",{}),\"This is an important question. The single biggest issue in the data center industry today is on the regulatory front. We talked earlier about the tsunami of demand coming for AI. Well, that demand will bring with it a host of questions related to energy consumption and sustainability. Europe is leading the way in terms of thinking through these issues, partly because we have less secure sources of energy than the US does. There\u2019s also less physical space available so finding locations for data centers is difficult. There simply aren\u2019t undeveloped twenty acre lots out there on top of which we can put a 400-megawatt data center in Europe today.\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"I think the data center world in Europe will soon reach a critical juncture as it tries to figure out how to manage the demand fast coming its way. Everybody \u2013 and that includes governments as well as those they represent - wants to see the benefits of AI. Everybody wants to see the benefits of technology. But we must understand the real cost of that in terms of the underlying architecture required to support it.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"As AI consumes more energy, all the parties here \u2013 industry, governments, and society \u2013 are going to need to come together to address some crucial sustainability-related challenges.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"And we in the data center industry are certainly going to need to make significant strides towards becoming more energy efficient.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"The market dynamics for digital infrastructure - high demand, low supply - are quite favorable now.\\xa0\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"But let's envision a less favorable environment: what levers could a data center business pull to still deliver decent performance? What separates the skilled from the lucky when the tide rolls out.\\xa0\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\"}),/*#__PURE__*/e(\"br\",{}),\"This question also touches on several important areas. And it all goes back to customer knowledge and allocating capital appropriately considering that knowledge.\\xa0\\xa0\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"I\u2019ll reiterate what I said in the beginning: you've got to understand what your customer is looking for. You need to be honest and rigorous about that. No one data center is going to be suitable for all customers. You need to balance the three parameters of location, price, and performance to determine the suitability of a data center to an application. You need to figure out where you stand in that equation and then position yourself accordingly. That strategic thought process - that rigor - needs to happen.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Because if you don't do that, then you won\u2019t know the reasons your customers are in your data center and why it is they want to pay you. And believe me, it\u2019s not because you have a sleek, attractive-looking set-up.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"And so allocating capital in a thoughtful way that is led by your customer is critical. In fact, it\u2019s the only way that I know how to deliver decent performance in variable environments.\\xa0\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"You've worked for both startups and established companies. People often regard startups as hyper-efficient organisms that can accomplish goals faster; where personnel are given blissful freedom to break conventions and cut through red tape. Meanwhile, established companies are seen as hidebound, slow-to-adapt sloths.\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"You have experience in both settings.\\xa0\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"To give established companies their due, are there strengths they possess that you don\u2019t think receive proper recognition? Do they have some positive qualities that startups could or should perhaps emulate?\\xa0\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI \\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"Well, I\u2019ve been lucky to work in a variety of environments. That includes startups, larger entities like Arthur Andersen, and Interxion, which wasn\u2019t a start-up when I joined, but still at a very early stage in its development.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"But before I answer your question directly, I should say that successful firms at any stage share a lot in common. What\u2019s essential \u2013 and what good firms succeed at regardless of size - is getting the culture right. There are certainly plenty of instances of startups, as well as larger firms, with toxic environments.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"With that being said, a problem that seems more specific to startups is a sort of overweening vision or overconfidence. A startup can become convinced of its forward-thinking golden vision in a way that leads them to fail to consider alternative paths or, just as damaging, to overpromise to customers. Startups can have a drive towards perfection that can be admirable in some contexts. But just as often, the perfect can be the enemy of the good, and promising outcomes are ignored in favor of grandiose futures with less chance of success.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Meanwhile, the reality is this: If you can figure out how to be thoughtful and accountable; to be fair about the way you engage with your employees and customers - and you simply do what you say you're going to do - altogether, that can have remarkable impact and you can drive growth in a manner that makes a lot more sense.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Forthrightness \u2013 humility about what\u2019s possible - allows you to build sustainable, long-term relationships and to deliver more assured, quality results to customers.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE \\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"I\u2019d like to ask about a different type of meaningful relationship. On a personal level: can you tell us about any mentors that helped guide you on your way up and any specific advice they may have given you?\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI \\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"There were two people that made an especially big difference.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"The first is someone I came to know during the boom-and-bust cycle that shook the telecom industry at the turn of the century. It was 2002 \u2013 and tech overall was undergoing a major slump. I was serving as the CFO of a telecoms company that filed for bankruptcy. I was in my early 30s. And I thought that my career was finished.\\xa0\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:'My mentor then was someone called Bruno d\u2019Avanzo - an incredible talent in the telecoms industry. And he proverbially slapped me across the face and essentially said, \"Wear this as a badge of honor. These experiences where you go through immense difficulty are important. It\u2019s a crucible of war and it\u2019s these hard moments that will enable growth. You\u2019ll eventually come out on the other side \u2013 and what you learn from this experience will be tremendously valuable; more valuable than any MBA.\u201D\\xa0\\xa0'}),/*#__PURE__*/e(\"p\",{children:\"And then our investors gave me some money to be able to take a year off, which is incredible given that they had just lost a lot of money as a result of my poor strategy.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"During that year off, I had time to reflect, and I came to appreciate that guidance as the best advice I had ever received from a mentor.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Now the other mentor helped initiate me into the data center industry. I can't lay claim to any great epiphany when it came to understanding how to build great data center businesses. Instead, I was educated by a gentleman by the name of Dave Ruberg, who was an industry titan in the data center world.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"He could be really difficult to work with, and for. He fired me three times over the eleven years I worked with him. It was that kind of a relationship. Still, he was a huge talent and was, in my opinion, one of the greatest minds in the data center industry.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"I was very lucky to learn from him, and though I can't say we always saw eye to eye, the lessons he imparted were invaluable.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE \\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"I understand you also sit on the board of a medical school. Can you tell us a bit about the school? I\u2019m also curious if you have advice for other private sector professionals who might be considering or about to take on board roles for the first time. Coming from the private sector, how can they best serve the non-profit institutions they want to support?\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"The medical school is in London. It's the UK's only independent Medical and Allied Health university.\\xa0\\xa0\"]}),/*#__PURE__*/e(\"p\",{children:\"To help frame this, when I retired in 2018 (before subsequently unretiring!), I needed to stop and consider what I would focus on. I did have some caring responsibilities for an ill family member at the time. But aside from that, I was thinking a lot about education in general, and increasing social mobility for people without access to decent education.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"I was already supporting a school and a monastery in Nepal, which I continue to do.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"So, as I thought about what I wanted to do, it became a natural progression to join the board of an education institution that was providing medical services to a close family member of mine and to give support to a field that is unfortunately in crisis right now in the UK.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Now, in terms of guidance I could give to other professionals regarding pro bono non-profit work, I think there are two things that that you can offer.\\xa0\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"The first is your skills. And the second is your passion. Ultimately, your passion for a cause or effort is what will enable you to engage and ask the right questions in the boardroom, which is where you\u2019ll find yourself seated.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:\"Now the hardest thing for me - and perhaps for many CFOs, because we're detail-oriented \u2013 is to understand that you\u2019re chiefly there to ask constructive questions; not necessarily provide granular solutions. Coming from outside the non-profit sector, you also need to appreciate that there are likely different ways to approach and solve a problem.\\xa0\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"CREDCORE\\xa0\"}),/*#__PURE__*/e(\"br\",{}),/*#__PURE__*/e(\"strong\",{children:\"That seems like sound advice \u2013 and a particular challenge for someone whose everyday role involves serving as a fixer.\\xa0\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"I guess that also helps bring our discussion full circle. Josh, thank you again for speaking with us and for sharing your insights regarding an industry playing an essential role in the development of AI; the set of technologies that is very much central to everything we are working on at CredCore.\\xa0\"})}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"JOSH JOSHI\\xa0\"}),/*#__PURE__*/e(\"br\",{}),\"You\u2019re welcome. It was a pleasure on my end, as well.\\xa0\\xa0\"]})]});export const richText2=/*#__PURE__*/t(n.Fragment,{children:[/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"em\",{children:\"In this inaugural edition of our interview series focused on digital transformation within the debt world, we speak with Eric Ball, Founder and General Partner of \"}),/*#__PURE__*/e(a,{href:\"https://impactvc.com/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"Impact Venture Capital\"})})}),/*#__PURE__*/e(\"em\",{children:\", a venture firm based in Silicon Valley. Impact Venture Capital invests in early-stage AI startups, often coinvesting with the venture arms of major tech corporates. Some of those investments are in fintech, including a few aiming to transform the capital markets, including \"}),/*#__PURE__*/e(a,{href:\"https://capconnectplus.com/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"CapConnect+\"})})}),/*#__PURE__*/e(\"em\",{children:\", \"}),/*#__PURE__*/e(a,{href:\"https://www.bondcliq.com/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"BondCliq\"})})}),/*#__PURE__*/e(\"em\",{children:\", and \"}),/*#__PURE__*/e(a,{href:\"https://280first.com/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"280first\"})})}),/*#__PURE__*/e(\"em\",{children:\". Prior to starting Impact Venture Capital, Eric served in senior roles in corporate finance, including as SVP and Treasurer at Oracle, where he spearheaded the issuance of more than $50 billion in bonds. He holds a PhD in finance from the Drucker-Ito School of Management and has taught at four universities. Eric has also authored books on management aimed at a general audience. He currently serves on the boards of voice AI unicorn \"}),/*#__PURE__*/e(a,{href:\"https://www.soundhound.com/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"SoundHound\"})})}),/*#__PURE__*/e(\"em\",{children:\", several private portfolio company boards, and on two nonprofit boards (the National Association for Urban Debate Leagues and the Lucas Medical Foundation). In this interview, we discuss transformation within both the CFO suite and the debt markets, as well as his efforts to bridge the worlds of academia and finance. We also touch upon the emergence of generative artificial intelligence and recent research he has conducted into implicit bias in venture funding.\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Bridging the worlds of academia and business\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Good afternoon, Eric - and thank you for joining us.\"})}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"You\u2019ve written two books. The first is a non-fiction work: \"}),/*#__PURE__*/e(a,{href:\"https://www.amazon.com/s?k=Unlocking+the+Ivory+Tower&ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:/*#__PURE__*/e(\"strong\",{children:\"Unlocking the Ivory Tower - How Management Research Can Transform Your Business\"})})})}),/*#__PURE__*/e(\"strong\",{children:\".\"})]}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"The second - \"}),/*#__PURE__*/e(a,{href:\"https://www.amazon.com/Silicon-Galaxy-Eric-Ball-ebook/dp/B09XWPRNC2/ref=sr_1_1?crid=2Q0TJNOBTGJPP&keywords=Silicon+Galaxy&qid=1677518210&s=books&sprefix=silicon+galaxy%2Cstripbooks%2C148&sr=1-1&ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:/*#__PURE__*/e(\"strong\",{children:\"Silicon Galaxy\"})})})}),/*#__PURE__*/e(\"strong\",{children:\" - a novel published last year \u2013 folds a primer on business management into the narrative.\"})]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Can you tell us how these books came to be?\"})}),/*#__PURE__*/e(\"p\",{children:\"Thank you. Well, I started my career as an academic. I did all the course work toward a PhD in economics at the University of Rochester and then left for the corporate world. However, I felt I had unfinished business, and many years later I found a part-time PhD program studying under Peter Drucker and completed a PhD in management.\"}),/*#__PURE__*/t(\"p\",{children:[\"During this time, I had one foot in the academic world and another slowly climbing the corporate ladder at big corporates. And I realized that although academic economists and researchers produce a lot of material that isn't relevant to the day-to-day work of business executives, there's a significant subset that \",/*#__PURE__*/e(\"em\",{children:\"is \"}),\"relevant and that sometimes gets lost in the noise.\"]}),/*#__PURE__*/e(\"p\",{children:\"For the first book, I applied a filter to all the literature I\u2019d been exposed to as an academic and tried to identify the 10% that would be most useful to business people, including those who may think that the ivory tower doesn't understand the nitty-gritty of their day-to-day work demands.\"}),/*#__PURE__*/e(\"p\",{children:\"I wanted to uncover and highlight answers to questions like, what motivates employees? What makes effective leaders? Just core questions that have to be addressed in any organizational context.\"}),/*#__PURE__*/e(\"p\",{children:\"That first book distilled the work of important thinkers down to a few brief pages each. In one volume, the reader can absorb the conclusions from dozens of essential books and articles on business management.\"}),/*#__PURE__*/e(\"p\",{children:\"Although the book was well-reviewed, it didn't sell particularly well. And what my co-author and I took away from that was that by just giving the conclusions, we had perhaps stripped out the interesting parts. People remember things in context; when they're fleshed-out and embedded in a narrative. There's a reason that some of these authors took 300 pages to make a point that could otherwise be summarized in a page. At the time, I didn't know if I would write another book, but I resolved that if I did, I would try to make it more engaging.\"}),/*#__PURE__*/e(\"p\",{children:\"That first book was published in 2012. Fast forward to COVID and we're all in lockdown. I decided I wanted something productive to come out of my quarantine. And I said, what if I took some of that same material that I had summarized - management research on how to be an entrepreneur and how to run a business - and embedded in it in a more entertaining context?\"}),/*#__PURE__*/e(\"p\",{children:\"And so I came up with the most ridiculous scenario I could, which is that aliens from outer space land on Sand Hill Road in Silicon Valley and kidnap a young venture capitalist. The aliens offer up all these advanced technologies to humanity, including a cure for cancer, flying cars, and other great stuff. But they say: \u201CWe're not going to give it to you - we're going to sell it to you. And so you need to help us figure out how to form startup companies that are going to bring humanity these advanced technologies.\u201D\"}),/*#__PURE__*/e(\"p\",{children:\"It's kind of a silly premise, but it was a way that I could teach readers about entrepreneurship through a hopefully entertaining story involving a VC that teaches a band of aliens the very same lessons.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"The aliens in Silicon Galaxy choose to launch their companies in the Bay Area for a number of good reasons outlined in the narrative. I don\u2019t feel it would be incorrect to assume you maintain a broad belief in Silicon Valley\u2019s ability to shepherd through innovation. At the same time, the book is not without a few critiques of the tech ecosystem there.\"})}),/*#__PURE__*/e(\"p\",{children:\"Well, that reflects that there is much to praise and criticize in the Valley. I live here and I love being near a bunch of bright people with ambition. On the other hand, sometimes Silicon Valley may need to get over itself; the pretension and bias and herd behavior can make it an easy place to mock. Still, I love it here and don't plan to live anywhere else.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"If much of academic research isn\u2019t terribly practical, can you describe the types of research you find most helpful or illuminating?\"})}),/*#__PURE__*/e(\"p\",{children:\"Well, let me use an example to try and answer that. There's a whole literature around leadership that gets circulated in business schools and I'm critical of some of that research because you could tell stories about one leader and stories about another leader - and derive opposing conclusions from each set of stories. And then you\u2019re left with the question of which principles to apply in which context.\"}),/*#__PURE__*/t(\"p\",{children:[\"I try to describe some academic work where instead of theorizing about what makes a great leader, researchers actually sat down and \",/*#__PURE__*/e(\"em\",{children:\"observed\"}),\" leaders. For instance, there was some research done in the 1970s where a researcher sat in CEO offices with a stopwatch and determined that the a CEO went an average of a few minutes between interruptions. And yet the CEO is responsible for strategic planning. Now, how do you think strategically when you can't go five minutes without an interruption? That kind of research can be illuminating and yet I don\u2019t think many managers appreciate it.\"]}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Digital transformation of the CFO suite\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Relative to other parts of the enterprise, finance has historically been underequipped with custom technology tools. However, that\u2019s starting to change with more targeted solutions for the CFO suite now coming to market. With better technology at their disposal, how do you see the role of the CFO - or the CFO suite more generally, including the treasurer and controller \u2013 evolving in the coming years?\"})}),/*#__PURE__*/e(\"p\",{children:\"I'd say at the core - finance organizations can spend less time collecting data and more time interpreting it. At the start of my career, I worked in five mega-sized corporations in finance and a lot of my time was spent in Treasury. And in Treasury, a lot of the labor hours were devoted to just trying to figure out what the exposures and risks were.\"}),/*#__PURE__*/e(\"p\",{children:\"At one point I managed foreign exchange hedging. It's actually quite simple to hedge a foreign exchange exposure. What's hard is figuring out what your exposure is - and most people in that job spent over 90% percent of their time on that. There are many jobs like that that are somewhat clerical in nature. But if technology can collect data then your labor force can do more actual thinking and analysis.\"}),/*#__PURE__*/e(\"p\",{children:\"With some of these technologies, you can simultaneously reduce headcount and make your organization more effective.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Can you point to a few of these tools?\"})}),/*#__PURE__*/e(\"p\",{children:\"Well, there's been an explosion of tools, actually.\"}),/*#__PURE__*/e(\"p\",{children:\"There have been a couple of tools to automate the financial planning and analysis function. This used to consist of employees populating spreadsheets with backwards-looking data, and then go to each business unit to collaborate on projecting future metrics, and then work to synthesize these projections into a unified total. The result would be a budget and series of stretch goals internally and more achievable guidance for investors externally. It was labor-intensive and time-consuming but thankfully there are a lot of tools now that have made the numbers assembly part of that easier. One such firm is Adaptive Insights (which was acquired by Workday), another is Anaplan, as well as offerings from some of the big tech ERP providers.\"}),/*#__PURE__*/e(\"p\",{children:\"I was at Oracle, which created ERP software that automated a lot of elements of the accounting function. There are also several newer startups that are automating the internal audit function.\"}),/*#__PURE__*/e(\"p\",{children:\"In the past couple of years, I\u2019ve seen a high number of startups whose customers are treasurers within the finance organization. I appreciate the chance to look at companies where my own experience may provide useful context. \\xa0I'm tracking at least ten treasury-oriented startups right now.\"}),/*#__PURE__*/e(\"p\",{children:\"And so the whole office of the CFO is in the middle of an automation revolution that's using machine learning, big data, and AI. I think that's going to continue, and I think it's going to allow the percentage of revenue accounted for by general and administrative expenses to go down while the impact of the finance function goes up. It's an exciting time for finance.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"When you see this impact going up, to the extent that power or responsibility is a zero-sum game, do you see other parts of the enterprise experiencing an attrition in those areas relative to finance?\"})}),/*#__PURE__*/e(\"p\",{children:\"It's hard to generalize because different job functions become relatively more powerful at different times and in different sectors. I think that in the 1950s and 1960s, there was a lot of manufacturing innovation and so the physical engineers had a clear path to power in a company. And then in the 1980s, there was a lot of financial engineering and leveraged buyouts, where the finance function became a bit more relevant. And I\u2019ve seen in industries facing regulatory and legal issues where the general counsel has become CEO.\"}),/*#__PURE__*/e(\"p\",{children:\"I think that in the tech sector over the last few decades, software engineering has been a good skill to have to rise to the top of the corporate hierarchy. However, I think that the new tools we just discussed are helping finance reclaim some of that ground. You now more frequently see CEOs who were previously CFOs as opposed to some other function. So CFOs appear to be a bit ascendant in terms of their relative power. In tech, I think engineering and product are still important but not as dominant as in the past.\"}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Reforming credit markets\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"As SVP for Finance and Treasurer at Oracle, you raised over $52 billion in bonds to fund over a hundred acquisitions. Can you tell us how bond issuance evolved at Oracle and the tech industry overall?\"})}),/*#__PURE__*/e(\"p\",{children:\"Oracle was the first major tech company to issue a significant amount of debt, which we executed as a $6 billion bond issuance in early 2006. The accepted wisdom before that had been that tech is inherently risky and so you need a more conservative financial profile to compensate for a riskier business profile. I give a lot of credit to the senior team at Oracle for realizing that this was an artificial distinction relative to non-tech businesses, that tech could use debt as a tool as well.\"}),/*#__PURE__*/e(\"p\",{children:\"The tax structure of the time made it hard to repatriate cash earned overseas. Oracle had tens of billions of dollars stuck overseas where it could be brought back into the US, but only at a punitive tax rate. It was more efficient to leave it overseas. And by issuing debt you could borrow in the US in a way that you'd still be net cash positive.\"}),/*#__PURE__*/e(\"p\",{children:\"We were the first big bond issuance in tech, and immediately thereafter, Cisco followed suit, and then others, it became a new trend. And now it's the norm, and gotten much bigger. There was a brief moment where a banker said I had participated in raising more capital than anyone in tech. But that record was quickly broken as other firms had mega issuances and so it is no longer remotely true, even at Oracle, which has raised more debt since I left than when I was there.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Can you tell us about some of the specific pain points you experienced during the process of issuing debt at Oracle? And have things improved since then?\"})}),/*#__PURE__*/e(\"p\",{children:\"I think a surprising element of the bond issuance process then and even now is that it hasn't changed a lot in the past few decades. You have a debt capital markets desk consisting of bankers who work the phones and call institutional bond buyers and ask them for their orders, and then inevitably the books get oversubscribed. They then cut back the orders.\"}),/*#__PURE__*/e(\"p\",{children:\"It's historically been a very manual process. And it is a lucrative business, with bankers historically charging a shared set rate, perhaps \u2153 of a percent to \\xbe of a percent depending on the term of the bonds. So a $10 billion bond issuance might generate $50 million in bank fees. Some larger corporates have been successful at negotiating lower fees, but it remains a high margin business.\"}),/*#__PURE__*/e(\"p\",{children:\"More importantly, the bond issuance process has not historically generated the true price discovery of an auction. On average, bond spreads tighten after issuance, which suggests that corporates end up paying a higher interest rate (that is, a wider spread over the treasury rate) than they have to.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Jeff Bezos famously remarked \u201CYour margin is my opportunity\u201D. I don\u2019t believe Amazon has tried to disrupt the capital markets yet. Have others tried?\"})}),/*#__PURE__*/e(\"p\",{children:\"Well, as a venture investor - instead of simply reacting to entrepreneurs who come to me and say, \u201CPlease invest in my business\u201D, the team at Impact Venture Capital (including my business partner Jack Crawford) and I engaged in an exercise where we said: \u201CWhat business should exist, but doesn't?\u201D\"}),/*#__PURE__*/e(\"p\",{children:\"And a true auction platform for debt issuance was one answer that we came up with.\"}),/*#__PURE__*/t(\"p\",{children:[\"So I played a role as a co-founder of a startup - \",/*#__PURE__*/e(a,{href:\"https://capconnectplus.com/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"CapConnect+\"})})}),\" - that does exactly that. The management team there - led by Suresh Perera - partners with bond issuers and banks to make the bond issuance process more efficient. The goal is for the corporate to be more of the customer and less of the product in a way that can save issuers on debt expense and provide a fairer and more transparent allocation to institutional bond investors.\"]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"In addition to issuance, bonds have also been somewhat laggard when it comes to trading mechanics. Trading for stocks, options, and futures have evolved at a rapid rate in the direction of transparency and speed over the last 30 years. Has there been any movement here for bonds?\"})}),/*#__PURE__*/t(\"p\",{children:[\"Well, another one of our portfolio companies is \",/*#__PURE__*/e(a,{href:\"https://www.bondcliq.com/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"BondCliQ\"})})}),\", which was founded by some Goldman Sachs alumni, led by CEO Chris White. He and his co-founders had the observation that bond pricing for secondary trading in bonds is intentionally inefficient.\"]}),/*#__PURE__*/e(\"p\",{children:\"If you want to buy a share of IBM stock, you can go on Yahoo and see in almost real-time what a share traded for five seconds ago, right? But if you want to buy an IBM bond - you have to go to a broker who gives you a bid-ask spread and it's based on yesterday's data. If you buy a bond, you don't know if you got a good price or a bad price. And this is how stocks were traded too until 1968.\"}),/*#__PURE__*/e(\"p\",{children:\"Stocks have since moved towards a more transparent system. But that hasn\u2019t occurred yet with bonds. So BondCliQ is trying to bring pricing transparency to secondary trading in corporate bonds and eliminate another source of friction in a market that's measured in the trillions.\"}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Investment approach at the Impact Venture Capital\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Impact Venture Capital is noted for the way you work with established companies on co-investments. I\u2019d like to talk a bit about that. Money is fungible \u2013 so why does it matter that the money is coming from an established tech company \u2013 and not, let\u2019s say - Abe Froman, Sausage King of Chicago? What do the start-ups gain that they might not obtain from other investors? And on the other side of the table, how do the established companies benefit?\"})}),/*#__PURE__*/e(\"p\",{children:\"I love the Ferris Bueller reference. That's a classic film.\"}),/*#__PURE__*/e(\"p\",{children:\"We're trying to invest in young companies that have either already caught the attention of a major corporate or that we think would catch the attention of a major corporate once we point it out.\"}),/*#__PURE__*/e(\"p\",{children:\"Having the corporates as a co-investor validates that it does overlap with the technology interests of the big corporates. Critically, these are the same big corporates that often act as acquirers. So, as a start-up, when you\u2019re looking for an exit, it gives you a leg up.\"}),/*#__PURE__*/e(\"p\",{children:\"We talk a lot to corporates to try to understand what technologies they're seeking access to and to help make them aware of young startups that are bringing those technologies to market.\"}),/*#__PURE__*/e(\"p\",{children:\"Corporates used to look for innovation from internal R&D and through M&A. And they finally figured out that there's a third leg in that stool, which is investing in startups, which is way more capital efficient. The corporate does not have to buy all of the company to get access to the technology. If you can buy say 10% of the company at a low valuation early, you can earn a large financial return and also engage with a much higher number of startups with new technologies.\"}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Diversity, equality and inclusion in venture funding\"}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"You conceived and helped co-author \"}),/*#__PURE__*/e(a,{href:\"https://ipira.berkeley.edu/relationship-ceo-gender-and-age-performance-venture-backed-startups?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:/*#__PURE__*/e(\"strong\",{children:\"a report on diversity, equity, and inclusion\"})})})}),/*#__PURE__*/e(\"strong\",{children:\", or DEI. Can you describe the findings of your research?\"})]}),/*#__PURE__*/e(\"p\",{children:\"I was basically revisiting my former life as an academic. And I was looking at this data that suggests that 40% of entrepreneurs are women. But over the last several decades women have received considerably less than 10% of venture-backed funding - depending on the study, it's anywhere from 2 to 8 percent. So women represent 4 out of 10 entrepreneurs, but they're getting a single digit fraction of the investment dollars - and that's a mismatch.\"}),/*#__PURE__*/e(\"p\",{children:\"At the same time, older entrepreneurs are experiencing a similar dynamic where a lot of the venture capital has gone disproportionately to younger entrepreneurs, despite the fact that the median age of founding CEOs has been going up dramatically. And there's some research that shows that you actually learn things over time. You don't just get tired and old; you may have actually learned something useful to help a startup succeed.\"}),/*#__PURE__*/e(\"p\",{children:\"So I wanted to look at the data in terms of the performance of CEOs of different gender, age, and race and ask: \u201CIs there a difference in performance? Could there conceivably be some rational reason for this bias? Are young, white male, twenty-something dropouts really better?\u201D I don't think so, but let's look at the data and see. So we looked at the data and we essentially found no real difference between men and women or between younger and older entrepreneurs, except that women CEOs on average tend to have shorter times to exit than male CEOs. So on that parameter, women seem to be - not just as good - but perhaps better than men.\"}),/*#__PURE__*/e(\"p\",{children:\"Interestingly, we tried to look at race. But there are so few entrepreneurs of color receiving funding that we couldn't even generate a data set - which tells you maybe all you need to know about that bias. The rest of the researchers are now trying to gather a bigger data set to capture more entrepreneurs of color. But this particular project had to set that aside and focus on gender and age.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Going through your portfolio companies, I saw the founder of one of your companies who appears to be past a typical retirement age and it struck me how rare that is.\"})}),/*#__PURE__*/t(\"p\",{children:[\"And he heads up \",/*#__PURE__*/e(a,{href:\"https://cornami.com/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"Cornami\"})})}),\" - our single best performing company. The founder there has CEO experience since 1981. And we invested in him and the company in 2016 when it was young. Last year SoftBank led an investment round there with a valuation several times higher, so we are expecting a pretty good return on that.\"]}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Generative AI and wrap-up\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"Through Impact Venture Capital's investments, your board appointments, and other activities, you have to stay on top of developments in AI, the mechanics of bond issuance, FAA regulations on personal aircraft, academic management research, blockchains, and quantum cryptography, among other topics. What\u2019s a new field or topic that you\u2019re currently trying to get up to speed on?\"})}),/*#__PURE__*/e(\"p\",{children:\"I would like to learn more about a topic that\u2019s top of mind for a lot of people: Generative AI.\"}),/*#__PURE__*/e(\"p\",{children:\"The AI up to now has been really good at predictive AI. To take one example, you might put sensors on physical structures and use AI to do predictive maintenance after the AI has been trained using images and past data on imperfections. So, instead of inspecting a building once a year, you put sensors all over a plant and inspect first the ones that show troubling data rather than the ones coming up on the one-year mark. So predictive AI has made progress.\"}),/*#__PURE__*/e(\"p\",{children:\"But lately we have this explosion in generative AI. This AI tends to draw upon a much broader, more disparate array of sources. So a management tool wouldn\u2019t just grab information out of the accounting system, but maybe also from the R&D team\u2019s work notes as well as emails between the CEO and the head of marketing. In short, it would canvass a larger space to gather data and come up with insights that may not be based on numerical indicators or regressions, but also on other associations. It doesn\u2019t appear infallible, it just reflects the information available, so if the tool canvasses discussions with inaccuracies, it can repeat those inaccuracies. But it can also be a tremendous time-saving tool.\"}),/*#__PURE__*/e(\"p\",{children:\"I am not an expert in generative AI and I would like to learn more quickly.\"}),/*#__PURE__*/e(\"p\",{children:\"Generative AI.\"}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"strong\",{children:\"You invest in some bleeding-edge, space age technologies. You also have two adolescent/young adult children. Do you ever go to them for tech help \u2013 or does your household completely invert the traditional age-ascending direction of tech assistance rendering?\"})}),/*#__PURE__*/e(\"p\",{children:\"Not at all! I invest in tech; I don\u2019t always have experience in using it. I have a sophomore majoring in honors computer science at the University of Wisconsin, and he\u2019s been my tech support since I became self-employed. I call frequently with requests that are some variation of \u201CPlease tell me how this gadget or app works\u201D. So we are certainly a bit inverted in terms of the younger educating the older generation.\"})]});export const richText3=/*#__PURE__*/t(n.Fragment,{children:[/*#__PURE__*/e(\"h3\",{children:\"Introduction\"}),/*#__PURE__*/e(\"p\",{children:\"Since the passing of the Dodd-Frank Act in July 2010, the SEC has relied upon disclosure and a principles-based regime to regulate private fund advisers. Under the regime, advisers to large funds must adhere to a fiduciary standard of care and inform investors of any conflicts of interest. Limited partner agreements \u2013 and the fund management practices they endorse - can then embrace a range of terms as long as the adviser makes \u201Cfull and fair disclosure to its clients of all material facts relating to the advisory relationship\u201D1.\"}),/*#__PURE__*/t(\"p\",{children:[\"In recent years however, the SEC has signaled\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf\",openInNewTab:!0,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"growing\"})}),\"\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/rules/interp/2019/ia-5248.pdf\",openInNewTab:!0,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"concern\"})}),\"\\xa0over perceived inadequacies with this system. A June 2020 risk alert classified deficiencies the SEC had uncovered during its examinations of private fund advisers into three areas: conflicts of interest, fees and expenses, and policies and procedures relating to material non-public information2. It found that these deficiencies \u201Cmay have caused investors in private funds to pay more in fees and expenses than they should have or resulted in investors not being informed of relevant conflicts of interest concerning the private fund adviser and the fund\u201D.\"]}),/*#__PURE__*/t(\"p\",{children:[\"SEC leadership continued to raise these topics in a\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/news/speech/lee-sec-speaks-2021-10-12?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"number\"})}),\"\\xa0of\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/news/speech/gensler-ilpa-20211110?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"speeches\"})}),\"\\xa0in the ensuing months. Finally, to address the mounting issues it had identified, in February 2022,\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/rules/proposed/2022/ia-5955.pdf?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"the SEC released a set of proposals\"})}),\"\\xa0under the auspices of the Investment Advisers Act that would, if enacted, upend the principles-based approach. In place of the emphasis on disclosure, the new proposals explicitly prohibit private fund advisers from engaging in certain activities while requiring them to implement others. In addition, the proposals specify in detail certain items that advisers must disclose to the Commission and to fund investors.\"]}),/*#__PURE__*/e(\"p\",{children:\"The SEC contends that the proposals will increase transparency and reduce conflicts of interest:\"}),/*#__PURE__*/e(\"p\",{children:\"[A] lack of transparency regarding costs, performance, and preferential terms causes an information imbalance between advisers and private fund investors, which, in many cases, prevents private bilateral negotiations from effectively remedying shortcomings in the private funds market. We believe that this imbalance serves only the adviser\u2019s interest and leaves many investors without the tools they need to effectively protect their interests, whether through negotiations or otherwise.3\"}),/*#__PURE__*/t(\"p\",{children:[\"Private markets have registered dramatic growth over the past two decades,\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/mckinseys-private-markets-annual-review?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"with fundraising reaching a record high of nearly $1.2 trillion in 2021, up from $94 billion in 2003\"})}),\". As private markets come to occupy a larger role in the overall economy,\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/news/speech/gensler-ilpa-20211110?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"the SEC sees more robust regulation as vital to protecting the interests of retail investors\"})}),\"\\xa0that participate in private markets through investments in institutional vehicles like pension plans.\"]}),/*#__PURE__*/e(\"p\",{children:\"Some of the proposed rules would also extend the SEC\u2019s regulatory authority to cover a part of the industry that has traditionally enjoyed exemption from the Commission\u2019s oversight. Dodd-Frank concentrates on large funds that are required to register with the SEC. A few of the new rules would expand the SEC\u2019s ambit and apply to all private fund advisers, including previously exempt ones such as smaller fund advisers, venture capital fund advisers, and non-U.S. advisers.\"}),/*#__PURE__*/e(\"h3\",{children:\"The CredCore Comment Matrix\"}),/*#__PURE__*/t(\"p\",{children:[\"The proposals unsurprisingly generated\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/comments/s7-03-22/s70322.htm?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"a cascade of official comments\"})}),\", many lengthy and detailed, from participants and stakeholders in the private markets, including private fund sponsors, institutional investors, service providers such as law and accounting firms, elected officials, labor unions, and advocacy groups. At CredCore,\\xa0\",/*#__PURE__*/e(a,{href:\"https://codepen.io/GabeCC/full/gOKoyjX?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"we have placed these comments into a matrix\"})}),\"\\xa0that can be filtered by criteria such as the type of respondent, the general sentiment expressed towards the proposals, and the specific issues addressed by the respondent. The tool can generate results for queries such as \u201Cservice providers with a negative view of the proposals that commented on audit-related provisions\u201D or \u201Cgeneral partners concerned with the cost implications of the proposals\u201D. We hope this tool will be helpful to both policymakers and market participants as they shape their contributions to the ongoing dialogue.\"]}),/*#__PURE__*/e(\"p\",{children:\"To better understand the proposals as well as our comment matrix, we provide here a thumbnail summary of the key provisions of the SEC\u2019s proposals. Following this summary, we describe some of the most commonly voiced reactions to the proposals from general and limited partners.\"}),/*#__PURE__*/e(\"h3\",{children:\"Summary of SEC Proposals\"}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Annual Audit\"}),\". Advisers would be required to obtain an independent annual audit on a GAAP basis for all funds it advises.\"]}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Adviser-Led Secondary Transactions\"}),\". Advisers would be required to obtain a fairness opinion from an independent opinion provider in connection with adviser-led secondary transactions.\"]}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Borrowing\"}),\". Advisers would be prohibited from borrowing any assets or seeking a line of credit from private fund clients.\"]}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Clawbacks\"}),\". Advisers would be prohibited from applying tax-based clawback reductions.\"]}),/*#__PURE__*/e(\"p\",{children:\"Some background to the proposed rule: Advisers invariably earn performance-based compensation on top of base management fees. Advisers that draw performance-based compensation during a period when a fund performs well may be required - by virtue of provisions in a fund's governing agreements known as a clawback mechanism - to return it to investors if the fund subsequently experiences losses. Without a clawback to compensate investors, advisers would enjoy underserved, disproportionate gains.\"}),/*#__PURE__*/e(\"p\",{children:\"However, it has also become common for governing agreements to contain further clauses that allow advisers to reduce the amount of any clawback payments by taxes the adviser has already paid or may be liable to pay on the performance-based distribution it received.\"}),/*#__PURE__*/e(\"p\",{children:'In prohibiting these types of reductions, the SEC asserts that the intended effect of the proposed clawback rule is \u201Cto ensure that investors receive their full share of profits generated by the fund\u201D and \\xa0contends that \"reducing the amount of any adviser clawback by taxes applicable to the adviser puts the adviser\u2019s interests ahead of the investors\u2019 interests and creates a compensation scheme that is contrary to the public interest and the protection of investors, even where such practice is disclosed\u201D.4'}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Documentation.\"}),\"\\xa0Advisers would be required to maintain books and records related to the proposed requirements and document annual review of their compliance policies and procedures.\"]}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Expenses.\"}),\"\\xa0Advisers can no longer pass on to investors certain expenses, charges, and fees, such as accelerated fees; fees for unperformed services; and any regulatory, audit, compliance, examination, and investigation costs.\"]}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Liability.\"}),'\\xa0Advisers can no longer secure terms that exculpate or indemnify themselves for \"breach of fiduciary duty, willful misfeasance, bad faith, negligence, or recklessness in providing services to the private fund.\"']}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Preferential Treatment.\"}),\"\\xa0The proposals explicitly prohibit two types of preferential treatment: a) granting preferential liquidity, and b) disclosing information on fund holdings to only some investors when doing so could have a material, negative effect on other investors who do not enjoy access to the same information. Meanwhile, all other forms of preferential treatment, such as that typically enshrined in side letters, need to be disclosed to all investors.\"]}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Pro-Rata Expenses.\"}),\"\\xa0Private fund advisers would be required to allocate broken deal fees pro rata to co-investment vehicles to avoid disadvantaging LPs in the primary fund that do not benefit from the co-investment opportunities.\"]}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"strong\",{children:\"Quarterly Reporting.\"}),\"\\xa0Private fund advisers would be required to issue quarterly reports that provide detailed, comprehensive data on both performance and fees/compensation. The reports would need to catalog all monies collected by the private fund adviser, including general fees, compensation paid by portfolio companies, and any amounts from offsets, rebates, and waivers. Requirements for performance reports differ slightly for liquid, open-end funds and illiquid, closed-end funds. The latter, which includes most private equity funds, would be required to state the fund\u2019s net asset value; total contributions and distributions since inception; as well as gross and net IRR and MOIC figures for the full fund as well as both the realized and unrealized portions of the fund.\"]}),/*#__PURE__*/e(\"h3\",{children:\"Adviser Reactions\"}),/*#__PURE__*/e(\"p\",{children:\"As might be expected, advisers have taken a dim view of most of these provisions. Among the more commonly voiced objections, advisers have:\"}),/*#__PURE__*/t(\"ul\",{style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\",\"--framer-text-alignment\":\"start\",\"--framer-text-color\":\"rgb(48, 45, 41)\",\"--framer-text-decoration\":\"none\",\"--framer-text-transform\":\"none\"},children:[/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Questioned the SEC\u2019s statutory authority to regulate private funds as well as the necessity of the initiative. They cite progress made within industry groups towards remedying many of the issues identified by the SEC as well as the fact that the SEC is already able under current provisions to mete out penalties for practices the new proposals seek to address.\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Challenged the likely efficacy of the proposals, arguing that they would often have the opposite of their intended effect. For example, by reducing the ability of investors to obtain custom reporting - as this might fall under the prohibition on preferential treatment - the proposals would curb, rather than promote investor disclosure.\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Advocated for the continuation of a principles-based regime instead of the rules-based system the SEC seeks to introduce, contending that the former is more suitable to the diversity of fund types present in the private market ecosystem.\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Registered concern over cost effects, worried that compliance expenses and new liability risks will prove onerous for many funds, especially small firms, and make their business models unviable. High expenses and liability risks might also create barriers to entry, inhibiting new fund formation and, by extension, the pool of capital available to fund new and growing enterprises.\"})})]}),/*#__PURE__*/e(\"h3\",{children:\"Limited Partner Reactions\"}),/*#__PURE__*/e(\"p\",{children:\"On the other side, limited partners have in their comment letters applauded most of the proposals, agreeing with the SEC on the necessity of introducing a more rigorous regulatory regime. They cite practices such as payments advisers make to related entities as emblematic of the conflicts of interest prevalent in the industry and note the difficulty they encounter while trying to reconcile non-standardized reporting practices. Despite their overall agreement, several investors have still sought to preserve their freedom to negotiate side letters and obtain any custom terms mandated by the government bodies that regulate their activity. Meanwhile, in response to concerns advanced by advisers regarding compliance expenses, some limited partners have argued to the contrary; that the proposals would actually reduce costs, especially those generated by legal negotiation and ongoing monitoring, in addition to facilitating more efficient capital allocation more generally. The proposals would thereby promote, rather than inhibit, economic activity.\"}),/*#__PURE__*/e(\"p\",{children:\"Footnotes\"}),/*#__PURE__*/t(\"ol\",{style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\",\"--framer-text-alignment\":\"start\",\"--framer-text-color\":\"rgb(48, 45, 41)\",\"--framer-text-decoration\":\"none\",\"--framer-text-transform\":\"none\"},children:[/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/t(\"p\",{children:[\"Securities and Exchange Commission.\\xa0\",/*#__PURE__*/e(\"em\",{children:\"Commission Interpretation Regarding Standard of Conduct for Investment Advisers\"}),\". July 12, 2019.\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/rules/interp/2019/ia-5248.pdf?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"https://www.sec.gov/rules/interp/2019/ia-5248.pdf\"})})]})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/t(\"p\",{children:[\"Securities and Exchange Commission.\\xa0\",/*#__PURE__*/e(\"em\",{children:\"Observations from Examinations of Investment Advisers Managing Private Funds\"}),\". June 23, 2020.\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf\"})})]})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/t(\"p\",{children:[\"Securities and Exchange Commission.\\xa0\",/*#__PURE__*/e(\"em\",{children:\"Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews\"}),\". February 2022. Page 11. \\xa0\",/*#__PURE__*/e(a,{href:\"https://www.sec.gov/rules/proposed/2022/ia-5955.pdf?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"https://www.sec.gov/rules/proposed/2022/ia-5955.pdf\"})})]})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Ibid. Page 146.\"})})]})]});export const richText4=/*#__PURE__*/t(n.Fragment,{children:[/*#__PURE__*/e(\"h3\",{children:\"Introduction\"}),/*#__PURE__*/e(\"p\",{children:\"Since private equity funds emerged in the late 1980\u2019s, limited partners (LPs) have requested side letters to secure special rights not granted in the limited partnership agreement (LPA) that applies to all fund investors. The provisions in a side letter can supplant terms in an LPA or address new issues absent from it.\"}),/*#__PURE__*/e(\"p\",{children:\"Though not a recent innovation, side letters have lately expanded across a number of dimensions. As a result, orchestrating the many exemptions, immunities, and preferences conferred by side letters has come to represent a growing burden for fund sponsors. The resources consumed form a cost center that detracts from fund returns, as well as general partner (GP) attention that could instead be devoted to core business activities like deal sourcing and facilitating growth at portfolio companies. Rather than buttress the LPA, side letters have instead tended to ensnarl and overwhelm the document with exceptions.\"}),/*#__PURE__*/e(\"p\",{children:\"After listing some of the most common accommodations sought by investors, this paper will attempt to describe the complexity of side letter management and its wider impact on fund operations. In addition to factors inherent to side letters, the paper examines external matters, including co-investing vehicles and looming SEC regulation, which compound the contract management and compliance strains bearing down on sponsors.\"}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Common Side Letter Clauses\"}),/*#__PURE__*/t(\"p\",{children:[\"Although side letters are widely viewed as a means to accord fee discounts to favored investors, they are \u201Cmostly designed to accommodate a fund investor\u2019s regulatory and tax concerns\u201D [\",/*#__PURE__*/e(\"em\",{children:\"Footnote 1\"}),\"]. Pension plans and sovereign wealth funds in particular use side letters to ensure that an investment does not violate their governing statutes or negate sovereign rights conferred by their government status. Side letter clauses with regulatory implications include ones that allow investors to:\"]}),/*#__PURE__*/t(\"ul\",{style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\",\"--framer-text-alignment\":\"start\",\"--framer-text-color\":\"rgb(48, 45, 41)\",\"--framer-text-decoration\":\"none\",\"--framer-text-transform\":\"none\"},children:[/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Avoid participating in deals involving certain industries (e.g., alcohol and tobacco)\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Obtain specialized reporting or disclosure information, which allows the investor to satisfy reporting obligations imposed by its stakeholders (e.g., a public section pension fund obtains permission to share a fund\u2019s prospectus with the fund\u2019s government stakeholders.)\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Secure guarantees of confidentiality regarding the investor\u2019s position in the fund\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Designate the place of jurisdiction for any litigation\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Gain the right to transfer its holdings to another entity\"})})]}),/*#__PURE__*/e(\"p\",{children:\"Investors also pursue side letters for non-regulatory reasons. They may want to secure seats on the advisory committee of fund investors, register their interest in co-investing opportunities that arise during the lifecycle of the fund, or receive a guarantee - through a most favored nation (MFN) provision - that they can obtain any favorable preference furnished to other investors in their separate side letters. Some investors, especially those considered \u201Cstrategic\u201D, such as seed investors or ones that have made especially large commitments, seek out fee discounts.\"}),/*#__PURE__*/e(\"p\",{children:\"Although this paper focuses on the problems associated with side letters, the positive role they play in the corporate finance ecosystem should also be acknowledged. By catering to the needs of institutional investors and allowing them to deploy capital in accordance with their by-laws, side letters have given borrowing enterprises access to large-scale financing that might otherwise have been difficult to secure.\"}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Growth of Side Letters\"}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(a,{href:\"https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4067905&ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"In a recent academic paper\"})}),\", Elisabeth de Fontenay (Duke University School of Law) and Yaron Nili (University of Wisconsin Law School) describe the results of their longitudinal study of side letter provisions. From a data set of roughly 250 side letters issued between 1991 and 2020, they track five indicators of length and complexity (total terms; word count, page count, provision count, and total MFN exceptions). As they show, each of these indicators has exhibited uninterrupted growth since the start of the study period. In documenting the evolution of two of these measures, they note:\"]}),/*#__PURE__*/e(\"p\",{children:/*#__PURE__*/e(\"em\",{children:\"The average length of side letters has increased more than sevenfold over the last 30 years with an average word count of 659 words in the pre-2005 era and 4,983 words in the post-crisis [after 2014] era. The page-length of each side letter has similarly ballooned from an average of 1.3 pages in the pre-2005 era to 8.5 pages in the post-crisis era.\"})}),/*#__PURE__*/e(\"p\",{children:\"Although no formal study has captured the change empirically, it is generally acknowledged that a greater percentage of LP\u2019s now seek to negotiate side letters. Whereas side letters were mostly the preserve of strategic investors in the early days of private equity, they are now common among a broader swath of investors.\"}),/*#__PURE__*/t(\"p\",{children:[\"Side letters have also come to address a greater range of issues, increasing the complexity of negotiations and the travail of ongoing oversight. The increased scope is perhaps most visible in regards to ESG provisions. LPs \u2013 each subject to different jurisdictions and representing unique sets of stakeholders \u2013 will come to the table with a unique bundle of ESG investing mandates. Because ESG provisions are rarely addressed in the LPAs of non-impact funds, side letters must shoulder the contractual responsibility of catering to these mandates. In addition to excusal rights that allow an LP to withdraw from participating in investments in certain industries, sponsors may also be required to produce periodic reporting that demonstrates adherence to third-party guidelines, including multilateral initiatives such as the\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.unpri.org/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"Principles of Responsible Investment\"})}),\"\\xa0and the\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.unglobalcompact.org/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"UN Global Compact\"})}),\".\"]}),/*#__PURE__*/t(\"p\",{children:[\"More broadly, side letters have come under the spotlight by virtue of the marked growth in private equity volumes. Total global buyout volume reached $1.12 trillion in 2021, an all-time high that roughly doubled 2020\u2019s total ($557 billion) and that represents a 9.5X on the post-global financial crisis low recorded in 2009 ($118 billion) [\",/*#__PURE__*/e(\"em\",{children:\"Footnote 2\"}),\"]. Buyout funds are inhabiting new niches such as infrastructure and technology and taking on more substantial deals, with the average transaction size for 2021 exceeding $1 billion for the first time [\",/*#__PURE__*/e(\"em\",{children:\"Footnote 3\"}),\"]. The quanta of outstanding side letters has risen accordingly alongside the important role they play in what has become a rapidly growing and important source of capital for business of all sizes and sectors in economies around the world.\"]}),/*#__PURE__*/e(\"h3\",{children:\"Ripple Effects\"}),/*#__PURE__*/e(\"p\",{children:\"On a strict contractual basis, side letters just treat the bilateral relationship between two signatories. Despite the limited number of parties, side letters invariably generate wider impact across several areas.\"}),/*#__PURE__*/e(\"h4\",{children:\"The Cascading Burdens of MFN Clauses\"}),/*#__PURE__*/e(\"p\",{children:\"Fulfilling the terms of one side letter can force additional work on the sponsor to comply with other letters that contain an MFN clause.Although each side letter represents a separate contract, in practice, substantial interdependencies exist. Sponsors do not therefore have the luxury of managing side letters in isolation from one another. As MFN remains one of the most frequently sought preferences, sponsors must then consider side letters on both an individual and group basis.\"}),/*#__PURE__*/e(\"h4\",{children:\"Borrowing Base Impact\"}),/*#__PURE__*/e(\"p\",{children:\"Side letters can impact a fund\u2019s borrowing base. Funds often take out bridge loans from banks for immediate financing needs while a capital call is underway from investors. These loans are secured by terms in the LPA that obligate LPs to fulfill all capital calls. Bank lenders therefore scrutinize side letters to ensure that provisions in the letters do not temper this obligation. A bank may reduce a fund\u2019s capacity to borrow if terms, especially those related to excusal and transfer rights, compromise the binding nature of an LP\u2019s commitment.\"}),/*#__PURE__*/e(\"h4\",{children:\"Effect on Fund Strategy\"}),/*#__PURE__*/e(\"p\",{children:\"A fund sponsor may forego promising investment opportunities that conflict with the preferences of major investors that retain excusal rights, especially if the fund would lack sufficient capital for the deals absent those investors. Other investors without the same concerns would then miss out on these foregone deals. The idiosyncratic preferences of some investors could therefore impact the fund\u2019s strategy, its portfolio composition, and the returns for all investors.\"}),/*#__PURE__*/e(\"h4\",{children:\"Transaction Costs & Risks\"}),/*#__PURE__*/t(\"p\",{children:['As a result of all these primary and knock-on effects, fund managers are forced to devote significant resources to negotiating side letters at the outset of a fund and to ensuring compliance with them on an ongoing basis after launch. As even the Institutional Limited Partners Association admits: \u201CThe cost of negotiating and complying with side letters can be sizable.\" [',/*#__PURE__*/e(\"em\",{children:\"Footnote 4\"}),\"]\"]}),/*#__PURE__*/e(\"p\",{children:\"In more detail, de Fontenay and Nili argue:\"}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"em\",{children:\"Side letters are costly to the industry. Not only do they burden the fund-raising process for buyout funds with ever-increasing delays and legal fees, they also create a highly complex web of contractual arrangements for a fund to comply with, which can restrict the fund\u2019s operations and investments in a variety of unexpected ways\u2014an outcome that harms both sponsors and investors. \"}),\"[\",/*#__PURE__*/e(\"em\",{children:\"Footnote 5\"}),\"]\"]}),/*#__PURE__*/e(\"p\",{children:\"The authors point out that for all the effort they require, even the most exquisitely designed side letters fail to contribute to activities that drive fund performance. Detached from deal acquisition costs and focused on accommodating investor preferences, side letters hamstring funds with an ongoing drag of administrative expense.\"}),/*#__PURE__*/e(\"p\",{children:\"Another recent study by a different set of authors that focuses on side letters in the context of impact investing builds on these conclusions:\"}),/*#__PURE__*/t(\"p\",{children:[\"Complex terms with layers of carve-outs, developed across multiple documents increase compliance costs over the life of the fund. ... Without limits on side letter provisions or a checklist to monitor performance of all fund side letter agreements, managers can be swamped by compliance obligations. The combination of complexity and divergence presents general partners with a business risk in complying with the stipulations of one side letter without falling afoul of another or of the LPA itself. [\",/*#__PURE__*/e(\"em\",{children:\"Footnote 6\"}),\"]\"]}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"SEC Regulation\"}),/*#__PURE__*/e(\"p\",{children:\"On top of the aforementioned concerns looms the issue of increased regulation. The SEC has released a number of proposals over the past year that, if enacted, would directly affect the crafting and ongoing management of side letters. Specifically, the SEC has proposed the following:\"}),/*#__PURE__*/t(\"ul\",{style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\",\"--framer-text-alignment\":\"start\",\"--framer-text-color\":\"rgb(48, 45, 41)\",\"--framer-text-decoration\":\"none\",\"--framer-text-transform\":\"none\"},children:[/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"No liquidity preference may be given to any investor, even with disclosure\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"No information, especially concerning portfolio holdings, may be provided to any investor when withholding it from other investors could have a \u201Cmaterial, negative effect\u201D on the latter\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Any other preferential treatment must be disclosed to all prospective investors when considering a placement, and to current investors on an ongoing basis through annual written notices\"})})]}),/*#__PURE__*/e(\"p\",{children:\"While eliminating some terms reduces complexity, persistent disclosure adds considerable work. More significantly, in future examinations of fund advisers, it is likely the SEC would place side letters under a microscope, thereby sharpening the need for fund managers to maintain rigorous oversight. The compliance risks would multiply even as the number of possible terms included in the side letter falls.\"}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Co-Investment\"}),/*#__PURE__*/t(\"p\",{children:[\"Side letter expansion has coincided with growth in side-car and co-investing vehicles. According to the World Economic Forum, the share of private equity investors that utilize co-investing has nearly tripled from 24% in 2012 to 71% in 2021 [\",/*#__PURE__*/e(\"em\",{children:\"Footnote 7\"}),']. The US-based asset manager Hamilton Lane has also estimated that \u201Cfor every dollar raised by a GP, an additional twenty cents is allocated to deploy in global co-investment opportunities\". [',/*#__PURE__*/e(\"em\",{children:\"Footnote 8\"}),\"]\"]}),/*#__PURE__*/e(\"p\",{children:\"Co-investments, however, bear their own set of terms that can affect the primary LPA as well as side letters. A number of thorny issues in particular arise in connection with stockholder rights. In an article on structuring co-investment transactions, James J. Greenberger notes:\"}),/*#__PURE__*/t(\"p\",{children:[/*#__PURE__*/e(\"em\",{children:\"The co-investment vehicle, the sponsor's fund, the management stockholders, and the other co-investors are all parties to a stockholder's agreement, which typically contains provisions governing such issues as tag-along rights, drag-along obligations, information rights, preemptive rights, registration rights, and supermajority consent rights among the various investors in the holding company.\"}),\" [\",/*#__PURE__*/e(\"em\",{children:\"Footnote 9\"}),\"]\"]}),/*#__PURE__*/e(\"p\",{children:\"The trade-offs associated with different approaches to handling these topics lies beyond the scope of this paper. Needless to say, ensuring that these rights are construed so that neither co-investors nor primary fund investors with their accompanying trail of side letters receive favorable (or derogatory) treatment requires active consideration during both the fund and co-vehicle formation processes.\"}),/*#__PURE__*/e(\"p\",{children:\"In addition to stockholder rights, the existence of co-investing funds generates additional issues related to disclosure, fee allocation, and apportioning of deal shares across separate vehicles. Managing liquidity events when investors in one particular vehicle wish to retain their position can also pose complications if sponsors are required to carry out uniform liquidity actions for all entities due to provisions in founding documents intended to ensure fair and equal treatment.\"}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Outlook\"}),/*#__PURE__*/e(\"p\",{children:\"The complications generated by side letters show little sign of abating. Both the size of the private equity market and the number of active investors in the class have tripled over the last decade10. As the best performing segment within private markets in recent years11, private equity is poised to attract additional capital and expand further. This growth will bring with it new investors and new investor types, each with the potential to advance a particular assortment of preferences that funds have not previously been asked to accommodate.\"}),/*#__PURE__*/e(\"p\",{children:\"On the regulatory front, regardless of the final form proposed SEC reforms take, the transition to a more stringent regime will likely be arduous as GPs and LPs alike work to interpret the intent and import of each new rule and adjust their approach to side letters accordingly. Separately, in many jurisdictions, new ESG concerns will continue to get enshrined into laws, industry standards, and eventually more rigorous investment mandates. Negotiations over side letters will need to reconcile these burgeoning concerns with a fund\u2019s overall strategy and operations.\"}),/*#__PURE__*/t(\"p\",{children:[\"Individual GPs, though seldom able to resist the full panoply of investor demands, can still take advantage of platforms such as CredCore that simplify side letter management. Several marquee private equity firms deploy CredCore\u2019s to integrate their side letters onto a common digital platform. Fund managers can then view like provisions from across different side letters and evaluate interdependencies that ensue from MFN provisions. For a demo of these and other features, please contact\\xa0\",/*#__PURE__*/e(a,{href:\"mailto:demo@credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:/*#__PURE__*/e(\"em\",{children:\"hello@credcore.com\"})})}),\".\"]}),/*#__PURE__*/e(\"h3\",{children:/*#__PURE__*/e(\"br\",{className:\"trailing-break\"})}),/*#__PURE__*/e(\"h3\",{children:\"Footnotes\"}),/*#__PURE__*/t(\"ol\",{style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\",\"--framer-text-alignment\":\"start\",\"--framer-text-color\":\"rgb(48, 45, 41)\",\"--framer-text-decoration\":\"none\",\"--framer-text-transform\":\"none\"},children:[/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/t(\"p\",{children:[\"Elisabeth de Fontenay and Yaron Nili. Side Letter Governance.\\xa0\",/*#__PURE__*/e(a,{href:\"https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4067905&ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4067905\"})})]})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/t(\"p\",{children:[\"Bain & Company.\\xa0\",/*#__PURE__*/e(\"em\",{children:\"The Private Equity Market in 2021: The Allure of Growth\"}),\". March 7, 2022.\\xa0\",/*#__PURE__*/e(a,{href:\"https://www.bain.com/insights/private-equity-market-in-2021-global-private-equity-report-2022/?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"https://www.bain.com/insights/private-equity-market-in-2021-global-private-equity-report-2022/\"})})]})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"Ibid.\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/t(\"p\",{children:[\"Institutional Limited Partners Association.\\xa0\",/*#__PURE__*/e(\"em\",{children:\"ILPA Principles 3.0\"}),\". 2019.\\xa0\",/*#__PURE__*/e(a,{href:\"https://ilpa.org/wp-content/uploads/2019/06/ILPA-Principles-3.0_2019.pdf?ref=blog.credcore.com\",openInNewTab:!1,smoothScroll:!1,children:/*#__PURE__*/e(\"a\",{children:\"https://ilpa.org/wp-content/uploads/2019/06/ILPA-Principles-3.0_2019.pdf\"})})]})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/e(\"p\",{children:\"de Fontenay and Nili.\"})}),/*#__PURE__*/e(\"li\",{\"data-preset-tag\":\"p\",style:{\"--framer-font-size\":\"16px\",\"--framer-line-height\":\"1.6em\"},children:/*#__PURE__*/t(\"p\",{children:[\"Jessica Jeffers and Anne Tucker. 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