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Understanding Fund Terms: Shadow Equity
Understanding Fund Terms: Shadow Equity
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Understanding Fund Terms: Shadow Equity

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Originally posted in the August 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

Originally posted in the August 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

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  1. Understanding Fund Terms: Shadow EquityOperational due diligence is a multidisciplinary subject. An investor beginning the operational duediligence process for the first time may encounter subjects with which they have little to nofamiliarity. As the scope of operational due diligence has become broadened in recent years, evenseasoned operational due diligence professionals may encounter terms whichthey may be unfamiliar. The purpose of this section of Operational Due DiligenceInsights is to cast a spotlight on some of the words and terms which investorsmay have not previously encountered, or which tend to get overlooked inoperational due diligence reviews.This issues word:Shadow Equity (also known as Phantom Equity)Defined:Shadow equity refers to a type of compensation scheme for hedge fundinvestment professionals. Employees compensated via a shadow equity schemeare not compensated as if they were direct owners of the hedge fund (i.e. -General Partner), but are effectively treated as investors of the fund.What investors should know:The way in which a fund manager compensates its employees can provide useful insights into how itvalues and retains its professionals. Shadow equity schemes are compensation schemes that seekto align the interest of personnel with those of investors. The theory is that this so-called skin in thegame helps to generate harder working investment professionals who will act in the best interest ofinvestors. Employee compensation schemes can also contain vesting components which facilitatethe retention of employees through financial incentives for remaining at a firm.During the operational due diligence process investors should analyze not only the management andperformance fees generated by a fund manager, but also the ways in which these fees aredistributed to employees via internal compensation structures, such as shadow equity. Funds thathave carefully structured employee compensation to incentivize employees and retain talent oftenhave lower turnover.Originally posted in the August 2012 edition of Corgentum Consultings Operational Due DiligenceInsights.For More info@corgentum.comInformation Corgentum.com | Blog | Twitter Feed Tel. 201-360-2430
  2. About Corgentum Consulting:Corgentum Consulting is a specialist consulting firm which performs operational due diligencereviews of fund managers.The firm works with investors including fund of funds, pensions, endowments, banks ultra-high net-worth individuals, and family offices to conduct the industrys most comprehensive operational duediligence reviews. Corgentums work covers all fund strategies globally including hedge funds, privateequity, real estate funds, and traditional funds. The firms sole focus on operational due diligence,veteran experience, innovative original research and fundamental bottom up approach to duediligence allows Corgentum to ensure that the firms clients avoid unnecessary operational risks. ©2012 Corgentum Consulting, LLC

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