DISCLAIMER AND REGULATORY INFORMATION

This communication has been issued in the United Kingdom by Generation Investment Management LLP (“GenerationIM”) which is authorised and regulated by the Financial Conduct Authority of the United Kingdom and is made to and directed solely at (i) existing customers of GenerationIM and/or (ii) persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance if taken on as customers by GenerationIM and/or (iii) persons who would come within Article 19 (investment professionals) or Article 49 (high net worth companies, trusts and associations) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001 and/ or (iv) persons to whom this communication could otherwise be lawfully made in the United Kingdom. Any recipient of this communication who is not one of the intended recipients as set out above should disregard the communication and may not rely on or take any ac on in relation to the communication. Recipients of this communication in jurisdictions outside the United Kingdom should inform themselves about and observe all applicable legal or regulatory requirements.

Whilst GenerationIM has taken reasonable care to ensure that the information in this communication is accurate at the time of its preparation. It should not be construed as the giving of advice or the making of a recommendation. In particular, actual results and developments may be materially different from any forecast, opinion or expectation expressed in this communication.

 

REGULATORY INFORMATION

This web site is owned and operated by Generation Investment Management LLP (“GenerationIM”).

Generation Investment Management LLP is a limited liability partnership registered in England and Wales.

Vat Number: 974882166

Registered No: OC307600

Registered office: 20 Air Street, London W1B 5AN

GenerationIM is the parent company of Generation Investment Management US LLP (“GenerationUS”), an investment adviser located in New York and registered with the United States Securities and Exchange Commission under the Investment Advisers Act of 1940. GenerationIM and GenerationUS only may transact business in any state, country, or province if they first are registered, or excluded or exempted from registration, under applicable laws of that state or province. Individualised, follow up responses will not be made, and additional information about GenerationIM or GenerationUS investment advisory services will not be provided, to persons in any state, country, or province absent compliance with applicable laws or an exemption or exclusion therefrom.

 

PILLAR 3 DISCLOSURE

Background

Following the implementation of the Alternative Investment Fund Managers Directive (“AIFMD”), Generation is designated as a Collective Portfolio Management Investment (“CPMI”) Firm. The designation applies because, in addition to carrying out collective portfolio management of Alternative Investment Funds (“AIFs”), it provides certain additional services to its clients which fall within the European Union’s Markets in Financial Instruments Directive (“MiFID”).

The practical effect of this is that Generation’s regulatory capital is calculated both with regard to the latest version of the Capital Requirements Directive and Regulation ("CRD IV") of the European Union and the AIFMD.   In broad terms, Generation must maintain own funds equal to the higher of the capital requirements calculated under the two regimes.  As explained more fully below, in practice this is the capital requirement established by AIFMD.

In the United Kingdom, CRD IV has been implemented by the Financial Conduct Authority (FCA) in its regulations through the General Prudential Sourcebook (GENPRU) and the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU).

The GENPRU/BIPRU framework consists of three 'Pillars':

  • Pillar I sets out the minimum capital amount that meets the firm's credit, market and operational risk;
  • Pillar II requires the firm to assess whether its Pillar I capital is adequate to meet its risks; and
  • Pillar III requires disclosure of specified information about the underlying risk management controls, capital position and remuneration arrangements.


Generation Investment Management LLP (“Generation”) is an investment manager, authorised and regulated by the Financial Conduct Authority. Generation is categorised as a Full Scope UK CPMI Firm.  It acts primarily as a discretionary investment manager, and does not hold client money or client assets. Although, Generation is an AIFM and falls under the AIFMD Regime, it is also subject to  CRD IV and the FCA’s BIPRU Pillar I, Pillar II and Pillar III requirements outlined above by virtue of the additional MiFID activities it undertakes in managing portfolios for separate account clients. In practice this means that in addition to meeting its minimum Pillar I capital adequacy requirements, Generation is further required:

  • To assess the adequacy of its capital to cover all of the risks to which it is or may be exposed. The results of this analysis is included in the Firm’s Internal Capital Adequacy Assessment (“ICAAP”), which is undertaken on at least an annual basis (Pillar II); and
  • To publish certain details of its risks, capital and risk management process on an annual basis (Pillar III).


Disclosure of our regulatory capital position and our risk management arrangements under Pillar III will be issued on an annual basis unless circumstances warrant a more frequent update.

Risk Appetite

Generation seeks to take a conservative approach to risk and it has endeavoured to reflect this approach in the design of the business organisation, investment philosophy and strategy, and composition of the client base. The amount of capital retained is designed to cover regulatory capital requirements and provide for future business growth.

Risk Management Objectives and Policies

Risk management is the process of identifying the main risks, including regulatory compliance risks, to Generation achieving its strategic objectives. Central to this process is establishing appropriate controls designed to manage those risks and to ensure that appropriate monitoring and reporting systems are in place. Risk management is an inherent part of Generation's business activities. Generation's risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of its major risks. Generation exercises oversight through a Risk Oversight Group (ROG). The ROG meets regularly to review internal controls, risk management processes, regulatory compliance and relevant reports received from Generation's advisors and auditors.

Amongst the risks inherent to the investment management process Generation has identified the following risks as being most relevant.

Credit Risk

Credit risk arises from cash and deposits with banks and financial institutions, as well as credit exposure to clients, including outstanding receivables and committed transactions.

The risk arises due to the potential non-payment of receivables and default by the banks or money market funds with which Generation may deposit surplus funds.

Generation conducts due diligence on any potential counterparty before it enters into any formal arrangements. Generation holds cash on deposit with global rated banks and other financial institutions pre-approved by the ROG. Exposures to such institutions are reviewed by the ROG.

Operational Risk

Operational risk includes those risks or events that could impact Generation's people, processing and technology in such a way as to impact the achievement of Generation's goals and objectives.

The adequacy of internal controls in relation to operational risk is periodically assessed across Generation. Independent evaluation and testing of controls central to the investment process is undertaken on an annual basis and results are reviewed by the ROG.

Systems, internal controls and human resources are in place to mitigate exposure to operational risk.

Market Risk

Market risk is defined as the risk of adverse movements of global securities markets, exchange rates, or interest rates.

Generation is exposed to market movements through the impact a market downturn may have on the value of funds under management and the consequent impact on management and performance fees. Scenario stress-testing has been conducted as part of the Internal Capital Adequacy Assessment Process (ICAAP) and Generation believes that the firm holds sufficient capital to manage this risk.

Generation is exposed to foreign exchange risk as the bulk of its liabilities are in sterling but management and performance fees are predominately calculated and paid in foreign currencies, primarily US dollars. Generation monitors its exposure to currency risk and seeks to minimise its exposure to fluctuations in exchange rates. This may be achieved by hedging against foreign currency exposures.

Generation does not rely on interest from banks for operating purposes. 

Liquidity Risk

Prudent risk management requires the maintenance of sufficient cash balances to ensure the operational expenses of Generation can be met.

Generation has a Liquidity Risk Management Policy, which sets out the processes used to manage and control liquidity risk. Generation has established risk tolerance levels against which the liquidity position is monitored. Cash flow forecasts are the principle management information tool employed to monitor liquidity on a day to day basis.

Generation has concluded no additional capital is required in order to manage this risk.

Capital Resources

We are required to disclose certain information regarding our capital resources and our capital resource requirement.  As stated earlier the capital resource requirement is the higher of the capital required under CRD IV contained in the FCA’s GENPRU/BIPRU and that of the AIFMD included in the FCA’s Interim Prudential sourcebook for Investment Businesses (“IPPRUINV”). 

The capital resources of our business comprise Tier 1 capital after required deductions. The capital resources requirement is calculated as the total of Pillar I and Pillar II capital.

Generation’s Pillar I CRDIV GENPRU/BIPRU capital requirement is the greatest of:

  • a base capital requirement of €50,000;
  • the sum of market and credit risk requirements; and
  • the Fixed Overhead Requirement (FOR).


It is Generation's experience that its GENPRU/BIPRU capital requirement normally consists of the FOR, although market and credit risks are reviewed periodically. Generation applies a standardised approach to credit risk, applying 8% to Generation’s risk weighted exposure amounts, consisting mainly of management fees due but not paid, and bank balances.

Generation’s Pillar I AIFMD IPRUINV capital requirement necessitates it to meet both an Own Funds and a Liquid Assets capital requirement.

The Own Funds capital requirement is based upon a combination of the funds under management capital requirement, which represents the higher of:

  • its base own funds requirement of EUR 125,000 plus its funds under management requirement of 0.02% of relevant funds under management exceeding EUR 250m; and
  • its own funds based upon fixed overhead (Article 97 of the EU Capital Requirements Directive)


plus its professional negligence capital requirement of 0.01% of relevant funds under management.

In practice Generation’s own funds capital requirement represents its own funds based upon fixed overhead which significantly exceeds its funds under management requirement.

For its Liquid Assets Capital requirement Generation is required to hold liquid assets which exceed its own funds based upon fixed overhead plus its professional negligence capital requirement of 0.01% of relevant funds under management. Liquid Capital represents assets that are readily convertible to cash within one month and have not been invested in speculative positions.

Pillar II capital is calculated by Generation as representing any additional capital to be maintained against any risks not adequately covered under the requirement in Pillar I as part of its ICAAP.

Having performed the ICAAP it is Generation's opinion that no additional capital is required.

As at 31 December 2016 Generation's audited regulatory capital position was:

 

Capital Items

£'000

Own Funds Test

 

     Total Tier 1 Capital after Deductions

12,210

     Pillar I Own Funds Requirement

7,608

     Pillar II Requirement

0

     Capital in excess of Requirement

4,602

Liquid Assets Test

 

     Liquid assets held

58,148

     Liquid assets Requirement

7,608

     Surplus of Liquid Assets

50,540


There is a surplus of reserves above the capital resource requirement deemed necessary to cover the risks identified.

 

REMUNERATION ARRANGEMENTS AND POLICY

We are required by the FCA to provide information on our remuneration arrangements. Generation has been categorised by the FCA as a ‘Level 3 Firm’ and is therefore subject to the minimum prescribed levels of remuneration disclosure.

Generation’s Remuneration Committee (the ‘Committee’), meets periodically to consider terms and conditions of employment, global head count requirements and remuneration policy. The Committee includes the Senior Partner, the Head of Client Business, the Chief Operating Officer who is also the Head of Risk, and the Non-Executive Officer, who also chairs the ROG. The Committee is responsible for recommending individual remuneration awards to the Management Committee, which is Generation’s Governing Body, and for the implementation of the remuneration policy which is approved by the Management Committee.

Generation’s remuneration arrangements represent a combination of salary, bonuses and long term incentive schemes that are designed to ensure the sustainability of Generation and to align the interest of Generation and its employees and partners with those of its clients. Employee Incentive Benefit Plans have been established that invest solely in Generation Funds, thereby directly aligning the interests of Generation’s partners and employees with those of its clients. Remuneration includes a variable discretionary component, based on Generation’s profitability, individual performance, and product performance. Individual performance includes a consideration of financial and non-financial measures. Financial measures are generally reviewed over a multi-year time horizon.

Breakdown of Remuneration for the financial year ended 31 Dec 2016:

Breakdown of aggregate remuneration of staff in respect of whom disclosure is required by Business Area (i) and by Senior Management and Other Staff whose actions have a material impact on Generation’s risk profile (ii)

(i) Business Area

 

Total Remuneration (£’000)

Investment Management

 

£62,585

 

(ii) Senior Management (£’000)

(ii) Other Staff (material impact) (£’000)

Total (£’000)

£48,223

£14,362 

£62,585

 

Generation is a limited liability partnership; partners are entitled to a share of distributable profits according to their profit share percentages as set out in the Partnership Agreement and their Individual Terms. For the purposes of this disclosure remuneration for partners excludes these amounts.

 

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