The following document is an approximate, but not exact, transcript of the Operational Leaders podcast conversation between host Terrance J. O’Malley and guest Josh Barlow.

Please support the production of this podcast by downloading the Josh Barlow episode.

Narrator 0:05
Welcome to the Operational Leaders podcast featuring leaders and innovators in the investment management industry, where we discuss the business of running the business with host and top industry executive Terrance J. O’Malley.

Terrance O’Malley 0:18
Our next guest has over 15 years of experience in the investment management industry. Beginning in 2006, he was a senior employee at PAAMCO, where his roles included the head of Operational Due Diligence and Accounting, and the Chief Financial Officer at PAAMCO Select. In 2018 he founded his own firm, Valhalla Fiduciary, whose core service is to provide independent non-executive directorships within the asset management industry. Please welcome Josh Barlow.

Josh Barlow 0:49
Thanks, Tery. Great to reconnect with you. Pleasure to be on the podcast. I’ve listened to a number of the others and they’ve been great, good information. So I’m looking forward to your questions and our discussion today. Good to be here.

Terrance O’Malley 1:02
Great, because I’m sure we’re going to learn a lot more having you on here today. So this is great. You started your own firm about two years ago, Valhalla Fiduciary, and you’re focused on the role of the independent director. Can you talk a little bit about what went into your decision to start your own firm and to focus on independent directorships?

Josh Barlow 1:20
Sure, you know, a lot goes into a big decision like that. I loved my old firm. I could have stayed there forever and been happy. But ultimately, the entrepreneur in me wanted to build my own thing. And I knew I could continue to do work that I loved. And I believe that there is an opportunity in the market for me to really help asset managers and investors. So I took the leap. I’m two years in and it’s been incredible. I’m ahead of my goals and my targets, and I’m doing the work that I love doing. So it’s been good. Like you said, my focus is being an independent director on fund boards. That’s primarily hedge funds. I do have a couple of mutual fund clients and a private equity client. So I’m taking the operational due diligence background to the fund board arena.

Terrance O’Malley 2:07
So you were at PAAMCO for 12 years or so. And you’re known there as one of the top operational due diligence people in the business. What was the catalyst? What are some of the motivations behind starting your own firm and focusing on the independent director role?

Josh Barlow 2:24
Sure, well, I love doing operational due diligence, and I still do, but it’s kind of taken with a different hat on, taking my operational due diligence expertise to the fund board. And it was a pretty easy transition. My entire time at my previous firm, I was focused on ODD but I had my fingers at a number of other areas as well, all the time. And one of those areas was that I sat on the boards of many of my firm’s Cayman entities, limited myself to 18 at that time, and they were all internal boards. So I started sitting on boards there in 2009. And then I also managed the independent directors that we used. I attended all of the board meetings. So I already had the board experience and performing that role, but knew that I could do it in an independent capacity using my ODD background. So that was kind of the thought process and the transition.

Terrance O’Malley 3:17
So Josh, tell me a little bit more about your business. Is it something you intend to maintain as boutique? Or do you see this expanding and hiring lots of people?

Josh Barlow 3:27
You know, I do plan to keep it a boutique. And a lot of people in the industry that have launched firms like mine have had a lot of success. And they’ve really grown out those businesses, really the largest governance firms in the world started out in the same way, right? They started out as one person or a couple people, and they’ve grown and had a lot of tremendous success. But my plan really is to keep it a boutique. I plan to always be the only one sitting on boards. I didn’t launch with a partner. I don’t plan to bring in any partners. I don’t plan to employ anybody to sit on boards. I do have administrative help. But I plan to keep it boutique and focused, and it’s just a different business model. But that was the business model that I really wanted to build.

Terrance O’Malley 4:12
And you have one of the better networks in this industry. And I imagine you can rely and tap into that for expertise when needed.

Josh Barlow 4:20
For sure. You know, the industry, like all industries, it’s all about your network. And I do a lot to keep in touch with friends of mine, and make sure I’m staying on top of the trends in the industry and best practices. That’s why I still do a little bit of operational due diligence consulting, that helps me stay sharp on that front as well. But I’m speaking with managers and investors every day and different service providers, the prime brokers, the lawyers, administrators, auditors, there’s a lot of interaction. So it’s pretty easy to stay on top of things and in tune.

Terrance O’Malley 4:54
Let’s drill down a little bit into the role of the independent director. So let me just tee it up. What does an independent director do?

Josh Barlow 5:00
Sure. Probably a long answer, but I’m going to try to simplify and take it from an “in general” approach. So first and foremost, you’re a fiduciary to the fund and the investors as a whole. So I need to uphold the fund documents and do what is best for the investors of the entire fund. As part of that, you attend board meetings, you visit the managers in person, you do frequent calls with the managers. And your responsibilities are to monitor the fund and strategy, the risk and liquidity, monitor the service providers, review and sign off on the audit, valuation, conflicts of interest. And then what I would call managing the discretionary authority. So that’s things like side letters, gates, side pockets, suspending redemptions, suspending NAV. Really that falls into the directors’ realm.

Terrance O’Malley 5:54
Can you talk a little bit about where the role came from, what the background, the history is, because it sounds like at least some of that stuff. a manager could do in-house or maybe have some other arrangement with some outside service provider? Why the independent director role?

Josh Barlow 6:08
Sure, well, mutual funds, PE and hedge all have different governance structures and a different history and what’s viewed as best practice. A lot of this happened organically for all three industries, really. But let me focus on the hedge fund space or what are open-ended private funds, PE being closed-ended private funds. So for offshore hedge funds that are typically structured as corporations, not partnerships, it’s an advantage to not be a tax pass through. So what do corporations have, they have boards. And this all depends on the jurisdiction. So you need to make sure you know the jurisdiction that your investment vehicles are in. Cayman remains the largest of all the offshore jurisdictions. And years ago, you were really required by the US IRS to have directors that were based in that country, that offshore jurisdiction. So that’s kind of how it started.

Josh Barlow 7:02
That’s now history. You no longer have to have directors that are based there. But that organic history put the director role in place. And it put in place that directors should be independent and that you should have a majority of the directors independent. That’s kind of the history. Now each market, the European investor, the US investor, the Asian investor, and the European manager, the US manager, Asian managers, they all look at it a little bit differently. But in the hedge fund space, all those groups agree that the best practice is you should have the majority of independent directors.

Terrance O’Malley 7:38
So that’s for offshore funds. Is that also true in the case of domestic funds?

Josh Barlow 7:44
Yeah, so domestic funds evolved a little bit differently. So for a hedge fund, that’s a domestic fund, yes, even that is viewed as “Hey, you should have governance in place.” So for PE, it’s a little bit different and that’s because they’ve had less of an offshore presence. But even in the hedge fund space, that’s where the push has been. But it’s a good question. I don’t know if this is where you’re going with it. But at times, I’ll be asked that question of, “well, if I only have onshore funds, why do I need directors?” And I’ll be honest with you, I spend zero percent of my time trying to convince people of the value. I don’t spend any time doing that. But if somebody were to ask me that question, I would turn it around on them. And I would say, “Well, what’s your goal? What type of firm are you trying to build? How much money do you want to manage?” If you’re planning to be under 100 million, I would say, “You’re fine. You probably don’t need directors.” But if you’re planning to have a firm where you manage hundreds of millions or a billion, then guess what? You are going to need to have independent directors. Because this is the best practice. Institutional investors expect this and that’s regardless of the value-add that directors bring. This is a best practice expectation. So that’s kind of where I would go with it. It depends on what kind of firm you’re building. And I would say, “Look, that’s more than just a governance question.”

Josh Barlow 9:13
After seeing hundreds and hundreds of managers over these 15 years, I can tell you the culture from the top matters. And managers that have sloppy operations, managers with sloppy organizational structures, guess what? They’re also sloppy on the portfolio side, on the investment side, almost without fail. So for me, it really goes to what type of firm are you trying to build? Are you trying to build a best-practice firm? Are you trying to really have large institutional investors invest with you? Well, if you are, then guess what, you’ve entered the world of independent governance.

Terrance O’Malley 9:52
Well, you’ve perfectly anticipated my question, but let me state it a little bit differently. I’m a manager and I say, “Look, maybe I’m an emerging manager. My assets are still relatively contained. And I have to really keep an eye on my bottom line. And you’re telling me I don’t have to have a director? Why do I want to have a director? it’s going to cost me more and it’s one more person that I have to respond to and have to explain myself to.” So are those the people who you say, “I’m not even going to talk to you,” or is there an argument to say “no, there is value here. And here’s what the value is.”

Josh Barlow 10:25
For those managers, you’re probably talking about a US-based manager that’s running just their LP fund, their onshore LPs, and they still have a small amount of money. What’s common there is for them to continue to just run those partnerships without the governance in place. And really those managers have a goal to one day bring in institutional investors. Well, institutional investors are typically offshore investors, right, because all of your non-US taxables go into the offshore vehicles, all of your foreign investors go into the offshore vehicles, right. So that’s really where you grow your firm. So what those managers typically do is, they should already be making sure that they’re talking with all their providers about best practices and building a great firm. And they may already talk to independent directors that aren’t officially hired, but that they’re keeping in the loop as to what they’re doing. And then that way, when they do go launch that offshore fund, they have directors that are already close to their business, understand what they’re doing, and they put them in place.

Josh Barlow 11:32
And then what they typically do is at the same time that they launched that offshore vehicle and put the governance there, they put that same governance on the onshore vehicle, and on the master fund vehicle. That’s what usually happens. And so it just kind of depends on how quickly you can raise money and what type of money you’re raising. So if you’re going to slowly chip away at it, and you’re going to launch at 10 million and you’re going to slowly kind of move those assets up, then you do what you’ve kind of said and you don’t have governance. If you’re planning to launch day one with 50 million or 100 million right out of the gate, oh, yes, right out of the gate, you’re going to have independent directors in place, and governance in place that gives the investors confidence and trust in what you’re doing.

Terrance O’Malley 12:22
So in addition to governance, what are the other areas that directors can add value?

Josh Barlow 12:27
This is kind of a newer piece of it. When I described the role of the director to you with your first question, really, I took it from a general perspective. Now, as the industry has evolved, you have really what I’m trying to do, which I would call “the value-add director” or the “consultant director”. So even though your official role is you’re director on the fund, you’re trying to add value in whatever way you can. And so for different directors that bring different expertise to the table that might be different things. For me, my ODD background, especially the emerging manager, they like that quite a bit because I can help them in structuring their firm and building their firm. And dealing with investors. I bring that investor perspective, and also that manager perspective where I’ve been in their shoes before of launching vehicles and hiring staff. So that’s one of the things that they might look to. But other directors with other expertise bring other things to the table. Your directors might be a former lawyer, former auditor – I mean, I’m a former auditor as well – but they might bring other things to the table. I would say that’s a new trend. And that was one of the reasons why I launched this business was to bring more to the table so that managers feel like they’re getting more value.

Terrance O’Malley 13:45
Josh, is there an optimal size to a board? We talked about how different board members can have different skill sets and add different areas of value, is there an optimal size or is there a typical size?

Josh Barlow 13:56
Your typical structure is two independent directors and one internal, that’s by far the most common. So you have three directors, two from the outside, one from the inside. But other funds do it different ways. You could have three independent and one internal. You could have zero internal and just two independent or three independent. That’s your typical structure. And then what you’re trying to do is, effective boards have a few different things in place. They have the split board. And what the split board means is that your directors aren’t from the same firm. So you have directors from two different firms. And then effective boards have diversity in their directors, meaning the directors have different backgrounds and different experiences. So that’s kind of what you’re looking for as you structure it.

Terrance O’Malley 14:44
You’ve probably struggled with this question or asked yourself this question a few times. Is there an optimal number of board seats that any one director can or should have, or is it really just dependent on the underlying fund, the underlying manager or the skill set of a director?

Josh Barlow 15:00
That’s the big question. So I’ve already highlighted that directors have been in place. This trend of putting directors in place, that’s already happened. Funds have had directors for a very long time. But following ’08, the big question was really, “well, how many boards can a fund director be doing?” It wasn’t, “Do they have independent directors?” It was, “well, how many boards are they on? And are the directors good?” And so what is that optimal size? Every firm will give you a different number. In some ways that might be okay, because every firm is structured differently, like I highlighted. My structure is to be more boutique. So I’ll probably do a lot less numbers than other people. My structure is to be very value-add and consult and to be involved. So I will do less numbers.

Josh Barlow 15:48
But that’s the question that managers and investors should ask directors, how many boards are you on? It’s common in the industry that directors will quote that based on manager relationships, the number of manager relationships. So you should ask that question, but then you should still follow up with “Well, how many actual boards is that?” So what’s the ideal number? I could give you a range, but it’s a little bit all over the place. Certainly before ’08, there were directors that sat on hundreds and hundreds of boards. There are still directors today that sit on hundreds of boards. That doesn’t feel super appropriate to most people. Right? Do you want an actual number? I would tell you that most of the governance firms have their number somewhere between like 15 relationships to high 30s.

Terrance O’Malley 16:38
You touched on this earlier about the expectation of institutional investors. What kind of role do institutional investors play in this? Do they ever suggest board compositions, board members, anything to that effect?

Josh Barlow 16:52
Absolutely. They do. The investor can really have however much influence they want to have in this area. So there are investors that are very opinionated about it, and express those opinions. And because of that, they end up really controlling who does get put on the board and what that board looks like. There are other investors that just want it to be a majority of independent directors. Really the investor can have however much influence they want to have. And I would also say that they’re probably more influential than they know. And there are a lot of investors that talk a lot about this. There are less investors that do something about it. But those that do really do have an influence. I’ll be honest with you, that’s a source of referrals for me. Because I know a lot of investors, investors will reach out to me and ask me if I could go be on a certain board because they know I bring that independence, that industry expertise and they trust me.

Terrance O’Malley 17:52
So quick question, we can’t really ignore it, Coronavirus has had a tremendous impact on our nation and on the world. How is that impacting the fund industry, how’s that impacting the role of independent directors?

Josh Barlow 18:05
Clearly, it’s been an unprecedent time for all of us. As far as it impacts the independent director, I would say it hasn’t been a huge impact on the independent director. The biggest issue is the lack of travel. And so all of your board meetings are being done over the phone or on video. You can’t really go see the managers; managers aren’t in their offices anyway. So that’s probably the impact on the independent director, which is much less than the impact on the industry as a whole. Obviously, a huge impact on managers.

Terrance O’Malley 18:36
Was there an initial period – when things really started to come to the national attention as to how serious this was going to be with the shutdowns and other disruptions – when funds were calling on their directors for advice or assistance or generally being more involved.

Josh Barlow 18:54
March was the time. Asia sooner, the Hong Kong manager, it was sooner than that. But I will say probably not a lot of managers reached out to directors for advice, right. Managers were very much in a reactionary mode. Certainly, there was their business continuity plans, ready or not? Right. And some probably did very well. Others probably had to figure things out on the fly and make sure they got solutions in place very quickly so that they could work outside of the office for their entire firm. Smaller managers were probably in a much better place to quickly adapt. The larger the firm, the harder it is to go into work-from-home mode. But in general, I would say managers weren’t reaching out to directors on that front. If their funds ended up having significant issues and maybe having redemption issues or liquidity issues. Those are things that they would be reaching out to their directors on and would still be happening today as you enter the redemption cycles.

Terrance O’Malley 20:01
So we still may see some impact from this. And directors may see some impact from this?

Josh Barlow 20:06
There will for sure still be an impact. And some of that will be valuation issues. Certainly, your March 31 valuation for firms. Let’s see what happens in the markets. Will that end up being an audit issue at the end of this year as well? Who really knows? As far as performance goes, there will be managers that will close down at the end of this year, for sure. But again, that very much depends on how things continue to go in the market. So there’ll be an impact.

Terrance O’Malley 20:39
Taking into consideration Coronavirus and other trends, where do you see the industry going in the future?

Josh Barlow 20:45
The governance industry – maybe taking a step at that first – for a hedge we’ve talked about it a lot already. For hedge funds, they’ll continue to be a push for directors to be more involved, directors to be more value-add, diversity and expertise within your directors. For PE funds, that will continue to be a movement toward independence. That’s not going away. Historically, PE has lagged hedge funds with regard to best practices and operational structures; there will be a movement toward independent governance in PE. For mutual funds, they’ll continue to be a big push for director’s with asset management experience. And there’ll be a push for more diversity in directors there. So those are kind of where I see the governance going.

Josh Barlow 21:32
As far as the hedge fund industry, this is an interesting year for hedge funds, and we’ll see how they perform. And certainly I have my client base that I know how they’ve done, and then other hedge funds. But I would say in general, the hedge funds that I know have done quite well, and some have done incredibly well. And so we’ll see how that goes. Certainly, there’ll be some that haven’t done well, that will close down. But my gut tells me that this will be a good year for alternatives. And a year where alternatives can say, “Hey, look, we did what we were supposed to do. We hedged and we performed.”

Terrance O’Malley 22:10
Josh, thanks for coming by today. We’re all a little smarter about the independent director role. We really wish you well with Valhalla Fiduciary.

Josh Barlow 22:19
Excellent. Thank you, Tery. I appreciate it.

Terrance O’Malley 22:22
If you want to learn more about Josh and Valhalla Fiduciary, you can go to Thank you.