Asia GPs feel weight of transparency debate

The debate over fees and transparency has loomed large over the private equity industry in the US and Europe over recent months, and is gradually becoming more apparent to Asia-based players, delegates heard at PEI's Private Fund CFO & COO Seminar in Hong Kong Tuesday.

“In general, investors always had the usual due diligence questions, which they still have. The two main items I’ve seen increase are over fees and expenses – since the GFC that has become a hot item,” Roderik Mulder, chief financial and risk officer at Composition Capital Partners in Hong Kong, said in a panel discussion.

The fee debate has been gaining traction, particularly with the US Securities and Exchange Commission scrutinizing private equity firms ever more diligently, having found almost 50 percent of the firms examined in a recent investigation guilty of some kind of compliance violation.

Investors do appear to be taking note, with the industry potentially losing out on a lot of capital due to its lack of transparency.

About 70 percent of investors have not invested in at least one new private equity or real estate fund due to transparency concerns, according to a recent Intralinks white paper that surveyed over 100 institutional, family office and high net-worth investors.

“What the SEC is going to look at is the key points in [a] partnership agreement and they’re going to focus on a couple of items in particular. The first one is fees – they want to make sure all the fees that are payable by the limited partners are clearly, unambiguously disclosed in the partnership agreement,” Scott Peterman, partner at Sidley Austin, explained of registering a fund with the SEC to raise capital from the US.

“The second thing is the allocation of expense items. So they want to make sure that allocation of investment opportunities and the allocation of expense items are fully disclosed.”

As many Asia funds still raise a vast proportion of their capital from Western markets, these regulations become increasingly onerous for Asia-based funds, with European regulation, too, causing difficulties when raising money abroad.

“The other one that is coming up now, which is mostly in Europe, has to do with AIFMD – over your remuneration policy and that really goes quite far these days,” Composition’s Mulder said.

For the most part, Asian private equity vehicles are registered in the Cayman Islands, whose requirements do not satisfy the standards of the new European regulation AIFMD (Alternative Investment Fund Managers Directive).

“AIFMD has been a bit of a dark horse. More money has been raised in the US and Asia for Asia funds, but there are some fund managers that do look to Europe [or] want to diversify their funding base even though they’ve had successful fundraises in the past,” Andrew Read, partner at Langham Hall in Hong Kong, explained.

The directive, which came into effect in July this year, puts restrictions on how and where firms can market their funds in the European Union unless they register with specific regulators in each jurisdiction, largely considered a big compliance burden for private equity firms.

“AIFMD is many degrees more complex, expensive and difficult to deal with than FATCA [the US Foreign Account Tax Compliance Act] because it applies to the marketing stage and to boil it down to simply language – you have to pay up front [and] what we are seeing as a result is Europe is becoming the last port of call [for some funds].”