Parallel USD-RMB funds worrying LPs

In a survey by Squadron Capital, LPs voiced concerns over private equity firms managing both USD and RMB funds.

Conflicting interests between parallel US dollar and RMB-denominated funds continue to worry LPs, according to a report from fund of funds Squadron Capital.

It notes that currently 34 percent of China funds have existing parallel funds of each currency. However, this is likely to increase with the QFLP programmes in China allowing foreign firms, such as The Carlyle Group, to raise RMB funds.

The survey covered 104 Asia-Pacific GPs that were actively fundraising or closed a fund in 2011. 

One issue was allocation. The China-based respondents of the survey were asked how they theoretically allocate opportunities between the two funds.

Half of those asked said it is purely at the discretion of the GP and the other halft said the allocation was pro rata.

However, the survey showed that in reality only 21 percent of the pro-rata funds strictly follow the pro-rata mandate, with close to 40 percent saying they do not follow it, and the rest following it “to some extent”.

Another key concern of LPs is that RMB and US dollar funds often have varying investment periods. Of the respondents, 57 percent said their RMB fund’s life term differs from their USD fund’s life term. The report said: “If fund lives are not coterminous, [it creates] the potential for sub-optimal investment and exit decision-making.”

Wen Tan, managing director of Squadron Capital, sketched a potential life term conflict: “When you have a situation where the China parallel fund has a three-year investment period as opposed to a five-year investment period on the US dollar fund, does that mean the GP then is artificially forced to deploy money at a quicker rate?”

Another issue that concerns LPs is the carry and management fee terms for GPs managing both the USD and RMB funds. In fact, 71 percent of funds managing both currencies have the same management fees for both funds, the report said. Carry terms are usually the same across both funds as well.