When it comes to a successful relationship between the asset owner and general partner (GP), transparency and active engagement are key to a successful relationship, according to a senior official of Malaysia’s Retirement Fund Incorporated (Kwap).
Good GPs are able to identify the problems and issues early on and bring the limited partner (LP) into confidence, said its director and head of private equity Saifulbahri Hassan at the Asian Investment Summit organised by AsianInvestor last month.
"As an investor, you would want the returns, the performance, and all the key metrics economically … above and beyond that, there’s also that need for transparency in terms of the ability to be really a partner where the GP and LP are able to have open conversations about what is happening and ultimately to a point where you can anticipate what is happening,” he said.
“The better GPs, we have seen, are able to identify the pain points early on, and they are not afraid to disclose those pain points rather than being stuck by fear.”
He cited Kwap’s experience with a reliable GP partner who shared its concerns about certain compliance issues with environmental, social, and governance (ESG) standards and what it was doing to address them.
He said that building a long-term relationship with the GPs and engaging them actively is important for private equity deals because of their long investment cycles. Both the LP and GP must be able to respond to the challenges quickly, find solutions, or engage third parties for help, he added.
“From experience, what we have seen is that engagement is important, so when we approach an investment, typically we would approach it from the standpoint of partnership,” he said.
“There is a flywheel effect at the start that may be painful because you have to put in a lot of work, systems and relationships have to be built. But over time, it gets better and easier.”
He said Kwap – which has RM135.5 billion ($30.7 billion) of assets under management - is a signatory of UNPRI – United Nations Principles for Responsible Investing - and has been a strong proponent and supporter of responsible investing long before ESG became a term.
“Private equity has taken the early steps into ESG in terms of making sure that we align ourselves with doing good … making sure that our investments are for the good of the society and humanity,” he said.
To ensure that the GPs it has engaged are aligned with the investment principles of the UNPRI, Kwap initially uses a checklist of exclusions it shares with its partners to factor out non-ESG compliant assets.
However, as ESG principles evolve, so has Kwap’s approach which has become more inclusive. Instead of merely ticking the checkboxes on the complaint checklist, it seeks now to engage with the GPs to understand the issues before making the decisions.
“As a capital provider, we have the responsibility as a steward to ensure responsible investing, making sure the E, S, and G are being implemented, but not to a point where it becomes a separation,” he said.
“Exclusion is easy, we can just exclude people, separate them, put them in a corner and say these guys are not ESG compliant … but the aim for us is to include because ESG is supposed to be for all,” he said.