Private equity firms may be posting decent performance this year, but they are under growing pressure to provide more transparency and flexibility as regards fees and contract terms.
Moreover, following reports this year that some private equity firms have been systematically overcharging clients, PE managers, including those in Asia, are said to be questioning the traditional practice of self-administering their funds (as detailed in a feature in AsianInvestor’s October magazine issue).
Generally, limited partners have become “less forgiving, especially given the challenging environment” when it comes to backing a general partner, said Sanjay Gujral, head of risk management, deal structuring and investor relations at L Capital Asia, the Asian private equity arm of luxury group LVMH.
“LPs [limited partners] have clearly been quite insistent on the issue of transparency of fees and adjustment of monitoring and other fees against management fees,” he noted. “Increasingly the industry is moving to a paradigm where the bulk of those fees are being adjusted against management fees.”
Historically, certain general partners were able to make money from portfolio companies in addition to the management fees they got from LPs, added Gujral, but that is changing. “It still happens, but a significant component of what GPs charge the portfolio companies is now adjusted versus management fees, so the GP gets to retain a smaller share.”
Whether this is this right or wrong is open to question, he said, but it is about finding the right balance. “For instance, if a GP is able to demonstrate that such additional fees are actually needed for creating additional value, and that they are not looking at profiting from such fees, that is a conversation to be had.”
L Capital Asia, which invests in lifestyle consumer businesses across the region, launched its second PE fund in March 2013 with an initial target of $800 million. It conducted the final close at $1.005 billion in August this year, having held a first close at its institutional hard cap of $950 million the previous August.
A trend related to the growing LP pressure for transparency is the growing amount of outsourcing to third-party administrators by PE managers. This suggests they feel having valuation verified independently could help counter negative opinion, and ultimately provide investors with more comfort and attract more capital.
PE assets under administration (AUA) globally increased 15.27% during the second half of last year, according to data provider eVestment, in its latest survey of 28 of the biggest administrators. That compares with 11.19% growth in hedge fund AUA. But eVestment could not provide any more up-to-date figures.
State Street said in September that its Asian PE AUA had grown by more than 10% this year. This is ahead of the rise in both Europe and North America. The firm’s Asian AUA represents 10% of its global PE AUA, which was $305 billion as of end-2013.
*An extended Q&A interview with Gujral appeared in the October issue of AsianInvestor magazine with more detail about how L Capital Asia goes about investing.