Why investors are demanding clearer PE governance

Asset owners want private equity fund’s portfolio companies to be more transparent, and expect more variations in fund terms, the latest survey by Coller Capital shows.
Why investors are demanding clearer PE governance

Most Asia Pacific private equity fund investors want general partners (GPs) to be more transparent about portfolio companies, with just 39% backing the need for confidentiality.

That was a key finding of a survey by private equity company Coller Capital, released today (December 2).

The biannual Global Private Equity Barometer polled 113 private equity fund investors*, including pension funds, bank or asset managers and insurers, with 22% being based in Asia Pacific.

“A small majority of both European and Asia-Pacific LPs take the view that the balance [between confidentiality and greater transparency] needs to tilt towards greater transparency (56% and 61% of LPs respectively),” noted the report. North American respondents were evenly split.

This finding comes as more institutional investors seek to increase their holdings of private market assets such as private equity. US buyout funds have already raised more than $246 billion this year as of November 4, surpassing 2017’s record $238.1 billion, on the back of strong institutional investor demand, according to PitchBook data.

The desire of LPs for fund GPs to be more forthright about their portfolio companies and the decisions they make regarding them comes amid rising discontent that some private companies display shoddy corporate governance, even as their valuations skyrocket.

That leaves LPs worried about potential bad news remaining hidden.

However, LPs find it hard to conduct due diligence on a private equity vehicle’s portfolio companies at the beginning, so they have to place a high level of trust in the fund manager.

Some venture funds, for example, invest in 30 to 50 companies and it’s not uncommon for some of them to run out of cash, said Zhan Yang, Hong Kong-based principal of Coller Capital.

Some PE market intermediaries believe the demand for transparency is an attempt by LPs to better understand how the GPs invest.

Ultimately it's not about figuring out where the GP is going to invest in and which company might fall short of governance, it's more about knowing that the GP has a strong governance framework,” Alexander Traub, regional executive Asia Pacific of fund services firm Alter Domus.

In response, Yang noted that GPs have a fiduciary duty to report on their portfolios and changes to which they have made. He argued that having to release additional “key information on the portfolio” could “damage or prevent the GP from creating more value and better returns of the LPs”.

“For example, an investor could ask whether a potential significant M&A event is planned for a particular portfolio company, and if this type of information was widely available it could impact the valuation of any target company,” Yang added.

“In the end, for LPs, they need to know how the portfolio companies are performing, but it's the GP's job to manage the portfolio.”

In other words, LPs should have faith in the private equity fund managers they’re placing their money with.


Apart from calls for more transparency, the survey pointed to increasing expectation among respondents for a bigger variations of fund terms in the private equity industry, including fees and conditions.

Almost three quarters of respondents from Asia Pacific said they expect to see a divergence in the fund terms offered by different GPs in the next five years, according to the report.

“We can see a pretty meaningful divergence in terms of how much management fee and carried interest different GPs are able to charge,” Yang said.

He noted that this widening spectrum of fee rates is being driven by industry peer competition and pressure from investors. “In order to be competitive, you may need to adjust your terms and conditions to reflect investors’ and market expectations.”

While some LPs believe that the performance-driven carried interest should be reduced, more survey respondents said they expect management fees to be reduced.

The traditional 2 and 20 fee arrangement – under which GPs get 2% management fee and 20% performance-driven carried interest – doesn’t necessarily translate well to larger private equity funds. Managers of a $1 billion fund, for example, could earn 2% a year, or $20 million, yet it’s unlikely they would be required to do five times more work than GPs operating a $200 million fund.

A Hong Kong-based executive at a single-family office told AsianInvestor that his firm prefers to invest in smaller PE funds – between $300 million to $800 million – for this reason.

“If you have a fund that's $100 million, and they can barely fund themselves with the management fee, these guys are performance-driven,” the executive said.

* Geographically, respondents to Collers’ survey were split evenly between North America and Europe (39% each), with the remaining 22% based in Asia Pacific. Public pension funds comprised 29% of responses, bank or asset managers made up 21% and insurance companies 14%. Collers said 58% have over $10 billion in assets under management, but it declined to provide a consolidated figure of the respondents’ AUM.

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