Not too long ago investors would continue pumping money into private equity funds if they thought they could take advantage of reasonably valued opportunities and obtain higher yields.
But now they are taking more care over their due diligence to guard against potential risks from shoddy fund operations.
For example, Softbank was recently faced with challenges in raising about $100 billion for a second mega fund, after several key investors in its first Vision Fund complained about the firm’s lack of transparency and its governance, reported The Wall Street Journal. A Softbank spokesman disputed the claim, saying it was "misleading and even inaccurate."
Looking back, the collapse of the Dubai-based Abraaj Holdings last year also shook investors' confidence in how these seemingly unstoppable private equity firms are run. Heavily indebted, the holding company of Abraaj filed for provisional liquidation within six months after failing to sell its stakes in Pakistan’s K-Electric to Shanghai Electric Power for $1.8 billion, reported Financial Times.
“We have seen large state corporate pensions down to multi-family offices spend a lot of time on asking detailed questions,” Haide Lui, head of investor relations at Ascendent Capital Partners, told delegates during a panel discussion on limited partners (LP) at the Hong Kong Venture Capital and Private Equity Association's Private Equity Summit on May 30.
These investors are now asking fund managers to explain how they make the bank transfers, where the paperwork is kept and where they have located their backup servers, Lui added.
This highlights the increased effort investors are putting into the operational due diligence of their fund managers, said Vicki Hui, managing director at Citic Capital Partners. Some investors even want to go on site visits or ask external professionals to do so, Lui added.
“Some of them are conducting either outsourced or in-house background checks,” she said.
As for the due diligence on the business side, while Lui said there hasn’t been a “huge evolution”, this depends on different type of investors.
But if fund managers are not raising first-time funds, investors want to find out “everything about existing portfolio companies, their history, financials and so on,” she added.
The extra emphasis on due diligence is not just an Asian phenomenon. Two family offices and the London-based director of private equity funds at the European Bank for Reconstruction and Development recently outlined their expectations for managers raising first-time funds.
The private equity industry hasn’t been around as long in Asia as it has been in the US or Europe. That may be contributing to investors’ concerns about fund managers in the region, said Doug Coulter, Asia head of private equity primaries at LGT Capital Partners.
“It's a newer industry here, our own investors are more concerned about these governance and ops [operations] topics amongst Asian GPs,” he said.
This is particularly true in China, as industry professionals have told AsianInvestor that local fund management experts are far and few between.
However, Dennis Kwan, managing director at MVision Private Equity Advisers, noted that renminbi managers are catching up with the international standards that most GPs [general partners] adhere to – the Institutional Limited Partners Association’s Private Equity Principles – which could see potential improvement in their governance.
“They are [the guidelines] very standard and they describe how you should do your carry system, transaction fees etc,” he said, “whereas in China, there is a lot of flexibility and unique terms within a lot of these RMB managers.”
In addition to more stringent due diligence, limited partners [LPs] also want to ensure that fund managers communicate with them regularly.
Jacob Chiu, managing director of Asian private equity at HQ Capital, told the audience that they want to communicate with GPs often for two reasons: investors want to understand the investments and don’t want to be “caught by surprise by the deals or by some rumours”, and they want to hear directly from the GP.
Regular communication also helps limited partners assess their fund managers, especially when the GPs come up with a second fund, he said, as this would mean they had a lot of evidence and insight already, for example, when the fund manager would raise capital or whether their strategies are changing.