Asian fund T&Cs acceptable, finds Squadron

The survey, conducted in-house, queried 90 private equity funds, distributed evenly across individual Asia Pacific markets and pan-regional funds, diversified in strategy and fund size. The funds were drawn from the 2008 and 2009 vintages – since the poor fundraising environment in 2009 prevented a representative sample from that year alone. GPs responded voluntarily, but anonymously.

Fees and payouts

Management fees, one of the key issues that drove the ILPA to establish the principles in the first place, appear higher in Asia Pacific, but also less of a problem in the region.  Almost 30% of the funds surveyed charge over 2%, and over 55% charge 2% - well ahead of the 20% and 40% Preqin global averages.

However, as David Pierce, CEO of Squadron Capital observed, “the concern about excessive management fees may not be so relevant here.” Most Asia Pacific funds, he noted, were still short of the multi-billion dollar sizes and “management fees in the hundreds of millions of dollars” that upset global LPs following the collapse of the 2005-07 buyout boom.  For the majority of regional funds, management fees are still close to “what is reasonable to actually run the fund.”

Furthermore, Pierce added, “we’re probably ahead of global competitors in terms of some things such as management fee offsets.” Partly as a reflection of the region’s strong bias to growth capital, he emphasized, Asian funds are on average slightly ahead in implementing ILPA’s recommendations that all other fees charged by a GP should accrue 100% to the fund; with almost 50% of the poll following this approach, versus around 42% globally. And, “distribution waterfalls in Asia seem to be a bit better,” with 99% of the poll following ILPA’s preferred model of European-style fund-by-fund distributions, rather than US-style deal-by-deal.

Key man clauses and no-fault divorce

Fund composition and stability may be a more hot-button issue in Asia Pacific, where teams are usually newer and often more tenuous. Where key man clauses are concerned – in which LPs protection through automatic suspension of investment period and other means if a key dealmaker leaves the firm – Asia Pacific funds seem fairly accommodating, with 95% of respondents having such clauses.

“These are particularly important in Asia,” noted Squadron MD Wen Tan. “There’s less to tie key individuals to certain Asian funds,” as many firms have not yet been through enough full investment cycles to pay returns to their members, and “there’s greater dependency on a single founder."

More disconcerting though, is percentage of interest vote needed to approve a no-fault divorce clause. ILPA recommends a two-thirds majority by interest for removal of a GP without fault. In Asia, 7% of the polled firms have no clause at all, while over 50% require a 75% majority vote.  And, more than 30% require a majority of 80% or more. Pierce remarked that, “three quarters is a pretty high threshold,” and added that as a result, no-fault divorces are rare in Asia.

PIPEs and problems

One area not touched on by the ILPA principles – but very important to LPs invested in Asia Pacific funds – is the strategy or PIPE investing into publicly-listed assets, and the proportion of capital available for these types of investments. Surprisingly, Squadron’s survey found that 43% of the polled firms had no pre-agreed limitations in place. For the 53% with formal clauses, these followed the accepted industry standard of 20% or less of the total fund.

Although the rationale for not having a fixed maximum on PIPE allocation is partly due to pressure from GPs for flexible investment in larger targets (particularly in markets like India and Australia), many LPs assume that private equity funds will engage only in private equity style investing, and have expressed a dislike for PIPEs. Squadron indicated that this may be a larger issue in the coming years and that more clauses may be implemented to define the boundaries.

The state of Asian T&Cs

Overall, Pierce said, “Asian funds are slightly better than their US and European counterparts” in applying the ILPA Principles, though the report concluded that they still fall short of true best practice. However, “The ILPA terms are aspirational,” he said, and Asia Pacific funds compare well with industry peers everywhere in pursuing them. Additionally, given that formation of the funds from the 2008-09 vintages generally pre-dated the formulation of the ILPA Principles, Pierce expected future vintages to be more in line.

Piece and Squadron also observed broad uniformity in industry practice, with Asia Pacific clearly part of a global community. “From an LP perspective, there is becoming a global market,” he said. And he regarded the ILPA Principles as applicable to the region, despite its relative immaturity compared to Western private equity. “We think the ILPA principles are generally pretty sensible,” Pierce said. 

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