The private equity industry must adopt better corporate governance standards in order to avoid “heavy-handed regulation” that could do lasting damage to the asset class, Jeremy Coller, founder and CEO of global secondaries investor Coller Capital, has warned. “In our sector, over-reaction by a regulator could kill the goose that lays the golden egg.”
Speaking at an awards lunch hosted by Financial News in London yesterday, Coller said: “The benign climate in which we are currently working must not blind us to the possibility of heavy-handed regulation. We should act now while times are good to embrace the kind of corporate governance standards that exist in other business sectors. If we don’t do corporate governance, corporate governance will be done to us.”
Coller said he was aware of examples of fraud committed by managers of private equity funds whose identity he did not reveal. Emphasising that fraud was far from common in the industry, Coller warned: “Sooner or later there will be a major scandal as a result of gross incompetence or downright dishonesty. When it happens, it is likely to lead to an over-reaction by heavy-handed regulators.”
Coller went on to say that private equity practitioners needed to do more to make the asset class more attractive to investors.
Specifically, he urged that investors insist on funds being audited by credible audit firms; the use of custodians for private equity funds become commonplace; no-fault-divorce clauses be written into all Limited Partnership Agreements so as to enable investors to remove underperforming managers; and deal-by-deal carry arrangements be replaced by fund-as-a-whole profit distribution schemes: “Deal-by-deal almost never works. It’s incredibly difficult to get money back from people who have already spent it and paid tax on it.”
Coller also insisted that private equity needed to provide better disclosure of performance-related information to help investors distinguish good performers from bad ones.
“One of the minimum conditions for true asset classes is comparable performance, something which is still not possible in private equity,” he said. “The ‘private’ nature of private equity has allowed too much poor performance to be hidden by smoke and mirrors.”