Financial regulations coming out of the US and Europe are prompting limited partners to ask for more details from fund managers, according to panelists speaking at PEI’s CFOs & COOs Forum Asia held in Hong Kong Wednesday.
Leonard Wei, chief operating officer at ARCH Capital Management, said a lot of investors have gotten “granular” with a lot more focus being placed on what goes in the side letters.
While he acknowledged that the relationships between GPs and LPs are long-term, Wei expressed frustration over some LP requests, which “have been honestly quite onerous”.
“The issue is when you look at some of the requests, you can’t be blamed for being a little bit suspicious as to whether you are actually being asked to fill in the blanks and do the calculations for your LPs to satisfy their own internal reporting requirement,” he said.
The issue is when you look at some of the requests, you can't be blamed for being a little bit suspicious as to whether you are actually being asked to fill in the blanks and do the calculations for your LPs to satisfy their own internal reporting requirement.
For example, Wei has had investors asking for the firm’s excel working capital model.
“Anybody who operates in this space would realise that is a fairly big ask to a GP,” Wei said. “But people are asking in the interest of knowing exactly what the GP is doing, and they need to understand what the expense is at the level of investment. All of these [requests are intended] to really feel comfortable that they’re working with a [trusted] manager and [that comfort] allows them to sleep at night.”
Another example was when Wei went through a 75-item checklist from an investor. He found that answers to 42 out of the 75 questions could easily be determined by looking at four slides from the firm’s quarterly report sent to LPs.
“You can argue that they also have limited manpower, but you could also say that they were just too lazy to figure it out,” Wei said.
“It’s human nature, I guess. If you can get someone else to do the work for you, why not?” he added.
He said a balance is required “between originating, structuring and executing deals for [LPs] versus spending the same amount of time working on their requests”.
That said, Wei thinks some of the reporting requirements which GPs might have some degree of discomfort with will become more common going forward.
“You just need to basically do what you need to do and get your LPs comfortable,” he said.