The terms and conditions for Asian private equity funds largely fall short of global best practices, but compare variably with global private equity fund managers in terms of specific clauses, according to a study by Hong Kong-based fund of funds manager Squadron Capital.
“Although most funds in Asia Pacific do not fully conform to the ILPA Private Equity Principles, neither do many funds in the US and Europe,” David Pierce, chief executive officer of Squadron Capital, said in a statement. Asian funds come out well on certain terms such as management fee offsets and distribution waterfalls, he said, while larger Asian funds are charging management fees that are materially above their expected cost base.
According to the study, more than 55 percent of Asian fund charged management fees of 2 percent on committed capital, compared to the global average of 40 percent. At the same time, more that 20 percent of managers charged more than 2 percent, in line with the global average of 20 percent.
However, according to Pierce, while the average management fees for funds up to $100 million in size is just over 2 percent, a number acceptable to most LPs considering a team size of about ten people, the same for funds larger than $1 billion in size is just under 2 percent, “which many LPs would regard as unreasonable for running a team of even triple that size”.
Squadron said fund managers often get additional income from being board members of their portfolio companies and other such services and the ILPA considers it best practice to offset this 100 percent against management fees from LPs. Forty eight percent of Asian funds offset 100 percent while globally, the average stands at 43 percent.
In Asia, 99 percent of fund managers repay investors all the capital they have invested in a fund in addition to the minimum profit hurdle before they themselves become eligible for their incentive payments. The ILPA regards this as best practice, but globally, 28 percent of managers use other approaches to payment whereby they get could start receiving incentive fees before they have even paid LPs their original capital investment.
Separately, the survey revealed that slightly more than half of private equity fund managers in Asia surveyed have formal restrictions on private investments in public equities (PIPEs), traditionally a topic of great debate in Asian private equity. The LP community in general has traditionally derived comfort about PIPEs through the imposition of caps on the proportion of a fund’s investments that can be made in listed equities, Pierce said. Where there are restrictions placed on PIPE investments, the majority of managers set a ceiling of less than 20 percent of the fund for such investments, he added.
Of the 90 private equity funds surveyed by Squadron, 22 percent were pan-regional, 21 percent invested in India, 20 percent in Greater China, 11 percent in Australia, 11 percent in Japan and the remainder in other markets in the Asia Pacific region.
All funds surveyed have been launched in the last two years and are open to investment by international investors. Sixty percent of them managed assets of between $100 million and $499 million, 17 percent between $500 million and $999 million, 12 percent more than $1 billion and the remainder less than $100 million.