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FOR THE ASIAN PRIVATE EQUITY MARKETS

ASIAN LP SPECIAL
A sian L P special

Asia’s quiet LPs

Influential but low profile: PE Asia introduces 20 LPs in Asian private equity
that rarely make the headlines

I n Asia, the limited partner landscape is unique. A handful of

institutional LPs such as national pension funds and sovereign
wealth funds operate alongside hundreds of smaller, less formal
entities like family offices.
Or, in the case of China, “perhaps thousands of small and mid-
size retail LPs and high net worth individuals who invest in RMB
funds and feeder funds and operate under the radar”, according
toWenTan, managing director at fund of funds Squadron Capital.
Most Asian LPs are new and everyone is in the process of building
private equity exposure, even the large institutions. “Very few entities
have mature private equity programmes,” says one industry source.
Jie Gong, executive director for Asia at Morgan Stanley Alterna-
tive Investment Partners adds: “Asia’s LP landscape is characterised
by a few long-standing investors alongside the newer crop of LPs
that have moved into private equity recently or are studying it as
they build out their investment programmes.”
Traditionally, rich families and tycoons who invested in the
stock market were Asia’s investor base. But these investors are
slowly transforming. Family offices, particularly in India and China,
are structuring their private assets in order to turn into a fund
management business.
“Instead of individuals making investment decisions on their
own financial assets, the professionalisation of wealth management
in the form of family offices is increasingly taking place,” Gong says.
And as the LP industry matures, “that creates a rising number
of LP institutions in Asia”.
Sources say Asian LPs have general characteristics that include
a greater willingness to invest outside their home base than their
Western counterparts and an attraction to global brand names
when investing in the US or Europe.They are also gradually increas-
ing their allocation to private equity and, according to one industry
source, Asian LPs “are as cost sensitive as anybody can be.”
They are also low key. PE Asia has therefore collected snapshots
of twenty low-profile regional investors. Not all are Asia-based,
but the common thread is that their investments in the region are
helping to develop the private equity industry.

Cobalt Hill Capital
Headquarters: Singapore
AUM: Unknown
PE allocation: Unknown
A Singapore-based family office that
has only just launched a private equity
programme. Rumoured early funds to
appear in its portfolio are Saratoga Capi-
tal and Kohlberg Kravis Roberts. In Sep-
tember last year, Cobalt hired principal
Marcus Tay to focus on private equity and
special situations.
SEB Asset Management
Headquarters: Stockholm
AUM: SEK2362 billion
(€260 billion; $329 billion)
PE allocation: Unknown
The Scandinavian investment house, run
by Barbara Knoflach, has been investing in
Asian private equity for about eight years.
It takes a pan-regional Malaysian pension fund plans to increase
approach and has a its private equity allocation to 2 percent
knack for co-invest- and has already invested in a number of
ments, despite having household names. Actis’ ASEAN Fund,
no office presence in Tata Capital Growth Fund andTempleton
Asia. Its preferred Strategic Emerging Markets Fund III are
investees in Asia are among them. It has a preference for invest-
lesser known GPs, SEB: hardly a ing in emerging markets and buyouts.The
as exemplified by passive LP pension fund’s private equity programme
its investment in an invests in Asia, Central and Eastern Europe
unnamed Chinese water fund. The firm and Latin America and is run by Zalman
currently has SEK2362 billion (€260 bil- Ismail, director of alternative investments.
lion; $329 billion) in assets under man-
agement. Quentin Ayers
Headquarters: Sydney
Kumpulan Wang Persaraan AUM: A$2 billion
(Diperbadankan) (€1.5 billion; $1.98 billion)
Headquarters: Kuala Lumpur PE Allocation: 100 percent
AUM: MYR70.5 billion This Australian superannuation fund
(€17 billion; $22.6 billion) will be changing strategy to focus
PE allocation: 0.8 percent more exclusively on Asia. Its allotment of

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asian L P special

A$2 billion (€1.5 billion; $1.98 billion) and €4.2 billion assets under management. commitment to private equity in the coun-
is solely dedicated to alternative assets, Chief investment officer at FMO is Jurgen try. Its GPs include CIMB Group and Navis
mainly private equity. It’s expected to shift Rigterink. Capital. Dato Abdul Rahman Ahmad is chief
a previously global mandate to an Asia- and executive officer.
Australia-focused platform.The fund com- Military Mutual Aid Association
mits to approximately five GPs per year. Headquarters: Seoul Google Southeast Asia
Gary Lines and Ralph Suters are executive AUM: $7.4 billion Headquarters: Singapore
directors of the investment team. PE allocation: 17.2 percent AUM: Unknown
A Korean government agency, the VC Allocation: 100 percent
Dragon Pearl Partners Military Mutual Aid Association pro- Backing venture start-ups in South-
Headquarters: Bangkok vides welfare to civilian employees, military east Asia, the Singapore-based Google
AUM: $200 million personnel and their families.The fund holds office has committed to at least four ven-
PE allocation: 70 percent $7.4 billion in assets and has a mandate to ture capital funds in Asia-Pacific since
Though small, with only $200 million invest up to 20 percent in private equity. its opening in 2007. It is 100 percent
assets under management, Dragon Pearl The fund’s current allocation is 17.2 per- dedicated to venture opportunities, but
Partners likes private equity.TheThai family cent, according to sister data publication PE covers a wide-range of sectors including
office has a target allocation to private Connect. The fund began investing in private cleantech,TMT, healthcare and consumer
equity of 70 percent, equity in 2004 and commits to GPs that goods. Managing director of Google
solely for the Asia- solely invest in Korea. Seok-Hwan Park is Southeast Asia is Julian Persaud.
Pacific region, focus- the chief investment officer of the fund.
ing on Southeast Asia. Shanghai Fudan University Education
The office manages Capvent Development Foundation
the money of George Headquarters: Zurich Headquarters: Shanghai, China
Chen and has com- AUM: $2.2 billion AUM: RMB 190 million (€24 million;
mitted $150 million PE allocation: 100 percent $30 million)
Dragon Pearl to private equity as Private equity house Capvent is based PE allocation: Unknown
Partners: likes of November 2011. in Switzerland with a heavy focus on Shanghai Fudan University Education
private equity Roger Chi is a partner. Asia. Although making direct invest- Development Foundation is one of the
ments, it mostly functions as a fund of smaller university endowments with a
FMO funds, in total investing $1.25 billion total asset of RMB
Headquarters: The Netherlands globally since 2000. Its current fund of 190 million (€24
AUM: €4.2 billion funds, CAPE III is $300 million and has million ;$30 mil-
PE allocation: 21 percent a mandate to solely invest in Asia – 50 lion) in 2011. It
Of course, FMO is not an Asian LP. It’s percent in India and the rest in China and reportedly commit-
one of the largest development banks in Southeast Asia. Tom Clausen and Varun ted RMB 20 million
the world and based in the Netherlands. On Sood are founders and manage the firm’s to a venture capital
the surface, it doesn’t seem to belong on this investment activities. Fudan: fund managed by
list. However, what is low key about FMO endowment in PE CDH Investments.
is the fact that they Ekuinas
have wide exposure Headquarters: Malaysia Gopher Asset Management
to the Asia-Pacific AUM: MYR1.4 billion Headquarters: Beijing
region. FMO has $5 (€353 million; $441 million) AUM: RMB 2 billion
billion AUM with PE allocation: 100 percent (€250 million; $314million)
26 percent ($1.5bn) New to private equity, Ekuinas made PE allocation: 100 percent
committed to Asia. its first commitment to the asset class in Gopher Asset Management, a fund
In total, FMO has a FMO: Asia looks 2010. It is a government-linked private of funds headquartered in Beijing, was
21 percent alloca- good from the fund dedicated to the development of the founded by NOAH Private Wealth Man-
tion to private equity outside Malaysian economy and has a 100 percent agement in May 2010. It has already closed

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asian L P special
three funds and has RMB 2 billion (€250
million; $314 million) in assets under man-
agement. Since its establishment, the firm
has also been an active investor and has
committed capital to more than 10 funds
including the first RMB fund managed by
IDG Capital Partners.
Beijing Flourish Libra Venture Capital
Headquarters: Beijing
AUM: $47 million
PE allocation: 100 percent
Beijing Flourish Libra Venture Capital
is another China fund of funds, also
established in 2010. It recently closed
two funds and has invested in Chinese
GPs such as SAIF Partners, Jiudong Capi-
tal and Fortune Venture Capital. It has
about RMB 300 million (€ 38million;
$47 million) in assets from the first two
fund of funds and is currently raising a
third fund targeting RMB 200m. Qiang
Liu is the chief investment officer of the
firm. The firm is known for its young
team, since most team members were
born after 1980. It is known to have a
very hands-on approach and team mem-
bers often join the investment commit-
tees of GPs that the firm has invested
in. The firm also seeks to strengthen its
investment capability by hiring GPs as
its investment advisors.
LDC (Asia)
Headquarters: Hong Kong
AUM: $34 billion (Assets of parent
company LDC)
PE allocation: 2 percent
LDC (Asia), the Hong Kong unit of
Lloyds Banking Group-backed LDC,
looks opportunistically for China-based
GPs that have strong on-the-ground
expertise and are willing to allow the
firm to make co-investments. It has
already made investments in two venture
capital firms, Blue Oak China Venture
Fund and CNEI. The firm aims to invest
up to $40 million across all investments
in China this year. LDC has around £2
3 Copying without permission from PE ASIA is unlawful
billion (€2.5billion; $3 billion) in assets
under management.
Okayama Metal & Machinery
Headquarters: Okayama, Japan
AUM: $502 million
PE allocation: Unknown
An industry pension fund in Japan that
other Japanese LPs tend to watch and
sometimes follow. Its chief investment
officer, Yoshisuke Kiguchi, is also a well-
known opinion leader in the space, and
he has more than 20 years of experience
in investment and risk management. The
firm has JPY 40 billion (€412 million; $500
million) in assets under management.
Aozora Investment Co
Headquarters: Tokyo
AUM: $64 billion
(Assets of parent company Aozora
Bank)
PE allocation: Unknown
Tokyo-based Aozora Investment prima-
rily engages in venture capital invest-
ments, but it is also an investor in buyouts
and fund of funds with a geographic focus
on Japan and the US. The investment
firm is known to have made over 200
investments in private equity, via direct
and third-party managed private equity
vehicles.
Dongbu Insurance
Headquarters: Seoul
AUM: $12 billion
PE allocation: 1 percent
Korea’s Dongbu Insurance allocates
less than 1 percent to private equity
investment. It is known to have invested
in funds managed by Darby Overseas
Investments and STIC. But the firm has
plans to raise its private equity allocation
to 5 percent by 2013. Similarly, it has
plans to commit to more funds targeting
only China and Asia. It likes global and
Asian buyout funds, venture and infra-
structure funds. It has around $12 billion
in assets under management.
Dai-ichi Mutual Life Insurance
Company
Headquarters: Tokyo
AUM: $319 million
PE allocation: 1.2 percent
Dai-ichi Mutual Life Insurance Company
in Japan has committed to 36 private equity
funds in Asia, the US and Europe. It primarily
focuses on buyouts and fund of funds. The
firm is said to be seeking more investments
in Asia and is strengthening relationships
with existing GPs. But it is also open to
new investments. It has around JPY 31,000
billion (€ 319 billion; $395 billion) under
management, with around JPY 62 billion
allocated to private equity.
Asia Alternatives Management
Headquarters: Hong Kong
AUM: $2.1 billion
PE allocation: 100 percent
Founded in 2006, Hong Kong-head-
quartered Asia Alternatives Management
invests in GPs across Asia and has a focus
on buyout, growth capital, venture capital
and special situation funds. The company is
known to have blue-chip backers including
California Public Employees’ Retirement
System and the New York State Common
Retirement Fund. The firm launched over
10 funds, and its latest fund of funds named
NewYork Balanced Pool Asia Investors has
a $75 million target.
CDIB Capital
Headquarters: Hong Kong
AUM: $700 million
PE allocation: Unknown
CDIB Capital was set up in 2006 and is
the Hong Kong-based investment arm
of the China Development Industrial Bank
in Taiwan. It has a fund of funds business
that makes selective investments in global
players such as Kohlberg Kravis Roberts,
the Blackstone Group, Oaktree Capital and
Sun Capital Partners. A typical investment
is $10 million – $30 million. It is currently
managing TWD 21 billion (€568 million;
$700 million) from its parent company.
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l i m i t e d pa rt n e r s

The next wave?

China’s private equity investment landscape has been largely dominated by the
country’s growing number of high net worth individuals – but is this about to
change? Vicky Meek reports

T he last few years have seen an

explosion in RMB-denomi-
nated funds, with both local
and foreign managers looking to cash
in on China’s growing wealth. In 2010
and 2011 alone, RMB funds raised
over $30 billion-worth of capital,
versus around $14 billion for US$-
denominated funds destined for China,
according to Asian Private Equity
Research figures.
However, the majority of this capital
has come from the country’s growing
number of high net worth individu-
als (HNWs) rather than institutional
investors. “Until six months ago, the
LP market was largely driven by non-
institutional investors – mainly HNWs,
with a few corporates,” says Ludvig Nils-
son, managing director at Jade Invest, a
China-focused fund-of-funds manager.
Until six
months ago,
the LP market
“These drove the development of RMB
funds in the 2009 and 2010 period – was largely
they were a major force in the devel- driven by non-
opment of a large range of grass-roots institutional
funds in China.”
This heavy bias towards non-profes- investors –
sional investors can cause issues, since mainly HNWs,
many – although keen to diversify their
investment portfolios by investing in pri-
with a few
vate equity – are not used to some of the corporates
characteristics of the asset class.

Institutional investors: a wave of change coming in China

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asian L P special
“There are a lot of HNWs in China
that have capital to deploy,” says Doug
Coulter, head of private equity, Asia
Pacific, LGT Capital Partners. “They
can’t invest it all in the stock market,
which hasn’t performed as well over
recent times as it has historically in any
case, and they can’t put it all into real
estate. So many are looking at private
equity. As a result, there is a lot of capital
going into RMB funds. The difficulty is
that many of these investors don’t fully
understand the asset class and don’t tend
to do sufficient due diligence before com-
mitting to a fund. [And] when they are
in, they may not appreciate the illiquid
nature of private equity as they are more
used to real estate and public markets
investing.”
The rise of Chinese funds of funds
China is starting to see the emergence
a domestic funds of funds industry
investing in RMB funds; for instance
CDB Capital, the investment manage-
ment arm of China Development Bank,
has just reached a second close at RMB
9 billion (€1.1 billion; $1.4 billion).
However, institutional capital in
funds of funds is severely limited,
partly because of regulations, but also
because many just don’t see the need.
“Most institutional investors are not
allowed to outsource their investment
process to a fund of funds,” says Ludvig
Nilsson of Jade Invest. “But even if the
regulations changed, it would take time
for meaningful amounts of capital to
be deployed in this way. Investors first
need to realise that they need to get
into the best funds to achieve good
returns and only then will they see
that manager selection is a skill that
can justify an extra layer of fees.”
Some of China’s funds of funds to
date have operated more like feeder
funds, allowing HNWs to buy what is
5 Copying without permission from PE ASIA is unlawful
A very peculiar market
This has led to the development of a
domestic private equity industry that is
very different from that seen elsewhere –
one that reflects the fast-paced nature of
the Chinese economy, and the impatience
of HNWs to see returns. “The terms of
many RMB funds have historically been
far from institutional,” says Nilsson.
“They have tended to have short invest-
ment periods of around a year, with short
harvesting periods and liquidation within
three years.”
This may have worked while China’s
IPO market was white-hot. But inves-
tors have become increasingly weary of
new issues failing to live up their prom-
ise. Local media reports have suggested
that three-quarters of IPOs saw price
effectively a package of pre-selected
fund investments. “These provide
HNWs with the benefit of diversifi-
cation as they could not build up a
portfolio of investments otherwise,”
says Nilssen. “[But] the problem with
these funds of funds is that they tend
to receive a placement fee from the
GP, part of which they pass on to the
HNWs in the form of a rebate. That
presents a massive conflict of inter-
est.”
Many of these vehicles have also
faced problems with HNWs default-
ing on their commitments as investors
have not fully understood the illiquidity
inherent in private equity. As a result,
they’re falling out of favour.
The core of the problem is that,
like institutional investors, HNWs see
little value in paying for fund manager
selection. Until this develops, and until
the regulations are changed to allow
more institutional investors to invest
via funds of funds, this type of vehicle
looks unlikely to gain traction.
falls on their first day of trading in 2011,
compared with 42 percent in 2010.
Nevertheless, HNWs believe they
can generate stratospheric returns from
private equity – at least for now. “The
return expectations of local LPs from
RMB funds are high – in the region of
30 to 40 percent IRRs,” says Weichou
Su, partner at StepStone’s Beijing office.
“These are not that realistic in today’s
market, as we have seen difficulties on
the capital markets in China over the last
six to nine months, and the domestic and
international economic environment and
exit markets have been less positive than
in the past. [So] these expectations will
adjust.”
And there will be other adjust-
ments to come. The institutional inves-
tor base in China remains surprisingly
tiny, largely because of central control.
“China’s institutional investor market is
very small currently,” explains Su. “If
you look at much smaller markets in
Asia, many of them have more developed
institutional investor landscapes cur-
rently than China. Korea, for example,
has around 15-20 insurance companies
and banks that have been investing in
private equity for over 10 years. That’s
many more than China, even though it’s
a much smaller market.”
While the high-profile sovereign
wealth fund the China Investment Cor-
poration (CIC) has long been involved
in private equity investing, much of its
capital has gone overseas.With a mandate
to help diversify China’s economy, it has
invested in a number of international
private equity firms and set up various
joint ventures (the most recent of which
is a collaboration with Belgian Federal
Holding and A Capital to create a fund
to invest in European companies with an
eye on growth in China). The other key
institutional private equity fund investors
are China’s National Social Security Fund
and the China Development Bank, plus a
handful of state-owned enterprises.
asian L P special
Light at the end of the
tunnel
However, back in 2010, the state issued
new guidance suggesting that China’s
insurance companies could start invest-
ing in private equity. This hasn’t exactly
opened the floodgates, but there are signs
that the largest groups are finally start-
ing to invest in the asset class. China Life
and Ping An, two of the country’s largest
insurers, have received the thumbs-up
from the state to invest in private equity,
for example.
“Insurance companies will be the
first to provide meaningful amounts of
institutional capital for private equity
in China, but this has been developing
slowly,” says Su. “This is in part because
they are risk-averse and don’t yet have
clear processes and guidelines in place
to make informed investment decisions.
It’s also because these are state-owned
companies and so tend to move slowly
relative to privately-owned businesses.
They have to follow strict directions
from the government.”
Indeed, until recently, insurance com-
panies had to gain regulatory approval
for each private equity investment –
although this is starting to change as new
government guidelines on investing in
the asset class develop over time. Many
in the market say that this is starting to
free up capital already.
“Previously, the only domestic insti-
tutional private equity investor in RMB
funds was the National Social Security
Fund,” says Nilssen. “That has changed.
The insurance companies have now
started to invest in private equity and
even despite the regulations, a relatively
large overall amount of capital has gone
into the asset class over the last six
months – we’ve advised on $1.8bn of
transactions in that period.”
This could be the start of a new wave
of capital heading towards private equity
investment, he believes. “The insurance
market will open up. At the moment, it’s
Copying without permission from PE ASIA is unlawful
only the mega-players that are investing
in private equity. That will change as the
second tier starts looking more at the
asset class, but the large insurance com-
panies alone will provide significant capi-
tal. China Life, for example, has a $260
billion balance sheet – that could provide
a lot of GP dry powder on its own.”
How long this will take is open to
debate. Some suggest five years; others
far fewer. “Things happen so quickly in
China,” says Jingjing Bai, who manages
distribution in Asia for Eaton Partners.
“If the regulations change, developments
can happen almost overnight – it’s highly
unpredictable because of the high level
of government control over everything.”
Changing the model
Either way, some believe these new
entrants could change the nature of the
Chinese private equity industry.
According to Bai, many of the insur-
ers getting into private equity already
have one eye on direct investing. For
instance, China Life is building a team
of investment professionals for this pur-
pose, she says. “At the moment, the deals
on the market are relatively simple,” she
explains. “They are growth equity deals
and so you provide equity, they grow
and then you list them. However, that
will change and as that happens, many
insurers may start seeing the need for
investing with managers. They may seek
increased diversification and the deals
may get more complex. It may be only
a couple of years before we start seeing
that shift.”
Others, of course, will be investing
via funds. “The entry of the insurance
companies is having a powerful effect on
the RMB market,” says Nilssen. “These
funds can now raise significantly more
than before and, with longer investment
periods and time horizons than they used
to have, they are adding to the competi-
tion already apparent in the USD fund
market.”
Insurance
companies
will be the first
to provide
meaningful
amounts of
institutional
capital for
private equity in
China
They are also helping to profession-
alise the market, he adds. “Some of the
more successful GPs are now shifting
towards more institutional terms to
attract institutional investors. The chal-
lenge these funds now face is convincing
insurance companies they know how to
manage risk over the long term. We are
seeing a clean-up of the domestic market
– and that is very healthy.”
This is likely to be encouraged by
the government in China, which is keen
for private equity to flourish – without
becoming a mass-market investment.
“The government is generally positive
about building an onshore private equity
industry and as part of that, there will
be moves to encourage the develop-
ment of a large domestic LP base,” says
Coulter.
And when – rather than if – that hap-
pens, there will be little to stop the Chi-
nese private equity industry. “We don’t
see any reason why China won’t become
the world’s largest private equity market
within 10 years,” adds Coulter. “Local
LPs will play a large part in this.”
6
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investor relations
What LPs really, really want
It may not be common for GPs to design their fund administration systems
based entirely on what investors want – but those that do are better positioning
themselves with the LP community. Nicholas Donato investigates
I f an investor were to ring you on the
phone asking for a tour of the back
office sometime this week, could
you do it? And not just give the tour,
but convincingly demonstrate the qual-
ity of your fund administration platform
and internal controls? Even when all the
constituent pieces are in place, some LPs
say they feel disappointed in their GPs’
ability to explain it all to them.
If you’re unsure about your answers
to the above questions, you may have a
problem on your hands – or at least you
will have in the not-too-distant future.
Impressing investors these days goes far
beyond the right performance figures;
more and more LPs are also quizzing GPs
on operational matters. Having the right
systems in place – including, for example,
being fully prepared for LP visits – go
a long way towards building trust and
instilling confidence.
And while back office functions are
not typically created based on what LPs
want, it can’t hurt to at least understand
what their expectations are.
Fortunately, for the most part those
expectations are largely in sync with
developments at the GP end: a move
away from Excel-based reporting; a more
holistic approach towards fund admin-
istration tasks; the ability to access and
produce data more easily. But in other
areas the expectations may diverge, such
as the level of access investors are given
7 Copying without permission from PE ASIA is unlawful
Scharfman: using third parties impresses
investors
to GPs’ fund administration systems
through web-based portals.
In general terms, the ability to provide
any kind of web portal tends to impress
investors. Software providers like to sell
these systems to firms by arguing that
it reduces ‘out of the blue’ phone calls
from LPs seeking information– because
it allows them to run their own reports
around capital call notices, portfolio
company information and other select
GP data points independently.
That clearly has its merits. But some
GPs are uncomfortable with the idea of
investors running ad hoc reports without
some type of screening process to put
any information gathering into context.
“On the one hand you give inves-
tors something they want, which is an
incredible level of transparency. But on
the other hand GPs don’t want num-
bers being pulled up without any type
of interpretation or analysis that explains
their meaning,” says Shawn Pride, head of
P&L Consulting, a private equity-focused
consulting firm.
Objection handling
These days, the demand for greater trans-
parency spills over into all aspects of
GPs’ back office work. Multiple sources
pointed to two areas in particular during
interviews for this article: capital call
notices and waterfall calculations.
“LPs don’t just want to see a capital
call notice for, say, £1 million,” says James
Hutter, global head of private equity and
real estate services of JP Morgan’s World-
wide Securities Services business. “They
want to understand what portion of that
money is for the actual investment, and
what portion goes towards things like
management or legal fees.”
Some influential LPs are even refus-
ing to sign on with managers unable to
provide a capital call notice in the format
they want, according to P&L’s Pride.That
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GPs that
proactively
engage with
investors
about the
firm’s internal
controls can
gain a glimpse
into how other
firms are
handling LPs’
questions and
concerns
could mean a loss of capital for any firm
running an antiquated software system
that’s unable to process the complicated
formats requested by some LPs, she sug-
gests.
With waterfall calculations, Hutter
says investors want some type of assur-
ance that things are reasonable. “Calcu-
lations should spell out GPs’ share of
distribution proceeds, as defined by the
waterfall calculation in the LPA.”
From an accounting perspective, a
major concern LPs have relates to acces-
sibility. “It’s a fraud issue,” explains Jason
Scharfman of Corgentum Consulting, a
firm that guides LPs through the opera- On a wider point, the scalability of
tional due diligence process. “Investors GPs’ fund administration systems is also
want GPs to show who has access to being questioned by LPs. While a small
the cash management sections of the system may have been sufficient for
accounting system, to make sure an a firm’s debut fund, when it was only
employee can’t just release a cheque to responsible for (say) $200 million in
himself.” capital, LPs want to know its systems
One great way to diminish LPs’ fraud can handle the increased workload if it
concerns is to outsource the accounting plans to grow in size. When it comes to
function to a third party service provider,
says Scharfman. “Third party administra-
tors provide a degree of independence
that is not available in self-administered
34%
funds.”
And in the eyes of LPs, the benefits of
an outside administrator don’t end there.
Even though some GPs like to argue that Percentage of LPs who
the efforts of a third party administrator identified valuation as the
can be a duplication of work already done largest operational risk in
internally, LPs enjoy knowing that an private equity, according
independent entity is running a second to a recent survey from
set of books and looking over GPs’ shoul- Corgentum Consulting
ders when performing fund administra-
tion tasks, says Scharfman. He predicts
more LPs will voice their preference for
GPs using third party administrators in
the years to come. 22%
There is a flipside, though: those that Percentage who cited
do go down this road should subsequently compliance and corporate
be prepared to show LPs how the firm governance standards
handles communications with its outside
administrator. Software systems are not
always able to easily share information
with one another; GPs have to show
that using Microsoft Excel, for example, 17%
is compatible with an administrator’s Percentage who cited
internal software and wouldn’t result
‘traditional back office
in any lost data or operational hiccups
procedures’
if the format has to be converted, says
Scharfman.

Copying without permission from PE ASIA is unlawful 8

asian lp special
scalability: “taking on new geographies,
for instance, or adding more clients, will
need to be considered,” says Scharfman.
The VIP treatment
As mentioned above, an effective way to
demonstrate quality controls to LPs is a
tour of the back office. However, some
GPs are now going the extra mile by
showing investors a clean internal audit
report as part of that visit. Firms that
undergo a third-party controls report-
ing audit, known as the ISAE 3402 (and
described by some firms as superseding
the SAS 70 in becoming the new “mother
of all audits”) are making headway with
LPs, according to sources.
And with good reason. The volun-
tary audit can be a gruelling and time
intensive exercise, involving as it does a
top-down probe into a firm’s investment
management standards, fund administra-
tion and information technology prac-
tices. Audit costs depend on the size and
complexity of the firm, but the price tag
tends to be at least $100,000. Not all
firms will be able to afford the time or
the money to gain this certification – but
for those that do, an independent audit is
a quick and easy way to stand out from
the crowd.
At the moment, the ISAE 3402 and
the more US-centric SSAE 16 certifi-
cation are not standard in the industry.
But the bigger and more complex the
asset manager (fund of funds of a certain
scale, for instance), the more investors
are spending time trying to determine
whether their GPs are sufficiently staffing
and resourcing finance and administrative
9 Copying without permission from PE ASIA is unlawful
An effective
way to
demonstrate
quality
controls to LPs
is a tour of the
back office
functions.What’s more, a successful audit
is also likely to go down well with regula-
tors should they decide to take an inter-
est in the firm’s operations.
As with all tests, prep work ahead
of the actual examination makes sense.
According to private equity CFOs, firms
interested in undergoing a reporting
audit should begin identifying key con-
trols to determine where adjustments are
needed, well before the auditor ever sets
foot in the door. It may even be the case
that no significant overhaul is needed;
that some more formal documentation
of the internal processes already in place
is all that’s required.
Despite the potential time and costs,
reporting audits may become more
commonplace as fund managers work
harder to demonstrate why their fund
is better than the competition. So rather
than looking at it as yet another hoop
to jump through, GPs should consider
it a chance to show off the sophisticated
systems they’ve put in place to investors,
one EU-based LP told PEI.
Another point for GPs to consider
is what happens after the tour of the
back office is done. Does everyone just
go home, happy in the knowledge that
some level of operational due diligence
has been completed?
Not really, say some market sources.
In one respect, any LP conducting some
type of back office inspection is a step
ahead of industry standards – and any
GP willing to submit itself to that kind
of scrutiny (with a cordial smile) is sure
to win marks. But many LPs say the
process shouldn’t end there: a follow-
up phone call, email, informal lunch or
something similar would go a long way
towards demonstrating their concerns
have not only been heard – but are also
being proactively addressed.
What’s more, GPs that proactively
engage with investors about the firm’s
internal controls can gain a glimpse into
how other firms are handling LPs’ ques-
tions and concerns. Say, for example, an
LP seemed underwhelmed by your expla-
nation as to how wire transfers were
handled. In that case, why not casually
ask for their thoughts on how they have
seen their other GPs clear cash? LPs say
they’d only be too happy to reveal the
red flags they’ve spotted during previous
inspection experiences – and vice versa,
which practices made them confident
their money was entrusted in good hands.
Information like that can be worth its
weight in gold…
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