PE firms flag tougher investor demands

Oct 29, 2014

Private equity managers outlined at a recent forum how their limited partners are setting increasingly strict investment conditions and asking for more information than in the past.

Pressure on private equity firms to provide more information and flexibility on investments is manifesting itself in different ways, said PE general partners at a forum in Hong Kong this week.

One example is increased demand from investors for side letters – clauses or agreements negotiating different terms for investment into a pooled fund.

“Everybody needs a side letter – it’s become the norm,” said Amit Gupta, partner and chief operating officer of Hong Kong-based private equity firm NewQuest Capital Partners. He was speaking on a panel at Private Equity International’s Private Fund CFO & COO Seminar Series 2014.

“Larger LPs are digging deeper into track records – not only about the quantity but also the quality of the money you made,” added Gupta.

In July, NewQuest raised its second fund bringing its AUM to $716 million across two strategies. Each has less than 10 limited partners (LPs), albeit large ones, said Gupta. “The expectation of bigger LPs is greater,” he said. “They increasingly ask for very specialised data requests.”

Additional clauses being requested now tend to be about compliance, tax and legal matters, as well as seeking options to opt out of specific deals, rather than about commercial terms, noted Gupta. Speaking on the same panel, Kathy Chen, Shanghai-based partner and chief financial officer at SoftBank China Venture Capital (SBCVC), echoed this view.

On a separate panel, Roderik Mulder, Hong Kong-based chief financial and risk officer of Dutch real estate PE firm Composition Capital Partners, said he had seen more transparency demand on fees and expenses since the 2008 financial crisis.

More information is also being requested about the remuneration of decision-makers and the process of valuing assets is being scrutinised a lot more, added Mulder. Composition Capital has $800 million in AUM evenly split between its two European and two Asian funds.

Of course, additional requests and clauses become more onerous for the GP as the number of LPs rises – which may help explain why some firms are less inclined than others to entertain side letters.

Singapore-based Nalanda Capital has raised $1.3 billion to invest in publicly listed Indian equities over the past seven years without a single side letter.

“Every LP is on the same platform, [the same] page,” said Ashish Patel, chief financial officer and chief operating officer at Nalanda, speaking on the same panel as Chen and Gupta. The firm has 30 LPs across three funds raised since 2007.

Indeed, SBCVC – which has 45 LPs and is raising its fifth fund – has a policy of discouraging side letters. This is partly due to the legal fees that can be incurred by drafting separate side letters during fund raising, said Chen.

Instead, the firm's policy is to give everybody a ‘most favoured nation’ clause. Under this approach, a master sheet is drawn up at the end of fundraising and LPs choose which clauses they wish to incorporate into their agreements via side letters.