Singapore, Dubai family offices demand greater GP transparency
Single-family offices in Singapore and Dubai are willing to pay high fees or share carried interest with general partners (GPs), provided such fee charges or sharing of profits are measured reasonably and structured transparently.
“In this current environment, fundraising timelines have extended for a lot of managers. So, there needs to be clear caps and overview as to what's been charged in those fundraising fees,” said Majella Healy, chief investment officer of Small House Capital, a Dubai-based single-family office.
Healy stressed that when it comes to fees, it is more important to share the upside through carried interest with the general partners (GPs) than solely focusing on reducing management fees.
“We're very happy to pay a manager who does a good job and who's properly aligned with us,” said Healy during a Preqin webinar last week.
“It's not just all about fees and the reduction of fees. Once we're properly aligned with our managers, we're more than willing to give the upside. And I think that's where carry becomes more important as opposed to management fees.”
“So, for us, tweaks on the management fees are always a benefit,” she said.
As the development of Asia’s family office industry accelerates, Dubai — together with other Middle Eastern markets such as Riyadh — has emerged as a new destination for Asian families and financial institutions to set up base and diversify investments or fundraising sources, especially for those from mainland China, Hong Kong, and Singapore.
Small House Capital’s portfolio is heavily skewed towards alternatives. It mainly invests in private equity funds, while opportunistically investing in secondaries and private debt. It also looks at co-investment and direct opportunities occasionally.
To properly manage the liquidity of the portfolio, Healy stressed the importance of having open, honest, and constant dialogues with managers on where they are when it comes to distributions and their expectations.
LIQUIDITY TRAP
One issue she found, especially recently, is the advertised liquidity of some alternative funds is proving illusory, raising concerns over a lack of transparency around redemption realities.
For example, a fund may boast quarterly liquidity windows of 5% on paper, but limited partners (LPs) are sometimes forced to wait a lot longer to retrieve their capital. Healy revealed she once had to wait for 16 months before a large fund could meet the redemption request.
Hence, smaller LPs — compared to large institutional investors — need to be extra careful about the terms and conditions of a fund and their underlying assets in order to make a proper judgment on liquidity realities and to avoid potential capital tie-ups.
It is also important for a family office to push back when there are red flags in the documentation, she said.
“They got [people] who are putting in $100- or $200-million tickets. We are obviously a small family office who doesn’t have those kinds of tickets. But you always have to give the pushback regardless. I think the more we do that, the better,” she said.
According to Preqin’s family office survey published in November last year, most family offices chose transparency at fund level as the area that can be improved when it comes to the alignment of LP and GP interest, followed by GP commitment to the fund, and management fees.
Family offices usually operate with no more than 10 staff, including fewer than five investment professionals, meaning they do not possess as many capabilities on due diligence as larger institutional investors, noted Angela Lai, Preqin’s head of Asia Pacific and valuations, research insights.
FAIR FEES
Veiverne Yuen, partner at Singapore-based single-family office Blauwpark Partners, also expressed frustration with the lack of transparency and timely communication from some GPs regarding these fee-related practices, which he sees as going against the interests of LPs — especially smaller family offices.
This includes the lack of transparency around why GPs increase management fees, especially when raising larger fund sizes compared to their track records, and whether the higher fees are justified given the strategies and performance potential in the future, or just based on the manager’s past performance alone.
If the strategies are different than in the past, then it makes it difficult for the LP to evaluate whether the GP’s previous performance is replicable, and thus assess the risk-adjusted return potential.
Moreover, Yuen said smaller family offices may not always be made aware of some fee practices like providing net asset value (NAV) financing or liquidity facilities until much later, often about three months after discussions at the limited partner advisory committee (LPAC) level.
“We like GPs whose skin are actually in the game. They charge very fairly for the work they do, and they will share disproportionately the upside than they create themselves,” Yuen said in the same webinar.
Blauwpark Partners is the family office for the Blauwpark, a Dutch single-family office that moved its master holding structure to Singapore in 2019.
It runs a classic endowment-style strategic asset allocation with a focus on permanent capital, and is thus quite heavily invested in alternatives — especially the more illiquid ones.
The family office makes 20 to 25 fund commitments per year globally to diversify across vintages, managers, and strategies, in order to harvest as much equity risk premium and illiquid premium as possible.
Both Blauwpark Partners and Small House Capital do most of their deal-sourcing and due diligence in-house.