Transparency and risk management are considered by investors to be just as important as performance when deciding whether to retain their managers of alternative investments, according to a report on the industry by
While the alternatives industry has grown at an astonishing rate, the development of the infrastructure that supports it does not appear to have always kept pace and the channels of communication between providers and investors are not always as open and effective as they could be.
PwC’s global survey of 226 institutional investors and alternative investment providers conducted by the Economist Intelligence unit on behalf of PricewaterhouseCoopers found that flattening returns have contributed to investor pressure for more and better governance. The study covers hedge funds, private equity, real estate and infrastructure funds and found that the quality of compliance and risk management process (41% of investors) and transparency (41% of investors) were rated higher than performance (40% of investors) among the criteria for deselecting investment providers.
This finding backs up the belief by some that when returns start to moderate investors focus more intently on operational infrastructure.
Pars Purewal, UK investment manager and alternatives leader, PricewaterhouseCoopers, said: “When returns start to flatten, as they have in many asset classes, investors focus more intently on operational infrastructure. Providers need to do more to reassure and communicate with their clients. In addition, clients would do well to engage better with investment firms and to ask the appropriate questions.”
Post credit crunch, it is reasonable to assume that investors will be looking for a much greater focus on governance, while levels of disclosure of processes and procedures will also accelerate as investors become more exacting.
Although many alternative investment providers are suffering from the effects of the global credit crunch, the report predicts the industry will enjoy rapid growth over the next three years. Among investors, 41% expect to increase their allocation to real estate, 40% to private equity, 35% to commodities and 33% to hedge funds. Very few plan a smaller allocation to any of these sectors.
Private equity uncovered
With regards to private equity there is a push for a greater oversight of the industry. This is particularly evident in Asia where 55% of investors would like to see guidelines on reporting and 48% want formal disclosures to regulatory bodies. This clear desire for a strong framework is suggestive of an emerging regional industry seeking a fast-track route to global recognition.
While there may be sound reasons for tightening regulation of the private equity industry, the most vociferous calls have tended to come from parties with fairly extended viewpoints. Trade union officials, for example, must be seen to be protecting the livelihoods of their members. The same is true of some local politicians, particularly when a buyout firm purchases a local corporate champion and restructures its workforce.
Private equity is not totally averse to regulation with 40% of firms in the survey supporting the introduction of reporting guidelines. However, just 28% would give their blessing for formal disclosure to regulatory bodies and the same proportion would support guidelines on valuation techniques.
The more mature economies are least in favour of regulatory moves with 43% of US private equity participants supporting guidelines on reporting and just 35% in Europe. By contrast in Asia, 55% would like to see guidelines on reporting and 48% want formal disclosures to regulatory bodies. This clear desire for a strong framework is suggestive of an emerging regional industry seeking a fast-track route to global recognition.
But worldwide the industry is hoping that trust is enough to ward off formal regulation. This hope was the main driver behind last year’s Walker report on private equity in the UK and the setting up of the Private Equity Council in the US. Such initiatives, which encourage dialogue between stakeholders, can surely only help to foster better understanding of private equity in general and buyouts in particular.