Investors call for increased transparency in private markets amidst governance concerns

Just over half of respondents (51 per cent) believe that while some practices could be improved, problems in private markets are not significant. 24 per cent say there are substantial problems or even market failures in private market practices. 17 per cent believe private markets function well

A majority of investors support regulatory requirements around quarterly statements, annual audits, and an independent fairness or valuation opinion of any adviser-led secondary transactions, reveals a survey report by CFA Institute Research and Policy Center.

The report also reveals views about private markets governance and practices, including: conflicts of interest; asymmetry of information; general partner, limited partner relations; transparency; valuation issues; fees and expenses; and regulation.

Globally, over the last two years, the end of cheap money is ushering in a new era for private markets. The investment performance in most private asset classes are below historical averages as tailwinds from low interest rates and consistently expanding multiples seem to have taken a hit.

Talking to Bizz Buzz, Arati Porwal, Country Head – India, CFA Institute said, “As global private market managers explore new avenues, this is relevant from an opportunity standpoint for India. The country remains an attractive destination for both domestic and foreign capital because of excellent GDP growth, robust domestic consumption, and favourable demographics.”

However, governance issues have been the reason behind some well publicised failures, leaving a bad taste behind for investors. In this context, it is not surprising that governance risks in private markets are getting attention of policymakers and regulators, she said.

This recent report from CFA Institute provides an excellent overview of the key governance issues in private markets and how the members are thinking about them. It emphasises the need to have a balanced approach to regulation, supporting the growth of a transparent, professional, and trustworthy industry.

Just over half of respondents (51 per cent) believe that while some practices could be improved, problems in private markets are not significant. 24 per cent say there are substantial problems or even market failures in private market practices. 17 per cent believe private markets function well.

The news about private markets does not hit headlines as often as we get to see developments in public markets such as India surpassing 150 million demat account holders or the country’s market cap touching $5 trillion. In general, information about private markets remains elusive and that leads to sharply differing views on the health of private markets and the contemporary issues which are more relevant. Over the last few years, while the Indian private markets space has remained exciting, it has also undergone a serious turmoil.

Pankaj Sharma, Senior Manager – Capital Markets Policy, CFA Institute said, “The bad news on poor governance and inadequate control in high-profile cases along with serious profitability concerns because of ‘growth at any cost’ philosophy led to general negative investor sentiment. The excellent performance of public markets over this time frame has added another important dimension to this landscape.” This is a clear signal that private markets need to fix their governance issues as a top priority. Even the most vocal supporters of private markets would agree that issues such as conflicts of interest (between investors and fund managers, among investors, and within investor institutions), limited partner–general partner relations (such as imbalance of negotiating power), valuation issues (including differences in volatility measures compared to public market) need attention and nuanced discussion. Apart from these efforts from direct stakeholders, a regulatory focus in which policymakers may impose a tighter approach to private markets is also on the horizon. Hence, this timely report which is based on CFA Institute member surveys should be useful for a better understanding of governance in private markets, he said.

A plurality (41 per cent) believes symmetry of information, or fear of missing out on a deal, gives almost all the negotiating power to GPs. But 38 per cent disagree, saying negotiating power depends on a variety of market factors.

A majority (52 per cent) support new regulations for private markets, but only limited ones. Respondents prefer required disclosures over regulatory prohibitions.

Seventy per cent support quarterly statements that include information on private fund’s fees, expenses, and performance. GPs and LPs voiced similar views on most questions. They differed most in their views on the disclosure of fees and expenses: 51 per cent of GPs found such disclosures adequate, while 58 per cent of LPs did not.