Protect investors, but give private market fund managers flexibility, industry players tell MAS

The transparency of private market funds, the amount they charge in fees, and the methods of valuation were among key points raised in the feedback given by industry participants to the proposal by the Monetary Authority of Singapore (MAS) to broaden investor access to private assets. 

On Mar 27, the central bank had invited views on its proposal on a framework for private-market investment funds, with a view to giving more retail investors exposure to the asset through long-term direct investment funds, or fund of funds. The submission deadline was May 26.

The private capital community has welcomed MAS’ proposal, describing it as an important step in building a more sophisticated investment ecosystem in the Republic. But a common thread in the feedback given was the need to strike the right balance between investor protection and product innovation. Especially pertinent was the need to ensure that investors are aware that such investments are less liquid.

Juan Delgado-Moreira, co-chief executive officer at Hamilton Lane, told The Business Times: “The concerns are ensuring cheaper, faster, better access, and the awareness of financial illiquidity... as well as the long-term nature” of the asset class.

Globally, investors are showing more interest in private market assets, which refer to assets that are not traded in the public domain. This means that information about the assets is more opaque, and funds that offer such assets are less liquid than those that comprise listed stocks and bonds.

In return, however, investors are rewarded with an illiquidity premium, although the funds tend to also have a longer tenor. 

Private market assets largely include private equity (PE), private credit, infrastructure and real estate. The MAS framework proposes that retail investors be given access to these asset classes through two types of fund structures: direct funds and long-term investment fund-of-funds.

Easing illiquidity

MAS’ proposed framework includes letting investors redeem their funds periodically, subject to gating limits, which are caps on the amount that can be withdrawn within a certain period. 

But this could result in private market funds that would not be much different from assets currently available, such as real estate investment trusts, said a market participant who took part in the feedback session with the MAS, and who declined to be named.

He added that retail investors may not understand or be comfortable with the way private capital funds work; he described these as “blind pool funds”, in which investors have no influence or control over the assets chosen.

The central bank wants to diversify investment options for retail investors, but this is inherently a difficult and complicated asset class, he said.

The opaque nature of private assets also creates another concern – how they are valued. Companies in a PE fund for instance, are not obliged to provide earnings reports.

To mitigate this for retail investors, MAS could stipulate that private market fund managers, also known as general partners (GPs), appoint independent third parties to value the assets regularly, such as every three months, Shihan Abeyguna, managing director of South-east Asia at Morningstar, suggested to BT.

Agreeing, Steffen Pauls, chairman and co-chief executive officer of Moonfare, a Berlin-based digital platform for PE investments, said this point is pertinent for retail investors, who are “typically not equipped or able to run these valuations on their own”. Moonfare did not provide feedback to MAS as it does not offer its services to retail investors.

Fees

The fee structure of private funds is a concern for retail investors, given that private-market funds charge higher fees than the usual public funds. This is because GPs need to be skilled in sourcing for new deals and exit existing ones.

Investors pay more for these skills, instead of the straightforward buying and selling of equities and bonds in typical mutual funds. GPs also collect performance or incentive fees, known as carried interest, when the fund yields returns that exceed a certain amount.

This could affect the level of returns for retail investors, especially after netting the fees.

To address this, Morningstar proposed transparency around the performance fees, and a prohibition by the MAS on the use of the deal-by-deal carry model.

“Under this model, carry is calculated on each deal independently, meaning that the asset manager charges full performance fees on positive deals, and none on negative deals without netting one against the other,” Morningstar’s Abeyguna said.

“We believe this model is detrimental to the end investor, as it can lead to the asset manager collecting a portion of performance fees even when the overall portfolio has underperformed,” he said.

One way to assuage the various concerns about risk management, valuation and periodic redemptions could be a phased rollout, suggested Sumit Narayanan, EY’s Asean financial services managing partner.

For instance, there could be “a longer waiting period for investors to withdraw their money, with clear communication on how it works. Some of the rules that apply to regular retail funds could also be adjusted to better fit how private market investments operate”. 

Compared to the US, UK and Europe, MAS’ proposals reflect its “measured approach”, and “may be better fit for purpose for our local market”, given that the Western regimes have the benefit of more mature markets and regulatory ecosystems, he added.

In addition, while investor protection is important, industry players cautioned against prescribing overly narrow definitions of product eligibility.

The Singapore Venture & Private Capital Association, which counts more than 300 members in its ranks, said the MAS “framework should create space for both fund managers and investors to determine the fund strategies, terms and safeguards that work best, within broad regulatory parameters based on a principles-based approach”.

In response to BT’s queries, an MAS spokesperson said: “We are reviewing the inputs received from the public consultation, and will consider all the feedback as we finalise the framework and incorporate the appropriate regulatory safeguards.”

Source: The Business Times © SPH Media Limited. Permission required for reproduction.

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