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Colin Mackay

‘Fiduciary creep’ could lead to independent governance


The debate around appropriate corporate governance continues with institutional investors, in particular, seeking greater insight into the role, responsibilities and skill sets of those appointed to the boards of corporate funds. 

At the same time, the development of advisory committees to perform a similar function over the activities of limited partnerships appears to be gaining traction, again, under the influence of institutional investors seeking greater independent assessment of the activities of general partners and delegated asset managers. 

Colin MacKay (pictured) is Group Director, Elian Fund Services. In his view, this evolution is, in part, why attempts to codify the duties and responsibilities of those charged with oversight could be counterproductive. "Far from increasing the effectiveness of governance, codification could stifle the evolutionary process, which is at the heart of the common law concepts of fiduciary duty and responsibility," says MacKay.

Of increasing interest in the discussion on independent governance is its application to private equity structures. However, one of the consequences of independent oversight is the greater administrative burden it places on a fund, and the greater the cost base the more of a drag there is on performance. 

MacKay says it comes down to finding the right balance and "prioritisation". What in theory is the optimum level of governance and involvement, and what in practice is acceptable to all concerned? 

"The counter balance for private equity funds has long been the limited partner advisory committee (LPAC). The growing challenge is that LPAC members are often reluctant to assume any form of fiduciary responsibility towards the wider limited partner base. Equally, they are reluctant to expressly approve or ratify the executive actions of the general partner or the delegated asset manager," comments MacKay.

Tying together the regulatory interest in the sector with the desire of limited partners to be informed, but not necessary obligated, through LPAC participation, an independent governance framework could provide comfort for both ends.

This could evolve the same way as it did for the hedge fund advisory committee model, providing a buffer between the manager and the investors on issues like valuation. 

"Big ticket items such as capital transactions and valuations are the main areas where investors want independent oversight in the hedge fund space. For private equity, this could extend to proposed variations in terms (on topics such as strategy change), and commercial aspects such as credit facility terms, where short-term credit facilities may be proposed as a more efficient means of covering costs, as compared to further capital calls," suggests MacKay. 

A governance board has the potential advantage over LPACs of obligating the board to consider what is in the best interests of the partners and the partnership as a whole – the epitome of the oversight sought by regulators and investors alike. That's not to do away with the LPAC altogether. But looking forward, there is a risk to the LPAC that increased regulatory scrutiny of the GP and the partnership could introduce `fiduciary creep'. 

"It's unlikely that LPs would be comfortable taking on an implied fiduciary duty. Fundamentally, LPs sit on the LPAC to gather information for their own benefit. They don't necessarily want to consider what they should and shouldn't reflect as views of other partners. A move to greater independent oversight is one that may be inevitable," concludes MacKay. 

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