PwC: Governance matters to investors

Date: 26-03-2008
Source: The Business Times

Many want to see more guidelines and regulations. In a subdued environment where returns are moderate, people putting money into alternative investments are increasingly looking beyond performance to transparency, quality of compliance and risk management, according to a report by accountancy and consultancy firm PricewaterhouseCoopers (PwC).

The study shows that transparency and risk management also matter when investors decide whether to retain managers of alternative investments, which include private equity, real estate and hedge funds.

'Alternative investing has very much become mainstream. Now we expect alternative investments to form an integral part of asset allocation,' said Justin Ong, partner and leader of wealth management practice at PwC Singapore. This is leading to growing calls for their providers to step up transparency, disclosure and risk management.

PwC's global survey of 221 institutional investors and alternative investment providers last December and this January came at a time when risk management has become a big issue amid news of a trading fraud at Societe Generale and concerns over years of lax risk controls leading to the current US sub-prime crisis.

As investment returns flatten, investors want to better manage risks. They are less particular about governance and risk management when investment portfolios are performing, Mr Ong said. In Asia, where the alternative investment industry is relatively young, the quality of compliance and risk management ranks higher than in the US or Europe, where regulation is perceived to impede growth.

In the survey, performance is the main criterion for considering an alternative investment provider for 73 per cent of the investors. But when it comes to de-selecting a provider, 41 per cent of investors ranked quality of compliance and risk management process, as well as transparency, as the main criteria, followed by performance at 40 per cent.

Many investors said that they want to see more guidelines and regulations. Almost half of all hedge fund industry participants would support guidelines on reporting to investors and 41 per cent would support formal disclosure to regulatory bodies.

'The understanding of what risk management really means and how to create that kind of oversight over the manager of your funds is key; but most investors themselves are not sure what they want,' Mr Ong said.

Despite the importance ascribed to governance, investors have been slow to adopt risk assessment processes. According to the survey, more than 53 per cent of respondents said that they have made no change to their risk management policies despite an increased allocation to alternative investments.

This, Mr Ong noted, suggests that the development of infrastructure that supports the alternative investment industry has not kept pace with the astonishing growth of the industry.

While the recent credit turmoil has placed alternative investments under pressure, the survey predicts that the industry will enjoy rapid growth over the next three years. Only a small minority of the respondents globally said that they expect to make smaller allocation to alternative investments.

'The appetite of investments into alternative products is pretty strong and the expectations for increased allocation into alternative investments is expected to continue,' Mr Ong said.

In an earlier investment management survey by PwC in 2006, more than US$540 billion of funds were estimated to move from conventional assets into alternatives by end-2009, about 9 per cent of assets under management.