Driving returns with post-investment fund management, compliance

The regulatory principle of “supporting the superior and restricting the inferior” has boosted a reshuffle of the private fund industry, accelerating optimisation of the industrial structure. To further unlock capital vitality, it now becomes crucial for private fund institutions to ensure compliance and efficiency in operation.

This article summarises key points for compliance and post-investment management of private funds, drawing on the Regulation on the Supervision and Administration of Private Investment Funds, the Measures for the Administration of the Disclosure of Information on Privately Offered Investment Funds; and the Guidelines for the Internal Control of Managers of Privately Offered Investment Funds, as well as practical experience.

Private fund management

Based on the content and direction, private fund management is categorised into compliance management and post-investment management. Compliance management focuses on obligations of information disclosure and the structuring of operational management, while post-investment management centres on the invested enterprises.

Despite varied direction, content and focus, both management mechanisms play a key part in the efficient and healthy development of private funds. Emphasising and improving the management mechanisms of private funds is essential for their empowerment, and for ensuring their compliance and efficiency in operation.

Compliance obligations

The obligations of information disclosure in the course of operational compliance can be summarised as follows.

(1) Obligors. Information disclosure obligors include private fund managers, custodians and other legal entities and organisations prescribed by laws, administrative regulations, the China Securities Regulatory Commission (CSRC), and the Asset Management Association of China (AMAC).

When there are multiple disclosure obligors for a single private fund, the items, responsibilities and obligations of disclosure shall be specified in relevant agreements.

Entrusting a third-party institution to disclose information does not exempt the obligors from their statutory disclosure duties.

(2) Principles and platforms. Pursuant to AMAC regulations and the fund contract, the articles of association or the partnership agreement (collectively, the “fund contract”), disclosure obligors shall disclose information to investors by reporting such on the private fund information disclosure platform designated by the AMAC, and shall ensure the authenticity, accuracy and completeness of the information disclosed.

Additionally, disclosure obligors, investors and other relevant entities are obliged to keep secret all non-public information, trade secrets, personal privacy and other obtained information related to the private fund.

(3) Management mechanism setup. In accordance with chapter 5 of the above-mentioned disclosure measures, disclosure obligors shall establish and improve the information disclosure management mechanism, designate personnel to oversee disclosure matters, and upload relevant disclosure policy documents to the private fund registration and filing system as required.

Post-investment management

(1) Significance. Typically, there are four stages of a private fund, namely: fundraising; investment; management; and exit. As a key part, post-investment management involves monitoring portfolio companies and providing value-added services.

Controlling risks. Beyond their own operational risks, companies invested in by a private fund have to navigate a volatile market, which directly impacts the fund’s investment returns. Therefore, it is crucial to implement a robust post-investment management mechanism to keep track of the financial and operational information. Such a mechanism enables a private fund to promptly and accurately obtain key information, better formulate effective exit strategies, and manage investment risks.

Promoting development of invested companies. Compared to usual corporate management, private funds have a more detailed and comprehensive understanding of business operations across various sectors. A competent private fund could guide invested companies towards disciplined development, provide strategic advice, and reduce their costs of trial and error. It is also expected to provide all-round support for the companies’ business development by integrating resources of both the industry and government.

Realigning pre- and post-investment mechanisms. A robust post-investment mechanism is expected to provide valuable feedback for pre-investment decisions. While private funds are generally cautious about investing in companies, market volatility and competitive pressure to invest in high-potential companies often make speed a primary consideration in investment decisions. Therefore, the post-investment management team is to conduct long-term tracking and follow-ups with portfolio companies to validate the investment logic and mechanism of the investment team.

(2) Varied stresses. Different aspects of post-investment management should be stressed for different types of portfolio companies. A private fund should establish a post-investment management mechanism tailored to its own investment strategy.

Investing in startups. Post-investment management for startups advises on operational strategies, provides model patterns of management structure, supports top talent, and facilitates a sound operational framework. It should also tap financing resources and assist in planning the financing schedule.

Investing in growing companies. Post-investment management for growing companies addresses the utilisation and integration of industrial resources, guiding portfolio companies to develop unique advantages within the industry.

Investing in mature companies. Post-investment management of mature companies focuses on risk monitoring and control, aiming at obtaining real-time operational information from portfolio companies to make informed decisions. Also, it helps connect portfolio companies with relevant government resources, contributing to their further development.

Key takeaway

McKinsey research predicted that post-investment management could unlock about USD2 trillion in value for China’s private equity and venture capital (PE/VC) market.

As relying solely on valuation multiples and financial leverage proves increasingly insufficient for yielding high investment returns, the concept of emphasising both “investment” and “management” is gaining steam. Private funds must therefore prioritise development of their post-investment management mechanism to empower portfolio companies with effective management, facilitating mutual growth and shared success.

Eric Zhou is a senior partner and James Tang is a senior associate at AllBright Law Offices.