Trust is a delicate virtue – it needs to be built up over an extended period of time, sometimes years, and yet it can be lost in a moment. This is true in personal as well as professional relationships. Some industries require a greater level of trust than others. Consider how much trust one has in a surgeon and anesthetist as you go into an operation. How about the trust one needs to place in an advocate defending your case in front of a High Court judge. In these examples, you are not only required to trust the skill of the person providing you this service, but also their integrity through the advice they have administered to you prior to going into theatre or the courtroom.
The same applies to investment professionals managing third party money. There is a special element of trust required for one party to invest their money with a Fund Manager who has made certain claims about their competence and historical performance, the fees they will charge, and the future returns they hope to achieve. This is even truer for Fund Managers in the Private Equity industry, as their performance can be opaque given that they are not looking after listed investments with publicly quoted prices that anybody can verify from one day to the next. Therefore, in industries such as this, it’s important to have organisations that look to provide overarching industry principles, ethics and guidelines to which the industry players can ascribe. The Institutional Limited Partners Association (ILPA), CFA Institute and South Africa’s Financial Sector Conduct Authority (FSCA) are just such organisations.
The ILPA exists to connect and educate LP’s (investors into Private Equity Funds), and thereby improve their chances of getting consistent information and ethical behaviour from Private Equity Fund Managers (General Partners or GP’s), so as to improve the capital allocation process into these funds globally. The ILPA have done numerous publications, but are currently on the 3.0 version of their Guiding Principles for engagement between LP’s and GP’s, which came out in 2019. The ILPA views an LP-GP relationship as a partnership, and as such, promotes a template for how this partnership should be structured around the following core tenets:
- Alignment of Interests via the eradication of any conflicts of interest between LP’s and GP’s.
- Transparency, including timely access for LP’s to notifications and relevant information which affects the value of their investment, and clear disclosures by GP’s on costs, which are expected to be both reasonable and not misleading.
- Governance, with the establishment of a Limited Partner Advisory Committee (LPAC) to advise on specific issues during the lifetime of a Fund.
The CFA Institute is a body that aims to increase the professionalism and standards of the entire investment industry, not just the Private Equity industry. This is largely achieved through their CFA Exam Program, and resultant Charterholders that must adhere to the CFA Code of Ethics and Standards of Professional Conduct. The major features contained herein are that investment professionals are to act with integrity, competence and diligence to promote the veracity of the investment profession. This includes taking reasonable care and acting with independence (i.e. no conflicts of interest) when making investment decisions. The CFA Institute deals with not engaging in criminal matters like fraud or insider trading, but also with the less clear-cut areas like treating customers fairly and using due care and diligence in your investment work. As a CFA Charterholder, I have accepted and adopted this Code since 2003, so it is only natural that this spills over into the conduct within Kingson Capital Partners.
The ILPA Principles and CFA Code of Ethics and Standards of Professional Conduct are both overriding global industry standards. Closer to home, these high ethical and professional standards are supported by a local body in the form of the FSCA. This is largely done via the Financial Advisory and Intermediary Services (FAIS) Code of Ethics, and specifically the area of “Fit & Proper requirements”. These requirements are made against all staff within regulated financial institutions giving investment advice to clients, split into Key Individuals and Representatives. The main focal points include: competence of the individual (in the form of qualifications and relevant experience); continual professional development through regular courses to refresh and update skills; financial soundness of the Fund Manager; and the critical matters of honesty and integrity which come through everywhere. Kingson Capital Partners adheres to all of these Fit and Proper requirements, and has regular internal checks done by independent compliance officers to ensure adherence with these requirements.
All these principles, standards and codes of conduct are attempting to achieve similar things – get competent investors with integrity managing funds in the investment industry so that the trust levels with investors can be high. It goes back to the central theme of this blog – the value of trust. At Kingson Capital Partners, we aim to earn the trust of our investors, and prospective investors, not only through our investment performance. To this end, we fully endorse the ILPA’s 3.0 Principles and want to achieve the highest level of alignment of interest, transparency and governance. We further adopt the CFA Code of Ethics and Standards of Professional Conduct, as well as the FSCA’s Code of Conduct. Our investment professionals, and the Fund Manager itself, all pass the “Fit and Proper” tests regarding competence, integrity and solvency. We believe it is important to publicly commit to these high standards, as this raises the level of accountability in the marketplace. When all Fund Managers do so, trust levels can only rise, and the whole investment industry, and the people whose money they manage, should all benefit.
Ross Jenvey, CFA, Co-founder of Kingson