ASIAVIEW: Trigger happy in Asia

When ING Real Estate Investment Management (ING REIM) was named the new manager of the New City Asia Opportunity Fund last month, following a GP beauty parade in front of 27 New City LPs, it was certainly indicative of the type of opportunity to come for other GPs seeking growth in the region.

Indeed there will be many management changes in Asia going forward. In the case of New City, an effort to replace the GP was set in motion after disgruntlement from shareholders in the fund's public holding company spread to the LPs in the unlisted vehicles. A co-ordinated search effort led eventually to ING REIM being able to increase its assets under management to $4.97 billion. This was good for ING REIM and perhaps good news for other GPs seeking Asian growth but keen to avoid the headaches that come with expanding organically.

On examining the detail of this transaction however, it seems that LPs are not taking any risks should ING REIM face a similar predicament to that of New City, the latter of which had fallen into negative net worth and seen its capital base drop beneath Japan's mandatory minimum. According to one LP in the fund, the subsequent management agreement with ING REIM includes a release trigger that could be activated should ING REIM face insolvency.

By offering little resistance to this measure, the GP projects confidence and fiduciary commitment as it agrees to hold itself accountable for not only the management of the fund but also for its own management company.

No triggers needed to be pulled in the case of the New City fund, as its corporate parent was in the midst of shedding liabilities to deal with bigger picture issues. But the LP source said he would insist on this release trigger as a term in all his commitment agreements with GPs in future.

While this tightening up of fund structures may cause a bead of condensation to form on the brow of more slippery general partners, those who truly believe in the quality of their platform should welcome the evolution. For one, it signals a progression towards market sophistication. The LP said release mechanisms are currently more prevalent in the mature US but something of a rarity in Asia, and have yet to fully take hold in Europe.

By offering little resistance to this measure, the GP projects confidence and fiduciary commitment as it agrees to hold itself accountable for not only the management of the fund but also for its own management company.

In addition to insolvency release triggers, LPs will also be asking for other kinds of security triggers to be inked into their agreements with investors. These will have little wriggle room in terms of interpretation.

Other triggers include items such as a release clause for LPs if there is insufficient clarification by the GP of its debt position. The idea here is for the LP to fix a minimum level of disclosure with its GP and, if the GP fails to meet that level, the trigger could be activated. These clauses would accompany items such as the more customary LP or GP default triggers and keyman clauses, both of which are well known, but in the case of certain very prominent vehicles in the region, are also surprisingly missing.

A tightening up of fund management agreements between investors and managers could be just the tonic the industry needs, particularly in the case of blind pool opportunity funds which have come under heavy scrutiny of late. For managers capturing such platforms through the distress of others, such as ING REIM, it instigates an era of extra responsibility to be celebrated as a mark of high standards, not feared as a potential penalty down the line.