Ensuring good governance in volatile markets
Opinion 4 minute read

Ensuring good governance in volatile markets

03 April 2020

Fund managers must maintain their duty of care to investors as the world adjusts to the COVID-19 pandemic, writes TMF Group’s Clive Short.

Fund managers have a fiduciary duty of care to their investors to ensure the safe custody of assets, valuation and management transparency. The importance of this role has been exacerbated by the COVID-19 pandemic, which has created significant economic instability throughout the world.

Given the volatile market conditions, I believe that investment oversight, governance and risk identification should be the clear priorities for fund managers looking to navigate the current climate.

Unfortunately, there are many risks for funds to now consider, whether it’s macro factors, liquidity, reputational risk, constitutional risk, or increased operating risk. These are all dependent on sector, for example financially-hit tenants in the real estate space.

It’s imperative that escalation policy and risk frameworks ensure that all significant risks and mitigators are identified, documented and well communicated to investors. Asset management strategies and business plans should be thoroughly reviewed and revised to ensure risks are monitored and mitigated wherever possible. Fund managers should conduct a detailed review of capital commitments, including investment/divestment strategy, financing and capex strategy for 2020/21 – will extra capital be required to patch up any breaches? 

Meeting substance requirements 

The risk profile of the asset or fund will dictate the frequency of board of director meetings but from a good governance perspective, the board should always be seen as actively managing the fund and associated risks.

It may sound counter-intuitive but I believe that there should be more meetings than usual, as boards seek to navigate their way through the COVID-19 crisis, Of course, these meetings should be virtual rather than physical. 

It’s important to keep substance issues front of mind. Corporate economic substance is high on the agendas of authorities worldwide following recent developments to improve fairness and cooperation. Remember that directors must be physically present in the jurisdiction in which the final decision is made but can liaise remotely with advisers to inform decision-making. 

Monitor the market

The majority of investment managers will suspend investment activity due to the initial shock of COVID-19 and wait for markets to stabilise. But I’d then expect to see increased levels of investment activity in Q3 and Q4 2020 as record levels of dry powder available at the beginning of the year is put to use. Data provider Preqin last year estimated that there was nearly $2.5 trillion at the ready to buy companies, real estate, infrastructure, natural resources and debt. 

I’ve been regularly speaking to lawyers in the real estate space who are quietly optimistic that investment and divestment will see significant activity in the latter part of the year, once valuations stabilise.

I expect fund managers will take a closer look at the fintech and technology sectors, which will see even more innovation as the world gets used to working remotely from home and even more dependent on the latest technology. Remote working may be a temporary measure for now, COVID-19 could well be the trigger for attitudes and behaviours to shift away from busy offices. Venture capitalists will also be watching the Business Intelligence (BI) sector as new tools are developed to battle the effects of COVID-19 and future pandemics.  

Monitor the pandemic

The positive news coming from the APAC region, where business is slowly starting up again, is an indication that the tide will turn over the course of the next few months. However, should the pandemic become a longer-term crisis with ongoing travel restrictions, managers may want to review their Board of Director composition and consider additional Directors and alternates in different jurisdictions. 

Managers and Directors might also consider revising the funds constitutional documentation with regards to the investment and divestment period, if extensions are required and asset allocation both by sector and jurisdiction.

Finally, given the uncertainty, managers and directors should discuss, consider and document wider BCP contingencies if the situation were to be prolonged or deteriorate further.

Team up with TMF Group

TMF Group’s experts provide robust governance and reporting services, allowing fund managers to focus on their core business.

Our fund services facilitate global and cross-border investment operations through a network of over 80 offices worldwide. This global footprint gives fund managers unrivalled oversight and connectivity at a time of great economic uncertainty. 

To help our clients navigate the fast-changing COVID-19 landscape, we are sharing expert insight into managing and mitigating risk, regulatory news and other information about how to access local government support where it’s available.

Written by

Clive Short

Commercial Director – Fund Services

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