Fierce competition among private equity companies for the management of blind pool fund limited partnerships (LP) has led to calls for the development of “fairer” selection systems after some recent contracts were enveloped in controversy.
Entities like the Teachers’ Pension, Government Employees Pension Service and the Export-Import Bank of Korea have finalized about 10 management deals since the second half of last year for LPs, which are popular investment tools for pension funds and mutual aid associations. They committed amounts ranging from 10 billion won ($8.23 million) to 50 billion won ($41.2 million) to the funds.
But debate is raging over the fairness of selection processes, which normally use a “beauty contest,” or open competition mainly comprising document screening and face-to-face interviews. In essence, participants have to show why they are the most qualified company to manage the funds.
South Korean LPs have traditionally viewed this method as the most objective and fairest means of selecting management companies. However, some losing contenders for recent deals have raised questions over the process.
Several firms refused to accept the outcome of the Teachers’ Pension LP, which will manage tens of billions of won, even though a later review found that that there were not any problems with the process. It used a beauty contest system.
The controversy may simply be a byproduct of intensifying rivalry between private equity firms, which often are not willing to accept the reasons given for their failure to get through the beauty contest.
Some argue this method favors bigger, well-known companies because of their proven track records in management. Others say that the beauty contest is the fairest system, as factors like presentation have the biggest effect on the result.
Efforts have been made by a few LPs in recent years to use other selecton methods. For example, MG Community Credit Cooperatives paid visits to several management companies that were planning to launch blind pool funds and asked for them to participate in the contest, instead of the usual route of making a public announcement and receiving documents.
“As the number of management companies is increasing and competition to get investment is getting fiercer, LPs are trying to find fairer ways of selecting them,” an industry source said. He expects alternatives to the beauty contest to emerge soon. (Reporting by Arrum Rho)