The battle between efficient asset allocation and sound governance

Publication

11-11-2025

3 minutes read

Although the current fundraising climate for private equity (PE) is under pressure it can not be denied that the PE industry has seen exuberant growth over the past decades on the back of historic outperformance of traditional asset classes such as listed equities and real estate.

In view of the large sums required for PE investments and the relatively high-risk profile, PE investments since the early days have been made through collective vehicles in which several investors participate. As the PE industry grew and matured, so did the features and structures of the collective vehicles through which such investments are made.

In order to permit investments in illiquid assets, traditional PE funds provide for long, but finite, hold periods without the possibility to redeem. More than once the rigid framework of a typical PE fund proved to be incompatible with the economic reality of the underlying assets. For instance, this is the case if a portfolio company unexpectedly requires additional capital, but the fund lacks the flexibility to provide such capital without breaching its mandate or exhausting its reserves, or when the hold period of the fund does not align with the optimal growth and exit path of the portfolio company. Over the years new fund structures emerged to allow fund managers to address such portfolio needs, often triggering new governance challenges. The opening up of PE to the masses (a/k/a/ the democratisation of PE) in recent years exacerbated the governance dilemma, both for the retail investors in such funds (often semi open-ended), as well as for the investors in the underlying PE funds into which such retail funds typically participate.

In this article we take a look at various fund vehicles that are being used in the fund industry to achieve efficient asset allocation and marry the economic reality of the PE assets with the structure of closed-ended PE funds. We discuss the key benefits as well as the challenges in respect of governance and oversight that investors in such vehicles are facing and suggest ways to overcome these. The article begins by looking at the emergence of PE funds to better understand the current governance model by putting it in historical perspective.

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