Understanding public vs private funds is essential for Singapore fund managers, as the sector matures and caters to a wider range of investors and their specific needs. Fund Management today can primarily be grouped into External Asset Management, Public Market Fund Management and Private Market Funds.
External Asset Management focuses on tailored investment solutions for high net worth individuals and family offices. In this model, the regulated asset manager acts independently from the bank. The manager is responsible for providing either discretionary or advisory services to the investor, free from the constraints of bank-driven products, while the bank is responsible for custody, execution, and valuation of the investor’s assets.
Regulated asset managers that decide to run their own Fund vehicles may prefer to do so where multiple investors want to participate in a similar strategy or product. This can be broken down into Public and Private Market funds.
Public Market Funds
Public Market Fund Management involves investors subscribing to Funds that in turn invest in publicly traded securities such as stocks, bonds and Exchange Traded Funds (“ETFs”). These Funds have the following positive key attributes:
- Significant liquidity: Most Public Market Funds invest in highly liquid securities that are easily tradeable on an exchange at any time during market-operating hours. As a result, a Public Markets Fund can easily take a position in a listed security. Alternatively, if it intends to divest its investments and hold cash, it can easily do so.
- Transparency:Tier-1 exchanges usually subject listed securities to significant disclosures, including their track record, performance, and financials. This makes it easier to value them, and compare them against similar securities.
- Valuation and Mark-to-market: Due to the transparent nature of data attributed to public market securities, their valuation can be easily tracked and monitored from multiple independent data sources.
Oversight Considerations for Public Market Funds
However, there are significant cost considerations and additional pitfalls to look out for when managing a Public Markets fund.
Public Markets funds require significantly more day-to-day oversight than Private Market Funds for the following reasons:
With the added liquidity comes the ease of investors subscribing and/or redeeming more freely. This is also known as an “Open-ended” structure. Although some funds impose a minimum lock-in period for investors upon subscription, other funds offer daily or weekly dealing. As a result, valuing the Fund, a function usually carried out by the Fund Administrator, becomes more complicated, while also increasing AML/CFT risks.
1. A Public Markets Fund vehicle, being its own legal entity – should have the requisite counterparties to assist with its operational needs, summarily as follows:
- Fund Administrator – to help with the Fund’s AML/CFT onboarding obligations and Fund accounting.
- Custodian – to hold the Fund’s assets (e.g. a bank could be the Fund’s cash custodian)
- Broker – to assist with the Fund’s trade executions.
2. As Public Markets investments are highly regulated, Investment Managers here are subject to more stringent conduct requirements. Greater scrutiny around potential conflicts of interest can arise, in relation to:
- Personal account dealing
- Insider Trading/Window Dressing/ Market Manipulation (to name a few market offences)
- Fair and Equitable Dealing
- Broker Allocations (and Gifts received/given to such counterparties)
Private Market Funds
Comparatively, Private Market Funds involves investors subscribing into Funds that in turn invest into non-publicly traded assets. Private equity, venture capital, real estate, and infrastructure projects are examples of such asset types. Note that for Singapore purposes, third-party investment management into real estate and infrastructure projects alone does not constitute substantive fund management activity, as these asset classes fall outside the definition of “Capital Market Products” under the Securities and Futures Act.)
Private market funds have the following attributes:
-
- Illiquid: Most Private Market funds invest in illiquid, privately held assets. As a result, their fund life is significantly longer than Public Market Funds, sometimes stretching up to 5-10 years.
- Less Counterparties: Private Market funds, such as Private Equity, don’t normally require a separate custodian or broker to help the Investment Manager carry out its operational requirements. However, many instances require an independent valuer to assist with objective valuation of a private asset.
- Less Transparency: Investors find private investments more difficult to value objectively, as different assets face different circumstances that may add to or reduce their value. Without sound fundamentals to objectively and professionally value a private asset, Investment Managers can easily deviate significantly from its real value.
- Higher Risk-Reward Ratio: Due to the points above, private investments are more likely to generate larger gains for investors, but also carry a higher risk of larger losses, compared to public market investments. Note that in certain circumstances of significant market volatility, the converse may be true.
Reduced Responsibilities for Private Market Fund Managers
However, with the longer tenors of Private Market Funds, this alleviates the responsibilities imposed on their Investment Manager(s), for example:
-
- Private Market Funds are considered “Close-ended”. This means the Fund is set up for a particular investment. Once the initial group of investors has subscribed, they are locked in for the life of the Fund, and can only redeem their proceeds once the Fund-life cycle expires, the Fund disposes of its assets, and is wound up.
- AML/CFT concerns are reduced here as there is less variation in the investors of the Fund, once subscribed. After a Private Market Fund onboards its investors and reaches its target AUM amount, the Fund closes, and no new investors join thereafter.
- The regulatory obligations of a Private Markets Fund Manager are not dissimilar to those of a Public Markets Fund Manager, but the practical implications are significantly lower. Conflicts of Interest arising from Personal Account Dealing or Market Sensitive Information are less likely to occur. Public Market investment rules do not apply to Private Market investments (Note: Unless a publicly listed company owns a private asset to which the Fund is investing into)
Public vs Private Funds: Key Differences
| Feature | Public Market Funds | Private Market Funds |
|---|---|---|
| Liquidity | High (assets can be bought/sold on exchanges) | Low (assets are illiquid, long investment horizons) |
| Transparency | High (frequent reporting and public disclosures) | Low (limited reporting, private investments) |
| Risk and Return | Lower risk, stable returns, moderate growth | Higher risk, higher potential returns |
| Compliance Requirements | More regulatory burden, subject to the Exchange’s Rules on Conduct | Less stringent regulatory oversight, often more flexible |
| Investment Horizon | Short to medium-term | Long-term (5-10 years or more) |
Public vs Private Funds: Conclusion
Both Public vs Private Funds come with their own nuances. It is important for a regulated Singapore Fund Manager that intends to expand its investment strategy to understand in detail the intricacies of running these strategies.
Partner with Curia Regis for Strategic Investment Solutions
At Curia Regis, we provide tailored regulatory compliance support for Regulated Fund Managers navigating Public vs Private Funds. Let us help you navigate the complexities of setting up and building out your internal infrastructure to provide for your expanded product suite, to the benefit of your clients. Reach out today to discuss how we can assist you in making informed investment decisions.
Want to learn more? Contact us here at admin@curiaregis.com or follow our LinkedIn page for the latest regulatory updates.
