Tag: ethics

Selecting private equity funds is essential. Reliably predicting which established institutional fund will outperform is a different proposition, argues John Renkema, Partner and Head of Private Markets at Avida International and a 24-year veteran of APG.

In Fund Shack episode #92, he joins Ross Butler to explain why diversification, commitment pacing and well-aligned manager relationships belong at the centre of private equity portfolio construction.

Key takeaways

• Fund selection is not the same as forecasting outperformance. Access, negotiated terms and portfolio fit remain essential, even when future relative returns are difficult to predict.
• Diversification has a time dimension. John argues for consistent commitments across vintages, supported by the liquidity to keep investing through difficult markets.
• Governance is part of the investment case. He sees committed capital, sector expertise and the capacity to change businesses as advantages of private equity ownership.
• Continuation funds require more than a liquidity decision. New terms, fees and negotiating arrangements complicate the existing LP’s choice to sell or roll.
• A constructive relationship still needs professional distance. Shared investment goals do not remove the need to challenge a GP or scrutinise its incentives.

Does private equity fund selection still matter?

Yes. Fund selection remains essential for access, negotiated terms and portfolio fit. John’s challenge to the concept is narrower: whether LPs can reliably predict which established institutional private equity fund will outperform comparable funds over the next ten to twenty years.

His argument concerns a mature market in which many managers have experienced investment teams and sophisticated institutional backers. Each group of LPs may believe it has selected a future outperformer. That conviction, he argues, is not evidence that the selection process can consistently deliver superior relative returns.

The conclusion is not to invest indiscriminately. It is to distinguish choosing funds for a coherent portfolio from claiming to know which credible manager will beat the others.

How should LPs build a private equity portfolio?

John’s framework starts with the purpose of the allocation, not a list of favoured managers. An institution seeking different exposures within its wider portfolio may need a different strategy mix from one primarily seeking to outperform listed equities or meet an impact objective.

That purpose should guide diversification across sectors, regions and fund strategies. It also needs to be considered alongside the institution’s size and its capacity to implement the programme.

Why does commitment pacing matter?

Commitment pacing helps an LP diversify across successive vintage years rather than concentrate its programme in particular market conditions. John argues that the programme should also preserve the ability to make new commitments when liquidity becomes scarce.

The concern is not simply missing a year. In his view, periods of scarce liquidity can produce particularly attractive vintages. An investor that cannot commit during those periods may miss opportunities precisely when it most wants to maintain its exposure.

The implication for LPs is practical: liquidity planning supports the investment strategy itself. It helps determine whether the institution can sustain its intended programme through a difficult market, rather than allow the availability of cash to dictate its vintage exposure.

Which fund terms should LPs scrutinise?

John puts alignment of interests at the centre of fund negotiations: who receives the rewards, what other incentives the GP has and whether the investment mandate keeps the manager focused on the job the LP has hired it to do.

Fees matter, but the headline fee is only part of the picture. A carried-interest arrangement deserves scrutiny where a large share flows to senior figures or shareholders who are not closely involved in the investments. The question is whether the people doing the work are appropriately incentivised.

John also highlights arrangements that allow a GP to invest through different entities or earn other income from portfolio companies. These can introduce competing incentives that need to be understood.

Finally, there is the mandate itself. An LP committing to a blind pool on the strength of a manager’s sector expertise does not necessarily want that manager moving into unrelated areas. Fund terms help connect the investment proposition to what the GP is permitted to do.

Why does “sell or roll” leave continuation-fund conflicts unresolved?

A choice about liquidity does not settle every question about price, fees, terms or negotiating power. In the continuation-fund transactions John Renkema describes, an existing LP may be offered the choice to sell or roll into a new vehicle, while the GP and an incoming secondary investor determine the new arrangements.

The rollover decision can therefore be more complicated than deciding whether to remain invested in a company. The new vehicle may have different fees, revised contractual terms and additional capital available for investment. An LP can like the asset without finding the proposed investment terms acceptable.

This is John’s central objection to treating the binary choice as a complete answer to conflicts: having a choice is not the same as helping to shape the choices available.

He also distinguishes a continuation transaction from a conventional exit. In his account, the latter gave the GP a clearer objective: achieve the best sale price. A continuation transaction involves negotiations about an ongoing investment relationship as well. Running a competitive process does not necessarily leave the existing LP choosing between competing final offers.

Does John think continuation funds are necessarily harmful?

No. His concerns about conflicts do not lead him to a blanket rejection of the structure. At the time of the interview, he says the major problems he previously feared had not emerged to the extent he expected. He also recognises that the need to find a buyer willing to commit capital introduces a degree of discipline.

His conclusion remains provisional: “the jury is still out”.

For the manager’s perspective, explore Flor Kassai of Inflexion on value creation and continuation funds.

How should LPs think about private equity risk?

John Renkema cautions against treating observable historical volatility as a reliable guide to future risk. Public-market prices make past fluctuations easier to measure; they do not establish how the same assets will behave in the future. Private equity’s less observable volatility presents a measurement challenge, not an absence of risk.

He acknowledges that parts of the buyout market can be closely correlated with listed equities and that additional leverage may increase volatility. His governance argument therefore sits alongside equity risk, not in place of it.

He returns to diversification as a means of improving the portfolio’s risk-adjusted outcome. The distinction is between organising exposure more effectively and assuming that a private ownership structure makes the underlying uncertainty disappear.

For the related liquidity discussion, read Alex Branton of Nodem Capital on NAV lending, secondaries and private markets liquidity.

Are LPs partners or clients of private equity managers?

“I think we’re clients.”

John Renkema, Fund Shack episode #92, 33:11.

For John, the distinction is about the working relationship. The parties share an interest in the fund’s success, but they do not perform the same role. The GP manages the fund; the LP pays for that service through management fees and carried interest. Potential conflicts remain, making professional distance important.

That does not mean keeping managers at arm’s length. When problems arise, a good working relationship should make it easier to speak openly. John expects GPs to disclose difficulties, explain their intended response and involve LPs where conflicts need handling. LPs should be equally clear about what they expect and why.

A reputation for treating investors well can help a GP retain support through weaker performance, particularly when the manager explains what went wrong. John is also clear that goodwill has limits: persistent underdelivery makes the next fundraise harder.

He recalls initially assuming that private equity would be straightforward after working with options and complex liquid instruments. Cash in, cash out. The longer education was understanding how the LP–GP relationship and alignment of interests behave across investment cycles.

Being a good LP is an investment discipline in its own right.

Who is John Renkema?

John Renkema is Partner and Head of Private Markets at Avida International. He spent 24 years at APG, where he managed a global private equity portfolio. His work at Avida focuses on independent advice to limited partners, particularly around the strategy and governance of private markets programmes.

Visit Avida International or connect with John Renkema on LinkedIn.

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About Ross Butler

Ross Butler is the host of Fund Shack and the author of Invest Line A Barbarian: Share in the Spoils of a Private Markets Revolution.

He has spent more than 25 years working across private capital as a journalist, policy adviser and consultant. His previous roles include Editor of Real Deals, Secretary of the EVCA Professional Standards Committee and Director of the Listed Private Capital Association.

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Rupert Evill is the founder of Ethics Insight, and in this episode, we discuss why due diligence should look forwards as well as backward, how AI can magnify box-ticking rather than improve judgement, and what fraud, speak-up systems and cultural signals can tell investors about portfolio risk.

Here’s a few top points to remember:

• Integrity risk is highly contextual. Two businesses in the same sector and geography can have radically different exposures depending on how they operate, who they deal with and where value is created.
• Policies are not the same as controls. An impressive ESG data room can provide false reassurance if policies are poorly understood, badly implemented or irrelevant to the actual business.
• Investment itself changes the risk profile. Growth capital, new markets, decentralisation, management changes and aggressive targets can create risks that did not exist before the deal.
• Culture produces early-warning signals. Speak-up data, staff turnover, absenteeism, losses and frontline feedback can reveal problems long before they develop into major scandals.
• Materiality matters more than completeness. Investors should prioritise the small number of integrity risks capable of genuinely derailing a business rather than attempting to satisfy every possible framework.

What does integrity risk mean for private equity investors?

Profit is an extraordinarily powerful signal of value creation, but it is not a flawless one. A company can make money while externalising costs, exploiting an information advantage or taking risks whose consequences will only become apparent years later.

Rupert prefers the term integrity to business ethics. For him, the practical question is not whether a company conforms to an abstract moral code, but whether the decisions it makes, the incentives it creates and the consequences that follow are consistent with the long-term interests of the business and its stakeholders.

That makes integrity a business and investment issue rather than a corporate virtue statement. The most effective interventions, Rupert argues, are often those aligned with enlightened self-interest. A business that depends heavily on customer loyalty, employee knowledge, regulatory permission or supplier relationships has a direct commercial reason to protect those relationships.

Why do context, controls and culture matter?

Rupert distills the assessment of integrity risk to three broad areas: context, controls and culture.

Context begins with deceptively simple questions. What does the company do? How does it do it? Where does it operate? Who does it deal with?

Those answers determine what controls are proportionate and what kind of culture the organisation needs.

Why can ESG box-ticking distract from real risk?

One of the sharpest examples in the conversation comes from a circular economy company with several investors, each requiring different ESG disclosures.

Its complaint was simple: “I spend half my time filling out ESG forms. I don’t have time to manage risk.”

Rupert believes the proliferation of frameworks can encourage investors and portfolio companies to confuse the presence of documentation with evidence that risks are actually being managed.

AI may intensify that problem.

An investor can generate a vast due diligence questionnaire. A portfolio company can use AI to produce the policies needed to answer it. Consultants can then use AI to review the resulting wall of documentation.

The process becomes faster and larger without necessarily becoming more informative.

The distinction Rupert draws is between having and doing. A company can possess every conceivable policy and framework. If people do not understand them, the controls are inappropriate to the business or they are not reflected in day-to-day behaviour, they provide little protection.

Why should due diligence look forwards as well as backwards?

Traditional due diligence is predominantly retrospective. Investors look for historic misconduct, litigation, regulatory problems, questionable transactions and other skeletons in the cupboard.

Rupert argues that investors also need to ask a different question:

What happens to the risk profile if this investment actually succeeds?

Putting capital into a company changes it.

The investment may finance international expansion, new manufacturing capacity, acquisitions or rapid hiring. Decision-making may become decentralised. The founder may surrender control. New management may arrive. Targets become more ambitious. The company becomes more visible to regulators, competitors and criminals.

A business that has operated successfully in one environment can therefore encounter entirely new integrity risks as a direct consequence of executing the investment thesis.

For private markets investors, this makes forward-looking integrity due diligence particularly relevant. The objective is not simply to decide whether the company is acceptable today, but to anticipate the pressures created by the value-creation plan.

Why does speak-up culture matter to investors?

Rupert spent much of his earlier career investigating fraud and misconduct. One lesson from that experience is that serious problems do not necessarily begin with people setting out to behave badly.

More often, people come under pressure, make a poor decision and then compound it.

That makes the ability to raise a concern early extremely valuable.

Rupert therefore sees speak-up and whistleblowing systems as a practical early-warning mechanism, not simply a compliance requirement.

A credible system needs more than an anonymous inbox. Employees and external stakeholders need to know where they can raise concerns, trust that the people receiving them are sufficiently independent and understand what will happen afterwards.

The mechanics also need to fit the organisation. A QR code on a physical site might work for construction or retail employees who rarely sit at a laptop. A professional services organisation may require something completely different.

Can private equity owners change culture after investment?

Rupert believes culture can be influenced, particularly in growth-stage companies where organisational behaviours have not yet become deeply entrenched.

Independent oversight matters. In a larger company that might mean a trusted individual on the audit and risk committee who is visibly capable of dealing with sensitive concerns.

Communication matters too. Rather than relying on a compulsory annual ethics seminar, Rupert advocates two-way discussions where employees can talk about actual risks: what have they seen elsewhere, could it happen here, what might prevent it and what would make people comfortable raising a concern?

That creates a much more useful flow of information from the frontline to management.

For private equity owners, this is important because the people closest to customers, suppliers, factories and operating processes may see emerging problems long before the CEO or board does.

What should a CIO monitor across a portfolio?

There is no universal integrity dashboard.

For a people-intensive business, relevant indicators might include staff turnover, absenteeism, speak-up reports, employee feedback, unexplained losses or other behavioural signals.

For a supply-chain-heavy company, different indicators may matter: delays, losses, exceptions, lead times or recurring problems with individual suppliers.

Rupert describes a Japanese organisation that began investigating corruption concerns across several subsidiaries and eventually broadened its diagnostic far beyond conventional compliance measures. The principle resembles a broken-windows approach to organisational risk. Small signs of tolerated bad conduct can indicate deeper cultural problems. If poor behaviour becomes normalised at one level, more serious problems become easier to rationalise elsewhere.

For an investor, the objective is therefore not to collect every available datapoint. It is to identify which indicators provide an early warning that something material is changing.

Is corruption really an emerging-markets problem?

Rupert spent more than a decade working across Asia and has operated in more than 80 countries. His answer is: same same, but different.

Corruption and coercion may be more visible in some emerging markets. In mature economies, influence can operate through more sophisticated institutional, commercial and political structures.

That distinction matters from an investment perspective because integrity risk overlaps with political and regulatory risk.

A business model that depends heavily on regulatory arbitrage, unusually favourable relationships or a particular political environment may appear highly profitable today but prove fragile when an administration or regulator changes.

Rupert’s preference is therefore to back businesses capable of succeeding despite a difficult institutional environment rather than businesses whose economics depend upon exploiting it.

What does fraud tell investors about integrity risk?

Fraud occupies a surprisingly large part of the conversation.

Rupert argues that many businesses devote significant resources to policies covering bribery, money laundering, human rights and other high-profile risks while paying comparatively little attention to everyday fraud.

Yet fraud can involve employees as well as external criminals. It can arise from misrepresentation, theft, collusion, conflicts of interest or the interaction between an insider under pressure and an external counterparty.

This again makes context important. The fraud risks facing a founder-led software company will look very different from those facing a pharmaceutical manufacturer, a construction company or a business with a complex international supply chain.

The objective should be to identify the fraud scenarios that are genuinely plausible for that particular company and build proportionate controls around them.

Does impact investing need more risk discipline?

Rupert is particularly sceptical of the assumption that an organisation operating in an environmentally or socially positive sector is inherently lower risk.

Good intentions do not remove commercial pressure, fraud, weak controls or poor management.

In some cases they may create complacency.

He argues that investors with experience in highly regulated or operationally difficult industries can sometimes bring valuable discipline into impact sectors precisely because they are accustomed to thinking about downside scenarios, incentives and bad actors.

This also complicates simple labels around what constitutes a “good” or “bad” investment. Defence, energy, agriculture and infrastructure all involve trade-offs that can look very different depending on geography and circumstance.

The investor still has to understand what the business actually does.

What is the bigger lesson for private markets investors?

The recurring message throughout the episode is materiality over theatre.

Investors do not need another 500-question questionnaire if only a handful of issues can genuinely derail the investment.

They need to understand the company’s context, identify those material exposures, put proportionate controls around them and create a culture capable of revealing when something is going wrong.

Rupert ends with a similar principle for companies trying to generate positive impact.

Rather than attempting to satisfy every framework and advertise virtue across dozens of categories, an organisation may achieve more by identifying something genuinely material to its business, committing to it and seeing it through.

That is a much more demanding version of ethics than putting another policy in the data room.

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About Rupert Evill

Rupert Evill is the Founder of Ethics Insight. He brings 25 years of frontline experience across more than 80 countries, spanning investigations, intelligence, political risk, due diligence, crisis response, integrity risk and human rights.

Rupert is a Certified Fraud Examiner and author of Bootstrapping Ethics. His postgraduate study covers communication, behaviour and credibility analysis, alongside Cambridge training in business sustainability.

His advisory roles include the Association of Corporate Investigators, the Human Behaviour and Performance Institute and the ACFE examination review council.

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Related Fund Shack conversations

• Systematic culture change. The playbook
• Avoiding moral hazard in private markets
• How Advent International creates value
• Private equity in Africa. A conversation with Stephane Bacquaert

Watch the full episode for Rupert Evill’s discussion with Ross Butler on integrity risk, fraud, culture and what private markets investors should really be looking for during due diligence

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About Ross Butler

Ross Butler is the host of Fund Shack and the author of Invest Line A Barbarian: Share in the Spoils of a Private Markets Revolution.

He has spent more than 25 years working across private capital as a journalist, policy adviser and consultant. His previous roles include Editor of Real Deals, Secretary of the EVCA Professional Standards Committee and Director of the Listed Private Capital Association.

Connect on LinkedIn

Amazon LINK

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Follow Fund Shack

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