Active Conflicts Management: Staying on top of the conflicts
- 23 hours ago
- 4 min read
Updated: 4 hours ago
Regulators across Hong Kong, the United Kingdom, the United States, and Singapore have made their position clear: conflicts of interest in private markets are no longer a self-regulatory matter. The SFC's October 2024 circular on deficiencies in private fund management, the FCA's compulsory conflicts questionnaire issued to private equity and private credit managers in 2025, and the SEC's sustained enforcement campaign against private fund advisers collectively mark a turning point. The era of laissez-faire oversight of private capital is over.
The challenge this creates for fund managers is a structural one. The regulatory frameworks governing conflicts of interest were designed for listed securities markets. The principles are sound: identify, prevent, manage, monitor, disclose. But private markets operate under fundamentally different conditions, and applying principles designed for liquid markets to illiquid, long-horizon, manager-controlled fund structures requires significantly more than a standard policy and a generic disclosure.
Why Private Markets Are Different
In listed markets, independent pricing is the norm. In private markets, the manager is typically the primary source of valuation, using models, comparables, or third-party appraisals, while simultaneously being the entity whose compensation (management fees on NAV, carried interest, performance fees) is determined by the valuation it produces. That conflict is structural, permanent, and present in every reporting period.
Beyond valuation, private market structures create a dense web of overlapping interests: co-investment allocation decisions that can favour personnel or selected investors; multi-fund management where the same manager holds debt across different tranches of the same capital structure; fund life extension decisions where additional management fees may incentivise duration over investor returns; and board appointments at portfolio companies that divide the loyalty and time of key personnel.
Alongside these headline conflicts sit a range of peripheral but equally important risks: allocation preferences, soft dollar arrangements, broker commission sharing, gifts and entertainment from service providers, and the use of fund resources to benefit the management company. These quieter conflicts rarely involve outright fraud. Instead, they involve gradual drift — benefits accruing to the manager at the margin without any single decision being obviously wrong. It is precisely this incremental erosion that a well-designed conflicts framework is built to surface.
A further and often underappreciated category arises from commercial arrangements that are entirely standard in institutional fund management: side letters and separately managed accounts (SMAs) operating alongside commingled funds on a pari passu basis. Each may be individually justifiable. In aggregate, however, they create a tiered investor structure in which the economics, liquidity, and information rights of different investors can diverge substantially. Getting this right requires systematic tracking, explicit cost apportionment, and governance frameworks that identify when commercial flexibility has created structural inequity.
New Products, Familiar Patterns
Product innovation is accelerating these challenges. Listed alternative structures and semi-liquid fund products are reintroducing valuation conflicts prominent during the 2008 financial crisis. The expansion of private credit is creating fund families where the same manager sits at every level of the capital structure, with inherently irreconcilable interests in workout scenarios. The increasing ownership of fund service providers by the same groups that manage the funds they serve is structurally compromising the independence that underpins fund governance. Digital asset fund structures present the same fundamental conflicts of custody, control, and valuation in a new technological form.
What is consistent across these developments is that the underlying fact patterns are recognisable. The specific product may be new; the conflict is not. Firms with cross-cycle, cross-jurisdictional experience can identify these patterns before they crystallise into regulatory or investor disputes.
What Active Management Requires
Effective conflicts management in private markets requires six elements working together:
A purpose-built conflicts inventory that maps the specific conflicts arising from your fund structures, fee arrangements, and activities.
A structured disclosure process that documents each conflict, how it was managed, and whether disclosure was made.
Legal counsel engagement on fund-level disclosures, combined with a central point of management within the firm supported by a controls team empowered to challenge and escalate as the firm's risk profile evolves.
Board-level engagement with conflicts as a standing agenda item, with independent oversight where appropriate.
Targeted training specific to the conflicts that arise from the firm's own products and structures.
Continuous review, treating the framework as a living system updated as the business grows.
The SFC has stated directly that generic and non-specific disclosures will not constitute proper disclosure. Enforcement actions across Hong Kong, the UK, and the US confirm that the existence of a policy is not sufficient. What matters is whether it is actively applied, monitored, and updated.
Download the Full Paper
Cognitive GRC's thought leadership paper, Active Conflicts Management: A Governance Led Solution to Emerging Regulatory Focus, sets out the full analysis — a detailed conflicts inventory framework, enforcement trends across jurisdictions, and eleven major enforcement cases from Hong Kong, the UK, the US, and Singapore.
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Cognitive GRC advises hedge fund managers, private equity managers, and other regulated financial services firms across Hong Kong, Singapore, London and New York on conflicts frameworks, regulatory compliance, and governance. To discuss an independent review of your conflicts framework, contact us at info@cognitivegrc.com or +852 3905 2886.
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