The Asian Development Bank is taking “material risks” by investing more money in private equity funds, even though internal controls on such investments show “serious weaknesses”, according to a confidential report by the Asian lender’s evaluation unit.
The ADB has accelerated private equity fund (PEF) investments since 2003 and now has stakes in about 40 funds. Many of the funds are registered in tax havens such as the Cayman Islands, but slightly more than half of the ADB money they have invested is in China and India.
The report claims that the ADB also “breached its capital allocation limit for private equity funds of 5 per cent”, adding that “a new standard” is needed “for risk management purposes”.
The ADB, however, denies violating its own rules. It has $650m in private equity funds out of total equity investments of slightly more than $1.3bn. This latter figure is within its 10 per cent overall equity limit. Concerning the portion earmarked for private equity, “allocation of the overall amount to private equity funds is an internal matter and could vary”, according to Seethapathy Chander, deputy director-general of the ADB’s private operations.
Concerns over risky investments come as the US and some other ADB shareholders have pushed for an overhaul of the Manila-based lender. One of its demands is that the ADB should strengthen its risk management unit, especially as it seeks to have private sector involvement in 50 per cent of projects by 2020.
The US, which is the ADB’s largest shareholder alongside Japan, recently voted against the bank’s long-term strategic plan because of its worries over ability to meet its goals.
The ADB’s independent operations evaluation department, which wrote the report, complained that the private equity expansion had been unplanned and had not been geared to the development objectives at the heart of the bank’s work. It also pointed to a lack of transparency about the investments and said the ADB had devoted less than half the staff required to oversee them, amounting to “serious weakness in the ADB’s monitoring arrangements for PEFs”.
Further expansion could cause serious problems, according to the report from early 2008, extracts of which were obtained by the FT. “The rapid growth in ADB’s PEF exposure over the next five years suggests this type of strategy will create material risks,” it said.
Campaign groups have criticised the use of tax havens by international lenders as sending a signal that tax avoidance is acceptable. However, the ADB is not alone in using tax havens, “as long as there are reporting controls in place that ensure that no illegally gotten wealth is laundered through ADB-participated funds”.
Other international financial institutions are also expanding their private equity investments. The IFC, the financial arm of the World Bank, has an equity stock of about $1.5bn in about 150 funds.
