At the crossroad of governance: the two choices for Australian fund managers

Private credit, private equity and alternative assets have moved firmly into the mainstream of wholesale investment strategies. Opportunities for fund managers are expanding, but so too are risks, particularly around governance, transparency and conflicts of interest.

This moment represents a crossroad. Fund managers can pursue stronger governance, structural independence and transparency, or continue with models that embed conflicts and opacity. With ASIC increasing its focus on private markets and the industry still responding to recent governance failures, that choice has become more consequential.

It boils down to a simple choice between independent oversight or self oversight.

This article explores that choice expressed in three dimensions: awareness, impact and decision.

Awareness: Understanding the Structure Beneath the Strategy

It is estimated Australia has more than 23,000 managed funds and investment vehicles across retail and wholesale segments. Most share a common structure: a separation, at least in theory, between the investment manager and the trustee (or Responsible Entity).

When establishing a fund, one of the most important decisions is where legal responsibility sits. Under Australian law, accountability rests with the trustee, not the investment manager. While the manager constructs portfolios and executes strategy, the trustee owes fiduciary and statutory duties to investors.

Although often overlooked by investors, trustees perform three critical roles:

1. Governance and oversight - ensuring the fund operates in line with its constitution, compliance plan and legal obligations.

2. Protection of investor interests - acting independently in situations involving risk, disputes or failure.

3. Accountability and compliance - maintaining controls, managing conflicts and reporting to regulators.

Another aspect that is not often recognised is that trustees often apply a forward-looking perspective. Preventative measures can be taken on behalf of investors, both through the fund establishment phase (for new funds) and on an ongoing basis. This is in contrast with many other fund service functions such as fund administration and auditing which are either backward-looking or real-time.

Supporting the trustee functions are a network of providers: administrators, custodians, compliance teams and others. However, the most important governance relationship remains that between the trustee and the investment manager.

Two common trustee models illustrate how governance differs:

1. Independent trustee model

Here, the trustee sits completely outside the investment manager's organisation, allowing for genuine independence in oversight and decision-making.

2. In-house trustee model

Here, the trustee and manager are part of the same or related organisation, often sharing reporting lines and incentives. While lawful and common particularly in private market funds, this structure risks weakening independence.

A critical implication arises in disputes. Where a trustee is internal under a self-oversight structure, the manager often retains control over its removal. Where the trustee performs independent oversight, removal is typically more difficult and may require unitholder involvement. This creates a stronger governance check and limits unilateral action.

Awareness begins with a simple point: every fund has a trustee, and how that trustee is structured materially shapes governance outcomes.

Impact: Why Structure Matters to Investors

Governance structure is often invisible when conditions are strong. Performance may appear solid and risks contained. However, governance is not designed to enhance performance in benign environments. It exists to mitigate risk when things go wrong.

The difference between independent oversight or self oversight tends to emerge during stress: liquidity constraints, valuation disputes, related-party transactions or operational failures. These are the moments when conflicts become real.

Recent failures in Australian private markets have demonstrated this clearly. Significant investor losses, including approximately $1.2 billion linked to First Guardian and Shield, have intensified scrutiny from regulators, investors and the media. In structures where trustees were closely aligned with managers, concerns around oversight and conflicts have come into sharper focus.

ASIC has made clear that private markets are now a priority area. Conflicts of interest-especially those embedded structurally-are under increasing examination. Situations where a manager also acts as trustee who appoints the valuer of assets, holds title and controls the bank accounts on behalf of the fund illustrate how conflicts can arise if not properly managed.

For investors, the consequences of weak governance are severe and asymmetrical. Losses from governance failures can far exceed those from normal market volatility. Rather than incremental underperformance, investors may face significant or total capital loss when oversight fails.

Importantly, these risks are not always obvious. A fund may present a strong strategy, capable management and solid historical returns, yet still carry governance vulnerabilities if independence is compromised.

There are signs the market is adjusting. Some fund managers, particularly in private credit, are moving towards independent trustee arrangements. These decisions signal that governance structure is becoming more visible and influential in investor decision-making. In an environment of heightened scrutiny, independence is increasingly seen as both a safeguard and a differentiator.

Decision: Choosing the Path Ahead

The crossroad ultimately presents two decisions - one for fund managers and one for investors.

For fund managers, the choice is about independent oversight versus self oversight, and market positioning. Self oversight trustee models may offer internal operational convenience, especially for emerging strategies. However, these benefits must be weighed against rising regulatory expectations, increasing investor awareness and reputational risk.

Adopting stronger trustee governance through an independent oversight approach, clearer separation of duties and greater transparency typically requires engaging external providers such as The SILC Group. While this introduces additional discipline, it also strengthens credibility and trust. As private markets continue to institutionalise, such structures are increasingly expected rather than optional.

For investors, the decision is equally important. Wholesale investors have traditionally prioritised access and returns, often assuming governance quality. That assumption is now under pressure.

With greater awareness, investors can incorporate governance and structural independence into their allocation decisions. Over time, this will influence capital flows. Managers demonstrating governance maturity alongside performance are more likely to attract and retain investment.