Time is ripe for Asian PE to deploy capital
13 Sep 2012
Changes in investment conditions and better capabilities of general partnerships that run private equity funds are improving the asset class' outlook in Asia and prompting some institutions to deploy capital in the region.
Past problems such as some GPs' inadequate investment skills and poor performance appear to be improving. Juan Delgado-Moreira, Hamilton Lane's MD and Head of International says: "The long run pool of international PE allocation is growing because of demands for global yield and Asia is a favourable area."
According to data from the Asian Venture Capital Journal, fundraising in Asia reached $26.2bn in the first half of 2012, representing a 23.4% drop from the same period last year.
Delgado-Moreira said that recent mediocre returns had been a case of a mismatch of investment management skills versus the asset class. "In 2000-2005, Asian and China private equity was transitioning from venture capital to larger growth and private equity deals, which implied a change in risk premium. The returns from those vencap years ended up in the mid-teens while US private equity performed much better."
The PE industry has also been plagued by the inability of GPs to survive for very long, substantial staff turnover with people moving around GPs and leaving the business entirely. "One explanation is the inequitable distribution of carried interest among the team members. Another is the lucrative, near-term opportunities available in investment banking being driven by rising stock markets. The temptation to do their own funds is too strong."
Delgado-Moreira adds specialist GPs last the longest and make the best returns. "Too much Asian PE is macro driven, without a focus on micro, industry drivers. A balance between skills in banking and organically growing investees through industry skills is critical for a GP's long term success."
Delgado-Moreira hopes China PE will be less dependent upon IPOs as the primary source of returns and goal of corporate development. "In the US and Europe, many CEOs prefer to and fully understand the advantages of working in a private setting with a PE shareholder. As China's financial markets develop more companies will understand the diverse kinds of funding opportunities that are possible."
Author: Peter Guy