Asia Alts collects $2bn after ‘manageable’ impact from China crackdown

PEI catches up with Asia Alternatives co-founder Rebecca Xu to discuss how regulatory headwinds and geopolitical tensions are impacting LP appetites.

Asia Alternatives has defied regulatory and geopolitical uncertainty to collect $2 billion for its latest fund of funds programme.

Xu: Indian exits no longer a pain point

The San Francisco-headquartered firm raised $1.1 billion for Asia Alternatives Capital Partners VI and parallel vehicles, according to a Wednesday statement. The remaining $900 million was raised via separately managed accounts, co-founder Rebecca Xu told Private Equity International.

Some 85 percent of the capital was provided by existing LP relationships, the statement said.

AACP VI will target 20 to 25 fund managers across Asia-Pacific, PEI reported in August. Roughly half of the money will be deployed in Greater China, 20 percent to 40 percent in Japan and South Korea, 15 percent to 25 percent in India and 10 percent to 15 percent in Southeast Asia and Australia.

Asia Alternatives collected $1.8 billion for its previous fund of funds programme in 2017, according to a statement at the time.

The latest vehicle comes at a difficult time for those raising capital for China, with regulatory headwinds, travel limitations and geopolitical tensions contributing to a decline in funds raised over recent years.

PEI caught up with Xu to discuss how this environment has impacted the fundraising process.

China has traditionally received a significant proportion of Asia Alternatives’ fund commitments. Has this appetite been affected by the country’s recent crackdown?

Since inception, [roughly] half of our capital has been invested in Greater China. None of our GPs have significant exposure – emphasising the ‘significant’, as I’d say some have some exposure – but across the board, negative impacts on their exposure to sectors that have been the target of the recent regulatory scrutiny are manageable.

Entrepreneurs and fund managers in China have always had to be nimble, adaptable and resilient. Over the last 16 years of investing in China funds, we’ve seen multiple cycles of market changes [and] regulatory storms, and people on the ground have always been able to adapt their strategy and realign their investment targets.

What kinds of conversations were you having with LPs about the regulatory uncertainty?

With the current geopolitical environment, and over the next investment cycle, we are operating in an increasingly bifurcated world, with US-China tensions, decoupling in the technology world and perhaps in many of the capital markets-related fields.

All our LPs are aware, at least big-picture, of what’s going on in the China market. There was a wide range of perspectives or current positioning of our LPs: there were ones in the camp of taking a pause or holding back a little bit on new investments into this market, but there’s also those who see the opportunity of the market downturn and are doubling down on their investments in Greater China.

We did have LPs who couldn’t re-up, but not necessarily for this particular reason. The world has been very uncertain in the past two years and so there are all kinds of reasons why some LPs decided not to at this point in time.

Indian PE activity has exploded in recent years. Will this be reflected in your latest fund?

Our expected exposure is 15 percent to 25 percent of AACP VI, slightly higher than earlier funds, as we’ve seen some pretty meaningful developments in India, where the digitisation of the economy and organised economy are really taking many of the opportunities to a whole new level. Indian companies have stepped up, after covid, the pace of digital transformation, and therefore we are seeing an increasing amount of capital flowing into these.

This also helps create more exit possibilities, which has been, for the longest time, the pain point for investments in India. It’s not lack of growth, but it was often harder to find an optimal exit point, and that has improved quite a bit.

What do you perceive as the greatest threat to PE returns moving forward?

One would always have to be mindful of any significant macro-level shifts in the market, whether by way of policy – for example, interest rates – or regulatory change, as we’ve witnessed in the Greater China market. While we are concerned and have to watch those carefully, we don’t invest in macro – we invest on the ground very much from the bottom up.

From that point on I would say that the biggest factor of risk on a daily basis that keeps me awake would be GP-level risks: if a partnership’s starting to show internal conflict. If there was any breakdown in the organisation of our GPs, that would be a risk that affects how they would be able to deliver cash on cash returns to us. There’s a people element that you can underwrite to some extent, but it changes and sometimes one could be surprised.