Asia's smaller funds get squeezed

Data shows that Asia-focused funds targeting less than $1bn are raising a dwindling portion of the overall fundraising pie as they decline in number.

Funds $1 billion and above are raising an increasingly larger share of total capital for Asia at the expense of sub-$1 billion funds, according to data from PEI's Research & Analytics division.

In 2010, big funds accounted for 33 percent of the total amount raised for Asia. In 2012, the figure was 54 percent, the data shows. 

At the same time, the number of small funds (sub-$1 billion) have been cut in half since 2010 while the number of $1 billion-plus funds have stayed roughly the same.

Javad Movsoumov, executive director at UBS private funds group in Singapore, attributes the trend to survival bias – funds may start in the sub-$1 billion range but if they are successful each subsequent vehicle raises a larger amount.

“If you don’t perform well, you typically don’t raise the next fund. Therefore the more successful funds in time move over the $1 billion mark in terms of amount of capital raised.”
“Successful funds rarely go down in size, but typically go up. In Asia there have been cases where a fund has doubled or tripled in size over a number of fund raising cycles,” Movsoumov said.
However, Dennis Montecillo, CEO & senior managing director of Diamond Dragon Advisors, believes survival bias is only part of the story.

The weak fundraising environment in combination with investors’ budget cuts in travel and hiring “is making it harder for them to take a chance on a high quality but smaller or newer – though not necessarily a first-time – fund. Investors are defaulting to the larger brand names as a result”.

Survival bias has historically been attributed to poor results, he added. But some large brand name firms are raising capital successfully despite weak to mediocre results from their previous funds, and one reason is investors' “fear of picking the wrong non-brand name”. 

The higher cost of raising capital combined with downward pressure on fees is also squeezing small fund managers, Montecillo said. 

“A sub-$1 billion fund manager will need more than a differentiated story. He will need staying power with a good capital structure. It used to take 9 – 18 months to raise a fund from start to finish. It now takes 18 – 30 months to do the same. [A small fund] needs up to $2 million of working capital to get to finish line, a cost that is up maybe 50 percent in the last three years.” 

“Without deep pockets or a supportive sponsor, a small fund probably won't be able to do it.”

Big funds are taking more of the total pie…`

 2010  2011 2012  2013 Q1
Asia Pacific 
total funds raised

 $31.8  $41.4  $29.6  $5.3
Amount raised by 
$1bn-plus funds

 $10.6  $20  $16.1  $3.5
 $1bn-plus funds 
percent of total 

 33.3%  48.3%  54.4%  66%

Figures in US$bn. Excludes venture funds, real estate and infrastructure
Source: PEI’s Research & Analytics division

…while the number of small funds decline

  2010  2011  2012   2013 Q1 
$1bn-plus    7  11  7  1
sub-$1bn    90  78  48  10

Source: PEI’s Research & Analytics division