Divided on Asia

Much has been made of the supposed increase in attractiveness of Asian private equity markets, with their background of continued economic growth and limited use of leverage to generate returns. This growth play has become even more attractive, some say, at a time when more developed private equity markets like the US and Western Europe have been visibly suffering the effects of the financial crisis.

But has the financial crisis really proved a tipping point for Asian private equity? And are institutional investors globally looking to shift their focus to Asia and gain greater exposure to the region in their private equity portfolios? Placement agents and fund of funds managers, it seems, remain divided on the issue. Here we present a snapshot of views.

Allocations

According to Matilde Attolico, a partner at Mercury Capital Advisors, a London-based placement firm, most limited partners still feel they are under-allocated to emerging market strategies and Asia is therefore a natural area of focus. “There is a generally accepted view that emerging Asia has reached an interesting inflection point,” she says.

Another placement agent, who wished to remain unnamed, says: “It’s clear that people have appetite for Asia, but the follow-through is not happening at the pace you would expect. Asia still remains largely underweight in limited partners’ portfolios.” Investors, he said, are questioning the need to venture into regions which are less familiar to them and inherently more volatile than the developed markets.

However, LN Sadani, a Singapore-based director at AXA Private Equity, is convinced Asia is receiving a larger portion of global commitments than it was two years ago.
Investors are interested in the region because of its growth, its continued deal flow, and because the stock markets offer good opportunities for exits and as such are beginning to put more capital to work in the region, he states.

Sam Takata, deputy head of private equity at Tokio Marine Asset Management, which manages approximately $2 billion in private equity capital, has a similar view. He says the firm has seen increasing interest in Asian private equity, particularly from investors in the US, Western Europe and Japan. “There is certainly more liveliness in Asia than in the US or Europe.”

Universe of GPs

Providing a rationale for why private equity capital flowing into Asia is not going to increase significantly, the placement agent who remained unnamed says it is difficult for LPs to put money to work in Asia, particularly if you have a large pool of capital to deploy. “Investors are looking for very high quality deals but the universe of premier funds is less than two dozen,” the agent says.

Once again, this is not a view that finds consensus. Takata says that while a lot of money is concentrated on the best managers – as exemplified by CDH Investments’ latest, highly oversubscribed fundraising – TokioMarine has spent the last 12 to 18 months digging deeper into the market to find other good managers. “I think we have found enough opportunities that we would like to pursue,” he concludes.

Sadani too dismisses the notion that the universe of good managers in the region is small. “It is superficial to say there isn’t enough depth in Asian private equity because there are plenty of managers,” he says, adding that AXA has met more than 450 fund managers in the region. He says it is a matter of doing thorough due diligence and sourcing opportunities.

There are a number of local country-focused managers that have their own proprietary networks and they own strengths. “They may not make the flashy kid of deals and you may not hear of the deals they make, but they make deals that make money,” says Sadani.

But with some of the standout Asian funds being oversubscribed, are Asian opportunities attractive enough for an investor to spend significant time and resources on the search for other upcoming managers? For TokioMarine, they are, says Takata. He does add, however, that it ultimately boils down to the resources an investor group has. For Tokio Marine, which is obviously close to key Asian markets in terms of geography and time zones, it is less exerting that it would be for investors from Europe or the US, he points out.

Diversity

Another sticking point with Asia, according to the anonymous placement agent, is that it is still difficult to create diversification across Asia as the market isn’t deep enough and has not evolved to the point where an LP can invest broadly across sector and style. “Much of the money over the last few years has been raised by the big buyout funds and I suspect that many of these groups have pipelines in which there is quite a bit of overlap among their deals,” the agent says.

Till such time as there is greater differentiation among funds and a larger selection of managers to choose from, he says, investors will find it difficult to add exposure to Asia without concentrating their bets.

Takata agrees that there aren’t enough quality deals going around in the large buyout segment, but adds that the buyout market in Asia is only a very small part of the private equity market in dollar terms as compared to other developed markets. He says investors looking for exposure to Asia need to think of investing in venture or growth.  “If you have to invest in buyouts, then just don’t invest in this market,” he says.

Sadani too points out there is virtually no buyout market in China and India, the two key markets for private equity in Asia. The days of the mega buyout deals in Australia are also behind us for now, he adds. He admits there would be concern about opportunities if one wanted exposure to mega buyouts in Asia, but says there is plenty going on in the mid-market.

The two investors also reject the view that a limited partner cannot get enough diversification in emerging Asia. The argument has two parts. Firstly, says Sadani, Asian fund managers do have niche areas. Even just looking at China, some firms have greater affiliation with state-owned enterprises; some have expertise within the consumer sector; some focus on coastal China; some others on the interior regions. In his view, while everyone appears to be sector-agnostic on the surface, in reality all managers have two or three core areas of expertise and ways to differentiate themselves.

Takata offers another take on why there is substantial diversification in the market. He says Asian economies such as China and India are large and the components of their respective GDPs have become a lot more diversified than before, as a result of which the opportunities for private equity have become more diverse as well. “So I disagree that one cannot have diversification in emerging Asia. I don’t think I’ve ever worried about that.”

He does caution though that for any investor, it is relative returns that are of paramount importance – not just absolute returns. The returns generated from private equity have to be higher than the returns generated by the public markets, which tend to soar as well when economies grow. So you have to be the right managers in order to beat the public markets.

TokioMarine certainly believes there are enough of these ‘right managers’ in Asia. The firm, which currently allocates about 5 percent of its private equity portfolio to Asia ex-Japan, is mulling doubling this to 10 percent, Takata says.