Funds of funds are consolidating as fewer people need their services. What type of clients still require funds of funds today?
The traditional, plain vanilla fund of funds model is under threat so it is very difficult to raise a generic fund of funds under the name of manager selection or diversification. A lot of the customers of funds of funds – the pension funds, endowments and insurance companies – have become more sophisticated in terms of gaining access and evaluating fund managers. So there is no pressure to outsource.
The second factor is that a lot of the private equity market is becoming more transparent. GPs can go direct to LPs for fundraising, so there is less and less need for a middle man.
There are only two categories of customers that a fund of funds could serve. One, the ‘big-to-small’ model – big pension plans that cannot spend too much time or resources looking at certain segments of the market. For example, small- and medium-sized growth funds in Asia – most pension funds can’t afford to have someone servicing such a small piece of the market so they can outsource that to a specialised manager to help look for emerging or small-cap managers.
In a few years there will be two classes of funds of funds…the big guys with global scale and brand names that get all the big accounts [and] the specialists that will have a niche strategy or a niche group of investors. Apart from these two groups, it will be very difficult
Pak-Seng Lai, head of Asia, Auda International
The other extreme is from ‘small-to-big’. A lot of [smaller, private] investors who would only invest one million or $500,000. They wouldn’t be able to meet minimum requirements of a lot of the bigger funds. So a fund of funds would make sense.
What are the challenges of customising and specialising for your clients in Asia?
The key thing is to get to know your LPs well. You need to know their needs and be able to interact with them well, so you need good marketing people. For specialising, you really need good investment people from the local community that can plug into the essence of the private equity community. All my team members in Asia speak at least two Asian languages and are all from the local communities.
The thing about fund evaluation is it is not excel spreadsheets and desktop research, it is all about going on the ground and speaking to the people. You get information from papers like the PPM, but you get the intelligence from the people.
In a few years there will be two classes of funds of funds that exist. One is the big guys with global scale and brand names that get all the big accounts. On the other hand, there will be the specialists that will have a niche strategy or a niche group of investors. Apart from these two groups, it will be very difficult.
How does the lack of experienced GPs in Southeast Asia impact your investment strategy and how do you manage the expectations of investors eager for exposure to that market?
We just don’t invest. The important thing is that we don’t invest for the sake of investing. We’ve probably seen every single fund in Southeast Asia and then we just come to the conclusion of which ones meet our criteria. Right now, we have invested in three and probably will do one more, but the important thing is it is bottom-up and we don’t put ourselves under pressure to put money to work. I think the most common mistake is having a billion dollar portfolio with a 30 percent allocation to Southeast Asia. Then you have to go and put $300 million to work in Southeast Asia and then go look for managers.
[For our LPs], I just say: ‘This is what you get in Southeast Asia, and out of these only two or three qualify. I’m not going to do the rest and these are the reasons.” So I think communication is very important and that goes back to my earlier point of customisation and knowing the needs of your customers.
Southeast Asia aside, China is the key focus for us. Despite all the negative sentiment, if I look at the numbers – we have 35 funds in Asia and the good performing ones are the China funds. China has actually delivered.