Fundraising figures for almost every country in Asia are down substantially this year and industry sentiment is that the drop will continue in 2013. How do you raise capital in this climate?
The important thing is the ability to really differentiate. Gone are the days of, ‘We’re a China fund, China’s hot – look at us.’ You really need to prove to the market and your optimum investors that you are the platform that can really live through the next phase of the China story. And particularly, [your team needs to] instill confidence in people that you’re going to be stable — a team with longevity. Because as you know, Asia has a lot of issues with team turnover. The human capital base is substantially smaller than you have in Western markets. And therefore, that’s a big factor often hindering the growth of funds, or funds being able to make it to the fourth and fifth generation. Because once you get to the third and fourth generation, you start to lose a lot of people.
Do you think there’s too much capital going into markets like China and India?
I think there’s too much capital that has already gone into these markets. In India, for example, a lot of funds were raised in the ’06, ’07, ’08 vintages – a substantial amount of capital that may not have, to be honest, matched the number of opportunities that were available in the market. So what you have seen is a stumbling block faced by a lot of the Indian managers to get to the next stage of their evolution. When you really look down at it, the vintages – which are now in their fourth, fifth and sixth years on – they’re starting to deliver, but most of them are tracking mediocre at best. Limited exits, but even when they do start hitting the exits, we’re talking a 2x at best, and mid-teen IRRs. And the impact that has had is when they’re coming back to fundraising again, a lot of them will really struggle to raise capital. Now on the other hand, China’s been a little different. It too has received a lot of capital, therefore causing concerns about valuations. But the benefit of China vis-à-vis India is the number of exits has been a lot more encouraging, and the numbers generated have been a lot more encouraging, as well.
TPG and KKR together are raising $10 billion for Asia and will likely include Southeast Asia as an investment target. What will be the impact?
Those investors that have invested through the KKRs or the TPGs of the world, and are looking for a pan-Asian approach, wouldn’t be the type of investors that local Southeast Asian funds would be competing for. If you’re going to be tackling Asia, and you’re going through a global, brand-name pan-Asian, you’re probably an existing investor of the TPG family and you’re accessing it purely for asset allocation. Those [LPs] that have graduated from that approach are now digging deeper and investing in country focused or emerging market or sub-regional-focused funds. There will be overlap, but it wouldn’t be the bulk of the same type of investors. Will it affect fundraising? It will, but not to the material degree that one would imagine.
The [other] side to the argument is if the dealflow or the size of the deals in Southeast Asia match the size of funds you’re talking about, or do a lot of these pan-regional, global brand-name funds have to dig a lot deeper down the value curve in order to put money to work? There could be a disconnect between the kind of deals they want to do and what's available. It may also be an indication that the other markets [like China and Australia] aren’t giving them the opportunities they have historically sought.