Four questions on Asia Alternatives $1.8bn Fund V

Asia Alternatives, a San Francisco-headquartered fund of funds, has just closed its fifth pan-Asia vehicle on $1.8 billion in new commitments.

The fundraise comes at a time when capital is pouring into Asia private equity – it is the latest in the line of multi-billion dollar funds raised so far this year, including KKR’s $9.3 billion Asian Fund III, CITIC Capital Partners’ $1.6 billion China-focused vehicle, and Axiom Asia’s $1.03 billion Axiom Asia V.

Co-founder and managing director of Asia Alternatives, Rebecca Xu, discusses the firm’s latest vehicle, its return expectations, and the opportunities she is seeing in Asia’s maturing private equity markets.

PEI: Asia Alternatives raised $1.8 billion for its latest vehicle, can you tell us more about the fundraising?

Rebecca Xu: Asia Alternatives Capital Partners V was certainly a milestone for us. Looking back in history, we closed our first fund in 2007 on $515 million and over a decade later raised more than three times at over $1.8 billion. In terms of setting the fund size target at $1.3 billion, our philosophy had been that it’s not about what we can raise but what we can invest. We believe that investment discipline is critical to generating return.

And there is an increased appetite from global investors in Asia private equity at the moment, that is reflected in the time we spent fundraising. It took about three months between our first close at the end of June to our final close in early September.

Over time and across several funds we’ve also been able to diversify our investor base. When we started, a majority of our capital came from North American investors, that has now expanded to Latin America, Europe and Asia. We also have a wide and well-balanced investor profile ranging from public pension funds and corporate pensions, to endowments, foundations and family offices.

PEI: What returns are you seeking for AACP V?

RX: Our Fund V return target is not different than what we have always aimed to achieve, which is delivering net 2 times multiple of invested cost for our investors overall. More importantly, the way we think about return is on a risk adjusted basis, which has several elements to it.

First, we want to deliver a premium on top of geographic risk. Therefore, we aim to generate about 500 basis points over top quartile US private equity – which is one criteria our investors compare Asian private equity to. Second, we also have to compensate for the illiquidity risk investors are taking by investing in Asia private equity versus Asia public equity. In this regard we also aim for 500 basis points over the equivalent Asia public equity performance. And finally, since we are part of the Asia private equity universe, we ourselves aim to be at the top quartile among Asia private equity funds. We use several return benchmarks but the main one for Asia Private Equity is Cambridge Associates.

PEI: What markets do you think provide the best private equity opportunities in the region?

RX: Japan, Korea are the two buyout markets that have been really rewarding to Asia Alternatives over the years. These are more mature economies that have in the last three to five years seen a change in political leadership and meaningful reforms. During this transition time, private equity has typically been an appropriate solution capital to help corporations whether in divestments, roll-ups, or business succession.

In contrast, emerging economies such as China, India and South-East Asia, are more growth-oriented markets where we have seen minority type opportunities generate attractive returns. In addition, we have also seen select buyout and distressed opportunities in South-East Asia as well as a rising trend in control buyout opportunities in China.

Australia is a market we have been involved in since inception. We see both ends of the market becoming more active in recent years – the larger end has seen the increasing involvement of global and regional firms, while the small to mid-end of the market is driven by domestic managers.

PEI: Now that the capital raising has been wrapped up, what’s next for Asia Alternatives?

RX: We will continue building out the rest of the portfolio of Fund IV. We reserve small amount of capital for follow-on investments, such as direct co-investments and secondaries with the same managers in the current fund.

As we kick off investments for Fund V in the near future, we continue to monitor the most exciting new opportunities coming up in our markets and look for the best managers in those areas to invest in. Across our markets we see positive trends both in terms of local leadership and reforms as well as improving economic conditions. I believe those will take us into another year of active investments.