Friday Letter Eyes on Asia

Whether the Western LP/GP relationship model is truly suitable for Asia was one of the many hot topics to surface at this week’s PEI Asia Forum in Hong Kong.

Private equity’s changing dynamics are on everyone’s lips the world over.

Delegates at the Milken Global Conference in Los Angeles this week debated the buyout industry’s shifting shapes, while many of the same discussions – from capital structure and preservation to secondary sales and LP-GP relationships – were taking place across the ocean at the PEI Asia Forum in Hong Kong.

The resounding theme from the fourth annual PEI Asia Forum was that the private equity model isn’t broken, but rather returning to its roots. Tangent to that, here’s a look at 10 hot topics that had delegates and speakers buzzing:


1. The froth couldn’t last forever. The deals – and excesses – seen in the boom years of 2006-2007 have gone for good. “The past will not come back,” said Maarten Ruijs, managing partner and chief investment officer CVC Asia Pacific. “Trying to find the kind of deals we were used to in the past is not going to happen.”

2. Debt financing is still elusive. The days when banks would happily underwrite large chunks of debt on private equity deals are firmly behind us. Debt financing is available on select deals, but it’s a tough ask and will continue to be for the foreseeable future – a fact that GPs have yet to come to terms with. As one banker commented: “The private equity community complains about sellers not recalibrating – well they haven’t yet recalibrated to where the banks are.”

3. Portfolios are the priority. Private equity firms are becoming more candid about problem portfolios, with a panel of top GPs admitting some 70 percent of their time is now devoted to portfolio management, and only 30 percent on sourcing new deals.  “For some funds, the best you can do is protect what you have,” KY Tang, co-founder of Hong Kong-based Affinity Equity Partners, told delegates. In an on-stage interview, Paul Yang, executive vice president and CIO of China Development Financial Holding, said many GPs were borrowing from LPs to buy back debt on deals done at a discount before it “begins to bite”. This was, he said, the right approach, adding: “All capital not invested into deals should be used to save deals that have already been done.”

4. Due diligence rules. “Thorough due diligence should be obligatory,” said Tang, as he predicted many investments made over the past couple of years would now be revealed to be unsound due to the inadequacy of pre-transaction due diligence. Post-Satyam, fraud remains a key concern for many investors in Asia, and China in particular. Corporate governance has shifted its way up the agenda.

5. Infrastructure is where it’s at. Despite the challenges confronting Asian economies, private equity investments in infrastructure are largely expected to do well. Various governments in the region are boosting infrastructure spending as part of their stimulus packages, and this presents ample opportunities for private equity to participate.

6. Secondaries are here to stay. While hype still belies the trading reality at the moment due to a pricing mismatch, Asia is seeing a large amount of secondary deal flow, mostly coming from Western LPs wishing to sell out of the region. Globally, $60 billion-worth of secondary opportunities are expected to be made available in 2009 – double the amount seen passing through the market in 2008.

7. Asia needs an Asian LP base. “Ultimately, the biggest investors in Asia should be Asian,” Yang told delegates. “We want to see private equity develop over time into a mainstream asset class. Whether you’re a GP or an LP we all have to work together to do this. We must somehow develop a very stable LP base in Asia.” Yang said the biggest barrier for entry for Asian institutional LPs remained regulation.

8. LPs want better terms. Traditional limited partnership terms and conditions might need a rethink in Asia. Whether the Western LP/GP relationship model is truly suitable for Asia was a question asked frequently, but one without easy answers. Asian sovereign wealth funds prefer separate accounts on modified terms – robust fee negotiations and co-investment rights being top of their agenda – and it was suggested other would-be Asian LPs might desire similar flexibility. “For an industry that regards itself as being entrepreneurs, terms and conditions are incredibly universal,” commented Mark Delaney, CIO of superannuation fund AustralianSuper.

9. Opportunity exists in adversity. While organic earnings growth continues to be tough, those portfolio companies sitting on cash – and there are a few – have some good opportunities to expand through acquisitions, Nicholas Bloy, co-founder and managing partner of Navis Capital Partners, told the audience.

10. Asian private equity does not need redefining. Practitioners must return to basics, GPs say. “The private equity model hasn’t broken; people have departed from it,” summarised Tang.