GPs look to Asia

Much as interest in Asia as an investment destination has grown, the prominence of the region as a source of capital has also increased steadily, according to a research paper released jointly by BNY Mellon and PEI Media in May. 

Some 28 percent of US and European GPs surveyed stated they would likely tap Asian and Middle Eastern institutional investors for the first time when they set out to raise their new funds, the study, Private Equity Faces the Future: Candid Views from the Market, found.

Encouragingly for these GPs, 85 percent of private equity investors in Asia surveyed for the same report say their commitments to private equity will either remain stable or increase over the coming years. 

Of these, 71 percent of respondents said they would maintain a similar allocation to private equity while 14 percent said they would increase their allocation. According to the study, this reflects the feedback that while Asian LPs without significant legacy portfolios are enthusiastic about private equity opportunities going forward, their boards need further education and experience to become more comfortable with private equity as an asset class. 

“We found that some of these newer Asian LPs have advantages compared to other investors. They did not suffer from the over-allocation issues that many western LPs encountered given the turbulence of the markets in 2008. This is one of the reasons why a good number of GPs are focusing their capital raising increasingly on Asia – they see an opportunity,” Andrew Gordon, head of BNY Mellon’s alternative investment services group in Asia, told PEI Asia in an interview.

Private equity continues to grow as an attractive asset class for Asian investors, the study found, despite unfavourable economic conditions over the last two years testing assumptions about the performance of the asset class and the long-standing relations between LPs and GPs.

Immediately following the downturn, board members at 40 percent of Asian LP respondents were described as having adopted a more negative view of private equity as compared to 25 percent in Europe and 14 percent in North America. 

“While LPs in Asia are enthusiastic about private equity, they recognise that there remains a gap in education and experience,” Gordon said. Other than Japanese insurance companies and Australian superannuation funds, many Asian institutions do not have a long history of experience in private equity. 

“They will need help in order to fully understand the market, the risks and the opportunities. GPs that can respond to these needs will have a bright future in the region,” according to Gordon.

More generally the survey, which was based on 102 interviews with GPs, LPs and other industry stakeholders, found limited partners want more private equity, but they want it to be better private equity. 

Globally, 79 percent of LP respondents said they were planning to either hold steady or increase their private equity allocations. However, LPs are focused on fees, and particularly on terms and conditions governing the management fee, as an area in need of improvement. 

In particular, LPs respondents from around the world said they would focus on how the management fee was calculated, and also as to what extent the income produced from this fee exceeded the budget needs of the private equity firm. LPs also said they would push for transaction fees to go 100 percent toward offsetting management fees. 

In the wake of the crisis, LPs have more vocally criticised fund terms that seemingly create GP profit centres based on management and transaction fees, a structure that many feel misaligns the interests of GPs and LPs . Notably, the study found no instances of LPs calling for traditional carried interest levels – usually 20 percent of investment profits – to be lowered. 

Some GPs interviewed for the white paper noted that an ongoing pressure on fees and fund size would have consequences for their own businesses. Some were anticipating a step down in fee income as a result of these trends. 

The white paper was based on 102 interviews with GPs, LPs and other industry stakeholders, of which half were based in North America, 29 percent in Europe and the remainder in Asia-Pacific.