Hamilton Lane sees strong LP appetite in Asia credit, VC

Private credit and venture capital will continue to be the big investment themes in 2017, according to fund of funds manager Hamilton Lane’s Asia market overview.

Private credit will attract stronger LP appetite in Asia as the strategy alleviates challenges faced by investing in private equity, Hamilton Lane said in its latest market overview for the region released on 29 November.

Mingchen Xia, Hamilton Lane managing director of fund investment in Asia told Private Equity International that private debt's higher cash yield, J-curve mitigation, and lower risk profile makes the strategy more interesting to investors seeking short-duration, risk-adjusted returns.

In June the alternatives asset manager held a final close on its latest credit fund Strategic Opportunities Fund 2016 on $210 million, against its initial target of $150 million after just three months in market. Launched in March this year, the fund will make credit-oriented direct and co-investments in Asia, North America, Europe and Asia. 

Along with strong interest in private credit, LP commitments to Asian venture capital funds will surge in the next year, predicts Hamilton Lane, as LPs continue to witness the strong performance of venture and growth funds, which are in turn driving up the performance of the asset class.

Asia-focused private equity funds in recent vintages (2011 to 2013) had a median IRR of around 12 percent, slightly higher than their developed market peers’ performance which came in at around 10 percent, according to the Hamilton Lane Fund Investment Database as of November 2016.

“The biggest driver of Asia private equity returns outperforming developed markets is the strong performance of venture capital and growth funds in Asia,” Xia points out.

“The venture capital funds of recent vintages have been performing very well, with many of them raising large follow-on financing rounds. So a lot of these unicorns are driving venture capital performance and consequently boosting performance for the asset class in Asia.”

Xia added that China’s venture market will be an interesting market to watch. “China has a very big venture capital market and is the second largest now after the US. In 2015 US venture capital investment reached $68 billion, while China’s was close to $37 billion, according to Bloomberg data.”

On the other hand, Asia is still behind the US and European markets when it comes to distributions. Xia attributes this to the choice of exit strategy.

“The issue in Asian private equity is that firms are still heavily reliant on the public markets for their exit strategy, which makes them more vulnerable to the volatility of the IPO markets. In addition, growth capital and venture are still the main strategies Asia – with fewer buyouts, you have less control on the timing and type of exit.”