Private equity’s congested fundraising environment hasn’t been kind to emerging managers. An influx of re-up opportunities and mega-funds in market has deprived many investors of the time and resources necessary to perform due diligence on new firms or relationships.
Private Equity International’s latest LP Perspectives Study found that 31 percent were “just as likely” to commit capital to new managers as to existing ones, compared with 38 percent in 2020. Meanwhile, 43 percent said they do not back such firms at all, compared with 29 percent the year before.
It is against this backdrop that PEI caught up with Frank Su, managing director and head of private equity Asia at CPP Investments – the world’s largest participant in the asset class.
CPP, whose 30-strong Asia team is based in Hong Kong and Mumbai, invests in the region through private equity funds, direct investments and via secondaries. The institution has 33 GP relationships in Asia, including the likes of Hillhouse, PAG and Anchor Equity Partners, per its website.
Here’s how the Canadian giant is navigating GP relationships in today’s congested fundraising environment.
How concerned are you by the scale and speed of re-up opportunities hitting LP desks?
It’s natural that GPs are scaling up the business, and to some extent we like it, because we want to scale our investments into our GPs. Scale itself is good. The question, though, is how you pace it, because oftentimes people see the mismatch in terms of scaling up too fast and not fast enough, which leaves opportunities on the table.
I think at this point [in] time, I’m probably more worried about people scaling up too fast… In the past couple of years, you saw in Asia $10 billion-plus funds getting raised and an inflow of LP interest into the region. That certainly has been an issue.
But this year, I would actually say that’s probably cooled off a little bit – partially because of what’s happening now, global firms are less confident in their knowledge in the region and slowing down.
We’ve seen LPs launching dedicated emerging manager programmes to ensure they have capacity for new opportunities. Would you consider doing something similar?
We’ve been continuously expanding and upgrading our GP network, and that involves adding new managers into our relationship. But it’s actually super-hard to take a top-down view and say that 20 percent of the capital will be for emerging managers, because you may not get enough managers, or you get too many. We constantly review them and bring them into our relationships when we see fit, so we don’t want to have an allocation constraint on our capability to either do more or less.
What do you look for in an emerging manager?
For emerging managers, the bigger question we ask is what they bring to the table that’s differentiated from the existing relationships we have. We add new managers pretty much for two reasons: the first is if they bring a particular sector or domain expertise that we think we’re lacking, and the second is if we can see them as a strategic partner for our direct investment business.
There are a lot of new managers emerging, but the quality varies, so you need to be very selective – especially in the past few years where the market was super-hot. Many of these emerging managers, especially younger generations, have been trained in the past 10 to 15 years and are trying to raise up funds. None of them have seen a true cycle, and that’s been giving us some pause. I think actually the good thing is, after what’s happening in the next couple of years, whatever managers emerge will probably be in a better position and that could be more interesting for us.
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