LP scrutiny in Asia tightens

Investors increasingly want to drill down into current and pipeline deals in Asia, according to GPs.

With Asia’s deals and fundraising totals down three consecutive years and emerging market returns underperforming US fund returns, LPs are scrutinizing money that has gone into assets, delegates heard at the Asia Forum 2014 in Hong Kong.

“LPs are really looking now on an individual granular basis at the investment to see if it stacks up,” said Marcus Thompson, chief executive officer of Headland Capital Partners.

“In meetings today LPs drill down for a lot of detail on portfolio companies to understand why we invested in that particular asset, what we like about it, what were the pricing parameters so they can benchmark them to public markets, and what we’ve done with the asset.”

Jonathan Zhu, managing director, Bain Capital added that back in 2006-2007, LP questions centered around deal sourcing.

“We’re getting a lot of more interesting questions from LPs than we did in 2006-2007,” he said. “Sourcing continues to be important, but now there’s also a lot of focus on managing the portfolio, delivering improvements and how to avoid downside risks. The overall ability to manage risk and drive returns has become top of mind for LPs.”

Sources agreed that operational value added work to grow Ebitda is critical to getting desired returns going forward.

“In Asia, a company’s expertise is relatively young. You can improve governance or the backoffice,” said said Patrick Siewert, managing director, The Carlyle Group. “Even in the lower growth environment, US and European trade buyers are looking for good quality companies. They won’t buy an SME that can’t close its books.”

LPs also have a higher priority on liquidity, when previously the industry in general was focused on delivering the highest returns.

“Most LPs are asking why so few Asian country or pan-regional Asian funds are returning so little capital,” said Patrick Siewert, managing director, The Carlyle Group. “That really is the number one question.”
LPs are also placing a higher priority on liquidity and would like to experience shorter holding periods in Asia than they have over the last 10 years, Siewert added.

“A fund that returns half the capital by the time it’s invested will stand out in the market,” Siewert said.

“Fifty cents on the dollar of exposure during the investment period of the fund leaves them in a much better position to take exposure in alternative assets. They can redeploy that capital into the next fund.”

“In the end, it really is not a wildly outsized return, but slightly outsized return.”