Limited partners looking at committing capital to Asian GPs are focused on finding partners that are building institutionalised businesses, according to panellists at the 15th Hong Kong Venture Capital and Private Equity Association China Private Equity Summit.
Doug Coulter, a partner at Swiss-based investor LGT Capital Partners said that returns, a deep bench and a focus on institutionalisation, governance and transparency are the key things the firm looks for in a general partner.
“In China historically, we’ve seen a lot of high profile firm leaders and charismatic individuals who raise funds among themselves but sometimes don’t share the economics that broadly, and that’s led to team instability over time,” Coulter said. “It’s good to have charismatic firm leaders, but how good is the next level of employees down?”
Coulter pointed out that some GPs in China do not appreciate how difficult it is to build a firm in the long-term. “It’s one thing to find great companies, invest in them and return capital. It’s another thing to be able to build a firm that will last 10 to 20 years and to transition that to the next partners.”
John Huo, director of private equity of Manulife Financial agreed that — particularly in China — the firm is looking at the stability of the team, evidence of a real succession plan, as well as its ability to evolve with the market.
“China’s a very fast developing environment from a political, regulatory and economic standpoint. It’s critical that teams are able to evolve and to learn from their mistakes – that’s one of the core things that we look for when we talk to GPs.”
Meanwhile, Myron Zhu, co-head of private equity in Asia-Pacific of Aberdeen International Fund Managers noted that the firm has not changed its GP selection criteria but has been “very selective” in finding the right general partner to back, which he adds, is not easy to find in the current Chinese market.
Zhu said that from a portfolio allocation perspective, Aberdeen intends to invest in about one or two GPs in growth sectors in China such as healthcare and technology, media and telecommunications (TMT) and consumer-related sectors.
Zhu added: “The worst isn’t over in China based on what we see in the market. There has been significant fund outflow from emerging markets to developed markets as well as significant divergence in terms of valuation multiples.”