LPs seek assurances over China exposure in APAC funds

Private real estate giant Gaw Capital is among those offering investors the ability to eschew China exposure in its latest flagship fund.

Limited partners are seeking greater clarity and certainty over their future China exposure in Asia-Pacific private markets strategies.

Earlier this month, affiliate title PERE reported that Gaw Capital, one of Asia’s largest private real estate firms, had agreed to carve out a sidecar vehicle from its seventh pan-Asia flagship fund for North American investors not wanting exposure to Chinese real estate. The request, which came from three or four institutions, was politically motivated, founder Goodwin Gaw told PERE.

Conversations around China exposure have become more common in recent years, Kai-Niklas Schneider, partner and head of the funds and investment management group at law firm Clifford Chance, told Private Equity International. Schneider was speaking prior to PERE’s report about Gaw and did not refer to any individual firms by name.

“For pan-Asian funds, we’ve seen investors pushing for reduced allocation to China, or at least a deferred allocation so that it wasn’t a priority, but also a greater focus on the mixing of Chinese and international opportunities,” he noted.

“And so we’ve seen, for example, some managers look at using sidecars or separate vehicles to capture China opportunities so investors can opt in or out. Managers are of course trying to be creative in structuring solutions that allow LPs to cater to their particular concerns.”

Western LP appetites for China have been impacted in recent years, not only by rising geopolitical tensions and three years of zero-covid isolation, but also a 2021 regulatory crackdown on some of private equity’s sectors of choice. These factors have prompted some pan-regional funds to deploy less in China and more towards markets such as India and Southeast Asia.

Diminished appetites for the region’s largest private equity market contributed to a reduction in demand for Asia-Pacific more broadly last year. Funds in the region had raised $71.8 billion as of mid-December, substantially lower than the $103.9 billion collected in 2021, according to PEI data.

LPs committing to regional funds are also pushing for assurances in due diligence questionnaires over how much of the fund will be allocated to each market, Liyong Xing, a Hong Kong-based partner at Clifford Chance, said.

“In the past, they would say: ‘I’ll do X percentage in China; X percentage in Japan; and X percent in South Asia, but a lot of times it ended up 70 percent China.’ Because that’s just naturally how the dealflow shaped up,” she added.

“We’ve seen regional GPs actively try to manage LP expectations and make it very clear from day one that: ‘It’ll be something like 40 percent in China – I’m not going to give you a legal covenant on it, but that’s our target and we’re happy to report back to the LPAC on a regular basis.’”