LPs: Weak GPs fundraise too easily in Asia

Concerns about Asian GPs were raised by two-thirds of respondents to the latest Coller Capital private equity barometer, which also showed re-ups at an all-time low, but new commitments bouncing back as belief in private equity endures.

A majority of LPs globally believe weak GPs in the Asia-Pacific region are able to raise funds too easily, show the results of secondaries specialist Coller Capital’s Winter Barometer 2010/11. 

Some 67 percent of the 120 LPs from around the world interviewed for Coller’s twice-yearly survey of investor appetite for private equity believe undeserving Asian GPs are able to slip through the net. 

“LPs struggle to do due diligence in Asia. When looking into individual transactions it’s hard for them to know whether it’s just luck or the skill and quality of the individual behind the deal,” said Hiro Mizuno, partner and Asia head at Coller Capital in a telephone interview. 

“LPs are making compromises– they’re lowering their standards when it comes to their Asian commitments, for example in terms of the quality of the management team.”

LPs are making compromises– they’re lowering their standards when it comes to their Asian commitments.

Hiro Mizuno


The lack of clarity was one reason, said Mizuno, that Asia-focused fund of funds could be somewhat exempted from the overall FoF fatigue highlighted by the survey, in which 43 percent of North American, 35 percent of European and 27 percent of Asia-Pacific investors in FoFs said they intended to either reduce or end their commitments to the strategies within the next three years. This compares to only 13 percent of investors in all three regions saying they would up commitments to FoFs.

The top three reasons put forward by LPs for this change were increased in-house GP selection capabilities; the high cost of FoFs strategies; and disappointing returns.

As Mizuno points out, the ‘access’ incentive offered by FoFs is no longer relevant in most geographies where “many GPs are struggling to fill their funds – not necessarily because of poor performance”. However, he notes that “Asia is probably the only region where there is continued strong interest in FoFs”, precisely because access to top-performing GPs is still an issue.

“Except for some VC firms in developed markets, GP access issues are mainly an issue in Asia, where good GPs still have to build out their fund sizes. This increases the relevance of FoFs in the region.”

However, he notes that Asia-focused FoFs still come in for their share of criticism from some LPs, who “raise the issue that Asian FoFs tend to invest in the same funds as each other and make big commitments to obvious names, which they don’t need them to do”.

Overall, LP confidence in private equity as an asset class continues to hold strong. In fact, 60 percent of LPs are anticipating returns topping 16 percent from 2010/11 vintage deals. 

Accordingly, allocation plans for private equity have bounced back, with 34 percent of investors surveyed in this Barometer stating intentions to increase commitments to private equity over the next year, compared to only 18 percent in last winter’s survey. However, the number of LPs – 16 percent – planning to reduce their allocation over the same timeframe has also increased marginally since last year, when only 12 percent planned to do so.

Additional good news for GPs is that 81 percent of respondents said they planned to add new GP relationships in the next two to three years; a further 60 percent said they would increase the pace of commitments in 2011.

However, the news was less positive when it came to re-ups. Some 84 percent, 91 percent and 70 percent of North America, European and Asian LPs respectively told Coller they had declined requests for re-investment in the last 12 months – a high compared to previous Winter Barometers.

Returning to Asia, Mizuno notes LPs still have high expectations for the region.

“Confidence in and expectations for the Asian private equity have increased again over the last six months – it’s raised concern that there might be a bubble building, but so far optimism and positive expectations remain the overwhelming sentiment,” he says.