Manager selection key for Asian PE

The lack of experienced and stable teams in Asia still remains a major bottleneck to investors, according to a new survey.

While acknowledging the changed economic circumstances in Asia since its last annual survey of the Asian private equity markets, Swiss alternative investment advisory firm SCM Strategic Capital Management has kept to the same message in this year’s survey: “Due diligence standards should not be lowered just ‘to get in’ in Asia.”
“Generally Asia as a region has emerged from the financial market crisis post-Lehman as an area of relative stability compared to Europe and the US which has influenced the perception of investors with regards to the riskiness of the area,” Stefan Hepp told PEO's sister web site PEI Asia in an interview. PEI Asia got an exclusive look at SCM's annual survey.

However, SCM sees as a lack of depth of managerial talent in the market that could prove challenging to investors who are optimistic about Asia.

“Our problem in terms of deploying capital is that I think there’s only a limited number of teams around that are seasoned enough to have a demonstrated track record and to provide comfort about organisational and team stability,” says Hepp. “The comparable lack of what are, in SCM’s opinion, institutional quality fund offerings is my biggest issue [with the region].”

Like last year, SCM points to large-cap buyouts, mid-market buyouts and the larger growth capital investments as the most attractive strategies in Asian private equity. It recommends investors avoid early-stage venture capital and smaller growth investment deals.

“Why are we focusing on buyouts? Because buyouts so far, our survey shows, have paid back the most,” Hepp said. “If I am interested in an area, I am not interested in postcard pictures of Shanghai, or Singapore or Sydney, nor is SCM exclusively focusing on the macro story in any region. I’m interested in money flowing in and out of private equity deals and the multiples generated on those deals. If I look at the money flow, it’s evident by an investor perspective buyouts have been a good thing not only investment wise, but also realisation wise.”

Pointing out that the bulk of proceeds in Asia have been generated by “a small group” of private equity firms, the SCM survey recommends two approaches to management selection.

“It is a fact that the larger global players such as Blackstone, Carlyle or TPG have a good presence in Asia. So if I want to be in an interesting buyout fund in Asia, I have to look at those firms,” says Hepp. “This is, however, not an exclusive focus. A second important access route is local firms which have either a country focus or a regional focus. And those local firms tend to focus on more the middle size deals.”

Though SCM remains cautious in its approach to the region, Hepp is an Asia-optimist and says he would like to have more capital in the region.

“Our clients have an exposure to the region which is about 7 to 8 percent, I think one could easily justify 12 to 15 percent,” he says, adding that in his professional life that figure could rise to 25 percent or more.

In the meantime, however, Hepp says SCM, which opened a Hong Kong office in 2008, is working on building relationships with managers in the region. The firm, he says, is “doing a lot of research and not so many investments and waiting for things to grow the organic way, instead of running out and buying a ticket now just to be in the boat with everybody else”.

Founded in 1996, SCM advises institutional assets worth $7 billion on investment in private equity, real estate and infrastructure. The firm is headquartered in Zurich and has offices in Hong Kong and London.