More co-investments, separate accounts in Asia by 2019

LPs are increasingly seeking closer alignment with Asian private equity managers as the industry diversifies away from traditional fund structures, an Intertrust report revealed.

A vast majority of Asian private equity professionals expect to see an increase in the number of co-investment partnerships and separate accounts offered by Asian GPs to LPs by 2019, fund services company Intertrust found in its Private Equity Market 2017 report.

“We’re seeing a lot more experimentation with fund structures in an effort to get closer alignment of GP and LP interest,” Paul Lawrence, global head for fund services at Intertrust, said. “It all comes back to investors getting closer to the managers, knowing what’s going on, having better alignment of interest.”

Lawrence added that the maturing industry and drive for better LP and GP alignment as also resulted in more experimentation with fund structures. “Short-dated funds with term limits of between three and five years is becoming more popular especially among new managers attracting LPs who are cautious of locking up capita for a decade or more in an untested strategy. Permanent or ‘evergreen’ funds with an investment term of 15 to 20 years are also expected to become more popular.”

Meanwhile in Asia deal activity, more than 80 percent of Asian private equity professionals believe China will see growth over the next 12 to 24 months, followed by South-East Asia at 43 percent and South Korea at 26 percent. Twenty-two percent expect to see growth in India, and only 13 percent in Japan and Australia.

To capitalise on opportunities in China, the industry has seen a big increase of international GPs setting up onshore structures in China in the last few years. James Donnan, head of fund services at Intertrust Hong Kong, said: “A key reason why these GPs are developing onshore renminbi fund structures and deploying capital onshore is the speed to market. It’s getting more and more competitive in China and to have US dollar-denominated fund that has to go through the capital conversion process, foreign currency conversion process and then land in China is a lot longer than for domestic GPs.”

Donnan cautioned, however, that increased investment activity into China inevitably creates more competition, higher valuations, and a macro environment that stems capital flows. “A lot of GPs are interested in China, you’ve got government policy supporting investment into China more so than in the past, as well as domestic GPs not being able to get money out of China thereby forcing them to deploy it onshore. All of this creates a very competitive environment.”
Intertrust carried out the research in the third quarter of 2017 and gathered responses from 142 private equity professionals in the UK, Europe, North America, Africa, Asia and the Middle East.