Most Asia GPs still aspire to Fund III

Three-quarters of Asia-based fund managers have not yet raised the key third fund, PEI’s data shows.

Only 26 percent (or 216) of 834 Asia-based GPs that have raised institutional capital have three or more funds under their belt, according to data from Private Equity International's Research & Analytics division.

The figures are only a rough sketch of the industry because they do not include fund managers who have failed. Moreover, the data generalises across some very specific conditions in certain Asian markets.
However, the numbers provide a picture of Asia as a place where the classification of “institutional grade” is still an aspiration for most fund managers.

“[The numbers] show that Asia is still developing in terms of private equity and it’s still early days compared to other regions,” said Niklas Amundsson, partner at MVision Strategic Asia.

Fund III is one of several important criteria for categorising a GP as institutional grade, sources said.

Closing the third fund is a milestone. When a manager is raising Fund I, investment decisions are based on promise. When raising Fund II, the first vehicle typically does not have enough realisations to provide a satisfactory assessment of track record.

Raising Fund III, a GP usually has return data from Fund I.
“The third fund is a tipping point,” said Javad Movsoumov, executive director at UBS private funds group in Singapore. “GPs move away from concept to actually showing investors what has been exited.”

Amundsson adds: “The third fund is when a GP goes from emerging to established manager.”

In Asia, Macquarie Group has raised the most funds (30), followed by fund of funds Asia Alternatives (28) and H&Q Asia Pacific (25), PEI’s data shows.

In Australia, home to the most mature private equity industry in Asia, 38 percent of total domestic fund managers have passed the three-fund mark – the largest percentage in Asia-Pacific (see graphic above). In India, which has one of the younger private equity industries in the region, only 18 percent of fund managers have reached the milestone.

One surprise is Korea, which has the second largest percentage of managers (37 percent) who have raised Fund III. Yet Korea’s private equity industry is only ten years old.

One factor that enables Korean GPs to raise more vehicles is that fund lives of domestic funds have historically been shorter – 6 years rather than 10 years, Amundssen said. They also tended to have a concentrated portfolio of, say, 5-6 companies instead of 10-12.

Closing Fund III is not the sole criteria for considering a fund manager institutional, sources said. The firm’s infrastructure and internal investment processes must be in place, as well as an articulated investment strategy that has been more or less proven in the previous funds.

“Three or more funds is not the entire story, but it’s a good benchmark,” Movsoumov said.