North American LPs narrow focus in Asia

China continues to top the priority lists of North American LPs allocating to Asia. But as investors get more experienced, they are seeking out more specialised strategies.

In February, the Washington State Investment Board committed $300 million to Affinity Equity Partners’ $3.5 billion pan-Asian vehicle, highlighting the continued interest in the region from North American LPs. 

However, as LPs grow more comfortable with Asia and begin to increase their allocations to the region, they are looking to invest with more country or specialised fund strategies. 

“The more mature the LP, the more likely they have already started to invest in Asia. There is [then] a natural evolution toward greater specialisation and that is especially true for larger programmes,” says Philip Yau, managing director at UBS Private Funds Group. 

There is a natural evolution toward greater specialisation and that is especially true for larger programmes

Philip Yau

Slowing macroeconomic growth was the big concern for China managers in 2012, and this was reflected in the country’s sluggish fundraising environment during the year. Nevertheless, the country remains the first port of call for North American LPs, Yau explains. 

“China remains hot. The overall Asian economy and global economy is so much driven by China. It is very rare to find LPs that have invested in Asia but not in China. It is more developed, there are many more managers and actually a track record of managers with success.”

In line with this trend, the New York State Common Retirement Fund in January committed $300 million to Hong Kong-based RRJ Capital’s $4 billion second fund, which is largely focused on China. Previously, New York CRF had committed to the pan-Asian vehicles of well-known global firms such as TPG Asia Partners and CVC Asia Pacific, according to Private Equity International’s Research & Analytics division. Shortly after the commitment, RRJ reportedly held a first close on $3.5 billion.

New York CRF told PEI: “The investment in RRJ is consistent with CRF’s strategic private equity plan regarding opportunities in Asia. Staff has followed RRJ for several years and is confident in the manager’s ability to produce strong risk-adjusted returns.” 

However, some big LPs are starting to take an increasingly targeted approach in Asia. Says Yau: “After you do country-focused funds, you may look for even more specialised funds. So it may be a consumer play for the region, with real consumer expertise – [perhaps] a group like L Capital [which invests in luxury consumer brands], or a group that specialises in distressed loans in Southeast China … So very highly specialised, operationally and strategically.”

GPs in India have responded to the cry for alternative, more focused strategies in the country. PIPE and distressed vehicles in India are popular; indeed, they’re arguably the only strategies attracting LPs to the country right now. 

ICICI Venture and Apollo Global Management have raised $325 million so far for their special situations joint venture, AION. And while many growth capital GPs can’t lure North American LPs into their funds, in September the Los Angeles City Employees’ Retirement System backed AION with a $20 million commitment. 

Manoj Thakur, chief executive of Avendus PE Investment Advisors, which has just launched its third PIPE fund in the country, says to raise capital in India “a differentiated approach is absolutely required.” 

As investors get more familiar with the nuances of the region, this may become increasingly true throughout Asia.