Pan-Asia mega funds to boost Asia dry powder

Investor appetite for the region shows no sign of slowing and fundraising is increasingly being driven by the number of large-cap funds betting on a rising consumer class.

Pan-Asia managers Baring Private Equity Asia, PAG and Bain Capital are among a host of homegrown and global private equity firms raising pools of capital for Asia and betting on the region’s strong growth story.

These GPs should add at least another $26 billion of dry powder to the region and join Blackstone, The Carlyle Group and Hillhouse Capital Group who have collectively raised nearly $20 billion this year. With $225 billion of dry powder for Asia as of the end of last year, according to estimates from Bain & Company, there is a wealth of capital chasing deals.

Asia, a younger private equity market than North America and Europe, is proving attractive to institutional investors because of its strong macro fundamentals, increasingly wealthy and tech-savvy millennials and business owners’ growing acceptance of private equity.

The California State Teachers’ Retirement System, the US’s second-largest public pension fund, could double or triple its less than $2 billion exposure to Asia in the next three to five years, chief investment officer Christopher Ailman told Private Equity International in May. Teachers’ Retirement System of the State of Illinois said in August that it will focus on Asia next year as part of its private equity tactical plan, while San Francisco Employees’ Retirement System has backed the TMT-focused Hillhouse Capital Group, which amassed $10.6 billion in September for the region’s largest-ever fund.

Building on the three strong years prior to 2017, Asia private equity achieved its best all-around performance to date last year. Deal value soared to $159 billion, up 41 percent on 2016, exit value at $115 billion marked the second-best year on record and fundraising rose 6 percent to $66 billion year-on-year, Bain & Company noted in the report.

An Asia-focused placement agent said that the GPs on the fundraising trail are marketing on the consistency of their returns, similar to KKR and Affinity Equity Partners, which raised $9.3 billion and $6 billion respectively for their latest Asia-dedicated vehicles.

Bain Capital’s $2 billion Fund II delivered a net internal rate of return of 25.3 percent and a money multiple of 2.08x, while the $3 billion Fund III delivered a 60.9 percent net IRR and a 1.29x multiple as of 30 June, according to Pennsylvania Public School Employees’ Retirement System documents.

PAG Asia II, a $3.6 billion 2016-vintage fund generated a 28.7 percent IRR and 1.2x money multiple, according to December performance documents by the Washington State Investment Board. Baring’s $3.99 billion Fund VI delivered a net IRR of 18 percent as of July, as previously reported by PEI.

Another factor is the consistency of best practices in the ability to return capital back to investors, the placement agent noted. “Distributions have improved a lot in the last couple of years, but for investors who are waiting in the interim, who will they put their money with? It’s the pan-Asians.

“Investors who want to get exposure to Asia will continue to commit to the large pan-Asian managers until the country-specific funds prove that they can not only deliver mark-ups but also deliver distributions back to investors. That is the theme.”

Bain expects its Fund IV to be oversubscribed and achieve a ‘one and done’ by year-end, according to September investment memorandum from PSERS. BPEA, meanwhile, has already raised its $5.5 billion target, it is understood. CVC Capital Partners began fundraising for its fifth and largest Asia-dedicated vehicle targeting $4 billion in September, according to the Financial Times. Meanwhile, traditionally China-focused PAG could raise as much as $6 billion for its latest offering and is expected to lock up commitments from US and Canadian pension giants, as PEI previously reported.

BPEA, PAG, Bain and CVC declined to comment on fundraising.

Wen Tan, co-head of private equity for Asia at Aberdeen Standard Investments, said a key trend is the polarisation of the fundraising landscape. There are a small number of large GPs raising ever-increasing fund sizes, while at the other end there are emerging managers, some of which are good quality spin-outs from large houses and which may remain below the radar for many LPs.

“That polarisation will continue because of the capital flows and dynamics of the industry,” Tan said.

Investors looking to deploy at least $100 million per fund will naturally gravitate towards the small group of big GPs in Asia who can absorb such cheque sizes, he added.