Is Asian growth capital growing up?

In a recent conversation, one Hong Kong-based limited partner highlighted a trend she labelled as a “kind of evolution” among Indian private equity GPs: the recruitment of operating partners.

Mumbai-headquartered Blue River Capital, currently in the market with its second fund, and Mumbai- and Silicon Valley-based Nexus Venture Partners, which has two funds under its belt, are among the firms that have appointed operating partners in the past year. They aren’t alone. As another LP said, “Almost every new fund in India has at least one operating partner.”

Almost every new fund in India has at least one operating partner



In China meanwhile, a similar trend is being seen. One Beijing-based management consultant told sister magazine PE Asia that throughout 2010 he saw a steady stream of local GPs come to him for advice on how to add operational expertise.

In markets where almost all private equity activity tends to fall under the broad banner of “growth”, it is not always easy to read an industry-wide shift in strategy behind the structural changes taking place at the individual GP level.

Nonetheless, this is exactly what seems to be going on: growth capital is growing up.
 
In China, certain firms that may have gotten into the private equity game by chance – through a hybrid mix of medium-term private and public investments – are now realising that to stay relevant, they need to say goodbye to the pre-IPO strategy and hello to the longer-term value-add.

“There are people who have made it past levels 1 and 2,” sums up a Singapore-based fund of funds manager. “They are big enough now to raise a lot of money and worry about how they are going to invest and maintain their returns.”

In India meanwhile, the sheer number of firms out in the market – many of them with first-time funds – is indication enough that only those with the strongest offering will be able to stay in the game.

Three years ago many first-time funds raised money without any box-checking elements. But they have realised LPs have become a little more sophisticated – LPs are asking whether GPs have delivered

In both markets – and in fact throughout Asia – the shift towards a more mature private equity proposition can also in part be pinned down to pressure from LPs to see exactly that.

“Three years ago many first-time funds raised money without any box-checking elements. But they have realised LPs have become a little more sophisticated – LPs are asking whether GPs have delivered,” says the Hong Kong-based LP.

Ultimately it is about survival of the fittest, and in the private equity context, fittest means most capable. “They all know that in order to be sustainable they have to be operationally capable,” says another LP.

Even so, a certain amount of scepticism remains in the LP community about the real extent of the GP buy-in to these changes.

“I don’t know if it’s just marketing, or if they really think they need [operating partners] to go forward,” said one. “GPs are becoming more sophisticated at investing, but also at marketing.”

Another LP agrees: “The GP community has cottoned on to discussing their operational value-add and earnings improvements – very few people now present themselves as opportunistic, even if they started out that way.”

So while the trend is undoubtedly welcome and positive for the long-term future of growth capital investment, LPs are unlikely to simply accept it at face value.

For GPs to prove that growth capital really is growing up in India and China, they will have to ensure that the focus on operational value-add continues long after the fundraising road-show has ended and the investment cycle has begun. LPs will be waiting to see this greater maturity reflected in returns.

Of course that will take several years and in the meantime, manager selection remains as tricky as ever for investors looking at Asia’s growth markets.

“In the last four to five years there has been a significant bull run – it’s actually hard to find any one investor in the last five years who didn’t do well,” stated a Hong Kong-based fund of funds manager.

“You tend then to look at track records – have they just been lucky enough to ride the wave? Or did they do something specific to add value?”

Unfortunately for Asian GPs, until a sustainable value-additive approach to growth-focused investment has become the norm rather than the exception, the suspicion will tend towards the former.