Sorting the wheat from the chaff

How has investor appetite for Asia changed over the years?

We’ve moved from the pioneers of a few years ago, who really were primarily the endowments and some family offices who quite early on were poking around Asia looking for some interesting opportunities and [were] a little bit more out on the risk curve than perhaps some of the more traditional institutional investors in private equity … to much more of the traditional, mainstream, large institutional investors looking for ways to deploy capital in Asian private equity.

That’s been going on for a while. It started before the crisis and stopped pretty abruptly during the crisis, but I think it’s resuming now.

This enthusiasm is not unalloyed of course. There is, as there should be, reasonable concern that things are not overheated, that there has not been too much activity too soon, especially in a couple of the major markets, that there are actually realisable returns.

As the market matures are LPs looking for more niche products?

Some are, but many are looking [at Asia] for the first time. Some LPs want to be quite focused in their portfolio construction and be very specific about what they’re looking for, while others are really looking for the broadest possible diversification.

It’s true globally that for funds of funds, [their] larger investors who have been more active for longer periods are now looking to tailor their mandates more specifically. So we’re seeing the rise of separate account mandates.

Also I think people … are looking at fund of funds that might do something a bit different from just everything that might walk or talk and move in the markets. So for example in our fund of funds offering the last time we offered a choice between all of Asia Pacific and emerging Asia, to cater partly to that demand. I suspect that one of the trends in the fund of funds industry generally will be more specific fund of funds products.

It’s estimated now that around 50-60 fund of funds are operating in Asia. Is that number sustainable?

Certainly we see larger numbers of boutique or Asia-only, or a subset of Asia-only, groups there. There’s some China-only fund of funds now, for example. We’re also seeing the global managers setting up Asia-only [funds]. It reflects the interest in Asian private equity – if there’s no demand, then we can’t do what we do.

Because the Asian markets are growing rapidly, and becoming more complex in many ways, the role of intermediaries such as funds of funds is probably as large as ever. Whether or not all of us can do this economically is another matter. I think a lot of the newer entrants are doing this in a way that it’s still too early to say if they’re devoting the right sort of resources to the activity or whether they’re doing it as a defensive mechanism and defending their relationship with LPs elsewhere that want access to the Asian markets. So there could well be rationalisation in a few years’ time.

What differentiates Squadron from others?

Longevity in the market [and local,] on the ground decision making allows us, and others like us I suppose, to really try to sort through the wheat and the chaff because there are a lot of new funds now, a lot of new managers. There are spin-outs, there are spontaneous combustions, there are all kinds of things going on.

It’s interesting to see this develop after having been in the markets now for 20 years – it’s remarkable how rapidly this is all happening. It’s exciting, but you have to be very thoughtful about what you do in these markets. At the moment, because of the sharp rebound from the crisis in East Asia and also the liquidity that’s sloshing around in the markets and the IPO successes of the last year in China, there’s this unbridled enthusiasm around which one has to be immune and that immunity takes time to develop. Those of us who have been doing this awhile have that immunity or at least a resistance to becoming overly enthusiastic and forgetting that things will not continue to grow to the stars.