Fundraising in Asia: Speeding ahead?

Apparently, the notion that “slow and steady wins the race” doesn’t apply when it comes to private equity fundraising in Asia. 84 percent of Asian-based GPs hit their final closes in under 18 months, according to a recent study from Private Equity Connect, the data provider of Private Equity International. That’s well ahead of the global average.

The speed with which firms can successfully market and close a fund is generally a powerful indicator of investor appetite for a sector or region; the faster the fundraise, the stronger the demand. So by this measure at least, investor enthusiasm for exposure to Asia-focused funds is far from waning.

Other metrics also look positive. Asia focused funds raised $30 billion in 2011, up 23 percent on the year before. While this was still well below the 2008 peak of just under $50 billion, the rebound has been much sharper than that of the fundraising market globally, according to the study. 

These results should hardly come as a surprise. Asia – in particular, China – has been at the core of limited partners’ emerging market strategies for the last several years. While Europe and the US have toiled since the market shocks of 2007-2008, China has continued to emerge as an economic powerhouse. It has also made several changes to its regulatory regime that accommodate – and encourage – private equity investment. 

Indeed, the steady growth in fundraising volume since the financial crisis has been facilitated in large part by interest from foreign LPs, which the study cites as making important commitments to several of the more noteworthy funds raised last year. 

Perhaps the strongest example of the strength and speed of the Asian fundraising environment was Hony Capital’s fifth fund, which hit its $2.4 billion target after only four months on the market with the backing of several US pension systems. WestBridge Crossover Fund also closed quickly, hitting $500 million in six months, which included a commitment from the University of Washington. 

But while foreign investors continue to support private equity’s development on the continent, Asia-Pacific based LPs appear to be pulling back. More than 70 percent of those surveyed said they expect to commit less than $250 million to the asset class next year. 

And although the Asia-Pacific region continues to be the preferred geography of native investors, their level of commitment to local vehicles is expected to fall in the future.

“One reason for the lack of LPs’ appetite is their overexposure to private equity investments, as some went beyond their target allocation. On the other hand, some investors also stated that market instability and illiquidity associated with the asset class are contributing factors as to why they have decided to cease making new investments,” the study says. 

That said, only 10 percent of LPs surveyed indicated plans to lower their allocations to the asset class in the next 12 months. A majority, 55 percent, said they would maintain their current allocation as they undergo a review of their portfolio, according to the study.  

But even if local investors do cool on the asset class, don’t expect fund managers to slacken their pace. According to one GP cited in the study, several prominent fund launches targeting $2 billion to $3 billion in commitments are in the pipeline. If 2011 is any indication, it probably won’t take them very long to hit their marks.