Fundraising optimism is picking up around the world, but nowhere more so than in Asia. Asia Pacific funds currently in market have an aggregate target of $186 billion – exceeding that of every other region globally, according to data from Private Equity International’s Research & Analytics division.
In better times, this might not be surprising. But the ongoing difficulties of exiting investments in China and India, coupled with some unpromising macroeconomic data, points to one slightly worrying conclusion: that fund targets have gotten out of whack with investment activity.
Asia currently has record levels of dry powder – a total of $131 billion as of the end of 2012, according to data from Bain & Co.
At the same time, firms have been struggling to put the dry powder to work. Private equity deal value and volume in Asia are down around 50 percent year-on-year to October, according to Thomson Reuters data (see chart).
Bain has previously predicted this dry powder would be sufficient to finance deals in the region for the next 2.5 years – but at the current rate, it will clearly last a lot longer than that.
So why are fundraising expectations so inflated? A mixture of reasons, sources say. Some are sensible – the long-term growth of the Asian economies, the promise of larger deals as these markets mature. Others are less so: part of it’s just coincidental timing, in that a number of funds raised during Asia’s peak of 2006-07 are coming back to market all at once. And then there’s plain old misplaced optimism.
“There is going to be a massive gap between the targets that funds are seeking in aggregate for Asia and the amount of capital actually raised,” says Hugh Dyus, head of private equity investing at Macquarie Funds Group. “The ambitious aggregate fundraising target for Asia is just wishful thinking on the part of many GPs.”
The data raises the question of how exactly GPs set fundraising targets.
The majority of GPs don’t do a hard analysis, sources say. Funds may increase the target size purely because they have added new investment team members or because they believe the firm has more experience than it did with the prior fund.
Some funds do not even specify a target, making it “more likely that investors would end up seeing an unexpected surprise”, says Conrad Yan, partner at Campbell Lutyens.
Yan says a few of the more scientific fund managers use data such as deal size and deployment pace from the previous fund, deal pipeline, fundraising environment, expected competition in market and LP demand for exposure to specific countries or region. “I can easily think of 20 factors GPs should look at to come up with a target,” he says.
Often, it’s just about keeping up appearances. As one LP source puts it: “If the target amount is smaller than the previous fund, it may suggest something has not gone as well as the GP had hoped.”
Either way, investment climate tends to play a relatively minor role in the analysis, sources agree. And yet it clearly does have an impact. For instance, one likely outcome, according to Yan, is that if big funds raise their targets, “they are bound to be competing in more auctions, driving up valuations”. That could be bad news for returns – and thus future fundraising. ?