PIPE-ing hot

Amid a quiet summer, it emerged that Orchid Asia, a Hong Kong-based private equity fund, had raised $920 million for its sixth China growth capital fund, which closed oversubscribed and well above its $750 million target after just six months in market.

GPs looked on enviously as the firm received strong support from its existing investors; it eventually attracted up to $1.3 billion of potential commitments, but chose to cap the vehicle at $920 million.

Happily, fundraising in Asia has enjoyed a marked rebound in 2014. Asia-focused funds raised $32.7 billion as of mid-September, 15 percent up on the $28.5 billion raised during the whole of 2013, according to data from PEI’s Research & Analytics division.

China is also very much back on the radar: US dollar-denominated domestic players raised $6.7 billion by mid-September, compared to the $2.3 billion raised during the whole of last year.

But not many firms have experienced the sort of rapid success enjoyed by Orchid. For instance, even heavyweights TPG Capital and The Carlyle Group took over two years to raise their pan-Asia vehicles, which both ultimately accumulated more than $3 billion.

The general sluggishness of the fundraising market wasn’t all that surprising, given that Asia’s private equity industry has been going through something of a lull in terms of both dealflow and exits. In particular, LPs have been disappointed by Chinese GPs’ failure to deliver a steady stream of realisations – and thus the sort of returns for which investors were hoping.

Orchid, however, claims to have secured at least a partial exit from 38 of the 70 companies it has backed since inception. According to information from the Pennsylvania Public School Employees Retirement System, Orchid’s funds were returning a net multiple return of 1.8x as of 31 December 2013 – while Orchid’s most recent fund, a $650 million vehicle raised in 2010, was showing a net internal rate of return of 55.1 percent.

So how has Orchid succeeded where others have failed?

The firm declined to comment for this article. But one GP source tells PEI that the firm invests highly opportunistically, including PIPEs (private investment into public equities) and traditional private equity deals as part of its investment strategy. This has allowed the firm to adapt to the changing market when dealflow has been limited or capital markets shut down, the source suggests.

And there is an argument that PIPE deals are an essential part of investing in some Asia Pacific markets. Particularly in China and India, firms have struggled to exit their portfolio companies due to slowing growth and weak capital markets. Moreover, since GPs in the region usually take minority positions, they often lack real control in terms of effecting change or securing an exit.

Ex-3i Asia head Anil Ahuja provides an illuminating case study. Having invested across the region for many years, his favoured strategy now is to invest in public markets with a private equity mindset – a “hybrid” style, he explains.

Ahuja, who is based in Singapore, launched a $100 million hedge fund called IPEPlus Advisors in March to invest in Indian listed equities. In an earlier interview, he told PEI that the traditional private equity model just doesn’t work in India.

“India, and all of Asia, has imported a Western private equity model. And I’m not completely sure that [model] fits into how business is done in Asia.”

The reasoning was well summed-up in a statement detailing the fund’s investment objectives: “Capital preservation is key. Liquidity is an absolute requirement for every position.”

The popularity of Orchid’s offering suggests LPs believe that many Asian GPs fall short in this crucial regard.