Co-investing in Asia: Better together?

This month FLAG Squadron, the newly-merged fund of funds, hired a number of new people ahead of launching its next vehicle, which intends to focus on co-investments in Asia. 

“We’re looking at many more co-investments than before,” Wen Tan, Asia partner at the firm said at the time. “Since we brought on [partner] Myron Zhu, the co-investment dealflow has gone from a more reactive two or three a month to 10 or 15, and direct and co-investing takes a lot more bandwidth than fund investing.”

A number of LPs, both Asian and Western, have been flexing their direct or co-investment muscles, with some Asian GPs responding by raising co-investment vehicles alongside their latest private equity funds.

TPG Capital’s fourth Asia fund, which closed on $3.3 billion earlier this year, and Pacific Equity Partners’ latest Australia fund, which is currently targeting $2 billion, both have co-investment platforms that potentially raise their investing power by about another $1 billion.

Nevertheless, the number of co-investments seen in Asia remains fairly minuscule; there’s relatively little evidence to suggest that a steady stream of opportunities is currently available.

Even Temasek, one of Asia’s most active LPs in the co-investment space, appears to be going outside Asia Pacific to do its deals.

In April, the firm teamed up with the International Finance Corporation to make a $255 million co-investment in African oil and gas company Seven Energy.

Temasek then bought €1.3 billion worth of shares the NN insurance business of Dutch financial services group ING alongside Hong Kong-based firm RRJ Capital, just before joining Warburg Pincus in the acquisition of 50 percent of Santander’s custody business in Spain, Mexico and Brazil. Most recently, in August, Temasek joined Riverstone and BNRI in backing a Norwegian oil business.

Globally, the additional demand for co-investments is undeniable.“A lot of LPs talk about co-investment and a lot of them are trying to increase the proportion of co-invested capital to fund commitments quite significantly – I’ve seen as much as 50:50,” Javad Movsoumov, executive director in UBS’ private funds group in Asia Pacific, explains. 

But not all countries are able to consistently and successfully provide them, industry sources admit. And even in situations where GPs are ready and willing to offer co-investment opportunities, investors will often shy away from doing those deals. 

“Ultimately when it comes to evaluating a co-investment, it is quite difficult for a lot of LPs to make that very conscious decision that they want to double down on a deal and put in a significant amount of capital because of course, they’re investing in a direct deal, which carries a lot more risk with it than in a fund,” says Movsoumov.

But there are options in Asia-Pacific. The co-investment vehicles raised by the likes of TPG or PEP, for example, are likely to target the region’s more developed markets, particularly Australia.

In June, Ontario Teachers’ Pension Plan joined TPG and Hong Kong-based PAG to buy Australian property services company DTZ in an A$1.22 billion ($1 billion; €845 million) deal. PEP, too, expects to deploy around $1 billion in co-investments in the Australia and New Zealand markets.

The trouble is that investors are typically attracted to Asia and other emerging markets as a growth play – but this typically means deals are more risky, and that makes it more difficult for LPs to commit to coinvestments.

“Emerging markets – even the bigger ones like China – are still associated with a high degree of risk, so as a consequence it is harder [for LPs] to get over the line,” Movsoumov believes. ?