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Asian funds of funds can blaze a trail

Fund of funds Axiom Asia Private Capital stormed past its $750 million target to close its latest Asia-focused fund of funds on more than $1 billion earlier this year.

Managing partner Marc Lau ascribed the effective fundraise to the Singapore-based firm’s regional knowledge: “One of the reasons why we’ve had a high re-up rate is that we’ve shown we are a true extension of our LPs’ team on the ground in Asia.”

With a continent as diverse as Asia, where languages and economies vary so widely, it’s important to have specific knowledge of the region, he adds.

Axiom Asia is one of 150 funds of funds assessing opportunities with nearly 3,000 private equity funds in Asia-Pacific, PEI data indicate.

Lau adds that even in markets investors are extremely familiar with, engaging a specialist can be helpful to speed up exposure and access parts of the market where firms would otherwise be constrained by allocation or size.

Wendy Zhu, a Hong Kong-based managing director at AlpInvest Partners, also stresses that Asia requires a close focus.

“To truly understand each distinctive market in the region and to invest in private equity, which is a truly local business, extensive travel and local presence are required. In addition [to follow] the changing market dynamics, given the growth profile and individual volatilities in each market, one needs to stay very close to the region which requires again a local team and deep knowledge.”

Doug Coulter, head of private equity, Asia-Pacific for Swiss-based firm LGT Capital Partners, also points out funds of funds offer exposure to different parts of the private equity business. He says: “If you are an investor sitting in Paris or St Louis, rather than having all your exposure in mega buyouts (which has a different kind of risk) you might want to get your exposure to the small and mid-market via a fund of funds, where there’s some additional returns to be had by backing smaller funds.”

Funds of funds also pave the way for secondaries and co-investments.

“In terms of the economics you are paying for that fund of funds, it might actually end up being more attractive relative to investing directly with general partners,” Coulter says. “And with a healthy secondaries and co-investment allocation in the fund of funds product, you’re obviously lowering the fees that you are paying.”

LGT made its first private equity investment in Asia in 1999 and has backed China-focused CDH Investments, Hong Kong-based SAIF Partners and secondaries firm NewQuest Capital, according to PEI data.

Zhu’s firm has been working in Asia since 2002, and keeps close tabs on the region. Even if it isn’t investing in a particular market, the firm spends time trying to understand what is driving dealflow, what pricing levels are high and how many participants are involved.

For Coulter, in Asia, where “everybody sounds good and everybody is chasing similar opportunities like the consumer space in China”, hiring a fund of funds manager to dig into the details is “hiring someone to keep you out of trouble”. After all: “If you back one big fund and it doesn’t do well, that really hurts your returns.”