Survey: GPs underestimated risks in Asia

Fund managers were too optimistic about China and India and especially underestimated the political risks in each country, according to an investor survey by Coller Capital.

Early private equity investors in China and India underestimated the risks of investing in these countries, according to a recent study by Coller Capital surveying 131 LPs globally. Of the respondents, 54 percent and 69 percent believe this is case for China and India respectively, with the majority seeing political and regulatory risk as most frequently underestimated by managers. 

Despite efforts by both China and India to loosen restrictions on foreign private equity investment, over 40 percent of LPs believe the situation is worsening in China, with close to 30 percent believing it is getting worse in India. 

During recent months, China has cleared a number of industries for investment in private equity and simplified procedures for foreign private equity firms to invest in the country. Also this year, India has opened to private equity, with its ministry of finance releasing a set of recommendations to the government favourable to foreign private equity investors such as decreasing capital gains tax to 10 percent from 20 percent. 

Nevertheless, below 20 percent of respondents said they thought the risk-reward equation in these countries was improving. 

Disappointing results from emerging Asia’s two more popular private equity destinations has caused some investors to look elsewhere. Now, one fifth of LPs are focusing more attention on Asian markets such as Indonesia and Vietnam than the developed countries in Asia including Japan and Australia. 

The survey also showed that despite increasing allocations to the private equity asset class from LPs globally, half of North American LPs will cut GP relationships over the next two years except in Asia-Pacific. Over 40 percent of Asian LPs expect to increase their GP relationships.