Want to raise capital from Asian LPs? Expect a grilling on fees

Performance track record is less important than fees, terms and conditions for Asian institutions considering a private assets fund, according to research from Schroders.

Fund managers seeking capital from Asian institutions should expect a heightened examination of their fees, terms and conditions.

That’s because 58 percent of institutional investors based in Asia-Pacific said these are the most important criteria when selecting a private assets manager, according to Schroders’ Institutional Investor Study 2020. This compares with only 49 percent of institutions in North America and 48 percent of those in Europe.

Performance track record was next most important at 57 percent, substantially lower than for those in North America (73 percent) and Europe (63 percent).

“Anecdotally, we have seen some firms in Asia-Pacific charge higher management fees than other parts of the world,” Gavin Anderson, a Hong Kong-based partner and funds lawyer at Debevoise & Plimpton, told Private Equity International.

“One of the justifications can be that because Asia’s quite a large and disparate region to cover, therefore your overheads are higher and you want a higher management fee. That can be a point of tension for LPs.”

Investors in Asia-Pacific – which made up 8 percent of the survey’s 650 institutional respondents – highlighted fees as their main concern around investing into private assets, while their peers in North America, EMEA and Latin America instead pointed to liquidity issues, the report said.

Some GPs charge lower fees on funds raised from Asian institutions. Korea’s STIC Investments, for example, is understood to charge a 1.3 percent management fee on the won-denominated portion of its 2019-vintage STIC Special Situation Fund II, which was raised domestically, and terms closer to the global norm for the dollar-denominated portion.

“European or North American funds can be very internationalised, whereas in Asia-Pacific you do have a separate market in some cases for local funds, whether that be China, India or Korea, for example,” Anderson noted.

“Some of these jurisdictions have a separate local market catering more to local investors. When you have people crossing over from those markets, and vice versa, that can throw things up in the air a bit more when raising a fund because you have this extra dynamic of a local version of those terms.”

Private assets fees have been particularly contentious in Australia since the introduction of a 2017 regulation that requires superannuation funds to disclose fees and costs paid on investments. As a result, some are competing on fees charged to members and domestic private equity sponsors have sought to diversify their exposure by looking offshore for capital.

“Our pension system is weighed down by a heightened focus on costs paid by our pension funds and we feel the time is right now to help transition to there being more emphasis placed on after-fee returns,” Yasser El-Ansary, chief executive of industry body the Australian Investment Council, told PEI last year.

Despite their concerns over fees, Asia-Pacific institutions had the biggest appetite for private equity, with 47 percent of Schroders’ respondents expecting to increase their allocation over the next three years, versus 37 percent globally.