Asia LPs and GPs still looking for balance

Delegates at the PE Asia Forum in Hong Kong this week voted 81 percent “yes” and only 19 percent “no” that there will be closer alignment of LP-GP interests this year compared to 2008.

But an LP-only panel didn't fully agree with the sentiment.

Speakers noted that there has been a general shift in the balance of power to LPs. However, Anouk Van der Boor, managing director of Cambridge Associates, noted that at the high-end of the market, such as with US buyout funds, changes regarding fees have not been significant.

Alice Chow from fund of funds Squadron Capital said that in Asia this issue was slightly different due to the less mature market. “The benefit of being a younger market is you have a head start in terms of negotiating favourable terms.” 

David Lin, head of fund investing at CITIC Goldstone Investment, said that in China, there has been no shift in the power balance. Lin, who was formerly at the Ontario Teachers’ Pension Plan, explained that private equity in China has been so successful, GP’s are still enjoying the upper hand in the relationship. 

In answer to the question, “What GPs in China have generated 3x-4x returns?” Lin said: “What GPs in China haven’t?”

The panel, moderated by UK finance development institution CDC Group’s managing director, Anubha Shrivastava, went on to discuss the different treatment experienced by larger and smaller LPs in the industry.

Panellists agreed that for smaller LPs, due diligence is of huge importance as once the contract is signed, their small cheque wields little power. Lin explained, “I went from a very big [LP] to now a fairly small one, and my negotiating leverage has gone from… well, I don’t have any anymore. I am joking a little bit, but it is very tough.”

Delegates also heard that LPs are beginning to find alternatives for investing in fund managers due to the high cost of the structure. Shrivastava told sister publication PE Asia in a post-discussion interview that having this structure in Asia does not make sense. “It has become a management fee game. I think 2 percent of $500 million goes a lot further in China or India than it does in the US or in Europe.”

However, panellists warned of problems with the direct or co-investment strategy that many LPs such as General Motors Asset Management or Ontario Teachers’ have been adopting.

David Nieuwendijk, senior investment officer of private equity at the Netherlands finance development institution FMO said LPs must ask themselves if they are equipped to do that type of investing. “It is a completely different ball-game,” he explained.

Shrivastava was also candid about the sustainability of direct investment, saying, “It is a new fad in the LP community – it will almost certainly drop off.”