Some revealing commentary about the challenging fundraising environment in the region was put forward during panel discussions at PEI’s recent CFOs & COOs Forum Asia in Hong Kong.
In China, for example, domestic LPs – which consist mainly of families and high net worth individuals – are driving strategy and investment decisions, according to Jarlon Tsang, managing director and chief operating officer at H&Q Asia Pacific. These LPs have different expectations and ways of approaching investment, and often ask to participate in the decision-making process.
“They’re not used to the concept of money management,” says Tsang. “In China, it’s ‘Hey I make the money … You should manage my money as my employee.”
In addition, many domestic LPs have a shorter time horizon and higher return expectations than do traditional institutional investors, which has led to a large amount of money pouring into the pre-IPO space.
“There’s probably too many GPs developing too quickly in the [pre-IPO space] and it’s worrying traditional GPs,” Tsang said, noting that these GPs’ have an investment-to-exit period that is shorter than traditional private equity.
“But at the end of the day, you’ve got to follow what the investors want,” he added.
Another LP-related issue that has CFOs and COOs buzzing is reporting and communication with investors. Leonard Wei, chief operating officer at ARCH Capital Management said financial regulations coming out of the US and Europe are prompting limited partners to ask for more details than usual from fund managers.
Wei, however, said he understood that the reason behind most of these requests was that LPs were seeking reassurance in an uncertain environment. LPs understandably “feel comfortable that they’re working with a [trusted] manager and [that comfort] allows them to sleep at night”.
However, there were a few odd requests that he described as “quite onerous”.
For example, Wei went through a 75-item checklist from an investor and found that answers to 42 out of the 75 questions could easily be determined by looking at four slides from the firm’s quarterly report sent to LPs. He has also had investors ask for his firm’s excel working capital model.
Wei believes a balance can be struck “between originating, structuring and executing deals for [LPs] versus spending the same amount of time working on their requests”.
US dollar-denominated funds versus those raised in local currency and the various conflicts that might arise for firms managing parallel vehicles – a perennial conference topic favourite – was also discussed at length.
Li Guo, chief financial officer at China’s CDH Investments, said her LPs are less concerned about the conflict of interest arising from the fact that the GP is managing both RMB- and USD-denominated funds than they were four years ago.
To manage LPs’ concerns, CDH has set up “clear rules and principles” as to how the investment team would allocate the funds and a “proper corporate governance to ensure that the rules and principles will be followed”, Guo said. “We also have very timely disclosure and full reporting with our advisory committee members and investors.”
In addition, Guo thinks the most important part of the alignment of interest lies in making sure the key terms of the fund’s limited partnership are consistent in both USD and RMB funds. The idea is to reduce the likelihood of investment professionals devoting more attention to one fund over the other.
At the conclusion of the event, the CFOs and COOs were generally in agreement that two main trends would be more evident in Asia in 2012. They had expectations that more detailed reporting requirements from LPs were coming as well as regulatory measures to ensure stronger compliance.