Almost half of GPs expect the proportion Asia-Pacific investors in their LP base to increase in their next fundraise, according to the pfm/SANNE CFO Survey 2018. The promise of a swelling pool of yield hungry capital, as well as rising numbers of LPs – some with eye-popping amounts of capital ring-fenced to invest specifically into a private equity program under construction – is a tempting prospect. Even more so for managers eager to seize the opportunity to diversify their capital base at the peak of the cycle.
“I’m not surprised by this number,” says Iesan Tsai, Hermes GPE head of Asia, in reference to the survey finding. While the US remains the widest and deepest private equity market globally, followed by Europe, the proportion of Asian capital has risen from 5 percent or less a decade ago to about a third today, she says. “If you look at the biggest GP names, about a third of their LPs are from Asia. And other GPs will follow suit to expand their base.”
Concentrated in China, Japan, South Korea and Taiwan, sovereign wealth funds, state and corporate pension funds and insurance companies are among potential sources of new capital grabbing the attention of overseas GPs. “Foundations and endowments are still early, but that’s a growing area as well,” says Tsai.
“In the next five years we are going to see a lot of new capital specifically from Northern Asia, Japan in particular,” says Mounir Guen, chief executive officer at MVision Private Equity Advisers, who notes he travels to Tokyo at least once a month these days. “There’s a good volume of capital coming from these countries and a lot more to come. When the Chinese pension and insurance companies become more international, there will be a huge amount of capital moving into the global market place from pension funds and insurance companies.”
While institutions like Japan’s $1.4 trillion Government Pension Investment Fund, with its 5 percent allocation to alternatives, and Japan Post Bank’s plans to invest around $64 billion into alternatives over the next three years grab headlines, down the scale, smaller sources of capital are also coming online.
The really exciting part of the expanding Asian investor base is the evolution of family offices into professional asset managers, says Eaton Partners head of Asia Chris Lerner. Regional institutions are also increasingly open-minded and prepared to look at mid-market vehicles, which “broadens the range of fund managers for whom sourcing capital from Asia is relevant,” he adds.
To tap these new sources of commitments, starting from a low base, GPs are spending more time, energy and resources in Asia to build the relationships necessary to raise capital there, says Lerner. GPs need to manage their expectations and target the right investors, he says, noting that interest is not the same as a desire to commit. “You can waste a lot of time taking meetings with people interested in the asset class but that’s not the same as raising capital.”
GPs entering Asia for first time need to grasp from the very start that it is not one monolithic commercial bloc. “There is no such thing as the Asian investor,” says Lerner. “It’s a huge and diverse geography with unique and different cultures. GPs need to know what makes sense and have a well informed and targeted strategy given that it is such a diverse set of traditional and non-traditional investors – all at different levels of maturity and with varying legacies of exposure to alternatives and a historically less programatic approach to the asset class.”
GPs would be foolish to regard new Asian LPs as low-hanging fruit. “There is a tendency among GPs who have not visited the region to underestimate the ease of raising capital,” says Javad Movsoumov, UBS Private Funds Group managing director.
After first targeting local GPs, Asian LPs typically seek to allocate to established international managers with an initial bias toward well-known US funds, followed by European GPs, he says. Given the amount of capital large investors need to invest, they will seek to establish relationships with large GPs that can accommodate big check sizes. Managers demonstrating top-quartile performance, scale, a strong brand and a track record of exits have no difficulty in raising capital, he adds.
Any GP seeking to collect capital from the region must be patient. Asian LPs can take up to six months or more to come to a decision. They also like to meet face-to-face, says Movsoumov. “GPs need to visit the region regularly. Investors want to build trust, which requires time and effort.”
When interacting with investors, GPs also need to tailor their sales pitch to each market’s unique business culture. “There are different styles in Japan, China and Korea,” says Tsai, who suggests GPs partner with a local distribution agent that can advise them on their approach.
Although some investors dislike pre-marketing, for less high profile funds seeking to establish a market presence, putting in the legwork is important to establish trust. “If you’re not a globally known name, they want to know you as an individual,” Tsai says.
A common mistake US and European GPs make is failing to understand that Asian LPs are interested in the manager’s profile, not simply what they do within the portfolio company. “In Asia, many deals are driven by access and people want to know your background and what drives you,” says Tsai.
Overseas GPs should be aware that Asia-Pacific investors are “high touch clients,” says Tsai. As well as frequent contact, they require regular portfolio updates and a seat on the LP advisory committee, she says. They also look for additional benefits from their relationship with the GP, such as education and training on the asset class. “They are at the bottom of the learning curve but are fast learners. Don’t underestimate how much they know,” she warns.
To attract capital, GPs need to recognize that Asia-Pacific LP motivations differ from their home investors. US and European investors typically seek to match assets to liabilities, says Tsai, noting “that’s less of an issue here. [Investment choices are more] about diversifying a portfolio and driving higher returns.” Undertaking research on each individual LP to pinpoint what they are looking for “will make a world of difference before you come here,” Tsai says.
Those GPs that choose to set up a local office “have a distinct advantage,” she adds. In South Korea, for example, where the government has recently relaxed overseas investment restrictions and interest in foreign private equity is rising in tandem with the number of locally based overseas managers, investors want to ask questions directly to the GP and like to deal with local staff who can communicate in Korean, Tsai says.
In order to access the GPs they favor, some Asian LPs have already taken the initiative and established offices in the US and Europe. However, managers still need to be mindful of local laws governing which entities can raise capital. “You might be able to access an investor through their London or New York offices but note you are still locally regulated,” says Guen.