LPs keep faith in Asia

Coller Capital’s latest Global Private Equity Barometer sheds further light on what has been an open secret for at least a couple of years now – that when investors say they want to increase exposure to private equity in emerging Asia, they are primarily referring to increased exposure to India and China. 

Respondents to the survey were asked to select their most preferred destinations in Asia for both buyout and growth/venture capital investing, and China and India were the only two emerging economies that found a place on both charts, with no other emerging markets featuring in either one

And if Asia is becoming increasingly attractive, so is direct investment globally. The proportion of LPs investing directly into private companies has risen steadily over the past few years. According to the barometer, 49 percent of LPs currently make direct investments in one form or another and 23 percent of them make proprietary investments into private companies. What’s more, 41 percent of LPs plan to increase their exposure to direct investments over the next three years. 

According to Hiro Mizuno, a Tokyo-based partner and head of Asia at Coller Capital, this is because investors who decided to stay put in this asset class post-crisis have increased sophistication and built up good knowledge about private equity. Due to an increase in sophistication on the part of LPs and the GPs’ needs to use more equity in times of lower leverage, GPs are increasingly inviting LPs to co-invest. “GPs are more encouraged to co-invest with LPs and LPs have built up enough expertise to consider direct investments,” he says, calling it a “win-win” situation for both parties.

In another sign of investors’ relative confidence in Asia, when asked about the prospects of returns being hampered by proposed taxation and regulatory changes, most limited partners said they do not expect a reduction in their returns from Asian private equity. 

According to Mizuno, this is probably due to two factors – first, the new regulations are likely to affect the banks first and that basically affects the leverage lending market and Asia is less dependent on the leverage market for deal making. Secondly, tighter controls that are expected on US and European banks are not likely to have as much of an impact on Asia, even if these banks claw back on their presence in this region.

There is increased confidence in Asian private equity, says Mizuno. “When you talk about upside, Asia has always been more attractive over the last decade. What detracted investors was the risk return profile. But today, people have concerns about stability in the developed markets and they see relatively less reason to invest there,” he adds.