Bruno E. Raschle, Executive Chairman at Zurich-based fund of funds Adveq Management, talks about Asia-focused trends among GPs, LPs and regulators, and what this implies for the future of the asset class in the region.
Q: What are you seeing in the Asian market?
A: We look at a tripolar world: Asia, growth; Europe, consolidation, US, restructuring. But recently, I have become more concerned about sovereign risk, protectionism, and regulatory [and political] moves. Everything that is long term today is less than five years. Even with sovereign funds, their compensation structure is mostly on an annual basis.
In the West, under innovation, we understand technological innovation; but [in Asia] it’s political, and social. On the technical side, the Chinese government is subsidizing development and the application of current technology, to gain an advantage over the Western world, by virtue of the size of the market.
Having said all that, we are very positive about Asia. We at Adveq are very committed to continue to commit to local fund managers, and also to build our local presence here in China, to provide services to local institutions.
Q: What level of quality of fund manager are you seeing here?
A: We are at the very early phase of the development of the industry here, and as in any industry in the early stages, there is a wide spread of quality. The [issue] here is not too much money. In my 30 years of experience I have seen too much money every single year. The question is not whether there are enough opportunities or deals, or even just a few good deals. The question is, are there a sufficient number of managers that are doing more than simply riding the wave? Rolling up your sleeves is a different thing to riding the wave. I would encourage all the GPs to come up with a report justifying or showing how much better they have done than the market.
Q: Is the issue mainly experience?
A: You can’t blame the emerging markets for having only a few years of experience. We are at the very early stage here. Having said that, there is also a cultural element. Asian culture is much more driven by the noise or dynamics on the street; and trying to take advantage of that, even if it’s only of an incremental nature. That is often their perception of what the market opportunity is.
Maybe there is even a paradigm shift in the private equity industry: providing more and more early liquidity; relative returns rather than absolute returns – that means J-curves are not possible any more – pushing the GP to take more risks.
Q: Are we going to see a new departure in the PE market now that Asia has outgrown its apprenticeship to the West?
A: The private equity industry that we have experienced in the Western world over the past four decades has been primarily a cottage industry. Textbooks of today have been written based on the experiences of the 1990s. Over the past four decades, each decade can be characterized by a certain trend based on certain fundamentals.
Suddenly, for the first time in a long time, we are confronted with uncertainty and incomplete information an order of magnitude larger than we are used to. Everyone is talking of higher volatility for the decade to come. Many models on the side of asset management, of dynamic asset allocation, of dynamic risk management, have either been forgotten or not been practiced. Additionally, we are faced with market sizes much larger than we ever have seen.
The best strategy is to play defense by being pro-active, by taking the offensive. But then you must have the instruments and capabilities and skills in place. That is where experience kicks in.
Q: As a result, do you foresee consolidation?
A: Consolidation in Asia may happen much faster. The loyalty factor today among professionals is one that we have not seen in the world. It is much lower, and I would apply the statement to both the GP and the LP side. It’s worldwide. However, it is higher and more dynamic in Asia.
Q: Is LP appetite driving rebalancing global allocations towards Asia?
A: If you think of rebalancing just 1% of the assets towards Asia, the region could not absorb that 1%. This is the order of magnitude we’re talking about. From a market perspective, all the regulatory efforts, cost and fee discussions, are almost naturally preventing the world from making that big shift.
Having said that, looking from the inside and the bottom up, Asia is here: 700 million new middle-class consumers are going to emerge in the next decade, just in northeast Asia. This is a force that will change business models, throw old beliefs overboard, and create an environment of high attractiveness for private equity investing.
But having a company with $50 million in revenue in this part of the world is nothing, because the order of magnitude of the competing companies for M&A and IPOs has grown five to seven times larger. Once again, it’s Western thinking where the scale necessary in order to be successful is completely different.
Updating your subscription status
South Korea continues to solidify its position as a premier destination for Asian private equity and venture capital investments. In 2014, nearly US$11 billion was invested into South Korean companies with exits topping US$8 billion, the highest return figures in the last 10 years. It is easy to see why international and domestic GP's hold South Korea in high regard, being one of few Asian destinations where large leveraged buyouts are possible.
Venture capital is also gaining momentum as the Park Geun Hye-led government continues to advance on initiatives to promote innovation and foster SMEs. With capital inflows and creative input from local and international VCs, South Korea is living up to its reputation as a flourishing venture ecosystem as we witness the rise of angel consortia, accelerators, and local offices for established VC funds.
This intensive and highly focused event will provide front row seats into one of Asia's most vibrant private equity markets. Key players will share their views on private equity and venture capital in Korea, Asia and beyond.
15 September 2015, South Korea- Westin Chosun, Seoul