LPs wary about raising Asia PE allocations above 10% - AVCJ Forum

"The flow of capital to emerging markets is such that it's pricing out the emerging markets premium," said Steve Byrom, head of private equity at Future Fund, Australia's sovereign wealth fund. "Asia will probably get us the same returns as other emerging markets, which will probably be about the same as the US and slightly better than Europe on an IRR basis."

The consensus among participants in the LP panel at the AVCJ Forum was that geographies with more developed capital markets - where control transactions are available - have delivered the best returns.

"Our best performing segment in the last 20 years has been the US mid-market - funds of less than $1 billion in size. We have seen net returns of 19%," said John Schumacher, chairman, New York Life Capital Partners.

"At some point it has nothing to do with risk and return and everything to do with alpha generation. We are still allocating 10% to Asia because there is growth in the region but every time a Chinese company de-lists we get phone calls asking why we continue to invest in the region. There are some endemic issues that need to be addressed for us to deploy any more capital."

Schumacher also expressed concern about the lack of experience and instability in many Asian private equity firms, asking whether there was a single GP in the region that could match New York Life Capital Partners' roster of eight partners with an average tenure of 16 years.

"We see many managers that have less than median returns and then two of the five principals leave and raise their own fund and then two more leave and they each raise their own fund," he said. "It's nothing like the US model where they raise $600 million every time."

Scott Parrish, private equity portfolio manager at the State of Wisconsin Investment Board, echoed these sentiments. "You have a number of groups that have done well but how big will they become?" he asked. "Do they grow out of their sweet spot that is driving most of the returns?"

Returning to the US mid-market theme, Byrom contrasted the "company building mindset" of American GPs with their Asian counterparts. While private equity firms in the region are trying to emulate the approach, they are still a long way away. "People will say they have an operations team and a company building strategy - but if you are buying minority stakes of 2-3% you are kidding yourself if you think you will be able to build out size returns like the US mid-market," he said.

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• Topics
• LPs
• North America
• Australasia
• Greater China
• South Asia
• Southeast Asia
• Future Fund
• USA
• LPs
• Asia
• China
• India