2023 preview: Fundraising

“We do see more climate-focused funds coming to market. A lot of them are generalist managers who are now pursuing climate strategies. Everyone has an angle these days, which could be a direct result of the difficult fundraising environment,” said Huai Fong Chew, regional lead for East Asia and the Pacific in the International Finance Corporation’s (IFC) private funds team.

“They need to have a track record or at least a strategy that makes sense. Some of them claim they want to build solar farms and wind farms, but they don’t have the knowledge, and they aren’t even trying to find people with that knowledge. They say they will learn as they go, but this doesn’t work.”

IFC can speak from experience, having backed a string of renewable energy funds a decade ago. Results were mixed, and poor outcomes were often a consequence of unstable regulatory regimes and inconsistent incentive schemes. The development finance institution (DFI) has evaluated the latest crop of climate investors in recent months and passed on them.

Strategic pivots have become a feature of Asian private equity as managers look for ways to engage LPs that – driven by overallocation to private markets in their own portfolios or concerns about worsening global macroeconomic conditions or Asia-specific risk aversion, or maybe a combination of all three – are wary of committing capital.

“Most LPs seem to be just catching their breath – for many, there’s no sense of urgency right now,” said Edward J. Grefenstette, president and CIO of The Dietrich Foundation, which has 42% exposure to Asia, and 25% to China, across all asset classes.

“Everyone expects PE and VC marks in the fourth quarter to reveal more realistic mark-downs, especially under the discerning eyes of auditors. Thus, many LPs likely won’t finalise a 2023 commitment budget until they can see what their numerators and denominators really look like.”

Hard times

Asia-focused GPs have raised USD 119.7bn in 2022 to date, down from USD 128.8bn in 2021, putting the region on course for a third consecutive year of declines. Remove renminbi-denominated funds consideration, however, and the picture doesn’t look so bleak: USD 92.5bn has been raised so far this year, compared to USD 87.5bn and USD 88.7bn for the entirety of 2021 and 2020.

But this capital is being committed to a concentrated pool of managers – there have been just over 400 partial and final closes for Asia ex-renminbi funds in 2022, down from approximately 700 apiece in the two prior years. China is an extreme case in point, where Sequoia Capital China collected USD 8.8bn for its latest collection of funds earlier this year, or 41% of the national total.

IFC’s Chew draws parallels with VC in Southeast Asia. While managers are attracting more capital than five years ago, LPs have sufficient data to distinguish outperformers from underperformers. Capital is gravitating to the more established players at the expense of those on their first or second funds – it’s natural attrition, yet it’s also challenging given IFC is often asked to anchor new funds.

“We must make sure there is a sight to a first close, but it’s more difficult because managers say they are talking to LPs, but those LPs are playing wait and see; they don’t necessarily need to back a Southeast Asian manager or even a new manager,” said Chew. “There is no FOMO [fear of missing out]. No one is rushing into a first close because they are worried about being kicked out.”

Doug Coulter, a partner at LGT Capital Partners, notes that LPs are wise to take stock rather than act rashly. LGT’s primary commitments in 2022 amount to three-quarters of the historical average (and 90% of it is re-ups), while secondaries and co-investment are down 75%. China, India, Australia, and Japan are the main jurisdictions of interest, but he does see a flight to developed markets.

“LPs should be taking a harder look at re-ups and being more cautious on direct deals,” Coulter explained. “You need to think about where you are allocating and whether that represents a good risk-reward going forward. Maybe emerging markets like China – if you call it an emerging market – India, and Southeast Asia are harder to do.”

At the same time, economic uncertainty has prompted most managers to slow deployment. One placement agent observes that he expected to have four Asia-based funds in the market in 2023, but three may now get pushed into 2024. He stresses these are not tactical delays: the GPs have deals lined up, but they are holding fire in anticipation of valuation resets.

Dietrich’s Grefenstette does see a correlation between a GP’s willingness to deploy and its fundraising prospects. “While they sense a compelling time to deploy, they are also fearful of running out of capital and being forced to fundraise in a very uncertain and difficult environment,” he said.

Structural alchemy

This dilemma is arguably most pronounced in China where geopolitics, recent heavy-handed regulatory interventions, and growth-restricting zero-COVID-19 policies have contrived to make some LPs regard the market as, at worst, un-investable, and at best, a place to hold back for the time being.

Strategic pivots have therefore become popular. Attempts by China-focused managers to reposition themselves as pan-Asian or global, often opening offices or recruiting more staff overseas as a statement of intent, are well-documented. Pursuing a narrower strategy – for example, by becoming a climate or sustainability investment specialist – is another option.

Gavin Anderson, a partner in the investment funds practice at law firm Debevoise & Plimpton, has seen managers adopt more concentrated strategies and more concentrated approaches to fundraising. Rather than casting a wide net, they are targeting LPs where there are existing relationships and, in some cases, adjusting their fundraising expectations downwards.

“They need to a do a first close of a certain size, and it’s a question of what’s realistic,” said Anderson. “If there is going to be a close, how big would it be and who would come in? Is it worth it in terms of the perception of a less successful fundraise? Would it be better to hold on longer and hope for more or raise enough money to keep going until the market comes back?”

This has resulted in a certain degree of structuring alchemy. When private equity firms are reluctant to announce a first close because the amount raised is below expectations, they may break it down into several tranches. This means capital can be locked in quickly instead of waiting another month for LPs that are dragging their feet and negative sentiment can potentially be contained.

In addition, GPs are offering LPs the full range of incentives: access to positions in existing funds in return for commitments to new funds; favourable terms for backing continuation funds; co-investments alongside funds or that warehoused for inclusion in funds; and opportunities to invest directly into portfolio companies that require bridge financing.

“Everything is on the table,” said LGT’s Coulter. “Even groups that are three-quarters of the way through their fundraise and have got traction are offering all sorts of sweeteners.”

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• Topics
• Fundraising
• Buyout
• Venture
• Greater China
• GPs
• LPs
• Secondaries
• Asia
• Fundraising
• IFC
• LGT Capital Partners
• The Dietrich Foundation
• Secondaries