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What Asia has to offer

European private equity investors are generally under-allocated to Asia Pacific. According to AVCJ Research figures, European GPs have invested $64.22 billion in Asia since AVCJ records began in 1987, while LPs have invested $5.18 billion in 241 Asia-focused funds tracked by AVCJ Research. Interestingly, AVCJ Research figures also show British GPs dominating - perhaps because of the UK's relatively early move into the asset class.

Even so, there is no question that Europe suffers at least as much as other Western markets from under-allocation to Asia - a deficit that investors are finally moving to address under the pressure of Europe's continuing underperformance. With Asia the bastion of growth and maturing in the industry, the growing interest in Asia Pacific appears to be consistent across GPs and LPs alike.

"Our feeling at the moment is that there is a strong interest from European investors to look at potential investments in Asia," notes Fredrik Ating, Senior Partner at EQT Partners. "They are seeking exposure to the high-growth markets in Asia, which means that a number of the potential investors either have increased or are thinking about increasing their allocation to Asia."

For European LPs the region offers specific benefits, especially in diversification. But these dictate preferential weighting towards certain investment theses and geographies, and market participants have different views on how this is playing out.

"Generally, Asia offers growth and diversification for a global portfolio," notes Pak-Seng Lai, Managing Director and Head of Asia at Auda International. "However, these benefits are mostly found in the emerging part of Asia such as China and India. For example, the risk/return profile of a LBO fund in Australia is similar to its counterparts in US or Europe. But the risk/return of a domestic China growth fund has limited correlation with US and Europe."

Another regional head at a major European firm, meanwhile, sees Europeans on the GP side tending to invest more into developed markets, such as Australia, Hong Kong, Japan, Korea and Singapore. "Minority investing is very important in China, but the European firms may be slightly more conservative" on that front, the source points out. "In general European PE firms seem to be favoring the more developed OECD markets in the region."

GPs and LPs alike can in fact be led astray in pursuit of growth, warns Ating. "You cannot look at growth in isolation. You need to focus on finding the right opportunities, the right companies that are well positioned in their respective sectors. It's always a danger if you get too carried away by the macro growth rates."

The experience of Asia

European funds and LPs' experiences in Asia Pacific have been correspondingly mixed, dictated partly by their investment preferences, as well as by their approach to market entry. In some cases, there has been a clear disparity between the American and European experience.

"European firms have been less aggressive than the US and local firms in building local teams," remarks AVCJ's European GP source. "The European firms are also largely investing from a European/global fund, so this has meant that they are focusing on larger-sized [buyout] investments." Interestingly, coming from perhaps Europe's biggest private equity investor in the region, The GP source also finds that, "European PE firms are very sector-focused," partly as they have fewer country-focused vehicles.

"Most of our competitors are American, and they have aggressively deployed capital in Asia," confirms Alex Emery, Principal and head of the Tokyo office at Permira Advisers. "European GPs have been less aggressive in Asia to date."

Lai sees the wide array of LPs as complicating the simple question of whether European investors have had a positive experience of Asia, and why. "Different LP groups within Europe and US have different experiences, mainly due to different portfolio strategy and regional focus in Asia," he notes. However, "in general, family offices and endowments which focus on smaller growth funds in China and India have enjoyed good returns, especially for earlier vintage years from 2001-05." The unfortunate corollary is that, "large pension plans which invest mainly in mega-buyout funds raised in recent years have yet to see significant results."

The view now is that Asia is essential. "It's very important to have a presence in Asia," confirms Ating. "You really get to know the markets, both the possibilities and the risks of investing out here. Regardless of whether you have a dedicated fund or a global fund, it's still important that you have a presence."

Emery also feels that larger funds in particular tend to transcend the US/European distinction, particularly when it comes to their sources of capital. "As a GP, our capital doesn't really have a regional color. We have Asian, European, Middle Eastern and America investors, probably in a similar proportion to other large buyout funds. We probably have slightly more European backers, but you won't see a huge difference... are we really a European GP, or an international GP that has its roots in Europe?"

European capabilities and performance

Despite their market positioning relative to the biggest American firms, European investors, especially on the GP side, do seem to feel that they have something different to offer Asian investees, and some advantages in the region. One aspect of this is certainly European familiarity with working across different cultures, jurisdictions and languages.

"When we look at Asia, we see Asia as a collection of different markets with a variety of characteristics, which resembles Europe more than the US," notes Emery. "The US is a homogenous market." He also sees some commonality in the types of company and ownership situation that they seek to invest, given Europe's oft-remarked propensity towards family ownership structures. "We see more similarities. In Europe, outside the UK, we typically deal with families, even in the very large deals."

Potential investment targets in Asia may also be eager to partner with European GPs in order to gain market access, but also other critical advantages, in EU markets. "Many Asian companies we come across are actively looking to get a platform in Europe and the US. Ideally, they are seeking to buy a brand name in Europe," observes Ating. He sees branding, marketing and technology as the three key assets most likely to interest a potential Asian investee.

"There is a lot of interest from investees and companies that are looking to acquire assets in the West," confirms Emery. "The US is a better understood market. There are a lot of people who can explain the US to Asian companies. There are relatively fewer people who can explain Europe."

Prospects and regulations

"Many institutions in Europe are adjusting their portfolio strategies by transferring allocations for the US to Asia," affirms Lai. "Asian private equity has become more convincing as an investment case, especially after the financial crisis."

Strategically, too, European GPs have grasped how Asian developments are affecting their business worldwide, and are acting accordingly, says Ating. "Quite a few of the European firms have a presence here and have Asia high up on the agenda from two aspects, both in terms of doing deals here but also because the Asian region is impacting the investments you have in Europe."

Finally, there is the looming threat of new EU private equity regulations altering the entire industry in Europe. Although the European GPs are less impacted by some of the new proposed regulations than outside funds, rules on areas such as capital adequacy will affect all alike.

European investors in the region are reasonably relaxed about the likely impact of the changes on their activity here. "We believe European firms, like US and local private equity firms, will continue to be interested in the region," affirms AVCJ's European source. "We don't see EU regulations affecting this interest."

However, the formative and controversial nature of the EU regulatory plans mean that any result is still uncertain, and investment is likely to press ahead. "In theory, the EU regulatory moves could create significant hurdles for Asian GPs to raise funds in the EU," adds Lai. "But the formulation and implementation of such regulations could take years to reach consensus, and the final outcome would be a pragmatic balance of different interests. As long as Asian funds continue to deliver high returns, capital will continue to flow from the EU to Asia."

Emery concludes, "there'll be a shift in the balance or the weight of where we invest our capital. That's true of European players who have global ambitions, as well as American. There will be a big question market for players who do not choose to become international."

 

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• Topics
• Europe
• North Asia
• South Asia
• Regulation
• Permira Advisers
• EQT Partners