Asia fundraising: A divided market

Asked whether he is relieved that Bain Capital closed its Asia fund ahead of the competition, Jim Hildebrandt, a Hong Kong-based managing director with the firm, hesitates before opting for a diplomatic answer: "Fundraising is difficult at present - it is a really competitive market. The best funds are getting the capital they need for follow-on funds, but others are not. A lot less money is being raised now than 5-6 years ago, and it's a lot more aligned to the opportunities out there."

Bain Asia Fund II reached a final close of $2.3 billion in July, roughly halfway between the initial target and the hard cap, after about one year in the market. The vehicle is more than twice the size of its predecessor, raised in late 2006.

A host of global and regional buyout players are still in the market looking to raise sizeable vehicles, some of which are substantially larger than those raised in the previous cycle. Should KKR, TPG Capital, The Carlyle Group, Affinity Equity Partners, MBK Partners and RRJ Capital all meet their targets, nearly $25 billion in capital would be added to the Asia pool.

Pushing the limit

It could be argued that this is commensurate with the size of the Asia opportunity. X.D. Yang, managing director and co-head of Carlyle Asia Partners, observes that private equity still only accounts for a small portion of Chinese companies' capital needs given the country's GDP stands at $7 trillion. Other industry participants talk up the potential for greater deal volume - and larger ticket sizes - coming out of Southeast Asia, Japan and South Korea than has been the case in recent years.

Nevertheless, the question remains: Are these firms trying to raise too much capital for Asia? "One could confidently say that too much money is being raised," says Doug Coulter, head of Asian private equity at LGT Capital Partners. "If all that capital does get raised, on top of all the dry powder in a market that really isn't that deep, how do you deploy it? Returns will fall and investors will be disappointed."

Asia's mid-market GPs present a different set of investment opportunities but they also face a starkly different fundraising reality. When the global buyout firms raise Asia vehicles they leverage pre-existing relationships with large European and North American institutions. Even if they find fewer doors are being opened to them these firms have the resources to go and knock on hundreds more.

"They have 50-strong investor relations teams that do nothing but raise capital on a global basis," says MounirGuen, CEO of placement agent MVision. "These teams work the market incessantly."

This is a strong competitive advantage at a time when the fundraising environment is challenging. Asia-focused PE funds have attracted $40.7 billion in capital so far this year, compared to $66.9 billion for 2011 as a whole.

Interestingly, the number of funds that have received commitments stands at 181, by some distance the lowest number seen in seven years. As a result, average fund size has jumped to $224.9 million in 2012, up from $160 million the previous year. It implies that LPs are focusing on a smaller number of managers, so competition for allocations is intensifying.

"You find people traveling a lot more to the US and Europe and focusing on investor relations even during the investment period of a fund," says Sebastiaan van den Berg, Hong Kong-based managing director at HarbourVest Partners. "GPs need to find a balance between time spent on client services and time spent investing."

This is a pertinent issue for all GPs that operate with relatively small teams, and feeds through to more fundamental questions concerning the viability of their business models. It is estimated that an Asian manager needs to have about $1 billion under management - ideally not spread over too many similar funds - to generate the fees required to support an IR team and related resources. If the GP has a pan-Asia focus and maintains investment teams in several cities, budgets are even more stretched.

Efficient use of time

It is therefore important that time spent on the fundraising trail is used efficiently, targeting LPs who might feasibly commit to the kind of vehicle being marketed, but not everyone grasps this. "A lot of GPs spend months barking up the wrong tree," says Vincent Ng, a partner at placement agent Atlantic-Pacific Capital. "They lose momentum and people start asking why they have been in the market for so long."

LPs have ready-made strategies for less proven managers who might stumble during the process. In order to avoid being locked into a fund that is seeking $500 million but is stuck on less than half that, an LP might attach conditions to the agreement, allowing the capital commitment to be withdrawn if a first close isn't achieved at a certain level.

Concessions aside, though, there is one key area in which an Asian GP can stand out from the crowd in the eyes of institutional investors: complete some exits.

"A lot of capital has been put to work in Asia but before committing more investors will want to see some real cash-on-cash returns," says van den Berg. "The only market that has shown it can deliver returns and liquidity consistently is Australia. In emerging markets GPs want to hold on too long. There is a belief that companies will simply continue to grow at 30-40% per annum."

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• Topics
• Fundraising
• Buyout
• Expansion
• Fundraising
• Asia
• buyout
• Bain Capital Asia
• The Carlyle Group
• KKR
• TPG Capital
• MBK Partners
• Affinity Equity Partners