Asia Pacific fund terms to fore in tough times

For David Pierce, CEO of Squadron (itself an ILPA member), perhaps the most significant finding is "the dog that didn't bark": how far regional funds already follow best practice. Apparently, there is no emerging-markets quality discount in Asian fund T&C. Furthermore, this is a homegrown development. "Many of the funds weren't aware there was such a thing as ILPA until recently," he tells AVCJ. "It wasn't driven by ILPA so much as what IIs had in mind for some time."

Fees and fund infrastructure

In fundraising as in telecoms, Asia seems to be skipping straight to the latest infrastructure, unfettered by legacy issues. "Clearly they're leapfrogging the knowledge base that was developed elsewhere, allowing them to move quickly to international best practice," notes Pierce.

According to the Survey, fund management fees in Asia are slightly above global averages, but purely by tighter focus on the 2% norm: even fewer funds charge fees above 2%, and most of those are under $250 million. And Asian funds are far better (at 70%) than the global average (less than 40%) in granting management fee offsets, where the GP's transaction and other fees are offset against the overall management fee.

Partly, this stems from "the relative preponderance of growth capital or lack of buyouts" in Asia, as Squadron MD Wen Tan points out. And as David Patrick Eich, Partner at Kirkland & Ellis International, adds, in Asia, "GPs are more amenable to a 100% fee offset partly because they generally do not expect significant fees from portfolio companies."

Structural factors

Structurally, this is not the only area where Asia Pacific private equity is more LP-friendly than Western norms. As Pierce observes, "the issue in US and EU PE has been very large funds that have the same terms compared to when they were much smaller. That isn't such a huge problem in Asia, if it's a problem at all." However, he continues, with Asian fund sizes escalating, "it will become an issue here."

Structural features of the Asian industry also manifest in less positive ways; as in the bias towards PIPEs. Here, the market seems actively polarized, with "a trend to either restrict PIPE investing or actually opening it up," notes Pierce. "There seems to be a bit of a barbell."

Team instability has also long been a concern in Asia. "It's a function of the rapid growth of the industry, the opportunities for spinouts as well as probably some less than best practice in terms of alignment of interest and structuring of partnerships," concedes Pierce. Here, the ILPA principles stress the importance of key-man clauses, but give little guidance in structuring them. Independently, wiser LPs "are pushing for a ‘second tier' or in some cases even a ‘third tier' key person clause," notes Eich. But, Pierce warns,"it's possible to have a key person clause that is effectively meaningless" - or unenforceable.

LP interest and the balance of power

LPs ostensibly were empowered by the 2008 crisis, but in Asia, other considerations may apply. "It's going to be an extraordinarily interesting year in terms of fundraising, because of the crisis and the issues around portfolio construction for institutional investors globally," Pierce believes. But the much-vaunted increase of LP power, he adds, is "a matter of supply and demand, and there is so much demand out there for Asia at the moment."

However, as Fadely confirms, the preponderance of development finance institutions and SWFs, which "account for a disproportionate part of Asian fundraising," creates greater momentum towards best practice, as these are often early closers, and carry great institutional weight. And Tan reports the "beginnings" in Asia of so-called sweetheart deals, where LPs receive preferential treatment for being early, large or anchor investors. Interestingly, he notes, "close to half the funds which are doing that are India-focused."

Anecdotally, Pierce sees some well-placed GPs pushing for, and getting, higher carry and other preferential terms. But the movement towards convergence around global best practice is clear and inexorable, and almost all GPs are more investor-aware than they were prior to 2008. "Even the best and most sought-after funds have increased their attention towards the distribution of their product," Pierce reports. "You see a huge boom in the placement industry here, which is partly due to the demand factor, and partly due to some problems in their home markets. That general raising of the game in terms of marketing and selling funds is coming out across the board."

Overall, though, Fadely concludes that: "Those with outstanding records are still able to set the terms."

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• Topics
• LPs
• GPs
• Fundraising
• Squadron Capital Advisors
• Wen Tan