LP interview: Munich Private Equity Partners

Munich Private Equity Partners (MPEP) may take its name from the iconic German city close to its headquarters, but the firm wants to be seen as a local investor.

"In many respects, I'm sure a lot of Asian GPs will feel we are an Asian LP. Operating with a local team rather than being a fly-in, fly-out LP is incredibly important for us," says John Morrison, MPEP's managing director. "As a Europe-headquartered LP, we have to be exactly the same as the GPs we speak to - need to have a genuine local presence in Asia."

The firm was created through a spin-out from German financial services provider RWB Group in 2012. It continues to serve RWB clients that want exposure to global private equity but now also raises capital from external retail investors, typically high net worth individuals.

MPEP's Shanghai office is its first - and so far only - overseas base, with a seven-strong local team.

Three-pronged approach

MPEP's investment vehicles fall under three broad categories. First, there are $1.9 billion global market funds, 30% of which are deployed in Asia, with half of that allocation going to China-focused GPs. Second, $450 million special market vehicles, which are either geographic-limited - for example, comprising entirely China or India managers - or follow thematic investment patterns, such as secondaries funds.

Third, the firm launched a pan-Asian fund last year that targets investments in India, China and Southeast Asia, with a target of $138 million.

MPEP's typical commitment is $15-20 million per fund, and it has so far backed 27 managers in Asia. There is a slight bias towards larger funds. "Up to now, we haven't invested in smaller single country funds because we don't want to be overexposed to the volatility in some of those countryies," Morrison explains.

In this way, MPEP gravitates towards markets in which the private equity industry has scale or is well established: China, India, Japan and South Korea. Through the same logic, while recognizing that opportunities are emerging in the likes of Vietnam and Malaysia, the firm favors a pan-regional approach to Southeast Asia. It backs managers such as Kuala Lumpur-headquartered Navis Capital Partners, which also offers exposure to Greater China and Australia.

"It is an opportunity to catch all Southeast Asia opportunities without exposing ourselves to single-country risk," says Tony Zhu, head of emerging markets at MPEP, who leads the Shanghai office.

Making primary fund investments is all about finding a local champion. MPEP does this by defining the entire opportunity set, placing GPs into several key groups, and then identifying a winner in each one.

Hony Capital triumphed in the large country fund category - MPEP backed the GP's fifth vehicle - and BVCF was chosen among the Chinese sector specialists. MPEP committed to the GP, formerly known as BioVeda China Fund, last year after being impressed by the team's ability to leverage domain expertise to find targets at attractive valuations.

However, not every sector specialist qualifies for consideration. While MPEP is willing to support GPs in telecom, media and technology (TMT) and life sciences spaces, cleantech vehicles are regarded as concept rather than sector-focused funds.

"We did think about whether to pick a local champion in cleantech several years ago," says Zhu. "But based partly because of our knowledge of European markets, we think that within cleantech it is very difficult to build up your domain expertise in specific industries, such as solar. It is a very broad concept."
Local champions are also selected based on positioning in a market that is seen to have future potential.

Another MPEP's investments last year was Kedaara Capital, an India-focused GP that reached a final close of $540 million on its debut fund. The LP's rationale is rooted in a belief that India will return to form in the next two years, with particular opportunities in the lower-middle market segment. Kedaara, which is targeting corporate carve-outs, was deemed to be a good fit.

"In a large market, it's possible to have a number of country champions," adds Morrison. "It's a bit like the Olympic Games - it's not like there is only one winner and one gold medal. There are a lot of different events, so we want to support managers who succeed in different niches," Morrison says.

Opportunities ahead

MPEP's co-investments and secondary deals have so far been restricted to Western markets. The in-house view is that, given its current stage of evolution, there is unlikely to be significant development in Asia's secondary market over the next three years. This is put down to the limited number of institutional investors active in the region compared to Europe and the US.

The trend MPEP does see emerging is increased specialization among Asian GPs, and with this greater operational value-add as sector expertise is truly brought to bear. This broadly follows the evolutionary curve of the US market, with larger players to the fore.

"Asia has yet to fully embrace all the benefits of operational improvement in portfolio companies," Morrison says. "There will probably a move towards more buyouts and really active engagement from managers. The mid-size and larger funds, rather than the smaller ones, are best positioned to do that."

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