LP interview: ROC Partners

The origins of ROC Partners can be traced back to the early 1990s and Macquarie Investment Management Private Markets (MIMPM). The fund-of-funds business was very much focused on the Australian market and then in 1998 started committing capital across Asia. 

Institutional investors such as Australia's superannuation funds were logical customers. MIMPM took their money, allocated it to PE fund managers - and with the gradual addition of LPs from the US and Europe - soon became the largest Asia-focused fund-of-funds in the market.

Now the clock is ticking. LPs have built up internal capabilities to manage assets, making the role of the primary fund-of-funds less important. MIMPM had to change in order to survive. Two years ago, Michael Lukin, Andrew Savage and Shaw Ng led a management buyout from parent company Macquarie and the business was re-branded as ROC Partners - it wanted to differentiate itself by providing investors with a truly tailored advisory service.

"Ten years ago, a primary fund-of-funds would be sufficient to generate premium fees," says Lukin, managing director at ROC and previously global head at MIMPM. "But what we're seeing now is that we need to be doing things that our investors just can't do by themselves, whether that is because of their own resourcing constraints, transaction timeliness, or the deal origination. The key is there is an increasing focus on transactional activities among fund-of-funds."

Having already deployed more than a half of its $5 billion assets under management (AUM) in secondaries and co-investments, ROC wants to develop these two themes further.

On the ground

With offices in Hong Kong, Sydney and Tokyo, ROC has over 20 employees managing its portfolio. Although the firm sees opportunities in infrastructure, real estate and agriculture in Asia, there are no plans to launch dedicated investment products in the near term. Currently the core business is Asian private equity, with 20-30 existing GP relationships on the primary side ready to generate deal flows.

Lukin warns that if a fund-of-funds doesn't work closely with GPs in order to understand their underlying assets and economies, its competitive advantage will be eroded.

"The risk in the market today is that, people are trying to throw away their primary fund relationships and purely focus on secondaries and co-investments. I think that's a very short-term game to play. GPs won't show you the best deals if you're not a LP. You need an integrated approach to how you manage your relationships in order to generate good returns," he adds.

Asia is a nuanced market in that countries are at different points in their respective economic cycles. It is not unusual for a market to be heavily favored for a period, and then completely fall from grace. ROC sees these moments as prime entry points. For example, Japan has not been popular with investors over the past three years, so ROC invested aggressively and these efforts have translated into fruitful returns.

"We're very reactive to where we see opportunities," Lukin says. "We use a bottom-up approach: if we see an opportunity, then we assess whether we can create outsize returns. That opportunity might come through our primary relationships across the region where the manager has a specific angle in a particular market; it might be a secondary opportunity that is quite attractive; or it might be a co-investment deal where we see an interesting industry vertical or segment with attractive valuations."

In addition to being geography-agnostic, ROC is strategy-agnostic, covering everything from buyouts to venture to distress.
Sweet spot

The fund-of-funds has never had meaningful commitments from Macquarie Group and its current AUM is all third-party money. New investments in the secondary and co-investment spaces will be $25-30 million in size - a market segment that is seen as less competitive than others, but also consistent.

"When we think about allocating or raising funds, we're most focused on ensuring that we don't move too far away from what we think is the sweet spot for equity investments in Asia. Once you get into a position where you need to allocate $100 million to each opportunity, you're in a very difficult part of the market, where you can't get access to a lot of country-focused funds or you are dealing in secondary opportunities that are highly contested," Lukin says.

In many cases, existing GPs will alert ROC when secondary positions in their funds become available. Lukin sees no lack of deal flow, noting that most of the global secondaries players focus on larger investments.

ROC sees increasing secondary opportunities in China, which could be attributed to two factors. Firstly, a large number of China-focused funds were raised between 2008 and 2010, so there is more supply on a general level. Secondly, some US investors are becoming impatient with the relative lack of liquidity generated by China compared to their home market. As such, they are likely to be interested in opportunities to exiting their China holdings and re-focusing on domestic opportunities.

In terms of co-investment, when the business was mainly a primary fund-of-funds few industry participants would seek co-investment. Although there is now more interest, it can be difficult for LPs to co-invest directly in deals unless they have dedicated resources on the ground.

"Typically, we've found that when the process starts, there will be up to 10 funds putting their names forward," Lukin says. "But then pretty quickly it narrows down to one or two because the others either don't understand the business or the geography or need too much time to execute the deal. Because we are on the ground, we do see a disproportionate amount of co-investment deal flow." 

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• Topics
• Fund-of-funds
• LPs
• People
• Greater China
• ROC Partners
• Fund-of-funds
• LPs
• China