LP interview: Hermes GPE's Saki Georgiadis

"We are grateful that we don't need to put $500 million to work in Asia," says Saki Georgiadis, head of Asia for Hermes GPE. "With such a scale of capital to deploy it would be difficult to get the excess returns we would expect from our European and US portfolios."

It is a natural reaction from an investor who, while upbeat about the region's fundamental growth prospects, is cautious about the speed at which capital is flooding into the market. As of September last year, Hermes estimates there was $39 billion in dry powder in Asia. The largest portion of this capital - $6 billion - can be found in India, where GPs are coming to terms with the fact they managed to raise $15 billion over the last 10 years.

Georgiadis opened Hermes' Singapore office - its first in Asia - last year. However, the group has been investing in the region for more than a decade, predating its current incarnation as a joint venture between Hermes Private Equity - a unit of the BT pension scheme - and the PE team from UK investment group Gartmore, which came into existence in 2010.

Hermes now stands as one of Europe's largest investors in private equity and infrastructure with $9 billion under management for institutional investors and pension funds. It is invested in approximately 200 funds globally and Asia accounts for 35 of these relationships and nearly $1 billion in assets. Two new commitments were made in the region last year.

The group has generally focused its attention on emerging markets but Georgiadis notes that the region presents opportunities in both developed and developing economies, so "there is something for everyone."

Fee mitigation

As is the case for the majority of LPs globally, the fees charged by private equity firms are an issue for Hermes. Concerns within the investor community are likely to mount if fund performance fails to match that of earlier vintages.

"Everyone understands returns are going to be compressed going forward. This brings fees into the spotlight as it is not palatable to pay 2% and 20% on a 16%-18% gross return," says Georgiadis. "The biggest issue is paying management fee on a committed basis which is a legacy structure from the early days of private equity."

With this in mind, Hermes has been seeking to maximize returns by nurturing co-investment opportunities - it already has 88 globally as part of a program that is among the longest-standing in the industry. This was part of the rationale for relocating to Singapore.

"We are very excited to be on the ground because it allows us to deploy our co-investment model more effectively in Asia," says Georgiadis. "We can't find enough high quality co-investments to get dollar for dollar but that is fine- we will probably get 25-30%."

For Hermes, co-investment is not just about reducing fees; it is also a way to get to know managers outside of the fundraising process and see them in action. "The reality is that it is almost impossible to really understand a GP through the highly structured and rehearsed fundraising process," says Georgiadis. "Once you have tracked a GP for a couple of fund cycles you really start to get under the skin of the nous of the organisation."

The group's goal is to build a network of GPs in Asia to complement those it has developed in other parts of the world, after years of investment. Familiarity with certain individuals in the industry is essential when investing in first-time funds that are assessed based on team members' track records in previous jobs. The smaller the team, the higher the risk, so Hermes has to be absolutely comfortable dealing with everyone involved.

Familiarity with the team was a key consideration when Hermes committed capital to Southeast Asia-focused GP KV Asia, which reached a first close of $100 million on its $250 million maiden fund last November. "You will rarely have a fully-fledged team in the beginning so you have to believe that the core individuals are high quality, have good chemistry and complement each other well," says Georgiadis.

Size matters

In Asia, Hermes backs large-cap buyout funds as well as smaller operators, although the former receive a smaller portion of the capital pool. Funds targeting $2 billion or more typically account for 15-20% of the group's total allocation in the region. Despite this agnostic approach, Georgiadis describes fund size as the "fifth element" in its investment strategy a key driver of for performance in the next few years.

"There is growth in emerging markets and there are opportunities to catch that growth through private equity but if a fund has way too much capital and a fixed investment period, they will make mistakes," he says.

"Asia is a market where you need to be flexible with your strategy. In a sense you can't go in dogmatically and say, ‘I will only do majority, I will only do this size range,' you have got to be more flexible by definition."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• People
• LPs
• LPs
• Asia
• Hermes GPE