The international viewpoint

Q: You've been observing the progress of Asia Pacific's private equity landscape for years. What can you pinpoint as an ongoing problem with the sector?

A: I think that one of the big issues you have is the overall performance. If we look at the Asian marketplace, it's diverse. Australia has been around and practicing private equity since the mid-seventies; it has a whole infrastructure and support system, which is quite important. Some of the other markets are still nascent, so one of the things that one would be looking for is performance on a portfolio basis.

Q: In terms of performance, what have investors traditionally looked for?

A: Back in the mid-nineties, to invest in Asia you had to be able to out-perform an American general partner by virtually 1.5 times. So if an American partner is producing 2.5 times, investors would be seeking something like 4 times return on a portfolio basis from this part of the world. And really we haven't been able to achieve this.

One of the big theories now being entertained is that leverage is not going to promote the [same] type of returns in Europe and the United States as in the past, and top line growth can actually generate significant performance. But the performance numbers are equalization numbers, so everybody is still looking for that 2.5x gross on a portfolio basis, and I still think that some of the markets are quite new in this area.

Q: Growth in key Asian markets has been a real lure for new funds. What advice do you have for these groups?

A: Chasing top line growth according to GDP growth is not necessarily the essence of what private equity is. I can show you funds that are generating four times returns in flat economies, but in the end of the day, this concept directs one to where one might find extra opportunity of performance, and I think that's what many of these investors are chasing.

Q: How about warnings about the fundraising space?

A: One has to address with caution that we're looking at fundraisings to be at about $200 billion a year on average, and at the peak it was $450 billion. Within that there is no systematic growth of this pool of capital, and can actually be shrinking on a relative basis.

But within that pool there is a drive to move up to a third of capital into new, emerging markets, mostly driven by Asia interest and focusing on China and India. The other country of interest is Brazil. We could in a very short period of time see a substantial amount of capital come into the marketplace when, in terms of its cycle and development, it's not ready to receive it.

If you're looking at control, if you're looking at large tickets, if you're looking at certain dynamics, and certain kind of capital market developments, services, financial structures and supports - there's a whole myriad of characteristics that need to come into play to generate these consistent long term capital, and these markets are still in development and may not offer them.

Q: Although funds pay lip service to understanding the risk-reward balance in Asia, do they?

A: Over the 20 years in which I've been in this profession, one of the things that struck me is that everybody speaks in English but they don't necessarily communicate in English. So trying to transpose techniques or successes or models of execution from different parts of the world, especially if you've developed a portfolio in the United States or Europe - and even in Europe you find out that the cultural differences are quite pronounced - becomes very complex. In India there are a lot of PIPEs, and in China there's a lot of minority-type stakes, and investors aren't used to this. It's control that's the issue.

Q: In that context, how many great managers are there in Asia's emerging markets?

A: The number-one rule in our industry is that past performance isn't indicative of future performance, but a lot of people seem to forget this quite easily. There's a handful [of great managers] and they're not necessarily the household names. Saying that, markets such as South Africa and Australia, which have been around and in private equity, you see what we would call great managers.

You're looking at two different models for execution. One is individuals who see the world differently and they have the touch to make money, and those have to be respected. Second, you have institutional structures that have a DNA that can generate that consistency of return, and for this it's still early days [in Asia].

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