LP interview: Axiom Asia

Singapore-based fund-of-funds investor Axiom Asia likes to back new GPs and smaller country funds because it believes they are more focused on making carried interest. "It's one of our characteristics that we do look out for good teams who might have less capital to manage," says Chihtsung Lam, the firm's managing partner. "We think they could be hungrier and deliver good returns."

Since Axiom was launched in 2006, it has raised $2.5 billion to commit to GPs as a primary fund-of-funds, make co-investments alongside portfolio managers, and purchase fund interests on the secondary market. Lam and four of the partners previously worked together at GIC Private.

The most recent fund, Axiom Asia Private Capital Fund III, reached a $1.15 billion final close in 2012 after just four months in the market, exceeding the initial target of $950 million. Secondaries and co-investments receive 10-25% of the corpus.

In keeping with the small to mid-market fund focus, Lam says the vast majority of funds Axiom commits to are less than $1 billion in size and a large number are below $500 million. Commitments fall within the $30-75 million range but can be as much as $100 million. Axiom likes to be one of the largest LPs in the funds its backs because this allows for greater influence.

"We are almost always on the advisory board, and get more co-investments and secondaries," Lam explains.

Regional distribution

The firm aims to commit half of its funds to China and the other half is distributed broadly between Japan, South Korea, Southeast Asia, India and Australia. India has the next biggest allocation after China, but not sizably more than the rest.

While the size of Axiom's funds has increased, the number of manager relationships has not, which implies that the LP is writing larger checks in each of its commitments. Each vehicle has approximately 20 GP relationships, including private equity and venture capital funds.

"We don't have that many managers per country, outside of China," says Lam. "If you add one more manager in any one geography, you drop one in another at the same time. That could change the allocation quite significantly for particular countries."

China's prominence in the portfolio is explained by GPs in the country outperforming other geographies since the Axiom began investing in 2006. However, Lam notes that there has been a change in returns coming from Japan. "The returns were initially very poor in the years immediately after the 2008-2009 crisis but in some instances there has been a fairly rapid turnaround on the back of stock market gains post-Abenomics," he says.

In China, Axiom expects GPs who can capitalize on the consumer, environment, healthcare, retail and affiliated sectors to do better as the country undergoes a structural rebalancing intended to ease its dependence on investment-led growth and boost the consumption share of GDP. The firm has also committed to Chinese VC funds in the expectation that rebalancing might lead to a slowdown in more traditional sectors, while emerging growth segments prosper.

India is the other VC play, where "the prospects for venture looks better than growth capital in the aggregate." Investments in the country are therefore weighted towards emerging technology and services companies.

Currency depreciation has been one of the reasons investors have received lackluster returns from India but Axiom has contained its exposure here and in other markets vulnerable to the effects of stimulus tapering in the US. In India for instance, it has managed the risk by the stage of the investment.

"Since venture capital is further back in the start-up stage I would argue that it is less vulnerable to valuation fluctuation or ultimately even short term currency fluctuation than say pre-IPO type investments," Lam explains.

Emerging secondaries

On the secondaries side, the firm backed the spin-out of Bank of America Merrill Lynch's Asia PE team to form direct secondaries specialist NewQuest Capital Partners in 2011. Axiom backed the GP's $400 million first fund used to absorb assets from the former parent, although it is understood to have decided not to participate in Fund II.

Axiom was also involved in a partial spin-out last year when it helped underwrite the deal that allowed Asia Growth Capital Advisors to acquire a portfolio of private equity assets from an investor group led by its former parent, Credit Suisse.

Lam says that relative to the global market, Asia's share of secondaries is still small. These would typically be the offerings of fund interests from a few years ago when private equity in the region was less developed. Also, a lot of selling LPs are still under-allocated to Asia.

"In terms of what they want to trim from the portfolio, they are less likely to sell the Asian assets. They are more likely to offer something where they feel they are overweight - for instance, if they have 10 mid-market US buyout funds," he explains.

Axiom is also seeing good co-investment deal flow, driven by it typically being among the largest backers of portfolio GPs. To apply quality control to the co-investment portfolio, the first thing Axiom looks at is the quality of the manager who shows them the deal and the alignment of interest between the GP and the LP.

Other criteria are adverse selection risk - the manager might be "showing this deal because it's a lower conviction deal on his part," Lam notes - and the GP's expertise in the relevant sector. Axiom is flexible on how early it enters into a co-investment, given its partners' experience doing direct and co-investments at GIC.

"We have that capability to partner the GPs at an early stage if need be, but we also welcome opportunities which are further along and packaged by the GP," Lam says.

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• Topics
• LPs
• Fund-of-funds
• Greater China
• North Asia
• South Asia
• Southeast Asia
• Secondaries
• Asia
• Axiom Asia Private Capital
• Fund-of-funds
• Secondaries
• China
• India