LPs see limitations as well as opportunities in Asia co-investment

"Despite sitting on the panel for co-investments today, I also would like to ask the question: does co-investment even make sense?" Alexander Pestalozzi, managing director at Mueller Asia, the family office of German businessman Theo Muller, said at the Hong Kong Venture Capital & Private Equity Association's (HKVCA) Asia Forum.

"From a family office point of view, we invest in a fund because we believe that fund can pick the best opportunity. If the fund comes back to us, gives us a choice and we need to decide which one is the best opportunity, I think it's very difficult. We're taking away of the whole diversification angle."

Furthermore, if the family office builds a team capable of handing the full due diligence process, it might as well make investments directly rather than participate alongside a GP, he added, unless it is a new relationship and one of the purposes of the co-investment is to get know the GP better. Mueller Asia only co-invests when the target company has a strategic relevance to the family's core business in Europe and there is the possibility of integrating the company into its operations.

Deploying capital in the mid-market buyout space is also difficult in Asia compared to the US and Europe, although LPs are seeing increased deal flow across China, Australia and Japan. In India and Southeast Asia, transactions in the $50 million range are regarded as significant in size – and competed for fiercely among a handful of GPs.

"Once it's competitive, LPs have to be super proactive if they really want to deploy that capital," said Nicholas Cator, executive director at Belgium-based family office Verlinvest. "On the other side, it's difficult for the GP to give a large percentage of the deal to LPs as co-investment."

A small allocation is not attractive to all LPs, with US-based Allstate Investments only willing to consider writing checks of at least $25 million. The insurer started co-investing in Asia two years ago and is targeting larger deals in order to build a significant presence in the region. Co-investment also helps strengthen relationships with existing and prospective GPs. For example, after participating in a deal alongside a Chinese GP, Allstate became an anchor investor in the firm's debut US dollar fund.

"We do use this [co-investment] to gradually expand our horizon," said Wei Wu, a representative at Allstate. "Having said that, as an insurance company, we have limited resources. We have to rely heavily on our GP relationships – and we must have trusting relationships, believing in a GP's expertise in the areas in which it invests."

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• Topics
• LPs
• Buyouts
• Co-investment
• Asia
• HKVCA
• Family office
• insurance
• Allstate