US investors wary of Asia spin-outs - AVCJ Forum

"We have done more work on China than other countries, but the speed of change is hard. You have guys spinning out of other guys, a lot of motion. We are getting better at following who is going where, but there is a lot of institutional change," Amy Falls, CIO at The Rockefeller University, told the AVCJ USA Forum.

Spin-outs have become an established characteristic of the private equity landscape, most conspicuously in China and India. Situations range from individuals at venture capital firms striking out on their own on the back of successful investments to country teams at global or regional GPs departing because they want greater autonomy to pursue deals.

Gregory Jania, head of fund investments for global private equity at APG Asset Management, is generally opposed to such moves – "sponsoring a spin-out from one of our own managers is a terrible thing to do," he said – but others argue that situations should be judged on their own merits. Maurice Gordon, managing director and head of private equity at Guardian Life Insurance observed that spin-outs can present opportunities, if the LP is very familiar with the people involved.

"There are certain private equity firms out there where the top guys are not the guys you want to be working with. If the motivation is greed, pure and simple, that is one thing. If the motivation is everyone knows there is a guy no one wants to be connected with, that is a good reason," he said.

Despite harboring uncertainties about team stability, there is a growing conviction about the prospects for Asia, and US-based LPs are looking for ways to make distance less of an obstacle to participation. For APG, which has EUR25 billion ($28.5 billion) in private equity out of an asset base of EUR500 million, size is the overriding guiding principle. With a minimum check size of $100 million – and an average of $300 million – there is a natural bias towards the region's larger managers.

Guardian Life has a $2 billion program, of which 10% is in emerging markets, and tends to rely on advisors and separate account mandates, while Rockefeller has established a close relationship with a fund-of-funds. Falls, who oversees a $2 billion portfolio with a 20% private equity allocation, said she looked at the extra layer of fees in terms of paying to become educated on Asia.

"As a small endowment with a relatively small staff the question is can you execute – that has been the challenge, it's why we have been cautious and slow," she explained. "Five years ago there was also the exit question. The bet was this is coming and these markets are getting deeper and more professional, and that has played out."

Hemal Mirani, an Asia-based managing director with HarbourVest Partners, added that the region is also looking more attractive on a broader basis, relative to other markets. "For the first time, when I see investors, I am able to say that geopolitical stability in Asia is so much better than the rest of the world, so why would you not invest in Asia," she said.

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