Talent shortages hinder Asian LPs' private equity returns

More than four in five institutional investors surveyed for the latest installment of Coller Capital's Global Private Equity Barometer identified recruiting high-quality talent as a problem. This compares to fewer than two-thirds of respondents on a global basis. Limited resources are the primary concern for LPs globally. This ranked second – on 68% – among the Asian contingent, followed by restrictive investment mandates and an inability to get large enough allocations to preferred funds.

"Many Asian institutions believe in rotation programs, but the private equity industry requires specialization. It's also an apprenticeship business. While length of tenure is not a direct indicator of ability, you need experience to make judgments," said Zhan Yang, an investment principal in Coller's Hong Kong office.

Rotation programs that see investment professionals move between roles every few years are often found in Japan, Korea, and China. In the past, they have been blamed for a chronic short-termism on the part of these LPs as people want to have something to show for their efforts before rotating out.

The talent shortage is seen by many industry participants as being especially severe in Japan, particularly given the country's LPs are increasing their exposure to alternatives. "We go to Japan and it can be very frustrating, but we have to keep plugging away to open up the market, it's such a big savings pool," one Asia-based GP told AVCJ.

While certain groups are on hiring sprees and managing to recruit experienced investment professionals from private equity firms and investment banks, not all LPs will be able to follow suit. Much like many of their peer institutions globally, Asian pension funds and sovereign wealth funds struggle to pay market rate for talent.

One symptom of an inexperienced workforce is a tendency to play it safe with allocations. A flight to quality – or at least a flight to scale – has been a characteristic of private equity in Asia for several years. Regional fundraising came to $128.5 billion in 2017, according to AVCJ Research. Nearly half of that was committed to funds of $2 billion or more, while 35% went to vehicles of $5 billion-plus. In 2013, the share attributable to funds in these size bands was 27% and 5%, respectively.

While the fundraising frenzy globally has led investors to conclude that the North American buyout market is overheating, only one-quarter think this is true of Asia. The more pressing concern – identified by nearly one-third of respondents – is a lack of quality GPs. This raises the question as to whether LP demand is driving the largest firms to raise ever larger funds, with performance potentially suffering as a result.

"Regional managers that have been performing reasonably well are able to raise very large funds in short timeframes," Yang said. "There are some concerns about what kind of returns those funds can deliver, simply because the market in Asia is not so deep. For example, there are only one or two very large transactions in Japan each year, so everyone must look at them. There is no doubt that the large end of the market will face increasingly stronger competition."

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• Topics
• LPs
• People
• Performance
• North Asia
• Asia
• Japan
• Coller Capital