LPs still keen on Asia despite slow distributions - AVCJ Forum

"Today, emerging markets are 45-55% of GDP, depending on whether you calculate it on a nominal or PPP basis, but only 14% of private equity fundraising goes to these markets," said Nicholas Vickery, global portfolio manager for private equity funds at the International Finance Corporation (IFC). "Emerging markets PE – if you want to be countercyclical or not follow the rest of the crowd, that is where the opportunities are going to be."

IFC has $6 billion committed to 320 funds across emerging markets and backs 20-25 new vehicles a year, investing around $400 million. Vickery noted that the organization's net return, in US dollars, on investments in the growth equity and venture capital space is 15.1%, which is "at par with what you see in some developed markets."

IFC has been ramping up its investments in venture capital – it has 40 VC managers in the portfolio – with a view to capturing the transformative impact of technology in developmental terms. Speaking on a purely commercial basis, Ivan Vercoutere, CIO of LGT Capital Partners, believes that new economy exposure through private markets is one of the reasons his firm's Asia PE program is up more than 20% this year, while public equities have struggled.

"Where we see the value creation in Asia is in IT, healthcare, biotech – you can't really capture it in the public markets and that's where you see the divergence in returns. The gap is wider here in Asia than in Europe," he said.

LGT has $60 billion in assets under management, half of which is deployed in private equity. Asia accounts for 20% of its global program. Vercoutere admitted that distributions from Asia had slipped below those of the US and Europe after outperforming those markets – largely thanks to China – in 2003-2005. In recent years, however, "there is a little bit less liquidity in [Asia], but there's a perception that the gap is bigger than it actually is."

Asked about the wider spread between unrealized and realized returns – total value to paid-in (TVPI) versus distributions to paid-in (DPI) – Vercoutere blamed the predominance of minority investments in Asia and a reliance on the IPO market leading to delays in distributions. He also observed that a portfolio with low DPI, though worrying in some circumstances, might indicate the presence of a lot of residual value that can still compound in others.

IFC's Vickery added that DPIs can vary greatly between different markets within Asia. However, a lack of distributions is still a concern. "We say to managers that if they want to attract more capital to their region, they have to return capital to investors, it's part of the discipline," Vickery said. Lagging DPI remains IFC's second-biggest concern in Asia after the impact of foreign exchange fluctuations on valuations.

Another curious aspect of IFC's holdings is that first-time funds, though forbidden territory for many LPs due to the higher likelihood of failure, have generated better returns than the overall portfolio on a weighted basis since 2000. This in part reflects a willingness to make investments in frontier markets where competition is sparse – Vickery pointed to Bangladesh and the Philippines as success stories. It also means there is a greater propensity to back spin-outs.

While IFC sees spin-outs as integral to building up a private equity ecosystem in emerging markets, for many other investors this is a function of high team volatility in Asia. "You follow talent," said Vercoutere. "Some of these venture firms in China were formed three or four years ago by a couple of partners stepping out from well-established firms. You have too much talent in a firm and it can't be accommodated, so some of that talent splits off."

LGT has backed spin-outs in Asia, sometimes staying invested in the original manager and sometimes not. Even Canada Pension Plan Investment Board (CPPIB), which maintains a more concentrated collection of GP relationships, has in the past year supported a spin-out from an existing portfolio manager. While GP stability is important, Frank Su, CPPIB's head of private equity in Asia, said the group ultimately wants to identify managers with which it can build lasting relationships.

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• Topics
• LPs
• Fundraising
• Performance
• Asia
• LGT Capital Partners
• IFC
• Canada Pension Plan Investment Board (CPPIB)
• AVCJ Events