LPs going direct 'not a front of mind issue' in Asia - AVCJ Forum

“It’s happening in Asia to some extent, although most LPs doing direct deals are co-investing or co-sponsoring,” said Jean-Eric Salata, CEO and founding partner at Baring Private Equity Asia. “I don’t see it as a negative, to some extent it’s logical. I am paranoid about what we do and making sure we continue to push ourselves. It’s not just LPs, but other GPs competing with us all the time.”

Salata acknowledged the possibility of issues around information sharing – for example, passing data supporting an investment thesis to LPs that might compete for the asset – but noted that this information tends to be reasonably high level. “It’s not a front of mind issue for us in Asia,” he said.

K.Y. Tang, founding chairman and managing partner at Affinity Equity Partners, is of a similar mind, noting that LPs operating independently of financial sponsors is “going to happen and we have to get used to it.” He said the best response would be to find ways to work with LPs taking the direct approach – while suggesting no more than 10-12 will be able to do this over the next five years.

Referring to co-investment more broadly, Tang observed that the pressure to deliver is relentless – “My large LPs come to see me and as soon as we sit down, before the coffee is served, they ask, ‘Where is my next co-investment?’” – and it may not be sustainable. GPs that pursue larger deals so they can provide more co-investment could end up stepping outside their comfort zone, resulting in adverse returns, or a general market downturn might leave a lot of LPs exposed.

“When the market changes I wonder how many of these guys will drop back,” Tang said. However, he admitted that large LPs with significant direct investment programs, including on-the-ground resources in Asia in some cases, are here to stay.

Private equity firms also stand to benefit from these changing dynamics as they develop more meaningful relationships with LPs. “It’s about focus, it’s about really getting to know each other, it’s about partnership,” Salata said. “You are working together for 10 years-plus – it makes sense to develop closer, larger relationships.”

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• Topics
• GPs
• LPs
• Buyouts
• Asia
• Co-investment
• Direct investment
• Affinity Equity Partners
• Baring Private Equity Asia
• AVCJ Events