LPs want to see how GPs learn from mistakes in Asia

Rebecca Xu, co-founder and managing director at Asia Alternatives, observed that markets like China have witnessed significant changes over the past 10 years, including technological disruption and increasing cross-border activity. Studying how a GP has adapted to these shifts is therefore a key part of due diligence.

"In a direct conversation with managers, this is a test of whether you are open to talking about failures and lessons learned from them - whether it's an organizational failure with a partnership break-up, underestimation of technology disruption, or overestimation of the ability to generate change in a portfolio company," Xu said.

For Warburg Pincus, one of the lessons learned during a decade of investing in China - and which it now seeks to apply in Southeast Asia - is that portfolio concentration leads to better performance.

"I think we really made some conscious decisions on the back of paying some school fees in the early days in China. One of those was making sure that we weren't trying to spread ourselves too thin by investing in a bunch of things that honestly weren't going to be meaningful in the context of the overall fund. We cut the number of investments and saw performance accelerate," said Jeff Perlman, the firm's head of Southeast Asia.

Another is that if something looks too good to be true, it probably is. For example, a pre-IPO investment may promise an attractive guaranteed minimum return, but a poor structure can disincentivize management. "You need to try to layer in the structure and make sure you have alignment. If you don't have alignment with your partner, your partner will probably deliver 50% of the outcome of the transaction," Perlman said.

LPs also want to see evidence of an evolving culture, especially important when it coincides with generational succession within a GP. Many founders and managing partners are now in their 50s and preparations for leadership transition can cause internal disruptions, potentially harming performance.

Eric Manson, a managing director at The Church Pension Fund noted that half of his portfolio managers in Asia are talking about succession. "It's never too early to be thinking about that because you want to be developing your steps as jumping-off points to go through that difficult path," he said.

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• Topics
• Southeast Asia
• Greater China
• LPs
• GPs
• Buyouts
• Expansion
• Warburg Pincus Asia
• Asia Alternatives Management
• HKVCA