Global LPs want more control in China – AVCJ Forum

Andress Goh, head of Asia Pacific private equity at Allianz Capital Partners, told the AVCJ Forum her firm has backed off growth managers in China as the local economy has slowed. Allianz is attracted to the scale and ability to consolidate in China, which represents almost half of the firm’s Asia footprint, but Goh is cautious about local managers that do not have deep value-add capabilities.

“I’ve always been of the view that the kind of growth capital models we have in Asia are probably not sustainable in the long run,” Goh said. “In the long term, Asian managers will need to develop specializations and sector expertise like in the West. Managers that actually know what to do to help their companies navigate a crisis are really the ones that can sustain themselves and their returns.”

One of the ways that Canada’s Ontario Teachers’ Pension Plan has approached Asia during the pandemic is to focus on domestic plays rather than cross-border strategies in markets that have bounced back faster. This implies an interest in increasing exposure to China, but Raju Ruparelia, a managing director at the pension plan, echoed Goh on the importance of control strategies in the current climate.

“During times of recession, being able to be in a position to create value and take hard actions – and the experience that comes with investing with control – starts to show benefits,” Ruparelia said. “So, we have been looking at ways to diversify. We have a pretty diversified portfolio across growth versus traditional buyout both in the growth markets as well as the developed markets. And we’ve definitely benefited from that diversity.”

US-based MetLife Investment Management splits its Asia exposure 50-50 between developed and developing markets. There is a strong preference for GPs that take control positions, which has resulted in the firm being slightly underweight in China.

“We are starting to see some GPs in China having more of a control orientated focus, and if that continues, I see our allocations to China potentially increasing a bit in the future. But for us at the moment, reliability of distributions is important,” said Nick Milnes, director of Asia private equity at MetLife. “If you have a control orientated focus, you have a greater control of the exit process, a broader range of exit avenues, and that’s what you want to see GPs tap into.”

Milnes noted that the emergence of China’s Star Market presented an attractive new exit route for technology, media, and telecom (TMT) and healthcare companies. But it remains unclear to what extent this will sufficiently serve the country’s hottest and most competitive sectors. 

“Looking at China, investment strategies are normally driven by top-down themes and trends, which drives GPs into a fairly similar subset of sectors, for example, TMT, healthcare, and education,” he added. “With growth-stage companies staying private for longer, GPs competing to get into the same companies, and follow-on financings driving these attractive returns, the question is whether these paper profits can be translated into distributions when GPs don’t really control the exit process.”

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• Topics
• Greater China
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