LPs worried by rising fund sizes in Southeast Asia - AVCJ Forum

Huai Fong Chew, regional lead for East Asia and the Pacific in International Finance Corporation's (IFC) private equity funds team, noted that longstanding issues around a lack of exits in Southeast Asia are being addressed. However, she questioned whether this success can be consistently replicated and whether fund managers are getting ahead of themselves.

"Success depends on vintages, and there are exogenous factors that cannot be controlled, but we see Southeast Asia managers trying to raise larger and larger funds," she said. "If they continue to live on this hype around Southeast Asia and raise bigger funds that cannot be deployed, that is a key concern for us."

Much of the upward pressure on fund size is in the venture capital space. Southeast Asia-focused funds attracted commitments of USD 6.6bn last year, up from USD 6.5bn in 2020, according to AVCJ Research. The annual average total for the past five years is USD 6bn, the same as the five years before that.

Over these two periods, the buyout and growth equity average declined from USD 3.1bn to USD 2.5bn, while venture capital rose from USD 590m to USD 2.1bn. Some of the largest PE players – such as Navis Capital Partners and Northstar Group – have raised less in their current vintages than in those preceding. Meanwhile, local VC firms are launching growth-stage funds.

Partners Capital, which manages about USD 50bn globally through fund-of-funds and separately managed accounts, has primarily invested in North Asia and India to date. Emmanuel Pitsilis, the firm's co-head of Asia Pacific, identified five challenges presented by Southeast Asia: scale, fragmentation, the availability of exits, and the ability to find reliable GPs.

Fragmentation – the fact that the region is a collection of very different markets – remains an intractable feature of Southeast Asia. Pitsilis believes that issues around scale and exits will be addressed over time, although the latter is not moving as swiftly as many investors would like. As for the availability of investable GPs, he is more bullish.

"We are seeing second and third generation entrepreneurs coming back and becoming GPs and we are seeing individuals who have trained at some of the best institutions in the world targeting Southeast Asia," Pitsilis said. "That ecosystem is a bright spot and growing well."

Performance, meanwhile, has been mixed – characterised by a sizeable gap between best performers and worst performers, which makes GP selection more difficult. This point was echoed by Sam Robinson, managing partner of family office North-East Private Equity Asia, who is generally encouraged by returns coming out of the region, yet frustrated by attitudes towards distributions.

"Low DPI [distributions to paid-in] doesn't necessarily mean poor overall performance. For some managers, the star deal is a large unrealised part of the portfolio. As a market matures, managers realise LPs need to get their money back, but that attitude hasn't really been there," he explained.

"They say, ‘Why should I sell this asset when I must find another just as good and there aren't many that are as good as this one?' It is very different from the European mentality of selling good assets, realising the DPI, and then raising another fund."

Sean Low, CEO of Golden Vision Capital, a family office-backed investment firm that runs fund-of-funds and direct investment programmes in Southeast Asia, added that despite the recent flurry of technology IPOs, there are still sizeable positions in those companies subject to lock-up provisions.

Low shares the concerns about increasing fund sizes, especially given the uncertainty as to how what extent market corrections globally will impact Southeast Asia.

"Fund sizes are getting bigger than deal sizes," he said. "Outside of the technology space, often you don't need much money to get things done because the cost of labour is much lower than in other markets. Sometimes companies raise too much money because investors have very large funds and they are willing to hand over that money."

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• Topics
• Southeast Asia
• Fundraising
• Growth
• Venture
• LPs
• Performance
• Fundraising
• IFC
• Partners Capital
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