Asia PE returns will rise as GP skills develop

"Distributions have exceeded capital calls for two years, but over the past vintages DPIs [distributed to paid in] have not been very high," Yong-Hak Huh, founder and CEO of First Bridge Strategy told the Hong Kong Venture Capital & Private Equity Association's (HKVCA) Asia summit. "Asian GPs have not been performing to the level of US buyout funds."

Huh added that he is reluctant to make direct comparisons between the IRRs of Asian funds and US buyout funds because the risk premiums are different. An institutional investor in New York is likely to look more favorably on a US-based manager delivery a 20% return than an Asian manager with identical performance because they are more familiar with their home markets.

Some of the challenges commonly associated with investing in Asia don't necessarily relate to the quality of GPs themselves - for example, regulation, uncertainty over IPO exits and the lack of a strong secondary market can all impact investments. On the other hand, GP reporting is in certain cases still opaque, making it harder for LPs to make decisions based on already limited track records.

However, Frank Su, a senior principal for private equity at Canada Pension Plan Investment Board (CPPIB), observed that the talent pool is deepening in Asia - within the GPs and in the surrounding services industry. "When we started in 1999 you had McKinsey and Bain & Company come to you and they were just doing market entry, but now they have all the infrastructure in the region," he said.

Among emerging markets GPs specifically, skillsets are developing in areas such as buyouts. John Huo, a director for private equity at Manulife Financial, sees a direct link between this evolution and fund performance.

"In Korea and Japan there are more buyout funds so you see better DPIs," he said. "China has been evolving so there will be more control deals and better DPIs as GPs become more mature. They won't be sitting on investments and waiting for IPOs, which is not the best strategy."

While the current state of affairs makes it difficult for unproven managers to raise funds, there is no shortage of capital targeting Asia. Mounir Guen, CEO of placement agent MVision, estimates there are 20 LPs globally with the ability to deploy capital at the same pace as CPPIB, which is said to be the biggest investor in Asian private equity. He expects this number to reach 50 in the short term.

With so much money looking for a home, there are concerns that the most in-demand GPs will shift their strategies to accommodate it - and performance could suffer as a result. "The amount of capital poised to enter alternatives from this region is going to make the GPs less disciplined," First Bridge's Huh added. "Maybe they will raise more capital than they should just because they can."

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• Topics
• Performance
• LPs
• GPs
• Fundraising
• Buyouts
• Asia
• Fundraising
• Performance
• buyout
• GPs
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• Canada Pension Plan Investment Board (CPPIB)