Western LPs still expect Asian PE to deliver a risk premium

Ernest Boles, CEO of Auda International, told the Hong Kong Venture Capital & Private Equity Association's (HKVCA) Asia forum that if LPs from these geographic areas are getting a 1.7x return on their developed market portfolios then they want 2x from Asia. This is how they justify putting capital to work a long way from home and exposing themselves to issues such as exchange rate movements.

"You can break it down and assign different values to volumes of risk but the bottom line is they are looking for 2x on an Asian portfolio and if you are not getting DPI [distributed to paid in capital] on top of that it becomes a harder sell," he said.

George Anson, managing director with HarbourVest Partners, noted that his firm breaks its exposure into growth and value categories. While a lot of clients say they want value and growth, which means Asia could be a good fit, risk premium requirements often steer them in a particular direction.

"If a client has the mindset to invest in US venture capital it is easier to get them in Asia, but if they want 1.7x then just stay on the value side," Anson said.

Any discussion about whether Asian GPs can meet these expectations for risk-adjusted returns must evolve as the LP base evolves. While a US investor operating in US dollars is likely to want a risk premium from Asian private equity, the increasing number of local investors coming into the asset class will perceive risk in a different way, said Eric Chan, managing director at J.P. Morgan Asset Management.

He added that most LPs back a relatively small number of GPs in the region, so performance assessments are highly dependent on manager selection. "If you do a lot of funds in Asia returns go down to the industry average," Chan said. "We have to get premium returns so we do a small number of funds and co-investment on top of that."

For some groups, frustration at the slow returns coming out of Asia also represents an investment opportunity. Auda's Boles noted that the focus of a lot of discussions with investors has switched from total value to paid in (TVPI) of Asian portfolios to DPI, but his firm is increasingly looking at secondary deals, with one transaction completed in India last year.

"We are spending a lot of time looking at secondary opportunities," echoed Raju Ruparelia, senior principal with Teachers' Private Capital, the private markets unit of Ontario Teachers' Pension Plan (OTPP).

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• Topics
• Performance
• LPs
• GPs
• Asia
• Performance
• LPs
• GPs
• OTPP
• Auda International
• HarbourVest Partners
• J.P.Morgan Asset Management