LPs say Asian GPs lack long-term investment model - AVCJ Forum

"I'm not sure we've got the right model for a long-term environment," Steve Byron, head of private equity at Australian Future Fund, told the AVCJ Forum in Hong Kong.

Thomas Kubr, executive chairman of Capital Dynamics, added that there has been a small pause in commitments to Asia from Western investors who are waiting for GPs in the region to return money from earlier vintages. He believes Asian PE firms have made two key mistakes: mis-selling the asset class and taking a number of poor quality companies public.

"I still see too many people that are not under the pressure of liquidity and try somehow to find ways to liquify private equity. That's a very fundamental error," Kubr said. "No private equity business plan is a two-year plan. It tends to be 3-5 years, sometimes shorter - that can happen. But if you have a fund that invests for four years, you don't expect to liquidate it too quickly."

He added that, taking different business and operational factors into consideration, some companies are just not suitable for a quick-fire IPO but would benefit from a longer holding period and comprehensive development model.

This view was broadly echoed by Spencer Miller, managing director of Optrust Private Markets Group, who observed that the capital markets phenomenon in emerging marketes is changing too and LPs find it difficult to follow.

Investors enjoy initial success from very small funds where they can create liquidity quickly from the first couple of movers, and suddenly GPs are able to raise large sums of money for markets in which deals are relatively few in number and difficult to access.

"It looks like potentially a very interesting market but suddenly the whole supply and demand of capital changes," Miller said. "It really takes some time to settle down."

The core problem of such pre-IPO strategies is that there is more focus on deal sourcing and less on operational improvement. When a GP once to put more emphasis on value-add the skills simply might not be there.

"I have no problem investing in financial engineers and in operators. But what I have a problem with right now is everyone jumping in as operators," Kubr said. "Some groups are really gifted at finding cheap companies and buying assets that others cannot. That's their strength, and that's fine. But please, be honest about where your strengths are."

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