Axiom closes third fund in just four months

Assessing the prospects for Asia's fund-of-funds earlier this year, AVCJ suggested that the next 12 would be crucial in determining who has staying power. Independent regional players that started out around 2006 and are now looking to raise their second or third funds can be properly judged on the performance of the earlier vehicles. And not all of them will pass the test. It is generally agreed that consolidation is imminent as smaller operators are pushed out of an increasingly competitive and global market.

Axiom Asia appears to have sufficient momentum. The Singapore-based firm this week announced the first and only closing of its third fund, Axiom Asia Private Capital Fund III, at $1.15 billion, exceeding the initial target of $950 million. The whole process took four months to complete.

"Raising the previous fund was more difficult because it happened just after the collapse of Lehman," says Chihtsung Lam, one of Axiom's three managing partners, alongside Yewhong Goh and Edmond Ng. "When fund two was raised fund one didn't really have a track record but this time around we raised the fund based on the current performance of fund one."

Quick close

The quick turnaround is impressive given the difficult fundraising environment, which has seen several firms spend longer in the market than originally envisaged. Arguably the closest counterpart to Axiom is Asia Alternatives, which has been in business for about the same amount of time and has raised similar-sized funds. Asia Alternatives launched its third fund early last year with a target of $1 billion and as of September had attracted commitments of $375 million.

However, drawing direct comparisons is complicated by the fact that the two firms have somewhat different approaches: Asia Alternatives operates a string of separate accounts for certain LPs while Axiom remains committed to co-mingled funds.

Opinion is divided on the virtues of separate accounts. They are an effective means of building up assets under management - the lifeblood of the fund-of-funds business model - but it is arguably difficult to avoid conflicts of interest when working with several large LPs that all want special treatment. Investors in a parallel co-mingled fund might also worry about losing out to separate account holders on allocations for leading GPs. Axiom prefers to keep it simple.

"Our focus has always been returns-oriented - we want to be seen as one of the best performing fund-of-funds for each vintage we are in," says Lam. "We have been fortunate not to have to spend too much time thinking about novel structures and we have always been very sensitive about our ability to raise funds in the future. To get a certain level of returns you need to limit the amount of capital under management."

Subscriptions to Axiom's first fund, raised in 2006, came to $600 million but the vehicle was capped at $440 million. Fund two could have reached $1.1 billion but was limited to $950 million, while the most recent vehicle attracted as much as $1.4 billion before being scaled back.

These constraints - and strong demand from investors in previous Axiom vehicles - meant there was little room for new participants in fund three and those that did get in had their allocations reduced. The LP base has broadened over time as US investors have become more familiar with Asia. The endowments and foundations that were among the early backers have since been joined by pension funds.

The LP roster is also increasingly international, with representation from Europe, Asia and the Middle East as well as from the US.

Consistent approach

Axiom III will follow a similar strategy to its predecessor, investing in a wide range of private equity funds throughout the region as well as making secondary purchases of fund interests and co-investing alongside certain GPs. It is estimated that 10-25% of the corpus will be put towards secondary transactions and up to 10% in co-investments.

"We have a co-mingled fund, from which we invest in primary funds, co-investments and secondaries," says Goh. "We are seeing more GPs come to us with co-investment opportunities. We are usually among the largest LPs in most of the funds we back and this means we are typically one of their first ports of call for co-investments and secondaries."

Axiom's preference to be a large - and therefore influential - investor in its portfolio funds is one of the principal reasons why its own vehicles are of limited size. Commitments to GPs can be as much as $100 million but typically fall within the $30-60 million range. Given that there are no more than 25 GP relationships in each fund, it is rare for Axiom to invest in a vehicle that is targeting in excess of $1 billion as this would dilute the firm's influence. Many portfolio funds are below $500 million.

As such, Axiom remains resolutely mid-market, even though the definition of this term has changed as fund managers - notably in Greater China, which accounts for half of the firm's portfolio - find they are able to raise larger vehicles.

"The definition of mid-market is changing but then market acceptance of PE is also changing," says Ng. "Ten years ago China had few entrepreneurs and they weren't familiar with private equity. The companies and the deals were smaller. As the market has grown the check sizes have also grown. That being said, any change in the sizes of funds we invest in will likely be gradual, if at all."

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• Topics
• Fundraising
• Fund-of-funds
• Greater China
• Southeast Asia
• South Asia
• Axiom Asia Private Capital
• Fundraising
• Fund-of-funds
• Asia