Tipping points: Asian LPs target the US

As one of the world's three largest public pension funds alongside the government pension vehicles of Japan and Norway - and with a far higher private equity allocation than either of those two counterparts - Korea's National Pension Service (NPS) is increasingly a fixture on the call sheet of any sizeable GP.

NPS had KRW512 trillion ($442 billion) under management at the end of 2015 and this figure could be closing in on KRW900 trillion by the end of the decade. Of the 10.7% alternatives allocation, KRW32.3 trillion is invested globally, including KRW9.1 trillion in PE. Its GP roster reads like an industry who's who: from Apollo Global to BC Partners and The Carlyle Group, and from EQT Partners to KKR and Silver Lake.

Most of these firms have the capacity to fundraise globally and many operate multiple strategies; NPS is regarded as a strategically important LP for the long-term and has resources - in the region or even within Korea - to engage in proactive relationship-building.

But what of GPs further down the size spectrum? North America remains the heart of the private markets universe, responsible for just over half the number of funds reaching a final close globally in 2015 and about 60% of aggregate private capital raised, according to Preqin. Coller Capital's global private equity barometer confirms the appeal of North America's middle market within this matrix. More than 41% of LPs polled plan to increase allocations to mid-market and small buyouts over the next 2-3 years, compared to 10% for large buyouts and 26% for growth capital.

Asian LPs are no different in their appreciation of US middle-market buyouts, but the question for many is how to get exposure to managers. At the recent AVCJ Japan Forum there was a familiar refrain: we don't have fast enough internal processes to make commitments to these GPs within the given timeframes - and, even if we did, most of these funds are fully subscribed before we even know they are in the market.

The situation is not unlike US venture capital, where many managers repeatedly raise capital from the same LPs. As a relative unknown, an Asian investor may have little hope of displacing longstanding backers from the endowment and foundation community, even if a GP grasped the need to diversify its LP base. Several Australian super funds have wryly observed that the door to US VC only opened - and then relatively briefly - in the aftermath of the global financial crisis when some LPs suspended new commitments while grappling with the denominator effect.

One solution, as the Australians discovered, is to put bodies on the ground. QIC, for example, has an office in San Francisco, while MLC Private Equity dispatched a portfolio manager to Silicon Valley to build relationships with GPs. Indeed, NPS now has three offices outside of Korea, including one in New York. Other large-scale, government-controlled institutional investors - Temasek Holdings, GIC Private, Korea Investment Corporation, and China Investment Corporation - have similarly international footprints.

In some cases, this reflects investment programs that are increasingly direct as well as increasingly international. Not every LP has the luxury of that scale or remit, but some nurture ambitions. Chinese wealth manager Noah Holdings, for example, started its offshore operation in 2012 and hopes to serve as the conduit for domestic capital entering international PE funds.

Piau-Voon Wang, formerly of Adams Street Partners, was recruited to help build this side of the business. He told AVCJ earlier this year that Noah already has access to global brand name firms that recognize the merits of a China distribution strategy, but the only way to unearth small and mid-market funds is by having a presence in those markets - in short, knowing in advance when a manager is coming to market, rather than reading about an oversubscribed fundraise. Local partnerships or direct recruitment are part of Noah's expansion strategy.

This will not be the answer for all Asian LPs, notably those without the asset base or internal resources to justify such investment. They are likely to rely on the services of advisors and managers offering a combination of primary fund-of-funds, secondaries and co-investment exposure. In the long run, though, US private equity firms might become as drawn to Asia as Asian LPs are to them. The more capital that comes out of the region, the more relevant it becomes as a fundraising destination.

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• Topics
• North America
• Fundraising
• LPs
• USA
• Asia