Asia PE: Shifting sands

Polarization has been a characteristic of Asian private equity for the best part of a decade. It is usually most starkly expressed in fundraising statistics, and 2018 was arguably the most polarized year on record.

Approximately $100 billion was raised, excluding renminbi-denominated vehicles, according to AVCJ Research. The top 10 funds – based on partial and final closes – were responsible for 48% of the total. This is roughly same the previous year, but they were sharing a much smaller pie of $62 billion. Eight of the 10 from 2018 are pan-Asian. Among the seven final closes, the average increase in fund size on the last vintage ranged from 33% to 152%.

Elite managers were not only raising larger sums but doing so in concentrated time periods. Bain & Company notes in its latest Asia Pacific private equity report that established managers raising more than $1 billion took an average of seven months to close. Sub-$1 billion funds and first-time funds took 16 months and 27 months, respectively.

It is a familiar picture. Various studies have found that smaller funds outperform their larger peers globally, but the standard deviation between top and bottom quartile is also wider. And it is generally accepted that the standard deviation in Asia is more extreme than in North America and Europe. Driven by unfamiliarity, check size, unhappy previous experiences, or a lack of confidence in minority growth strategies, LPs are playing it safe in Asia and going with big brand names.

But the Bain report adds another twist to this polarization debate, claiming that the established phenomenon in fundraising has carried over into exits. “Large, experienced PE-owned companies racked up the vast majority of successful exits and dominated total exit value, while smaller companies had increasing difficulty finding buyers,” the report says. Exits from sub-$100 million companies were down 58% year-on-year, while the $500 million-plus category was up 26%.

Should the macroeconomic environment deteriorate to the point where it challenges private equity firms’ ability to create value, “vulnerable and less differentiated” GPs will struggle more than most. The reference point is the global financial crisis: Out of the about 500 Asia-Pacific PE and VC firms that were active in 2007, only 290, or about 60%, went on to raise another fund.

 

It’s logical to assume that an industry shake-out would consume much of the long tail of Asia’s GP community – the non-institutional and the sub-scale. But to what extent are the elite set in stone?

A case could be made that some managers have become too big to fail. Their track records are so long and their product ranges so diverse that a weak vintage in one area wouldn’t be a disaster. They have institutional practices down to a tee, so that reporting and compliance are virtually plug-and-play. And they have ingrained, often multi-faceted relationships with LPs that are difficult to unpick.

However, only a handful of global firms meet these criteria. Even the largest Asia-only GPs are comparatively modest by assets and only scratching the surface when it comes to product diversification. Several are still primarily associated with certain geographies, which makes it difficult to envisage them dealing with complexity across multiple asset classes as well as multiple markets.

At the country level, managers are several steps further away from institutionalization. In most cases, there is simply not enough history on which to base any reliable predictions of the future. Any number of factors could play havoc with the fortunes of an individual GP – from Australian institutional investors scaling back their support of local private equity firms to the exits overhang in India, which reined in an industry that had allowed hype to get the better of reality.

For many economies in the region, the development narrative is still playing out. GPs see the plates shifting beneath their feet – strategies change, teams spin out, and realizations seldom come easily. No manager is infallible.

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• Topics
• Fundraising
• Exits
• GPs
• Performance
• Asia