Asian fund-of-funds: Local linchpins

Do Asian fund-of-funds have the scale and selling points to survive in an increasingly complex and competitive market? This question was posed by AVCJ in a story from 2012. Axiom Asia’s recent fundraise would suggest they do – although Axiom is one of only two that can claim significant scale.

Over the past eight years, there have been considerable shifts within the fund-of-funds industry globally. This is reflected in a fair amount of M&A but also in a strategic evolution. Solutions are more customized, depending on how much a client is willing to commit, with co-investment and secondaries coming to the fore while primaries have in some cases retreated. Clients specify their risk-return appetite, they might pick some geographies or strategies, and capital flows into the relevant buckets. On balance, they are probably paying less in fees as well.

The selling point of Asia-based fund-of-funds – as distinct from global players that deploy worldwide vehicles or have Asia-specific products – was more about access. They would identify best-in-class managers that overseas institutional investors had never heard of, didn’t have the bandwidth to properly due diligence, or couldn’t even consider backing due to minimum check size constraints. Gradually, co-investment and secondaries became a bigger part of it as well.

In 2012, the market was consolidating. It was estimated that the number of fund-of-funds in Asia had fallen from 60-70 in 2010 to 40-50 a year later – and only about 20 of them targeted global institutional investors. Calculations were always complicated by family offices that harbored ambitions of raising third-party capital. Even among the handful of higher-profile names, there has been change. Emerald Hill, Squadron Capital, Eagle Asia Partners and Jade Invest either no longer exist, have been absorbed by larger players, or are pursuing different strategies. 

Axiom and Asia Alternatives have become bigger, but otherwise, they are largely the same. Predictions that they would team up with larger sponsors to tackle that increasingly complex and competitive market haven’t come to pass. Moreover, there is a dash of new – or recycled – blood in the US dollar-denominated fund-of-funds space, with Unicorn Capital Partners and Roc Partners, spinouts from Emerald Hill and Macquarie, respectively. Both pursue very specific strategies.

Axiom’s most recent fund closed at $1.8 billion, up from $1.5 billion in the previous vintage and $1 billion in the vintage before that. Asia Alternatives, which is said to be in the process of raising its latest vehicle, raised $1.8 billion in each of the last two vintages and $1.5 billion in the one before that, spread across co-mingled fund-of-funds and separately managed accounts (SMAs). Clearly, they still have a role to play for many LPs and, though it has changed over time, it’s remarkable how little.

When Asia Alternatives started, the founders were warned that LPs would graduate and move beyond them. After each of the last two fundraises, AVCJ asked the team whether they were finally seeing this happen. The response has run along the lines of: Some LPs are handling more investments in Asia directly, and a minority of them are opening local offices in some cases, but we are surprised by how few. Perhaps it is worth bearing in mind that relatively few non-Asian institutions have direct exposure to Asian managers and most of those are relying on pan-regional players.

Even among the more Asia-philic, there is still demand. On why he continues to use these fund-of-funds, one investment professional with a North American pension plan that has a reasonable amount of China exposure, highlighted his small team, the value of having someone on the ground who can contribute to due diligence, and the information that comes through the fund-of-funds manager network. Another LP, with a larger internal team, said he wanted more exposure to emerging managers who are too early in their development to be direct relationships.

For now, at least, the selling points remain.

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• Topics
• Fund-of-funds
• Fundraising
• LPs
• Asia
• Axiom Asia Private Capital
• Asia Alternatives Management
• ROC Partners