Playing the Asia expectations game

Whether they are longstanding Cathay Pacific customers who rely on Hong Kong as a sometime home and launching pad or less seasoned travelers entering the region supported by an adviser or via a fund-of-funds, LPs want more Asia exposure. It is part of a wider trend whereby investors are gravitating towards emerging markets, looking to high GDP growth as a proxy for strong returns.

This is confirmed in the findings of the Emerging Markets Private Equity Association's (EMPEA) annual global LP survey, which was published last week. Three quarters of LPs expect their commitments to emerging markets to increase over the next two years - compared to 24% in the 2009 survey - while barely one quarter plan on expanding investments in developed markets.

More than half anticipate that emerging markets will account for at least 16% of their total private equity allocations at the end of the period.

Latin America ex-Brazil is seen as the most attractive market for deal-making, moving up from fourth to push Brazil, last year's leader, into second place. China and other emerging Asia were third and fourth, down from joint second in 2011. There is also increased appetite for less penetrated markets, with Southeast Asia most likely to see an expansion in investment activity.

Those looking to boost commitments to emerging markets were clear as to why: a significant portion cited a desire for exposure to high-growth economies and an improvement in the risk-return profile of emerging markets versus developed markets. Indeed, nearly three quarters of respondents expect emerging markets to deliver net returns of at least 16% in the next 3-5 years. China and Southeast Asia are thought most likely to meet these expectations out of the 2011 vintage funds.

This begs the question as to whether there are sufficient fund managers in these regions - that are deemed likely to deliver the desired returns - to meet LP demand.

China GPs have shown themselves adept at raising ever larger vehicles, but few can offer track records that will stand up to the scrutiny. It was only by their third or fourth funds that industry leaders like Hony Capital and CDH Investments began to attract commitments from large-scale North American pension funds. Before that, the LP base was largely fund-of-funds and the more proactive endowments and sovereign funds.

Indonesia, Southeast Asia's leading market, is even younger in private equity terms. If an LP fails to get into a Northstar Pacific Partners or Saratoga Capital vehicle, would it really be willing to back one of the less experienced managers currently raising capital for the country? These are the perils of investing in markets from which you are far removed and unfamiliar.

For LPs that remain uncertain, there is always the "safe option" - Asia funds raised by large global or regional players. These private equity firms have been aggressively recruiting staff in key markets or even launching smaller, country-specific funds in order to assuage concerns that they can't match local peers in terms of deal access.

It remains to be seen if this argument convinces LPs, but if they are as keen to gain exposure to Asia as the EMPEA survey suggests, maybe they won't ask too many questions.

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• Topics
• LPs
• Fundraising
• Greater China
• Southeast Asia
• Performance
• Fundraising
• LPs
• China
• Southeast Asia
• Indonesia