LPs on Asia: The risk factor

While an office in Chicago, New York or Sacramento doesn't offer a great vantage point of Asia, neither does it favor other geographies - apart from the US and that is where the bulk of US dollar-denominated US pension fund resources will inevitably and understandably go.

For all the bullish voices we hear on Asian growth prospects, the North American LPs who participated in the AVCJ Forum in November were guarded in their optimism. Some said they couldn't justify raising their private equity allocation to the region beyond 10% until risk factors ease and local managers build up stable teams and more substantive track records.

The general consensus was that geographies with more developed capital markets - where control transactions are available - have delivered the best returns.

Does this indicate a swing in investor sentiment as the flood of capital into Asia in recent years prices out the emerging markets premium? The winter 2012 edition of Coller Capital's global private equity barometer appears to say as much.

The LPs who participated in the survey felt more or less the same about US and European buyouts as they did four years ago (the US has crept up a few points while Europe has retreated by a similar amount). Sentiment towards Asia Pacific GPs, however, has dropped off considerably.

Subsequent questions on risk and reward suggest why. Two thirds of LPs said private equity firms had underestimated the investment risks in India; more than half said the same was true of China. Three out four LPs expect the risk-reward equation for China is worsening; the picture for India was also negative but not to the same degree, perhaps because LPs think the situation can't get any worse than it already is.

Given these views, it is puzzling that in the same survey 20% of respondents said they were focusing more on nascent private equity markets such as Indonesia and Vietnam than more established destinations like Australasia, Japan, South Korea, India and China. These countries present similar regulatory and political risks to China and India; indeed, in some cases they are far worse. So do the potential rewards really warrant participation?

Hiro Mizuno, a partner at Coller, observed that the 20% figure is a strong statement, but nothing more. The reality is that, of the North American institutions that account for the bulk of global private equity capital, only a tiny percentage would be bold enough to establish direct relations with Indonesian and Vietnamese GPs right now.

They may get some exposure through pan-regional funds and fund-of-funds, but even the latter, that have teams on the ground assessing opportunities, are relatively conservative.

One global fund-of-funds most recent vehicle is deployed as follows: just over 25% of capital committed so far is with funds run by pan-regional players, predominantly the global buyout firms; another 25% is invested in established Australian GPs; another 25% is with China-focused vehicles; there is only one Southeast Asia fund, and it is among the smallest holdings.

There is a difference between focusing more attention on nascent markets compared to established markets - maybe an LP previously didn't focus on Indonesia at all - and actually putting your money where your mouth is.

It will take a number of years, during which Southeast Asian GPs must build up track records and perhaps North American LPs establish offices in Asia, before the regions more emerging markets account for a meaningful slice of the pie. And there are no guarantees that early promise can be sustained over multiple cycles.

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• Topics
• LPs
• GPs
• South Asia
• Southeast Asia
• Greater China
• North America
• LPs
• Asia
• China
• India
• Southeast Asia
• Vietnam
• Indonesia