Private equity and Asia’s new rich

Pension funds and endowments from the US and Europe remain the key players and their role is so significant it will take years for the balance to change, despite the recent arrival of ambiitous sovereign wealth funds from Asia and the Middle East. High net worth individuals (HNWIs) from the West are represented through family offices, but what of Asia's wealthy?

They are without doubt growing in number. According to the most recent installment of the Bank of America Merrill Lynch-Capgemini World Wealth Report, the population of HNWIs - defined as people with over $1 million in investable assets - in Asia-Pacific is now the second-largest in the world behind North America. Total assets controlled by these HNWIs grew 12.1% year-on-year in 2010 to $10.8 trillion.

Some family offices in the region are already active in private equity, but the spate of smaller-scale local fundraising seen in China and India in the last few years suggests that plenty of other wealthy people are willing to go it alone. Agents and other intermediaries are often responsible for reeling in such capital commitments.

Dealing with individual investors directly can present three fundamental problems. First, do these individuals fully understand what they are getting into? In China, where speedy returns on pre-IPO deals have lured in many immature participants, reports abound of investors being sold a product based on ambitious projections delivered by commission-hungry agents. As we discuss on page 10, the government has made tentative first steps to crack down on illicit fundraising, but there is a long road ahead.

Second, does the GP have the resources to keep each of its individual investors up to speed on the fund's activities? Again, the informal nature of fundraising in China is a potential vulnerability. There may be five investors none of whom understands a capital call or 5,000 investors - often participating through feeder funds - who have minimal contact with the GP.

Third, do the individual investors grasp the GP-LP relationship? This might apply equaly to the large number small participants in a China fund as to a few heavyweight backers of an Indonesian vehicle. The danger is that investors might become disillusioned with the venture and refuse to honor capital commitments or attempt to muscle in on the investment process. If tensions do emerge, will the investor re-commit for subsequent vehicles?

Criticisms can be made of most classes of LP. Is the fund-of-funds too pushy? Does the sovereign wealth fund have too much influence? Is the pension fund tied up in too much red tape? As a result, once a GP has the luxury of picking its investors, it will opt for a healthy mixture. In this context, a HNWI can benefit from a fund as well as offering value to it. A well connected businessperson in a particular market would be able to offer valuable due diligence and perhaps even support portfolio companies. If the fund operates across several jurisdictions, this businessperson can gain exposure to new areas.

Wealthy individuals participating in private equity vehicles in an unregulated mass clearly contributes little to the industry beyond embellishing fundraising numbers. And the more challenging fundraising environment seen of late in India and China might suggest that those who got involved in expectation of speedy and stellar returns have now retreated to the sidelines.

As for tapping the reserves of Asia's super rich, success can only be judged on a case-by-case basis. A GP needs to persuade these people that he can make enough money investing in their own backyards that it makes sense for them to stump up the fees rather than commit capital on their own on a proprietary basis. If the fund manager secures commitments, he must then manage expectations and head off any attempts to interfere. It is a tough balance to strike.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Fundraising
• LPs
• Greater China
• Southeast Asia
• Fundraising
• LPs
• HNWIs
• Asia
• China
• Indonesia
• Industry best practice