Don't lose your head in a hot market

Industry participants in Europe and the US point to a couple of trends on a global level.

First, LPs are wary of committing capital to the mega-funds - not so much a retreat as a more selective approach. Mid-size funds around the $1 billion mark, meanwhile, are in short supply but strong demand, especially if the GPs have a track record pursuing a certain investment angle.

Second, emerging markets are solid gold. According to one placement agent, US investors spooked by Europe's economic problems are reducing their exposure to the region by around 30% year-on-year. On the flip side, their emerging markets allocations - led by Asia - are up by about 20%.

Alongside increasing capital commitments from the traditional US and European LP bases, newer investors like sovereign wealth funds from Asia and the Middle East are becoming ever more active in the region. It all points to a lot of cash entering the market and struggling to find a home with the leading GPs.

The fallout will take years to fully emerge and, as Hamilton Lane CEO Mario Giannini argues in this week's Q&A (see page 11), it won't be pretty. "While a lot of money will be made in private equity in Asia, more money will be lost here than in any other area," he says.

China is inevitably the focal point. According to AVCJ Research, the country's share of regional fundraising has grown year-on-year: 21% in 2007, 29% in 2008, 34% in 2009, 49% in 2010, and 69% in 2011. This trend coincides with a marked increase in renminbi fundraising in particular. In 2007, $4 went into US dollar-denominated funds for every $1 to Chinese currency vehicles. The situation has since pivoted and last year renminbi funds raised twice as much as their US dollar counterparts.

The problem is uncertainty. It is difficult to assess how much of this capital has found its way to GPs who are looking beyond pre-IPO deals. Even when fund managers come to the table with a sustainable investment strategy, there is no guarantee they will have sufficient experience to know how much is too much. With such a large amount of capital entering the market, the danger is that GPs will raise more than they are realistically able to deploy, based on their own capabilities and the capacity of the market at its current stage of development.

The situation bodes well for big pan-Asian funds currently in the pipeline. They are a natural home for traditional LPs who want exposure to the region but either lack an on-the-ground presence or fail to get into the leading single-country funds.

Investors looking for the next big thing, however, should tread carefully. In a competitive market, it takes a disciplined LP to avoid an ill-disciplined GP.

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• Topics
• Fundraising
• Greater China
• China
• Fundraising
• Asia
• LPs