Patient capital?

Having seen their listed assets devastated by the great selloff of 2008, and private capital holdings upset by markdowns and the denominator effect, many switched from greed to fear as the debacle unfolded. However, remarks by many industry observers and intermediaries suggest that in many cases institutional investors have not tightened their investment disciplines and resolved to be more cautious and measured in future, but are simply abandoning the big buyout trend for a new fashion: China.

Of course, this could be simply a measure of the feeding frenzy around the few proven – or at least most widely credited – firms currently in the market. LPs and advisors continue to complain about the dearth of truly credible managers in China, with indications that only about 1% of the new China funds being launched are actually worth following, especially on the domestic side. In conditions like that, the small minority of credible firms will naturally experience a swell of interest.

But, as recently reported in AVCJ’s coverage of the latest EMPEA/Coller Capital Emerging Markets Private Equity Survey, LPs’ expectations of overall private equity returns from Asia Pacific are also at fever pitch. And the 77% of the poll expecting the asset class to deliver16%+ annual net returns over the next three to five years apparently based their assumptions on nothing more than a comparison with returns from the heyday of the Western buyout era. Expectations like that, pitched against the kind of actual fund quality level suggested above, are a recipe for deep disappointments, as well as some seriously rash decisions.

Furthermore, some recent developments underline the missteps that even the most experienced firms can make in a new and highly unpredictable environment. Kleiner Perkins, somewhat unfairly, has been singled out by online commentators lately for its track record in China. Actis and Taizinai, Bain and GOME: the list could well continue down the alphabet as problem deals unfold. And how many of those might have been conceived under pressure from LPs to get money into the ground and give them China deals?

No single firm is particularly at fault in the face of a general industry trend. LPs as a whole still appear, on balance, to exercise too little stewardship over their investment decisions, if the results and the comments of industry players are anything to go by. The honorable exceptions only prove the rule. And too many GPs appear to have left behind the disciplines and hard-headed analysis they ostensibly apply to investee companies when it comes to their own operations, and especially their expansion in Asia. As one source says of China investing, “Some of the major brand names are obviously very loose with their money.” And if that is the behavior of the industry’s leading brands, what hope for the rest?

Perhaps it really is time for the industry to start living up to its mantra of long-term, patient capital. There is precious little patience in view. And there is also no sign that the need for painstaking, scrupulous due diligence – on deals, and on GPs – has reduced in China and Asia as a whole. Recent developments suggest the complete opposite. Of course the Asia Pacific market will continue to be a highly attractive place to invest, with many opportunity drivers to create a generous pool of targets, but in terms of actual private equity returns, LPs and GPs alike are right now likely to find impatience punished. 

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• Topics
• LPs
• Performance
• Investments
• Actis Capital
• Bain Capital Asia