Evolution of the spin-out

A PE professional in Asia chokes at the bit held by an investment committee in the US or Europe. His deals are held up to scrutiny against transactions emanating from Western markets and the individuals doing the scrutinizing are unfamiliar with the dynamics of Asia. His discoveries are debated in boardrooms far away and the final push comes too late or not at all.

Alternatively, the professional successfully executes and nurtures investments that are beyond the reach of his colleagues yet is obliged to give up the lion's share of the spoils to them. There comes a point when he asks if the effort and hassle is really worth it. Working for a global brand name brings kudos and being able to draw on a deep pool of resources is helpful, but only where that brand is recognized and the value-add is relevant. A Chinese entrepreneur might not care less about them.

Going it alone - one or more star dealmakers accompanied by a small band of willing juniors - means freedom and potentially higher compensation; there are fewer mouths to feed from management fees and carried interest. Some LPs actively encourage spin-outs, keen to ride with a team that is liberated, financially incentivized, and has something to prove. It is not unusual for teams to bring a ready-made pipeline of deals with them, which gives prospective backers a clearer sense of what they are backing.

At least nine of Asia's top 50 fundraises are the work of genuine spin-outs. From Affinity Equity Partners and MBK Partners in the early to mid-2000s to FountainVest Partners and Primavera Capital in the present decade, plenty of first-time managers but not first-time investors have raised funds of $1 billion or more. It is also hard to draw a line in the sand. After all, CDH Investments did spin-out - although it was at a regulator's insistence, while the parent, China International Capital Corporation, is not a global firm.

Spin-outs get traction as long as there are LPs willing to back them, and so, to some extent, success depends on market sentiment. At the same time, the localization mantra espoused by spin-outs from global firms has been absorbed by the global firms themselves; teams within Asia are more local than before and in a number of cases more empowered.

Successful investment professionals will no doubt continue to strike out on their own, combining the best practices - and LP contacts - accumulated at global firms with the knowledge and networks to operate effectively on the ground. But is there a phase two spin-out, a defining characteristic of such GPs that is removed from the autonomy-greed scale?

The increasing maturity and complexity of the industry in Asia would suggest not, but there are trends worth noting. One is strategic.

There are employees of global firms who have no grievances about compensation, colleagues or investment committees, yet still feel the urge to depart. The reason is that as fund sizes and equity checks become larger, the number of feasible investment targets in certain markets declines. A private equity executive might become bored or frustrated; he is seeing plenty of deals, but none of them fit his firm's remit.

It isn't necessarily a purely geographic phenomenon. As strategies and specializations proliferate in Asia, there are more ways to eke out value in an industry that must think about more than just multiples arbitrage.

The urge to go independent is there, and provided the departing executive isn't setting up in direct competition to his former employer the transition process doesn't have to be painful. Indeed, the new GP may even walk away with an LP commitment in his pocket, or at least an informal agreement to cooperate and share deals above a certain size.

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• Topics
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• Asia
• Fundraising
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