Asia co-investment: The waiting game

The $6.4 billion acquisition of South Korean retailer Homeplus by an MBK Partners-led consortium earlier this year inevitably drew attention to the prospects for co-investment in Asia private equity. Canada Pension Plan Investment Board (CPPIB) alone put in $534 million, while further contributions came from Temasek Holdings and the Public Sector Pension Investment Board.

However, co-investment is neither new to Asia nor as significant as the Homeplus deal might suggest. Yes, an increasing number of LPs want to see these kinds of opportunities. Yes, that's in a large part because the zero fees condition reduces their cost burden. And yes, Canadian pension funds are among the most active (Ontario Teachers' Pension Plan, in addition to the two mentioned above).

At the same time, Homeplus is the exception to the rule. It is the largest private equity deal ever announced in Asia, so the co-investment check is particularly large. It is difficult but no impossible for the Canadian pension funds to put substantial amounts of co-investment capital to work in the region. In one case, the minimum check size has been lowered from $50 million (the global threshold) to $35 million in order to access more deal flow.

Notions of these large institutional players switching to a direct model and challenging GPs for investments are also overblown - at least for now , and in an Asian context. Infrastructure and relationship investing (usually minority pre-IPO deals) aside, the Canadians and others prefer to partner with private equity managers. Often these managers are also portfolio GPs.

A recent study of "the next generation private equity investor" by Josh Lerner, a professor at Harvard Business School, Hugh MacArthur, head of Bain & Company's global PE practice, and Marcus Simpson, head of global private equity at Australia's QIC, is therefore interesting in the picture it paints of a potential future for Asian private equity. To the extent there is "a new kid in town providing private capital for companies," those towns are more likely to be Chicago or London than Beijing or Hong Kong.

The study identifies a small group of institutional investors - with an enormous amount of capital at its disposal - concentrated in the Middle East, Asia, Australia and Europe that co-investing and co-underwriting deals with GPs, setting up separately managed accounts, or simply going solo into deals. It cites a 2014 estimate by Bain & Company that solo and co-investments by institutional investors comprised 20% of buyout deals worth more than $1 billion between 2009 and 2013.

Taking the model to its potential conclusion, a company founder could be left with a choice between a traditional private equity buyer and one of these next generation investors. Going with the latter has its merits: a longer time horizon for the investment; lower fees monitoring and other fees; the ability to meet a variety of needs from different pools of capital; and the potential to deliver synergies through introductions to existing portfolio companies or strategic partners.

Most sizeable private equity firms could meet the last two of these requirements, so it is worth considering how traditional PE investment structures may evolve in order to offer efficient and relevant capital solutions. Certainly, the GP-LP relationship is already evolving, partly in recognition of the demand for separately managed accounts and co-investment.

For these next generation investors, the issue is having the internal resources capable of acting and executing on deals. As the study notes, such is the "blind enthusiasm" with which some LPs are embracing the changing opportunity set, there will be failed investments. This may result in a clearer demarcation between the next generation and the rest. Indeed, GPs are already distributing co-investment opportunities based on an LP's ability to respond quickly and add particular value.

Wherever this shake-out ends up, for a variety of reasons Asia is likely to be a follower rather than a leader. It is tempting to say change will happen "soon but not yet." However, perhaps "soon but not even in the medium term" is more accurate.

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• Topics
• LPs
• GPs
• Investments
• Buyouts
• Asia
• buyout
• Co-investment
• LPs
• GPs