An issue of GP sustainability

Our concerns are shared by a number of influential investors that have publicly aired their frustrations about being unable to identify the right ingredients for proper development of the Asian private equity industry. It is difficult to put a number on these frustrations but it is affecting their appetite and outlook for PE in the region.

Indeed, coupled with weak economic performance - the fundamental grown drivers of many deals - in numerous markets, some investors are threatening to decrease their allocations to Asian private equity. In recent discussions, some LPs cited poor returns (or even the lack of returns) for their proposed asset reallocation, while others wanted to bet more on a potential rebound in Europe and the US.

Industry surveys, such as Coller Capital's Global Private Equity Barometer, have echoed this with more than 80% of LP respondents in the most recent survey saying that they are most bullish on North American buyouts, followed by European buyouts and then Asia Pacific buyouts. They are even more bearish on Asian venture, where some investors are expecting returns below 5%. Only European venture and fund-of-funds and generalist funds are expected to perform worse.

While there is, of course, some sensationalizing, there is a lot of truth to the matter. Although many Asian private equity partnerships have thrived over a number of economic cycles, few have successfully tackled succession issues, for example.

This is particularly the case when a "superstar" founder is involved. Not only are junior and mid-level team members unlikely to stick around if don't have some kind of stake in the GP's financial success - the vast majority of the carried interest goes to the superstar - but there is also the fact that LPs identify that firm with that particular personality.

Different firms have tackled the issue with different strategies. Some partnerships have "retired" existing partners to make room for the current crop of rainmakers, while others have departed for larger competitors (and, in the process, make their almost partners the new owners' problem). There is probably no one strategy fixes all and each individual firm would have to find their own unique solution - definitely a subject worth further discussion.

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