The soft middle

Three mega funds reached final closes in 2013: KKR Asian Fund II on $6 billion, RRJ Capital II on $3.5 billion and MBK Partners III on $2.7 billion. Remove vehicles with an element of government or strategic interest from consideration and there is nothing else in the $1 billion-plus space and just four representatives in the $500 million to $1 billion bracket. A further 13 funds raised $200-500 million.

Compare that to 2012, again removing government and strategic-backed vehicles: two funds reached final closes on $2 billion or more; five raised $1-2 billion; there were nine in the $500 million to $1 billion bracket; and 17 received $200-500 million. Throw in the 2007 numbers and the picture becomes even starker: three final closes of $2 billion or more; a further seven raised in excess of $1 billion; 14 got $500 million to $1 billion; and more than 40 finished on $200-500 million.

Admittedly, 2007 represented the peak for Asia fundraising with $63.4 billion committed to final and incremental closes, while the 2013 total was the lowest in four years. And 2012 included the back end of the boom in renminbi-denominated fundraising.

There are a string of supplementary reasons for the mid-market fallout: LPs that are either so big or so diligently reducing their GP relationships that they only write big checks to big managers; investors driven to brand names by risk aversion; and the painful truth that too many GPs raised too much capital too easily during the pre-global financial crisis period and many have now disappeared or downsized.

But does this make the fundraising shift a permanent or temporary phenomenon? It is too early to tell. While the flight to quality is clear, this doesn't mean there won't be fund-of-funds or institutions with a particular strategic remit looking for small to mid-size managers. There is also the issue of performance. Plenty of LPs see merit in the middle market, noting that returns often flatten out as GPs move through the vintages, raising incrementally larger funds.

The prospects for 2014 appear better than for 2013, with final closes announced since the start of the year already amount to $5.9 billion. Much of this comes from two $2 billion-plus funds, but there have been two final closes in the $500 million to $1 billion territory. Given what is sitting in the pipeline - based on anecdotal evidence and AVCJ's own information - the middle market looks set to be more active.

As a final point, annual Asia private equity fundraising crossed the $20 billion threshold as recently as 2004. Assuming global institutional investors' allocations to the region only increases as economies mature, it might be a little early to pick to pick outright winners in the GP community. The middle market still has potential stars to deliver.

 

 

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• Topics
• Buyout
• GPs
• Fundraising
• KKR
• buyout
• GPs
• Fundraising
• RRJ Capital