A new constituency

The growing importance of these investors, who are most heavily concentrated in Asia and the Middle East, to large cap vehicles has been apparent for some time. For example, in 2011, EQT closed its sixth European buyout fund at EUR4.75 billion ($6.5 billion), with more than half the capital coming from sovereign players. Asian LPs accounted for 23% of commitments - up from 5% the previous time around - as non-European investors committed the bulk of the corpus, a first for an EQT fund.

Since then we have seen large private equity firms, fund-of-funds and placement agents strategically adding to their investor relations power in the region. To be fair, sovereign funds are not their only target, but one of a breed of investors still in the process of constructing alternatives programs. Korean pension funds are just as interesting as Malaysia's Khazanah Nasional.

Another reminder of the significance of these emerging LPs came last week as Affinity Equity Partners reached a final close on its fourth pan-Asian fund at $3.8 billion.

In the GP's previous fund, a 2007 vintage vehicle, North American investors accounted for 50% of the corpus, with Europe on 36% and Asia and the Middle East trailing on 10% and 5%, respectively. Fast forward six years and Asia and the Middle East have between them emerged as the largest source of capital - the former accounts for 26% of Affinity's latest fund, while the latter's share has risen to 13%. The North American share has dropped to 38% and Europe is now on 23%.

The Volcker Rule and the Basel III regulations, which restrict financial institutions' exposure to private equity and hedge funds as well as imposing higher capital adequacy requirements, have certainly pared back North American and European firepower. Asian and Middle East investors appear to be filling the void - and although they are fewer in number they are writing bigger checks. Affinity's fourth fund is $1.1 billion larger than its third, but the number of LPs is largely unchanged.

Winning mandates from these investors requires a particular strategy. A CIO in the process of building an alternatives program is often under enormous pressure to put capital to work, which inevitably draws them to GPs capable of scaling up in terms of fund size and infrastructure. A $50 million allocation to a mid-market manager would only be considered if they came with a strong co-investment pipeline or if the GP picks the right moment - for example, the CIO might want to water down exposure to global buyout funds by backing regional and country managers.

Persistence, industry participants say, is paramount. It might take 18 months of meetings and site visits before a sovereign wealth fund agrees to commit to a fund, which means much of the initial groundwork must be done before the official fundraising process begins.

In addition to talking prospective LPs through their portfolios and putting forward co-investment opportunities, fund managers are expected to share knowledge. While longstanding investors like GIC Private don't need to be told how to do their jobs, groups that are relatively new to the asset class might appreciate assistance. This could involve offering views on certain geographies or strategies, or even the provision of training and technology.

The lengths a GP is willing to go in order to generate goodwill depends on how much it needs the money. While Affinity's fund came in oversubscribed after only a year or so in the market, Asia's depressed fundraising figures - commitments reached $41.7 billion in 2013, the lowest annual total in four years - indicate that many others are finding it tough.

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• Topics
• Fundraising
• GPs
• LPs
• EQT Partners
• Affinity Equity Partners
• GPs
• LPs