The shape of the future?

For even if the winding-down of Hopu Investment Management has not been definitively confirmed by the firm itself, there is a general consensus that the multi-billion-dollar vehicle helmed by Fang Fenglei is on its way to dissolution and will not be returning to market for a second fund. But the outcome sheds light on some of the idiosyncracies of private equity in the region, as well as some pointers for its potential future, that could be worth further reflection among the LPs and advisors gathering in Hong Kong this week.

For one thing, Hopu did PIPEs. A lot of PIPEs; very big PIPEs. And although these were undoubtedly within the firm's investment mandate, they did lead to some questions about whether Hopu should be classed as a private equity firm at all. One LP memorably protested to me that AVCJ had no business covering Hopu, and should ignore it. Yet the argument for a more flexible approach to PIPEs in Asia has long been rehearsed. Indian private equity firms especially would be practically unable to operate without the capability to do a significant number of public markets deals.

And Asian assets in general are frequently listed by the time they get to a scale where major private equity firms will take them seriously. Some LPs may find that this flexibility upsets their asset allocations models, or their purist sensibilities, but it is arguably part of the cost of doing business in the world's most dynamic region.

Given that, though, it's then up to GPs to demonstrate that they can outperform the public markets and deliver better value than a mutual or hedge fund. And this raises another important question about Asian private equity: are connections more important than capabilities? Are the networks and dealmaking skills of a Fang Fenglei more likely to secure value for investors than post-investment company-building skills? This is a more finely balanced argument, and one that may have to be taken case by case. But it's also worth remembering that Asia has fewer opportunities for control investments, and even the larger transactions often involve working alongside business owners rather than supplanting them. Access to those business owners and relationships with them may well matter more than business-improvement skills that mean little without the controlling positions to apply them.

Personal connections turn the discussion to personalities, and individuals. And here, Hopu demonstrates one unsettling fact for LPs. As one prominent local GP pointed out to me, "a partnership is not something that China has experienced as a historical form of business." The business partnership of equals was a model developed under Western capitalism, but, as the GP said, "China jumped directly from feudalism to socialism."

The big boss model applies too often in many Asian general partnerships, in India or North Asia as much as China, as anyone who has examined succession or alignment issues in Asian PE firms close up can tell you. In the end, the partnership structure at Hopu could not hold Fang and Richard Ong together. LPs should bear that cultural factor in mind when looking for team stability in the region.

Finally, Hopu also demonstrated the style drift into the advisory role seen in its work for Bridas. This does have precedent in the West: Kohlberg Kravis Roberts and Blackstone both appear to be going this route. But, as another prominent fundraising professional says, "the larger question is: What is PE going to wind up looking like in China? Is it what people understand in the US? Or is it this kind of merchant banking model?" Is the general partnership truly the best approach for this region? Or is something more like Taiwan's limited company approach to private equity and VC more suitable? LPs should reflect.

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• Topics
• Greater China
• People
• Funds
• Fundraising
• PIPEs
• Hopu Investment Management