Asian private equity – size does matter?

So it is sobering and salutary sometimes to be brought up against the realities of just how small the Asia Pacific private equity industry still is, and how far it still has to go.

As one indicator, the State Street Private Equity Index, as at end September 2009, tracked 1,343 private equity firms in the US, versus 180 in Europe and 127 in the rest of the world, including Asia. The Index covered almost $1.2 trillion in private equity commitments in the US, with Europe accounting for $273.5 billion and the rest of the world just under $74 billion.

Note that this edition of the Index came out just after the nadir of the GFC. And at the peak of the industry's recent boom, $685 billion was invested in 2006 and $659 in 2007, according to the Private Equity Council. This compares to AVCJ Research's figures for $93.8 billion invested in Asia Pacific in 2007, the region's best ever year, and just over $43.2 billion in 2009. And the AVCJ Research figures are based on some fairly generous assumptions, counting many PIPE transactions by large institutions and SWF deals.

You could take the view, as some do, that the still relatively small size of the industry, even after at least five years as one of the world's most attractive private equity destinations, leaves everything to play for. As some argue in this issue, the situation means that valuations are relatively favorable and competitive pressures between GPs light, with low-hanging fruit still awaiting the fortunate investor.

However, as others have already pointed out, Asian deals are growing increasingly intermediated and sophisticated. Private equity bidders may not encounter their peers often, except in investment bank-refereed buyouts, but the region's buoyant public markets exert all the pricing pressure needed to create problems for GPs. And the community/cluster effect of a bigger, more influential industry might help a lot more to advance joint issues of concern, such as the recent tax pressures in Australia and longer-standing taxation concerns in Japan.

As for LP interest in and commitment to the region, the latest Coller Capital Global Private Equity Barometer reports favorably on investor intentions to increase their allocations to Asia Pacific – through a doubling of those with commitment levels to Asia of the princely figure of just 10%. The Barometer describes this as a "major" increase.

Add this to the relatively small size of alternatives generally in the institutional investment scheme of things, and it is no surprise that GPs complain that true pricing power is in the hands of the public markets, or that anything other than a PIPE deal in India is highly problematic. And compare even the aggregate capital volume in Asia's public markets to the size of the overall economies, and it brings home the fact that private equity is still a very niche discipline, and Asia Pacific is a small side pocket of that segment.

A decade that began with rock-star VCs and continued with GP Masters of the Universe has left direct investment still with a very high view of its own stature and importance. And often the beneficiaries of that limelight have only complained when its negative aspects ensued in the form of backlashes and regulatory crackdowns. Post GFC, a little modesty and realism would not hurt, particularly when dealing with target companies, LPs, and regulators alike.

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• Coller Capital