Finding a niche

A conversation with LPs investing in Asian funds suggests that large buyout funds focused on Asia will not be raised in the very near future. A smaller fund, with a team focused on a market it knows well and that is willing to grow small businesses (of which there are many in Asia), is what most LPs now say they are looking for.

There just aren’t enough big deals in the market to accommodate mega-funds, LPs say. That, coupled with the fact that a number of firms in the region have raised large buyout funds has meant that there far too many people chasing the same few deals, pushing entry multiples much higher than they should be. The drying up of credit has not helped matters either. Talk of a few large take-privates lingered for a while last year and then all but dissipated.

“Investors generally are very much growth driven and growth is definitely oriented towards China. Their apprehensions are more for larger funds,” observed Mounir Guen, chief executive officer of London-based placement agent MVision.

As many institutional investors are faced with liquidity issues, they have a smaller amount to commit and small funds are received better. Smaller private equity funds with a focus on growth capital opportunities are a more viable proposition for most, LPs say.

It is a view clearly reflected in the fundraising numbers for 2008 as well. Last year, 85 funds focused specifically on India or China raised $22 billion, according to data from the Emerging Markets Private Equity Association. Of this number, 48 China-focused funds raised about $14.5 billion, only marginally below the $16.4 billion raised by Asian pan-regional funds. Furthermore, almost all pan-regional funds have a mandate to invest in China as well.

Another market with a similar growth profile is India, but one fund of funds manager says that some investors prefer China over India because of the latter’s poor infrastructure, the greater correlation between private equity and the public market in India, the fact that most Indian GPs are corporate- or bank-affiliated and finally, because there is more growth in China.

From a regional perspective, China is a favourite among most LPs. Besides China, investors want to be India, followed by other growth markets in Southeast Asia, particularly Vietnam and Indonesia.

Another fund of funds manager estimates that there are about 50 Asia-focused funds raising capital at the moment, and most of them are country-specific funds focused on either China or India.

That is not to suggest that no capital is being raised for other markets. Australia, despite not being a “growth” market, is still popular among investors and they are also backing funds in other markets such as Japan and Korea, albeit more selectively.

 LPs' overall focus, though, is clearly on smaller funds, smaller geographic mandates and smaller deals. 

LP appetite for Asia-focused funds will be further addressed in the September issue of PEI Asia magazine.