Fragile foundations

In a world of doubting LPs, it seems Asia’s limited LP base wears the crown for being the least satisfied with private equity. 

Some 77 percent of Asian LPs interviewed for the Coller Capital Global Private Equity Barometer Winter 2009/10, released last week, said they were disappointed with the recent performance of their private equity portfolios, compared to around 58 percent in Europe and only 40 percent in the US.

The explanation for this? The relative youth of private equity as an asset class in Asia, according to Hiro Mizuno, partner and Asia head at Coller Capital.

“Many Asian LPs started in private equity in 2000, so we hit the credit crisis just before they started enjoying private equity returns. Because of this, Asian investors haven’t had much of a cushion internally and it’s hit them more, unlike US and European LPs which have had good experiences in the past,” he said.

This is alarming news, especially when seen in the context of the relative paucity of Asian private equity LPs, compared to investors in the US and Europe.

Although recently we have seen country-focused funds in countries like India turn to domestic investors, most of the pan-Asian funds that close still count North American and European institutions as the bulk of their investor base. Take for example MBK, which at $1.5 billion closed one of the region’s biggest funds this year in July. Of the five LPs named, one was a US pension fund, three were Canadian pension funds and only one, Hong Kong-based fund of funds Asia Alternatives, was a regional investor.

Asia Alternatives itself in turn has an LP base which is predominately North American – LPs in its most recent fund, which closed on $950 million at the end of 2008, include CalPERS, New York State Common Retirement Fund, Ontario Municipal Employees Retirement System and the Pennsylvania State Employees’ Retirement System.

One of the themes seen often in PEI Asia throughout 2009 has been the need for a greater domestic LP base in the Asia region. Although global appetite for Asian private equity investment remains strong, the overall dependence on foreign capital makes it susceptible to fad investing and retrenchment of capital at times of economic stress, as seen earlier this year when the denominator effect kicked in.

On this note, comments made at April’s PEI Asia Forum by Paul Yang, executive vice president and CIO of China Development Financial Holding, still ring as true at the end of the year as they did at the start.

“We must somehow develop a very stable LP base in Asia,” he said. “Even if the economy comes back, we’re going to struggle to see the supply of capital. Whether you’re a GP or an LP, we all have to work together to do this. Ultimately, the biggest investors in Asia should be Asians.” 

Going against private equity in the building of a local LP base have been several well documented factors. Firstly, the need for a softening of the investment restrictions around the asset class in many jurisdictions; secondly, the need to review and adjust the limited partnership terms and conditions inherited from the West; thirdly, the fact many Asian investors prefer their investments to be more liquid; and finally, a lack of education around the asset class.

While for all these reasons it is an uphill struggle to recruit new investors to the asset class, the Coller survey worryingly shows it might also be difficult to keep hold of those already invested.

“What the barometer is saying is that Asian LPs seem to be struggling to continue to be aggressive in private equity,” Mizuno told PEI Asia.

Looks like the case for better education around the asset class in the region is more urgent than ever.