Undeservedly unloved

Winning commitments from potential limited partners is never easy. You are asking people to entrust you with very large amounts of cash. I think sometimes investment people forget just how large even a ‘small’ LP commitment is in real terms, probably due to spending each day staring at large numbers. Given this, why has fundraising for private debt in Asia in the distressed space been even harder than usual in the last few years?

I believe the main reason has been the view among global fund investors that Asia does not provide compelling investment opportunities relative to other regions, specifically the US and Europe.

Let us put the US to one side, where the market is broad and deep with a long history of private debt provision across the spectrum of liquidity and risk. Firms with strong US experience have always had, and always will have, significant opportunities to choose from.

My bone to pick here is with this view that Europe provides an attractive opportunity set. There are very large amounts of distressed and stressed debt sitting within the European banking system. Accessing it however has not been easy at all, due to repeated emergency interventions by the politicians allowing banks to continue in ‘zombie’ existence and massive cultural resistance. Instead you now have significant amounts of fund capital chasing European investments, typically in competitive bidding scenarios and driving down returns on deals to worryingly low levels.

It is true that Asia does not have the same level of distress in the banking system across the region nor the same urgent need to tackle it. People can keep praying for a sudden surge in opportunities, and stay out of China (“One day…”), yet the reality is that Asian debt funds do not need such a major collapse to find attractive investments. The Asian capital markets remain imperfect with wide gaps between available bank financing or bond issuance and the needs of smaller corporates.

At the same time you have far less capital chasing these Asian opportunities, due to the primary focus away from Asia, the disappearance of principal desks from the banks and to the exit of many large global funds which have not returned.

The continuing lack of local Asian LPs is another contributing factor. Many Asian institutions cannot invest in foreign funds or cannot invest in alternatives. Others may look at real estate, maybe even more liquid hedge fund strategies but consider private debt as too illiquid and too esoteric for their taste. This situation is slowly improving but most Asian debt funds continue to rely on accessing investors from other regions.

Another issue has been the background of the many of the new funds looking to raise money. Managers who were previously regional investment professionals for global funds have started some of these funds. In such cases often the ultimate portfolio manager who “pulled the trigger” on investment decisions sat in the US or Europe. This means LPs can feel they are being asked to now back a team who cannot fully ‘own’ the previous investment performance track record.

Other new funds have been formed by ex-principal investment folk from the banks. Often they have deployed significant amounts of capital highly successfully in the region. However an LP’s concern can be that they have benefited from a bank franchise and coverage, which they will not have at a fund.

Of course some Asian funds, whether seasoned or new, have been successful in raising capital over the last couple of years and in some cases highly so. If anything the mood seems to be shifting positively in recent times with some LPs expressing a desire to increase their Asian exposure.

Finally a little argument for Asia. At some point the US will stop printing money and eventually raise rates, most likely some time next year. A series of asset bubbles globally will then implode. Would it not make more sense to have capital ready to take advantage of the effects in Asia rather than currently investing in European assets at unattractive potential return levels with little room for error as the implosions occur? Just a thought.