The Asia-Pacific Private Equity Parade: Is it Passing You By?

Private Equity 27 Sep 2011

It is true by definition that the crowd is right in the midst of a trend, and wrong at the moment when that trend is about to reverse itself.  In the Asia Pacific region, broad confidence in opportunities for private equity surely constitutes by now, a trend, even a parade. Whether it is the sort of parade one ought to join … or leave, is as always the big question.

Preqin, the multi-national data and consulting firm, in its latest Private Equity Survey, offers a preview of a forthcoming “Special Report” on private equity in the Asia-Pacific region. That says much that bears on this question.

Momentum and Preferences

The preview, written by Alex Jones and Tom Carr, concludes that investors in that region are likely to increase their allocations to private equity both within the next year and in the longer term. Over two thirds of the investors Preqin interviewed say that they have increased their commitment to private equity over the last year. The number of Asia-Pacific based investors who give this answer (69 percent) is higher than the number of investors who do so globally (64 percent).

An unequivocal sign of momentum is that nearly all (95 percent) of the limited partners interviewed said that they are either at or below their targeted allocations for this asset class. That breaks down into 54 percent who are “at” and 41 percent who are “below,” with just a lonely 5 percent sliver of pie asserting that they are over-allocated. Surely any contrarian’s hair stands up upon hearing the numbers “95” and “5” in such a way.

Assume two funds both invested in Asia-Pacific equity: does it matter where the funds themselves are headquartered? Is there a case for proximity, however small the digital world becomes? Evidently many of the Preqin interviewees opt for proximity. Sixty-three percent expressed a preference for working with local managers. This breaks down into a smaller group that is indifferent as between a local manager with a local office or an international manager with a local office, and the larger group (42 percent of the whole sample) with a definite preference that both the manager and the office be local.

This is a greater site-specific preference than one finds for the managers of funds looking for investments in the rest of the world.

As to strategies, the small to mid-market buyout funds are the most popular. Large to mega buyout funds are very much out of style, as are mezzanine funds.

Too Much Money

Asia-Pacific investors are bullish both about private equity vehicles for investing in the world at large and about the use of such vehicles for investing in their own region. The interest is obviously not undiscriminating. Nearly half of the region’s LPs are looking to invest in North America, and one-third is looking for private-equity investments in Europe, whereas just 17percent have an interest in Latin America, and only 3 percent in Africa. Ninety percent prefer funds focused on investments in the Asia-Pacific region.

There is some sentiment, mentioned briefly in the Preqin article and discussed recently in India’s leading financial paper, The Economic Times, that the promise of Asian market opportunities is somewhat lessened by the very fact that every investor in the world seems to see Asia as the scene of unprecedented market opportunities. Preqin quotes an unnamed Singapore-based investor who said, “There is currently too much money in the space.” Similarly, The Economic Times observed that the most significant “threat to private equity investing in the region came from the wall of capital entering Asia looking for opportunities,” citing a survey at the SuperReturn forum in Hong Kong.

The general bullishness, though, has urgency to it, such that 42 percent of those interviewed said they expect to make their next PE commitment before the end of 2011, and another 19 percent expect to make their next commitment within 2012.

“Our conversations,” say Jones and Carr “suggest that this group of investors is likely to become increasingly active in the asset class going forward.” Thus, general partners raising money for new vehicles may find Asia-Pacific based limited partners a promising source of capital, they conclude.

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