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Economics & Finance

The heat is on: private equity goes to Asia

Stuart Pallister |

"Valuations are higher - and when valuations are higher, people feel a little bit more comfortable about taking on risk,” according to Philip Bilden, Managing Director of HarbourVest Partners (Asia).

After a difficult year for private equity in 2009 following the global financial crisis, many limited partners are looking to invest in Asia in search of gross returns of two to three times invested capital, if not more. PE firms and hedge funds may have been demonised somewhat in the west, but in China these days, many want to put PE-related titles on their name cards.

At the recent SuperReturn Asia PE conference in Hong Kong (Sept 27-30), China had clearly become the ‘flavour of the month’ for LP investors, with India a not-so-close second, in part due to valuations there (see sidebar).

“You must keep in perspective that 2009 for our industry was one of the absolute worst on record following the global financial crisis and a leveraged-led crisis which had a huge impact on buyout operators throughout Asia Pacific, particularly in developed Asian markets like Australia, Japan and Korea,” says Philip Bilden, Managing Director of HarbourVest Partners (Asia), a fund of funds with operations in the United States, Europe and Asia.

As for developing Asia, the PE markets in China and India were less affected, he says, adding they had been “somewhat detached from what was happening.”

Now there are signs that deals are getting done, with a greater level of liquidity in the system.

“Valuations are higher - and when valuations are higher, people feel a little bit more comfortable about taking on risk,” Bilden told INSEAD Knowledge.


Even so, according to a new study by INSEAD’s Global Private Equity Initiative jointly with Axa Private Equity institutional LP allocations for Asia only account for about 10 per cent of the total.

“While it may be a surprise to many, a recent study by Preqin (a research firm focusing on alternative investments) in spring this year showed that out of global LPs only one third really has an allocation to Asia … and that means we still have two-thirds of the western world with zero allocation to emerging Asia,” says INSEAD Affliliate Professor of Decision Sciences, Claudia Zeisberger, who is also Academic Co-Director of INSEAD’s Global Private Equity Initiative.

“So, on the one hand, we have quite a strong inflow of capital into private equity in Asia already. On the other hand, we can expect significantly more to come, going forward.”

The expected risk premium for investments in emerging Asian private equity, according to the INSEAD – Axa Private Equity study, is almost seven per cent higher than for developed Western PE markets.

“A lot of new LPS showed up this year at the (SuperReturn Asia) private equity conference, who are new to Asia. Even though they may have had allocations – or the right to allocate to Asia – in the last few years, for some reason or other they never saw the need to, or they felt they risk premia did not justify the allocation to Asia,” says Zeisberger.

At the same time, LP investors have plenty  of GP firms to choose from, as many new general partners are springing up in China and elsewhere in Asia. The issue, says Zeisberger, is finding GPs with the right track record.

“It’s only really been over the last couple of years that China has become the undisputed number one in Asia, both in terms of fund raising and in terms of investments”, says Doug Coulter (MBA ‘98J), Head of Private Equity, Asia-Pacific, with LGT Capital Partners, a fund of funds with some 20 billion dollars in assets under management. “And now with the growth of onshore RMB (remninbi) funds that’s likely going to intensify going forward.”

In China, it’s like a “mad dash” right now, says Bobby Chao, Managing Director, Venture Capital at DFJ DragonFund China.

However, Chao cautions there may be some ‘disasters’ on the way, which would likely result in the Chinese government having to step in.

Plus, with the rush into the PE market, which has an investment time horizon of five to ten years, there’s now a ‘mini-vacuum’ in early-stage venture capital in China, Chao says.

Coulter cautions that because of the due diligence issues, particularly in China, you need to have ‘your feet on the ground’ as it can be a challenging market.

Indeed, due diligence is difficult in China as financial statements cannot be relied on and background checks tend to be carried out using informal networks.

"There are, depending on who you listen to, 1,000+ private equity firms in Asia-Pacific … And if you’re not really able to distinguish between who really has the networks, the proprietary deal flows, and really delve into the track records of the managers, that’s another problem in Asian private equity”, he says.

According to Yibing Wu, President of CITIC Private Equity Funds Management, [see related article] China’s a fast-developing market with plenty of opportunities. But, as in any market, you have to be somewhat cautious.

“Most people will lose money – the new funds, particularly those who lack governance and incentive structures”, he says. “They will lose money and the wash-out (in China) will be very fast.”

Although clearly a case of caveat emptor or ‘buyer beware’, Bilden and many other fund managers we spoke to at SuperReturn Asia are optimistic about the prospects in Asia – particularly China – in the short to medium term.

Bilden, whose firm scored returns on 13 times invested capital through its investment in Shenzhen Development Bank, says there’s been huge growth in both GP and LP activities.

“In China specifically, we calculate there is roughly 50 billion dollars of investable capital currently and that should take three or four years to invest. And yet despite that capital overhang, the market interest in all things Chinese will mean there’s going to be more capital on top of that. So that’s a risk.”

“Navigating that amount of capital into the market will require some dexterity”, Bilden told INSEAD Knowledge. “Having said that, China is a very large market and so it’s going to be up to the general partner community to price in risk, find opportunities, and find situations where growth opportunities could be wedded up with growth capital, and interest can be aligned between the owners of that business and the shareholders and funders of that business.”


Stuart Pallister is the editor of INSEAD Knowledge.

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