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Asian LPs Prefer To Bet On New GPs: Coller Capital Survey

19 January, 2011

A large majority of investors in private equity or limited partners (81%) intend to make commitments, over the next two to three years, to fund managers or general partners (GPs) with whom they have not previously invested, according to Coller Capital’s latest Global Private Equity Barometer. Coller Capital is the world’s biggest investor in secondary deals.

This finding spells positive tidings for a host of PE funds managers, including industry veterans who have set up their own outfits, from India currently on road to raise money.

For 30%-40% of North American and Asia-Pacific LPs, these new relationships will be a function of portfolio re-shaping. But, for around half to two thirds of LPs in all regions of the world, it is simply their institution’s policy to continue exploring new GP relationships, according to a biannual survey of 120 investors by Coller Capital.

This is also evident in the fact that Asia-Pacific investors have also refused more reinvestment (or re-up in PE parlance) requests with 70% declining to re-invest in the past year compared with only half (52%) in the earlier survery.

For many LPs in the less mature PE markets of Europe and Asia-Pacific, this will be because they are still growing their PE portfolios, the report suggests. 

Another caveat to this is the fact that a lot of LPs do believe that it is too easy for weak GPs to raise funds in the Asia-Pacific region. According to the survey, about two-thirds of LPs believe investor appetite for the Asia-Pacific region has made it too easy for weak GPs to raise funds. So, while the quality of GPs in these new markets is not so high in terms of experience or returns that they have delivered on their portfolio, it is being compensated by the growing economic attractiveness of these markets. 

That the activity from Asian LPs will only increase going forward is also demonstrated in the trend that while the exposure of global LPs to funds-of-funds will fall over the next three years, about three quarters of Asia-Pacific LPs will make the maximum use of funds of-funds, according to the survey.

Private equity investors’ total exposure to funds-of-funds will fall over the next three years, it notes. While high costs are cited by half of investors planning a reduced funds-of-funds exposure, disappointing returns are cited by one third (36%).

Hiro Mizuno, Head of Asia, Coller Capital, explains the reversal in trend here. “LPs just can’t afford to miss the growing economies of Asia. Generally speaking, the quality of GPs is not so good here and they have to expose to fund-of-funds to gain an access to the ‘better GPs’ operating here”.

The attractiveness of the Asian market is also leading to a continuous stream of new PE investors.  According to the survey, about 71% of Asia-Pacific LPs expect to be joined by institutions not currently investing in PE over the next three years.

Best Deals To Come From Family Controlled Businesses

According to the survey, Asian LPs think that the best deals will come from families selling off businesses or corporate spin offs. The report suggests that LPs see corporate disposals and sales by families/entrepreneurs as providing the most attractive investment opportunities for GP investments over the next two years.

Most LPs to increase rate of new commitments in 2011

According to the survey, about 60% LPs plan to increase their rate of new PE commitments in 2011 – though the increase will be modest in most cases. Only 7% of investors expect to slow their rate of new fund commitments in 2011.

Growth capital to mid-sized buyouts are best bets

Two thirds of investors believe the best areas for GP investment in the next two years will be buyouts of less than $1 billion in size in North America and Europe. The main changes since last year’s Winter Barometer are an improvement in the perception of large buyouts. Now, one-third of LPs see $1 billion+ buyouts in North America as attractive (compared with one-fifth of LPs in Winter 2009-10). Also, there is an improvement in the perceived attractiveness of mid-market Asia-Pacific deals of all sizes (from growth capital to mid-sized buyouts). This transition is already being seen with some PE funds backing or funding mid-market buyouts.

PE Robust; Venture Loses Sheen

About half the corporate and public pension funds (50% and 47% respectively) believe they could improve their returns from private equity if they were allowed to take on more investment staff. Also, asset allocation intentions signal investor confidence in PE. Twice as many LPs (34%) are intending to increase their target allocation to private equity. While PE is showing healthy signs, the report suggests that the venture industry is losing sheen. Majority of European and Asia-Pacific investors see early-stage VC funding shortfall in their region. According to the survey, 57% of European LPs and 63% of Asia-Pacific LPs perceive such a shortfall. North American LPs are more optimistic with just 37% seeing a shortfall in their region.


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Asian LPs Prefer To Bet On New GPs: Coller Capital Survey

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