An increasing number of Limited Partners (LPs), mainly European followed by North American investors in private equity, plan to increase their exposure to Asia-Pacific driven by the economic expansion in China and India. Coller Capital's latest Global Private Equity Barometer, a bi-annual survey of trends in private equity, suggests that 53% of the existing and new investors will expand or begin investing in China and 44% will do the same in India in the coming two years.
The just released survey reflects the LP views on the prevailing state of PE industry globally. And their increasing faith in China and India stories comes at a time when over 51% of them now have seen lifetime returns from private equity fall below 11%, a significant jump in their number from around 29% in 2009 and 22% in 2008. Clearly, the full impact of the global economic crisis on the PE investments is revealing rather dramatically in the summer of 2010 compared to even 12 months ago.
About 38% of European LPs are planning to increase their Asia-Pacific exposure to over 10% in the next three years, up from 16% at present. North American LPs with more than 10% of their PE commitments in the region will stand at 41% in the next three years, going up from 26% currently. Almost 87% of the Asian LPs will also have above 10% exposure in this region, up from 69% now.
According to Hiro Mizuno, Partner, at Coller Capital in Japan, the investors are going after higher annual net returns in Asia-Pacific despite the risks, as the economic instability is rendering the developed markets unattractive at the moment. "China and India are leading the way in terms of attractiveness for growth capital flows into the region, while Australia ranks as a favourite for buyout capital essentially because of its history in delivering investor returns through leveraged buyout transactions," Mizuno told VCCircle.
Last week, Exor SpA, an asset management house of Italy's Agnelli family, which majority owns automobile giant Fiat, said it was putting up to $100 million into a $250 million private equity fund focused on India and China. Independent investment banking firm Rothschild is another investor in this fund, which is probably indicating the growing interest of many European LPs in the emerging markets of Asia.
The robustness of the India story for LPs may also bring with it the pitfalls usually associated with the private equity. Mizuno warned that there could be a fundraising bubble in the country with a long list of General Partners (GPs) or fund managers trying to raise their maiden fund. "We hear about a number of first-time funds, with managers who have very little track record, being in the market raising funds. This reminds about the Silicon Valley in the late 90s when several maiden funds showed up, who were unsuccessful in raising subsequent funds due to their embarrassing track record. We feel there is probably a similar fundraising bubble going on in India currently," he explained.
India's PE sector has seen exit of more than a dozen senior executives, sometimes backed by the domestic corporate houses, who are on the road for raising their first fund.
This is happening at a time when nearly 38% of the North American and about 22% of the European LPs plan to reduce their GP relationships. Over one-third of the surveyed LPs believed that existing GPs were ill-equipped and did not posses the operational know-how to turnaround struggling portfolio companies. But Mizuno said most of this culling (of the GP roaster) would happen in the developed world, while even some of the first-time fund managers could succeed in raising their funds on the strength of the emerging market story.
"Overall, we are going to see reduced number of GP relationships. But LPs are likely to relax their yardsticks when it comes to the emerging markets because there are not too many established GPs, besides there is this growth story to be captured," he added. Meanwhile, almost 49% of LPs now invest directly in one form or another. This applied only to 35% of the LPs in the summer of 2006. And 41% of the surveyed investors said they will increase their direct investment into private companies in the next three years, mostly on proprietary basis and through co-investments with GPs.
Notwithstanding the hammering on returns from private equity, 20% of the LPs are now looking at increasing their exposure to the asset class and only 13% is contemplating a decrease in allocations. This marks a reversal of the LP sentiments one year ago when a larger share of them wanted to ramp down their exposure to private equity.
The Coller Capital survey said the PEs will face several debt related challenges in the next few years. The biggest of these, according to 84% the LPs, will be refinancing the wall of buyout debt due for repayment in 2012-14. More conservative capital structures, debt for new leveraged buyout investments and changes to debt syndicates are the other major LP concerns on this front.
Interestingly, 58% of the North America, 46% of the European and 40% of the Asian LPs think the private equity industry will be smaller in size in the next five years ' time than before the credit crunch. However, a large number of them believe that the quality and efficiency of PE as an industry will be higher in the coming five years than it was prior to the economic crash.