September 23, 2016
Interviewed by: Privcap
Video Clip
Login to view full video

What East Asia’s LPs are Bringing to the PE Table

The availability of capital from Asia’s big institutional investors is expected to grow in the coming five to 10 years. But Mounir Guen of MVision Private Equity Advisers cautions they might have difficulty breaking into the U.S. and Europe where GPs have long-running existing core relationships.

The availability of capital from Asia’s big institutional investors is expected to grow in the coming five to 10 years. But Mounir Guen of MVision Private Equity Advisers cautions they might have difficulty breaking into the U.S. and Europe where GPs have long-running existing core relationships.

What East Asia’s LPs are Bringing to the PE Table
With Mounir Guen of MVision

Q1: What is the availability of PE capital from large institutions in East Asia?

Mounir Guen, MVision Private Equity Advisers:
If you look at access to private capital from the investors to our private equity community, it’s still dominated by North America. Around 55% or maybe 60% of the capital comes from there. Europe comes in second, around 20% to 25%.

When we look at assets under management in countries like Taiwan, Japan or Korea, they’ll be increasing five times in the next five years. China will be 10 times in the next five years. And that’s just asset under management from plan sponsors, whether they’re sovereign wealth, pension plans or insurance companies, life insurance companies.

That volume of assets at this particular point is not fully open to private equity. Some of it has a domestic orientation that, when programs normally start, regulators put in a condition of around 2% of assets. So, there are these restrictions. Certain amounts of the available capital are domestically oriented for a number of different reasons, which might vary from currency exchanges to portfolio views to other regulatory requirements on the capital. That will change.

In some cases, we’re looking at the Chinese currency now being reserve currency that implies dramatic change for those institutions, going forward in terms of movement of capital. And we’ve got a number of institutions coming into the private equity program. So, when we speak or spend time with communities in certain countries, one of the things we notice is that there’s more and more of them at the table.

Also, as they need to realize more and more, they will be able to speak to the peers in their community on a global basis to share experiences, which means that, by doing that, they will be doing primary, secondaries and directs. They will be blending credit with private equity to manage the shape of their J-curve and they’ll be able to compare notes with their peers in terms of best practice and diligence, selection and portfolio construction to achieve their targets.

Q2: In the future, where do you see Asia as far as contributions to PE?

Guen: In five years, I would very much expect Asia to be between 25% and 30% of global contribution to private equity, because you’ve got to remember the programs in the United States are quite old, where it’s difficult to get into the program because they have their established core relationships.

The programs, in and of themselves, have been in the asset class such a long time that they have quite a large, natural growth rate from the activities because they’re past their J-curve, whilst the newer institutions have to work through the J-curve. That’s why portfolio construction is so crucial and their focus on the kink of the curve is absolutely important because the program has to deploy over three to five years, a consistent amount, and then increase it as their AUM grows and as the portfolio starts returning capital.

Q3: What level of interest are you seeing in Asia from GPs?

Guen: Private equity firms and successful ones are pretty much self-funded these days and the ability to access them is extremely hard. So, how do you then build the program?

Some general partners have an enlightened view and, every time they come to market, they pay attention to the balance and the geographic diversification and type of investment diversification of their funding base. But most don’t.

If their existings are extremely supportive and they have already now three or five Asian investors that were looking at Asia, they might not want to have another 10 Asian investors.

Recently, in the last year, I identified a fantastic new investor of substance that was Asian that could potentially make large commitments, had a very straightforward process and was a very uncomplicated investor. So, it ticked all the boxes in terms of a wish list. It was very interesting because I contacted a U.S. general partner and I contacted a European. The European said, “We’re full.” The American said, “Let me meet them.”

But that new capital is going to have a bit of a challenge to get the portfolios they’re seeking and that’s why secondaries could be a very good solution to get access as well as being able—which is harder for new groups to understand—you have to premarket yourselves as an investor.

Register now to watch this video and access all content.

It's FREE!

  • CHOOSE YOUR NEWSLETTERS:
  • I agree to the Privcap terms of use and privacy policy
  • Already a subscriber? Sign In

  • This field is for validation purposes and should be left unchanged.