June 30, 2017
Interviewed by: Privcap
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MVision: Fundraising Constraints in Asia

A veteran fundraiser explains the fundraising and deal slowdown in Asia, particularly in China. Khalifa also describes a relatively buoyant VC fundraising market in Asia.

A veteran fundraiser explains the fundraising and deal slowdown in Asia, particularly in China. Khalifa also describes a relatively buoyant VC fundraising market in Asia.

MVision: Fundraising Constraints in Asia

The fundraising statistics out of Asia pale compared to activity in North America. Why?

Hussein Khalifa, MVision:

The big issue you have is you have a relative lack of large investable managers in Asia. That isn’t to say that there aren’t some very experienced groups out there that have several funds behind them. But if you look at the size of the funds relative to the economies, you realize that there is a bit of a shortfall. Japan, notoriously, has very low penetration of private equity, and the most well-known Japanese funds are still 500, 600 to 800 million dollars. In China, you have a number of large groups, but a lot of money has gone in and a lot of the deals they’ve done have been growth deals, deals in the public market, not through buyouts, so there haven’t been the distributions that you’d usually expect.

We’ve had now two years of declining levels of fundraising in Asia, despite a proliferation of new smaller managers. Interestingly, venture funds have stayed about the same in terms of the number and the amount of money raised, but there’s been a clear decline in the number of funds focusing on growth and focusing on buyouts. Buyout activity has declined by about 55 percent from last year, which is a pretty alarming level, and that is because there aren’t that many deals to be done in China, which is by far the largest market.

Privcap: What is the interest among Western LPs for China? Does demand match the number of backable GPs?

Khalifa: When you talk to the large investors and they tell you how much they’re trying to put to work, they struggle to identify which groups they’re going to allocate to. There’s also the challenge that a lot of money has gone in, particularly into China, and there haven’t been the exits to match that. So, a lot of invested capital, very little in distribution, and you’ll see the DPI is very low compared to their peers in Europe or the United States.

Privcap: Fundraising for Asian venture capital funds has been, by comparison, impressive. What accounts for the VC successes?

Khalifa: One is you have a lot of very talented entrepreneurs coming out; India, China. And there’s a nexus with the West Coast over here. But I think additionally in many cases, these companies are satisfying a need that is as yet unmet, be it some of the environmental challenges that they have in China, be it the burgeoning consumer market where they need to address it through technology, and in the financial technology space.

Most of the focus at the moment in terms of application of technology is focused on the domestic economy. It’s just so huge, that that’s going to be tier one, and then they’re looking to see where they can expand in the United States.

I think the big change is that in the past, the only exit was really through an IPO, and you’re now beginning to see a lot more strategic activity. There are some very well-funded companies out there that are purchasing some of their peers, or people they feel that they can integrate into their system.

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