Post on 14-Mar-2018
Trends in First-time Fund Management in Asia Pacific
Contents
1. EXECUTIVE SUMMARY 3
2. METHODOLOGY 5
3. INTRODUCTION: ASIA PACIFIC PE INDUSTRY 6
4. SURVEY FINDINGS 7
Key Success Factors 8
Fundraising 9
Asia Pacific Geographical Aspects 10
Challenges 11
5. CONCLUSION 12
This report was prepared by Austin Arensberg (MBA Class of December 2013) in the
second half of 2013 under the supervision of Claudia Zeisberger, Academic Director
of the Global Private Equity Initiative (GPEI) and Professor of Decision Sciences and
Entrepreneurship and Family Enterprises at INSEAD, and Michael Prahl, Executive
Director of the GPEI.
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1. Executive Summary
This report focuses on first-time fund managers in the Asia Pacific region. Based on
surveys with Private Equity and Venture Capital (PE/VC) professionals in the region,
it outlines the hurdles first-time fund managers face while fundraising and deal
sourcing, and puts forward strategies to successfully overcome these obstacles.
The current capital raising environment is a challenging one. Industry body EMPEA
reported that in the January to June 2013 period, private equity funds in emerging
markets (among which Asia Pacific is typically the leading region for fundraising, at
63 percent of total funds raised in 2012) had raised only $10.8 billion, down 52
percent from the corresponding period in 2012 and compared to a full-year total of
$40 billion raised in 2012.1
Amidst this difficult fundraising environment, first-time fund managers face
additional hurdles. In 2013, these managers raised only 7% of all private equity
capital,2 a significant drop from the 11% recorded in 2012 and the lowest share on
record.
The difficulty in raising capital is also reflected in the small fund size – nearly 75% of
newly raised funds were $100 million or less, whereas only 5% of newly raised funds
were of such a small size in the past 3 years. To add to the woes, the average time to
reach final close has also been increasing.
In addition to these fundraising challenges, first-time fund managers also face
performance issues. A preliminary finding in 20133 by Professor Josh Lerner from
Harvard Business School highlights the relative underperformance of the first fund
raised by a given fund family, as compared to the family’s subsequent funds.
1 Reuters 2 That’s globally not Asia specific, see Preqin, Private Equity Spotlight February 2014. 3 Venture Capital, Private Equity, and the Financing of Entrepreneurship Josh Lerner (Author), Ann Leamon (Author), Felda Hardymon (Author).
4
Given these circumstances, there is an important need to understand the dynamics
specific to first-time fund managers. Various questions arise: What are the
challenges that they face and what causes their funds’ underperformance? Are there
unique issues in the Asia Pacific region that hinder or improve their chances for
success? What lessons can be drawn from past experience?
In order to address these questions, we conducted over 20 interviews with PE/VC
professionals in Asia. We found that many first-time funds are experiencing difficulty
across the private equity value chain, from deal sourcing to portfolio management
and exit.
The lack of sophisticated broker networks in Asia affects first-time fund managers
more than their established competitors, and puts them at a significant disadvantage
in deal sourcing. Furthermore, first-time fund managers are typically only able to
participate in deals with transactions sizes below $250M, a highly competitive
bracket. This competition places upward pressure on deal valuations, and adversely
affects fund performance. The highly variable regulatory environment across
different countries in the region and the lack of exit opportunities add to the
difficulties faced by these fund managers.
Various lessons learned and helpful strategies can be culled from our survey results.
First-time fund managers need to objectively assess their skill set and determine
whether they are able to create a niche appreciated by LPs in this fundraising
environment. Creating multiple exit avenues as well as demonstrating a track record
that is specific to the region and/or a given sector will be beneficial. Specifically in
the Asian market, firms need to increasingly focus on building teams that have
operational expertise so that they can provide meaningful value to their portfolio
investments and build confidence amongst company promoters. Given the
increased competition and small deal sizes, having the right balance of local talent
and functional experts will significantly enhance a team’s ability to perform.
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2. Methodology
We conducted interviews to answer
the following questions: what are
the key trends among first-time
fund managers operating in Asia
Pacific, and what are the necessary
requirements and factors to
consider when raising the first fund?
Over 20 interviews were conducted
with first-time fund managers and
private equity professionals with experience working and observing first-time fund
managers in the Asia Pacific region. The telephone interviews were unstructured
and were conducted over 20-60 minutes.
Throughout our research, we measured
the percentage mentions on particular
topics and logged the frequency of
keywords used.4
Potential sampling bias exists due to the high
number of INSEAD alumni in the pool. Where
possible, first-time fund managers were
contacted; however, the pool was broadened
early in our research process to include other
PE/VC professionals to ensure a comprehensive
perspective.
4 Quotes were transcribed from notes and, where required, particles were paraphrased to make structured sentences.
Dow Jones + Preqin +
S&P Capital IQ Asia Pacific PE Associations
INSEAD Alumni Linkedin Groups +
iConnect in Asia Email requests sent out
Interviewees 300+200+
80+100+
20
20 interviewees identified / screened from numerous resources,
databases, industry associations, and alumni associations
China: · Venture Funds
· VC · PE
· Fund Service industry
India: · VC
· PE · Fund Service industry
England: · Fund of Funds
Singapore: · PE
· VC
Indonesia: · PE
20 interviews conducted over 4 weeks across range of disciplines
Vietnam: · PE
41%
47%35%24%
18%
82%59%
PErespondents
VCrespondents
ASEAN-basedrespondents
China-basedrespondents
India-basedrespondents
INSEADalumnirespondents
Workinginfirst- mefund
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3. Introduction: Asia Pacific PE Industry
A difficult decade in the Asia Pacific private equity industry underscores and further
complicates many of the challenges faced by first-time fund managers in the region,
as identifying and executing profitable portfolio investments has been difficult for
even the best performing funds. The following graphs and commentary provide
additional insight into the challenges faced by regional private equity investors.5
Reduced activity in M&A markets – private
equity-backed and otherwise – has
compounded the investment and exit
environment for first-time funds. Not only is
private equity dry powder in the region at an
all-time high – estimated at more than $150
billion as of year-end 2013 6 – significant
unrealized value remains tied up in regional
funds raised between 2004 and 2009.
The difficult environment for private equity
investors in Asia Pacific is also reflected in
the returns for funds raised over the last
decade. Whereas median IRRs for regional
funds raised between 1999 and 2003 ranged
from 14.3% to 26.8%, funds raised between
2004 and 2009 generated median IRRs
ranging from only 5.7% to 8.4%.
5 In the course of this research it was discovered through database searching and interviews with research services (including ThomsonOne, Preqin, MergerMarket, and S&P Capital IQ) that no service currently provides first-time fund management tracking and performance. Tracking is instead conducted on the firm level. As tracking this data is outside the scope of this study the author has provided generalized proxy data here as reference only. 6 Preqin
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4. Survey Findings
The interview questions and their responses can be bundled into four broad
thematic categories that were utilized for data classification and trend analysis.
Keysuccessfactorsinfirst-
mefundmanagement
Lessonsinfundraising
Challengesforfirst- mefundmanagers
AsiaPacificgeographic
considera ons
2
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1
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Key Success Factors
According to the PE/VC professionals in our
survey, the ability to generate deal flow is a
strong predictor of success for first-time funds in
the Asia Pacific. As one Chinese interviewee
noted “at the end of the day it’s all about
proprietary access” to deals. This is in stark
contrast to more developed markets where
existing pipelines are often facilitated through
more sophisticated broker networks and increasingly online marketplaces. Another
VC fund manager based in India stated that “deal sourcing is a huge problem,”
partly because there are simply “too many GPs in the country,” resulting in
competition for the same deal sizes.
Another often cited success factor was
the ability to navigate the challenging
regulatory environments found in
many countries in the Asia Pacific. All
but one Indian respondent in the
survey mentioned that this as a key
competency. As one PE Manager in
India noted, “GPs from abroad need to have worked in India to understand the local
conditions. Knowing how the regulatory framework operates and how business
functions is the biggest value add.”
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Fundraising
Fundraising for first-time fund managers is a vital skill. Throughout the interview
process, we noted references on the need for “track record” that were nuanced in a
variety of forms. One associate at a Vietnam PE
fund said that fund managers need track records
that extend to the fund’s locale and sector, “this
might mean having native language abilities and
ties to the region or having a track record in
those markets.” Having a track record also
seemed the key constraint for many aspiring
fund managers.
Background of first-time fund
managers varied widely. In
developed markets, first-time funds
frequently spin-off from established
firms with an attributable track
record. In Asia, most talent is from
investment banking, consulting or
MNCs, as these historically
represented the most attractive career paths. While these paths offer some
experience, there is little front-end transaction expertise.
Raising money as a first-time fund manager often requires showcasing investing
ability in one particular sector; as a result, fund mandates can be restrictive and
reduce a manager’s flexibility to develop a regional or industry-agnostic approach.
As one ASEAN fund Manager noted “LPs will often force you to be sector-specific,
but we felt it was important to maintain our flexibility.”
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One interviewee who is currently raising a pan-ASEAN fund noted “it has taken us 18
months to get to first close and we thought it would take only 6.” As this comment
highlights, first-time fund managers must factor significant buffers into their
fundraising forecasts in this demanding environment. An interviewee based in
Singapore observed that teams need to have all of their diligence documentation
ready as “you are always fundraising.” Another Vietnam-based manager noted that
GPs seeking support from placement agents are often forced “to pay upwards of 5%
of capital raised. Therefore, having good direct relationships with LPs increases
access to potential commitments and avoids costly third parties.”
Asia Pacific Geographical Aspects
Local talent was cited by numerous interviewees as a vital predictor for success.
“Partners should have spent at least ten years living and working in the region.”
Others went further: one Chinese manager noted that
GPs from abroad – even Chinese nationals - were
often viewed with suspicion by entrepreneurs: “there
is a large cultural difference; they often find it difficult
to work with the more localized entrepreneurs.”
Another Chinese manager noted “… family
connections are really important in China. They can
bring proprietary access to certain
projects; hiring sons or daughters of
famous top tier government officials
can help.” Functional skills and risk
controls coupled with rigorous
quantitative analysis were
anecdotally shown to not be
rewarded as much as strong
relationship.
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Operational skills were also not highlighted as a key skill impacting overall success.
However, one interviewee mentioned, “One critical problem with Asian GPs now is
that they are typically bankers. It is very difficult to persuade someone who has run a
business in their family for 50 years that they should undertake a change to their
factory when it comes from a banker.”
Challenges
The most common refrain noted for challenges by
far was the lack of exit opportunities. Chinese and
Indian interviewees were particularly aware of this
issue, as one fund of funds LP who invests in
emerging markets noted, “That’s really where
private equity in Asia has suffered, when the
momentum dies, they are stuck.” He continued
stating, “We need PIPEs sometimes for this reason,
LPs don’t like it but we need to maintain liquidity.” A Chinese national fund manager
noted, “The IPO process has been almost completely frozen for a year – a manager
must come up with new exit methods.”
One M&A professional in one of
China’s largest advisory firms cited,
“there are now increasingly more
secondaries entering the market that
may provide liquidity.” The key
takeaway was that private equity in
Asia is still to some degree a
momentum business, especially as a
common investment strategy is to focus on growth equity which, by its nature, must
rely less on operational improvements and alpha generation than strong market
conditions and exit opportunities.
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5. Conclusion
Survey Results: Critical Factors for Success
First-time fund managers utilize local networks to generate strong deal flow;
Fundraising centers on showcasing track record; there is no substitute;
Lack of exit opportunities will continue to hurt first-time fund managers and
cause consolidation; and
Teams in Asia Pacific are short of local talent and operational skill sets.
These surveys were validated through general and industry research, industry
publications and performance database statistics. Professionals seeking to raise
funds need to be realistic on goals, focus on their track record, generate good deal
flow, create multiple avenues for exit and build complimentary, local, expert teams.
Implications
First-time fund managers need to constantly assess their own skill set and determine
whether their particular value-add sets them apart and creates what one manager
called a “unique niche” in the fundraising environment. Fundraising should only be
initiated if the manager is strongly convinced that a cornerstone investor is on
board, otherwise the expenses of maintaining a rigorous fundraising schedule can
be too much for a small team.
In Asia, firms need to increasingly focus on building teams that have operational
expertise and that can provide meaningful changes in control and non-control
investments. Momentum and growth equity are out of favor as current market
conditions have all but eliminated many chances for profitable exits. As the markets
become increasingly competitive, sourcing local talent that can both secure deal
flow and provide strong transaction execution will significantly improve a team’s
performance.