LPs demand Asian presence for portfolio growth

Over recent years we have seen the rise of funds focused on buying up European companies and harnessing the growth markets in east Asia.

Baird Capital Partners is a dab hand at this strategy. Notably, its investment in UK door mechanics business Paddock back in 2006 saw the buyout house utilising its international operating resources to develop the company's Asian sourcing capabilities. Baird also introduced India-based engineering design and product development partners. Thanks to its exposure to Asian markets and impressive increases in its gross margins the business was bought by trade buyer Assa Abloy in 2010, rewarding Baird with a 2.7x return.

Arguably, the recent return to growth in Europe can be attributed to overseas demand. According to John Allan, national chairman of the Federation of Small Businesses, writing in The Independent: "Overseas demand has played a pivotal role in driving growth for British manufacturing. Trade with non-EU countries has risen 29% since 2009, helping generate record exports of £78.4bn between April and June."

Thankfully, as we've seen with Baird, GPs are fully aware of the importance of fast-growth overseas markets, with a spate of firms opening up offices in Asia. Investindustrial's new office in Shanghai has certainly paid off for the Italian GP following its 2012 exit of Ducati to Audi, reaping a 3x return thanks to the investor exposing the motorcycle maker to Asian markets.

LPs increasingly demand funds able to push assets into fast-growing eastern markets

Other firms that have opened up in Asia in recent years include LDC, Axa Private Equity, Inflexion Private Equity, Cinven, Terra Firma, Bridgepoint, Providence and Summit Partners.

Furthermore, recent years have witnessed new funds formed with strategies focused on the expansion of European assets in Asia. Cathay Capital, Mandarin Partners and A Capital all serve as neat examples.

And it is not just GPs that are realising the potential benefits of an Asian presence; fund-of-funds Unigestion was recently awarded a licence in Singapore enabling it to set up funds for local clients. "We see Asia as a strategic region for us, both on the client side as well as on the investment side. Our clients are increasingly interested in gaining more exposure to Asia, particularly in private equity," explains Robert Collan, Unigestion's private equity investment manager.

Mixed bag
When it comes to European GPs setting up shop in Asia, Collan has some doubts: "It is certainly advisable for GPs whose portfolio companies need access to these vital export markets to have an office or at least a business partner in countries like India or China. Some GPs have taken this idea further by setting up a local fund. However, so far, it's been a mixed story – some have done well, others haven't." Collan believes that this approach still needs to prove itself: "These funds are too young to prove whether this strategy has been successful or not."

According to several placement agencies, a strong trend of LPs wanting European GPs with some level of Asian exposure has arisen. Collan caveats this message, insisting that it depends primarily on the GP's strategy in Europe. "If the GP's investment strategy doesn't target emerging market exposure – for example, a UK manager who targets UK businesses in the services sector – I don't think they necessarily need a presence in an emerging market.

"But, as soon as the GP's portfolio companies are dependent on growth in emerging markets, which probably comes from exporting into these countries, then I think it is advisable over the long term to have some sort of network or connection to the region. That can be either through an office or through business introducers in countries like China or in Latin America."

However, crucially, the ability to create a presence in emerging markets comes down to assets under management. Says Collan: "Having a presence in Asia is not cheap. It not only involves setting up an office but you also need professionals on the ground and there is lots of travel involved. Therefore, you need to be a certain size in order to undertake such an expansion."

There is no denying the advantages offered by having a local presence in fast-growth developing markets for GPs in need of portfolio-company growth. "Many more companies today are dependent on growth in these markets because growth in Europe and the US is slower," says Collan.

Collan is encouraged to see the growing interest of LPs in the region and the willingness of GPs to establish a presence in Asia. But he warns that this should be done "carefully and thoughtfully and only if really needed to support their portfolio companies and their investment strategies".

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• Topics
• Fundraising
• Baird Capital Partners Europe Ltd
• Investindustrial
• LDC
• Axa Private Equity
• Inflexion Private Equity
• Cinven
• Terra Firma
• Bridgepoint
• Providence Equity Partners
• Summit Partners
• Cathay Capital
• Mandarin Capital Management SA
• Top story