Recipes for success in Asian markets

"It has taken us 20 years to build our business in Asia, and for the first 10 years we didn't know if there would even be a business" said Jim Hildebrandt, managing director of Bain Capital Asia, speaking at the AVCJ Europe conference. "That said, it has been the most profitable market for us on a realised basis over the last 10 years. The results have been worth the effort," he added.

The market is clearly attractive: correlation with plagued western markets is low and portfolio companies carry less leverage than their European or American counterparts, typically only 1-2x EBITDA. And though the market displays immaturity relative to the US or Europe, this lag in development presents money-making opportunities on the buy-side; inefficient deal-sourcing leaves GPs able to put together a portfolio of companies without recourse to a sell-side intermediary or auction. As a result, savvy pricing can reap rewards.

Organic growth is the favoured strategy. Many Asian firms have become national leaders through reliance upon the strong judgement, instinct and perseverance of an entrepreneur, the panel suggested.

Weekly data offering insight into pricing and volume by geography and channel is absent, and board meetings often rare. What is needed to take a business into the next tier is information and governance.

"We do not want to take the risk of trying to transform a lower-tier business into a higher one. It is basic blocking and tackling and frankly, you get paid for it. That is why I like these markets," explained Chin Chou, CEO of Morgan Stanley Private Equity Asia. And Hildebrandt agreed: "We do a lot of HR-focused things in Asia, building the right team."

And this simplicity is appreciated by LPs in the region. "I think value-adding is becoming a marketing strategy more than an investment strategy," said Pak-Seng Lai, MD and head of Asia and Auda family office.

"I think in Asia, the most important thing is the relationship with the entrepreneur. I just want returns; at the end of the day, value-add is a means to an end, it is not the end in itself," he stated.

Whether GPs drive returns through operations or pricing, one thing is clear to LPs: "The important thing is that fund managers recognise what they are good at and don't try and pull the wool over our eyes, telling us what we want to hear," said Thomas Kubr, chairman of Capital Dynamics.

But is primary investing the best way for LPs to draw out profit from the Asian markets?

"Two thirds of our LP base wants more co-investment opportunities in the region," said Hildebrandt. "I have been very impressed by LPs that have built up a large staff base in Asia, and made that commitment in an HR sense." The local presence seems essential if limited partners are to successfully implement a co-investment strategy.

So too is prior knowledge of the cultural differences across the continent. "In Asia, these countries are not in any way similar. They are more different than even Greece is to the UK. Really, Asia is a collection of regions," explained Kubr. "Fundamentally, I believe co-investing [from outside] Asia makes no sense for almost every LP out there."

The draw for LPs though is clear: fewer fees, more control over capital deployment and a direct hand in geographical allocation. Limited partners are also afforded a direct insight into the workings of a GP, as due diligence requirements offer a window into the mechanisms of a GP's deal teams. "It has really opened our eyes," said Patrick Knechtli, partner at SL Capital. "And in some cases it has really impacted our decision."

But although the due diligence may keep GPs on their toes, increasing interest in co-investments has catalysed an unusual shift in the power balance between GPs and LPs. "You have to keep reminding GPs that you are in the co-investment space and want to see opportunities," said James Pitt of Lexington Partners. "It is a question of bringing the capital together with a marketing effort."

Quick reflexes when PPMs are sent out can also help the cause of limited partners seeking opportunities. Those LPs that commit capital before the first close are the initial recipients of deal opportunities being pursued in the early days of a vehicle's lifespan. A welcome moment of respite for those GPs trying to eke out commitments from tightened pockets.

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