LPs voice concerns about big PE funds

Private equity firms that have raised ‘mega-funds’ in recent years may be victims of their own success. Allocators at wealth management firms in Asia have expressed concern about how multi-billion-dollar vehicles will deploy that capital, suggesting that small or mid-market players are a better bet.

Certainly some general partners – including well-established names such as Apollo, Carlyle and RRJ – have admitted they are finding it harder to raise money in Asia these days.

Small and mid-sized GPs across Asia are more likely to provide better returns and to be interested in co-investment partnerships than the big players, said Mike Imam managing partner at Hong Kong-based multi-family office Silverhorn Investment Advisors.

“The large firms have been raising large amounts of capital, which puts more pressure on deploying capital and potentially distorts their incentives,” he noted. “Naturally, they become more focused on annual fees generated and tend to chase larger deals that often end in an auction process.” That ultimately makes it difficult to obtain the kind of upside they achieved in the past, added Imam.

A Hong Kong-based allocator for a Chinese wealth manager takes a similar view. “We are a little cautious on large- and mega-cap buyout funds, seeing the amount of money raised,” he said. “They have a large amount of dry powder that’s pushing up entry multiples for large-cap buyouts, so they may pay a premium to get the deals.

“[The bigger players] are writing large cheques because there’s a lot of equity sitting in their funds, and also debt financing has been cheap, so they have borrowed a lot of money from banks.”

Moreover, since a number of sizeable buyout funds have been raised in the past year, that segment is very competitive, added the unnamed allocator.

Conversely, small and mid-market buyout funds tend to employ less leverage for buyout deals, and middle-market deals tend to command lower valuations than the larger transactions, he noted.

Capital raising for emerging-market PE funds appears to reflect a shift in preference towards mid-market strategies. Last year there was a year-on-year decline in the number of funds reaching a final close for all size segments, except those between $250 million and $499 million, according to the Emerging Markets Private Equity Association.

Meanwhile, another area of focus for Silverhorn is PE secondaries – the trading of existing commitments to funds – in Asia. It is not yet a crowded market and one that offers a shorter investment cycle and more predictability in terms of the price paid for assets, said Imam.

Moreover, PE funds that invested in 2007, 2008 and even 2009 are coming to end of their lifetime and, with market volatility in China and IPOs more difficult, exits are harder to come by, he added. “This creates opportunities for secondary managers to buy into interesting portfolios at good valuations because there are dealing with forced or at least keen sellers.”

In China, in particular, a “massive amount of money” has been deployed and has not found an exit, he added. Imam pointed to Hong Kong-based TR Capital as one firm that has been able to return capital “rather consistently and relatively quickly”.