Small institutions seen buying Asian PE FoFs

Asia-focused private equity fund-of-funds will in the near term remain the preferred route to gain PE exposure to the region, at least among smaller Western institutions, according to alternatives placement agent Monument Group.

“There’s been investment demand for funds of funds in Asia. That reflects interest by institutional investors in identifying smaller, high performing groups [of general partners],” says Robert Mast, managing director of the US firm.

He pointed to the large private equity FoFs raised in recent years by Hong Kong-based firms Asia Alternatives, which closed its third fund at $1.5 billion in 2012, and Axiom Asia’s third vehicle, which raised at $1.15 billion the same year.

Since the crisis, the global trend among large institutions has been towards growing direct investments in single-manager PE funds, which has resulted in a shrinking FoF market.

There were 72 PE funds of funds that held a final close in 2013, raising a total of $12 billion, down from the 87 FoFs that raised $16 billion the previous year, according to data provider Preqin. This is part of a downward post-crisis trend in fundraising since reaching a peak in 2007, when 164 PE FoFs raised $58 billion.

However, direct allocations to single-manager PE funds have largely been made by big institutional investors, which have the resources to manage a portfolio of PE allocations, effectively taking on the role of an FoF, Mast tells AsianInvestor.

Smaller institutions with fewer resources will still tend to prefer to gain Asia PE exposure through an FoF, he adds.

Their large counterparts haven’t abandoned the FoF market, he notes. “Some big institutions put capital into funds of funds focusing on the middle market”, which would have exposure to single-manager vehicles with AUM below $400 million. “This is an area where institutions wouldn’t normally play,” says Mast.

However, he adds: “The Asia focused [multi-manager] funds are going to be here for a while, and will be able to raise capital. Gradually, maybe in 20 years, when everybody has [various] investments in Asia, they won’t be so important, but in the next 10 years I think they will.”

Set up in 1994, Monument Group launched a Hong Kong office in January, marking its first Asia operation, and is awaiting regulatory approval for a planned outpost in Tokyo.

These branches are intended to help expand the firm’s activities in Asia, where it will focus on raising capital for indigenous PE funds and offering overseas funds to local investors.

It already has been doing business in the region – most recently helping to raise capital for a Hong Kong-based PE property fund that closed in December – but has seen a pick-up in demand for Asia vehicles from Western institutions.

There is rising interest in Japan PE, given the stimulus effect of Abenomics on the economy, adds Mast, as well as in Southeast Asian markets such as Indonesia and the Philippines. “Perhaps not so much in country-specific funds, but regional funds which would invest in those markets."

“A lot of non-Asian investors are looking at these funds for above-average performance,” says Mast, given the rate of economic growth in the region. “Asia, even when it’s slowed down, is a high-growth area relative to most other regions, so that’s an attraction.”