How has private equity (PE) investing adapt to the needs of a knowledgeable investor in the Asia-Pacific region?

The topic is an analysis on the growth of Private Equity (PE) investing in the Asia-Pacific region, and some of the opportunities, and changes that might come along. The article is based on excerpts obtained from the recent Asia Private Equity Symposium held at the campus of Singapore Management University (SMU) on September 24, 2013, and is a summary of another article written by one of my former CFA Programme instructors, and currently working as a fund manager for a major fund management company in Singapore.

Based on the summary article of the Symposium, the audience mix comprise of mainly faculty members, industry practitioners, students, etc. A series of presentations ranging from topics such as the size, growth, and potential investment areas which private equity managers (General Partners (GP)) are actively eyeing, and some of the investment fundamentals of some of the companies that these GPs are seeking out in the Asia-Pacific region. Based on some of the speakers’ remarks, most GPs interviewed, and panel speakers have expressed their optimism over the growth prospects in the Asia-Pacific region, with the majority expressing their optimism over some of the potential investment areas that they are seeking out, including natural resources, infrastructure development, technology, and other potential up and coming projects that some fund managers have chosen to remain closely guarded of their investment portfolios, and did not want to elaborate further on the details of the specific investments.

For example, based on the excerpts of some of the major highlights during the Symposium was from one of the fellow members, Mr. Alan Thompson of Temasek Holdings, who was speaking from the perspective of a sovereign wealth fund (SWF), and as well as a Private Equity (PE) investment fund manager. During one of this comments, he briefly mentioned about the size of Temasek as a SWF with approximately 450 staff; Assets under Management (AUM) of approximately USD 215.0 billion; Cumulative Average Growth Rate (CAGR) of approximately 16.0 percent since inception, CAGR of 15.0 percent for the last 15 years, etc. During his speech, Mr. Thompson broadly outlined some of the investment themes that Temasek is actively pursuing, including commodities starting from the active search of companies dealing with the extraction of Liquefied Natural Gas (LNG) reserves, a changing consumer demand for certain types of services, including financial services, to the expected growth in the middle-class consumers in the region, which is broadly in line with someone who is mobile, and travels a lot. This trend shifts have resulted the increase in competitive challenges, including the rise of emerging Asian economies seeking to actively participate in the various growth opportunities that will enable the middle-class generation to move up the ladder in society.

Temasek Holdings, according to Mr. Thompson has pointed out, is one of the pioneering examples of a private equity investing firm which is currently working out a new comprehensive set of investment guidelines that will seek to provide much transparency, and as well as regulatory compliance with the tax requirements needed to satisfy the regulators. This could be critical in my view, especially with new regulations being kicked in several Asian economies, and moves by several economies in the region seeking to bring about tough disclosure rules, which should bode well for investors who are seeking for professionally well-managed PE fund investing companies. In addition, some of the fee-based requirements have also been standardised in order to align with international practices, including having the LPs to co-invest, providing full disclosures of the fee structure, including determination of the so-called 1.5 percent fixed management fee, plus performance fees north of 20.0 percent, the distribution waterfall structures that follow the European model where strict performance criteria including terms such as clawback provisions, hurdle rates, etc. are being set in order to highlight some of the risk exposures PE fund managers take, which should be working in the interests of the Limited Partners (fund shareholders).

Mr. Thompson of Temasek has also outlined some of the taxation code issues particularly with those funds domiciled in the United States that might result in some adverse impacts to some PE investment firms, reputational risks to the GPs that goes along with potential violation of some of these US tax codes, liquidity issues, particularly in several emerging Asian economies due to capital and/or fund controls.

Another panel speaker during the symposium, Ming Lu from one of the prominent global PE fund investment form, Kohlberg Kravis & Roberts (KKR), had outlined some of the broader trends seen in the Asia-Pacific region including the rise of the middle-class, who are driven by the rapid pace of consumerism, westernisation, demand for capital, urbanisation, etc. The case for PE investing firms, such as KKR seeking to participate in these growth opportunities is a natural choice, especially when they have the relevant expertise to help businesses grow, bringing about operational experience, and sound corporate governance practices to help business grow, seeking alignment among businesses and shareholders, and active participation in the growth of the portfolio of companies they seek to invest in order to maximise shareholder returns. Readers might have noted KKR’s desire to expand in the Asia-Pacific region, especially with its recent acquisition of a sizeable stake with Qingdao Haier, which is one of China’s most prominent household appliances manufacturer, and an example of a Chinese company seeking to tap into the potential growth of consumerism in China, and elsewhere around the globe through the partnership and expertise provided by KKR.

In summary, some of the remarks being noted by the panel members have been on the various roles which many PE fund investing firms play to help bring about transparency, modern corporate governance practice codes that seek to help businesses grow, and be able to tap into a wider capital markets for financing purposes, having PE fund managers co-invest their capital in order to prove that the GPs are taking responsibility over their investment decisions, navigating around regulations, especially with funds domiciled in the United States with the recent application of the industry-wide Dodd-Frank Act, etc. I believe that there exist tremendous growth opportunities in the Asia-Pacific region, particularly with the rising middle-class and urbanisation which could enable PE fund investing firms to stay actively focused on such broader trends in order to remain viable.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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