Southeast Asian tigers recoil from private equity
By Paul Mackintosh - 08/10/12
Research house Preqin’s latest special report on Asian private equity gives a thought-provoking perspective on the current state of the asset class in Asia. And in particular, it is clear that the investor base in the region is still very different from the limited partner (LP) community elsewhere. “Corporate investors are the most common type of private equity investor in Asia, representing 18% of the universe, while banks and investment banks account for 14% and insurance companies 12%”, the report states. “The most common investor types in Europe and North America, foundations, endowments and pension funds, together make up less than 8%”. Furthermore, Japan (23%), China (22%), South Korea (15%) and India (13%) “account for almost three-quarters of the Asian investor universe”.
Why does North Asia dominate? The so-called ‘Tiger Economies of Southeast Asia’, after all, were the flag-bearers for emerging markets Asian growth post-war. And yet their institutional investor universe seems to have stalled at a level below that usually associated with private equity, as in many other areas of those economies. Of course, Singapore represents an exception, but a small one given its limited size. The fundamentally greater institutional maturity of much of North Asia – a norm that China is returning to post-1989 – is reflected in its proliferation of private equity LPs.
The LP structure is also affected by the traditional regulatory restrictions on Asian pension funds investing in private equity and other alternatives. Historically, many Asian pension platforms considered even public markets too risky – in the context of post-war Asian bourses, with their high volatility and low transparency, perhaps not an unwise assessment. Attitudes are changing, but slowly. And in the traditional grand bargain underpinning growth in many post-war Asian economies, the job of state and many private pension funds was to buy government bonds to support the fisc, public investment, and national development, more than to secure commercial returns for their pension-holders.
And this reflects another bias in the maturation of Northeast Asian economies also seen in the breakdown of LPs: their dominance by producer interests. Corporates, banks, and insurance companies still command a large share of the national economies; institutional asset managers and pension bodies far less so than in the West. For once again, the historic pact propelling much Asian growth required banks and financial institutions to act as the facilitators and conduits of growth, and corporations as their drivers. These, rather than citizens and their institutional investor proxies, still dictate the allocation of resources across much of Asia.