Chindia hangover looms
By Paul Mackintosh - 17/12/12
The latest edition of Coller Capital’s Global Private Equity Barometer, polling opinion among 131 representative limited partners (LPs) worldwide, had some interesting insights to deliver at year end. One is that the fashionable Asian markets of China and India seem to be losing their gloss in the eyes of LPs. According to the Barometer, some 69% of LPs believe that the earlier generations of general partners (GPs) investing in India were too optimistic about risks there, while 54% took the same view on China-focused private equity. And perceptions of the risk/reward balance in China among LPs are growing sharply worse. Over 40% of LPs see a less favourable risk/reward balance in China in future, versus some 13% expecting a more positive ratio. India fares better on this count, with around 28% of LPs expecting poorer risk/reward balance henceforth versus around 18% expecting an improvement. But as a whole, 20% of LPs with Asian exposure are now looking more closely at the less developed frontier private equity markets such as Indonesia and Vietnam, rather than the region’s more developed markets.
Conceivably, these figures might have been different if the poll had been taken after the recent handover of power in China and the anointing of the new generation of leaders. However, I believe the souring of sentiment on China is concerned more with basics and a clear perspective on returns. In most of the Barometer’s other target topics, Asia Pacific occupies a middle ground between the US and Europe, with Asian debt supply for deals seen at almost American levels compared to concerns over underfunding in Europe, while expectations of buyout default rates over the next two to three years are closer to America’s one quarter of LPs than Europe’s two thirds. But European and Asia Pacific LPs both see significant distributions from their portfolios as a far more distant prospect than their American peers. In fact, LPs for Asia Pacific have the lowest expectations of all in terms of significant uptick in distributions in H1 2013: just 11% compared to close to 20% for both North American and European LPs. Around 67% of North American LPs are expecting a significant payday from their investments during 2013: for Asia Pacific LPs, meanwhile, the figure is 38%, and they have the highest proportion of all, around 18%, who expect an upsurge in distributions only after 2014.
So the data suggests that LPs are now looking at the hangover after the party of breakneck Chindia investing pre- and post-crisis. Asia Pacific is now the least attractive region for buyout investments over the next 12 months, the Coller poll also concludes, and 48% of Asia Pacific LPs have reduced their fund commitments after more intensive due diligence since the Crisis. Asia, it seems, is going to be a harder sell in future.