A growing trend of institutions doing direct private equity investment in Asia is being driven by their desire to execute large deals without incurring PE fund fees, says Hamilton Lane.

In the past few years, Asian sovereigns and pensions have been increasingly bypassing private equity funds to make large investments across a broad range of assets.

“It’s driven by a belief that you’re going to get better returns and [for] cheaper," says Juan Delgado-Moreira, head of Europe and Asia for Hamilton Lane, a global PE firm with $23 billion in discretionary AUM and oversight of $135 billion in advisory assets. “It hasn’t been proven,” he adds.

Last week, the $320 billion National Pension Service of Korea launched a London office. The NPS has already spent $1.6 billion on British property holdings and a stake in Gatwick Airport.

An NPS insider tells AsianInvestor that it will target investments in Europe, Africa and the Middle East from its new London base, and broaden its network of financial entities and European pension funds.

Meanwhile, another pension, the $114 billion Ontario Teachers’ Pension Plan, last week closed a deal to acquire a 9.9% stake in Korea’s Kyobo Life Insurance. It beat private equity firms Carlyle Group and Affinity Equity Partners for the $400 million investment.

The two pensions are among a growing faction of institutions that are seeking out and investing directly in assets, following a trend seen previously in the US. The difference, says Delgado-Moreira, is that some Asian institutions have little or no prior experience in private equity.

“CalPERS invested in a very boring, relaxed way for 15 years” before doing direct investments, he says. The California state pension had been a passive investor in PE funds before doing deals on its own.

“But here in Asia, [institutions] who have not even started private equity programmes, or who started two or three years ago, [now have a] scalable, customised, aggressive approach” to direct deals, says Delgado-Moreira. “That’s very new here.”

Sovereigns wealth funds Temasek and Government of Singapore Investment Corporation (GIC), along with Canada’s largest pension plans, have done well in building up private equity deal knowledge over a period of decades.

“They are very sophisticated and they’ve taken their time,” says Delgado-Moreira. “There are many others that are in a hurry to do what GIC does. If you do a $3 billion deal and it doesn’t go well, you’re in trouble.”

He suggests it will only be matter of time before there is news of a direct investment deal “gone bad”. 

Another potential challenge lies in finding a profitable exit strategy, he predicts. “Over the next few years, there will be pressure to exit [investments].” There is a “queue” for company IPOs, while selling to strategic buyers at a profit takes experience.  

“You don’t exit to a strategic [buyer] just like that,” he says. “It takes a skill-set.”

Hamilton Lane and other PE firms are seeing their business model impacted by this direct investment trend. Some of the institutions that once invested in their funds are increasingly becoming co-investors in their PE deals, or are now competing alongside them to win deals.  

Hamilton Lane is taking a neutral view on the development, Delgado-Moreira maintains, as in addition to conventional PE activities it is involved in helping institutions make co-investments along with private equity managers through a dedicated programme.  

Still, he expresses reservations about what he views as a collective rush by institutions to do direct investments in Asia. “It may go right, [but] it may go wrong – that’s the biggest risk,” he says.