Most institutional investors globally have become more selective about Asia-Pacific private equity thanks to relatively weak returns from the region (see figure 1), with European asset owners in particular keen to reduce their PE headcount there.

At the same time, PE investors – also known as limited partners (LPs) – are more optimistic about prospects for Asia-Pacific assets than for other regions (see figure 2), most notably in respect of Japan. They are least optimistic about North America, given the uncertainty over potential tax and regulatory changes under US president Donald Trump.

These are among the findings of a bi-annual global survey* by PE secondaries manager Coller Capital, due to be released today.

Fig 1: LPs' returns (click for full view)

A third of the 110 respondents said they were making little change to their Asia-Pacific PE investment strategy. But just over half (54%) said they were more selective in picking managers – or general partners (GPs) – in and for the region.

Indeed, one-fifth of European institutional investors are planning to cut down their Asian private equity teams, compared to just 8% that intend to expand their staffing in the region (see figure 3).

Attracting talent

However, four in 10 Asia-Pacific LPs are planning to strengthen their PE headcount in the region. And their prospects of doing so look better than they used to, despite the fierce competition for talent.

Asset owners in Asia are now better able to attract PE expertise, because they are more aware of the need for clearly structured remuneration schemes like those offered by private equity firms, said Zhan Yang, Hong Kong-based principal at Coller Capital. “Regional LPs are becoming more market-orientated,” he told AsianInvestor.

This will help the bigger Asian institutions as they expand their private-market investment teams overseas. For instance, South Korea’s $480 billion Nation Pension Service is looking to add three in its London office and two in New York, having hired four more in Singapore recently – across infrastructure, PE and real estate.

   FIg 2: LPs' expectations
   (click for full view)

Most Asian LPs are trying to copy the model of Singapore state funds GIC and Temasek, which have been very successful in building local investment teams in overseas offices, said Yang.

More Asian autonomy

Meanwhile, many European and US institutions are realising that they need to give their Asia-based teams more decision-making autonomy, Yang said.

If an LP requires all of its allocations to be approved by a central investment committee (IC) in Europe or the US, it may miss out on certain opportunities in Asia, he noted. “A deal might require a decision to be made within two weeks, so if the IC convenes every month, that’s not going to work.”

Hence many western institutions are considering how to optimise this process to ensure they can capture the best deals, added Yang. “The trend is for them to delegate more power to the teams on the ground in Asia.”

Rising interest in Japan

When it comes to investing in the region, interest has re-ignited in Japan in particular: 41% of North American LPs, 45% of European LPs and 71% of Asia-Pacific LPs are more optimistic about that market.

Fig 3: LPs' team plans
(click for full view)

Yang puts this down to several reasons. “It’s not just down to the ongoing generational transition in corporate Japan and Abenomics. Ultimately, [Japanese] people’s perception of private equity as an asset class has changed dramatically – they are more accepting of PE investment than in the past.”

Corporates are seeing more and more cases where private equity is helping their business, he added. For example, PE managers have provided international expertise and introductions to help companies expand overseas.

Moreover, said Yang, GPs have increasingly recognised the need to offer long-standing management teams incentives to align them closely with the performance of the business.

Asked about the typical level of returns from Japanese deals in recent years, he noted: “For the funds we look at, it generally ranges between 1.8 and 2.5 times return on investment.”

*For Coller Capital's Global Private Equity Barometer, 21% of respondents were from Asia Pacific, 39% from Europe and 40% from North America. The fieldwork was carried out in March and April this year.