British building society Nationwide’s pension fund has been investing into Asian illiquid assets since 2012, but chief investment officer Mark Hedges remains wary of the governance challenges posed by private equity markets in the region.

“You get funds with a lot of minority interests in companies, rather than majority ownership,” he told AsianInvestor. “And sometimes you worry whether you can really control the governance of the underlying asset if the entrepreneur is still in charge and you’ve just got a minority interest.”

Another issue he raises is that exits from private equity investments in Asia tend to be done via initial public offerings. “[IPOs are] a declining activity in Europe and the US,” Hedges said. “Exits are more often done through a sale to a strategic buyer or into another fund structure.”

Such issues reflect that Asian private equity markets are less mature than those in Europe or the US, he concedes.

Mark Hedges

This is a concern because IPOs provide less certainty around asset valuations than, for example, trade sales, Hedges said. “You don’t know what's going to happen to the share price in the period between when it was listed and when you’re allowed to come out of your lockup.”

As a result of such issues, he is particularly selective when picking managers of Asian private equity assets, as is demonstrated by the two firms to which it has allocated: consumer brand-focused L Catterton Asia, which is backed by luxury goods maker LVMH; and Hahn & Company, a Korean firm that specialises in corporate carve-outs.

Nationwide Pension invested in funds 1, 2 and 3 of L Catterton (formerly L Capital), which have had a “mixed performance thanks to a number of headwinds,” Hedges said, most recently as a result of the Covid-19 pandemic.

Hahn, meanwhile, extracts businesses from Korea’s chaebol conglomerates that it feels may benefit from better support, he said.

Nationwide’s £6.5 billion ($8.4 billion) pension fund, with 19% of its assets under management allocated to private markets, also has allocations to infrastructure and real estate in Asia.

RENEWABLES AND REAL ESTATE

Its first venture into Asian private markets was with Singapore-based infrastructure manager Equis in 2012. “We invested in their first and second funds and to a co-investment fund,” said Hedges. They have realised almost all their investments over the past three years.

“We liked what Equis were doing; we felt it played to our views on Asia,” he added. “It was very focused on renewable energy and it was almost all greenfield development – new solar, wind, biofuel and hydropower projects.” 

Hedges said that the fund might invest in replacement infrastructure at some point, but in more mature assets that are focused on securing cash flow rather than value-add opportunistic development risk. The defined-benefit scheme is closing to new accruals next year and thus de-risking with a view to ensuring it can meet its payout obligations.

Nationwide is allocated to Asian real estate via Hong Kong-based PAG. It committed to its second fund and re-upped into its third fund last year. “We like PAG as a real estate team and the way they operate across Asia, across many of the gateway cities,” said Hedges.

Private credit is a gap in the plan’s Asian exposure and is one that Hedges expects to fill at some point, as reported recently by AsianInvestor

“As we tilt our portfolios towards more de-risking, more cash flow and credit-type activities, private credit will increasingly be part of our focus,” he said.

“We don’t have any exposure to private credit in Asia yet, but that will probably be the next port of call in that asset class. It’s a natural thing for us to do, given we’ve got private credit exposure in the US and Europe.”