<article>It seems like there are <a href="https://www.dealstreetasia.com/stories/asia-pacific-pe-bain-125560/">some uncertain times ahead for the private equity sector</a>, especially for smaller funds, which are taking longer to close their vehicles.</article>

It seems like there are <a href="https://www.dealstreetasia.com/stories/asia-pacific-pe-bain-125560/">some uncertain times ahead for the private equity sector</a>, especially for smaller funds, which are taking longer to close their vehicles.
According to a <a href="https://www.dealstreetasia.com/stories/asia-pacific-pe-bain-125560/">report by Bain &amp; Co</a>., the overall fundraising in Asia declined more than 50 per cent to $75 billion in 2018, as the region’s private equity market became sharply polarised between large funds with strong track records that dominate activity across the region, and smaller, less experienced funds that are having difficulty raising funds and exiting.
The situation marks the emergence of a winner-takes-all dynamic, warned the consulting firm. However, this does not mean global funds are performing better than regional or first-time funds, noted Bain.
“What we see, however, is that there is a flight to quality in Asia-Pacific, with larger funds attracting most of the capital and raising in a record amount of time,” Johanne Dessard, practice director in Bain’s Global Private Equity practice, told DEALSTREETASIA.
In 2018, funds larger than $1 billion were closed in seven months’ time, versus 16 and 27 months for smaller, experienced funds and first-time funds respectively.
“In the same vein, all of the large experienced funds that closed last year met or exceeded their target &#8211; versus 39 per cent for smaller experienced funds and 63 per cent for first-time funds,” added Dessard.
How should smaller and first-time funds differentiate themselves then? The key is specialisation.
“Ultimately to differentiate their offerings from the mega-funds, smaller firms have to be nimble on their feet. These firms should be able to offer specialised knowledge of the local market and a more personalised relationship with their portfolio companies or management teams looking at seeking investment, especially when investing in earlier stages of a company and being able to show that company the path to growth. This specialised knowledge can often mean a narrower focus for potential investments and the establishment of specialist funds, for example in medtech or ESG investments,” said global law firm Linklaters partner Parthiv Rishi.
Bain’s Dessard concurred, adding that smaller and first-time funds can produce track record from their team and a differentiated angle in terms of special relationships or network, proven value creation playbook for target sectors and more.
“If this is about how to attract capital from LPs, past returns, team and track record are usually some of the top criteria for LPs to evaluate their GPs. And to some extent, size does not matter if these conditions are met,” she said.
<h3>The rise of specialist funds</h3>
In Southeast Asia, there has been a rise of specialist investors or sector-focused funds, such as financial services-focused Apis Partners and healthcare-focused Quadria Capital.
Based in the UK, Apis Partners is focused on South and Southeast Asian financial services companies. It made its first investment in the region last year by putting in $21.2 million into Malaysian payment systems company GHL Systems Bhd.
“As they pulled the [first] fund together, the deal flow that came to that fund from day one was enormous. It just immediately proved that there is this space in the market and that a specialist fund is actually required. So the trouble is that we’ve been so busy and haven’t really been able to focus on Southeast Asia, quite frankly. Hence, the first fund was mostly deployed in Africa and South Asia,” said its operating partner Nigel Lee.
The firm is on the road to <a href="https://www.dealstreetasia.com/stories/apis-partners-southeast-asia-119191/">raise $400 million for its second fund</a>, with a $500-million hard cap. It has secured commitments from global impact investment firm PG Impact Investments and World Bank&#8217;s International Finance Corporation (EFC). Its Fund I was closed in March 2017 at its hard cap of $287 million.
“…as we invest in emerging markets, it can be more volatile and riskier, and one way to de-risk is to be a specialist. If you hopefully know what you’re doing with expertise in a specific area, then you have a better chance of maximising the returns for your LPs. Apis really is a specialty private equity fund where we only invest in financial services in the emerging markets and only do growth – Series C and above,” said its partner Nick Talwar.
On the other hand, healthcare-focused Quadria Capital is on the road to raise its fourth fund, for which it aims to <a href="https://www.dealstreetasia.com/stories/quadria-capital-fourth-fund-104279/">gather about $700 million, including $100-200 million for a co-investment pool</a>.
The firm was founded in 2010 by Amit Varma and Abrar Mir, both former senior executives at India’s Religare Group. Varma is a physician with over two decades of clinical experience and has previously led the international expansion initiatives at India-based Fortis Healthcare. Law graduate Mir has spent an equal amount of time in the PE, investment banking and healthcare spaces.
As competition for healthcare deals and valuations are on the rise, Varma said Quadria prefers to look at proprietary deals and avoid participating in a bidding process that might result in overpaying for a deal.
“Out of the nine deals that we have done so far, we have never had a high-teen multiple valuation. Most of our deals, if not all, are proprietary. We have a bunch of healthcare guys who have only run healthcare companies, so we are able to convince the companies to take up a saner valuation,” he said.
<h3>Southeast Asia is still hot among PE investors</h3>
Now back to fundraising. The abundance of dry powder in Asia forced fundraising activities to slow down in 2018.
The Bain report noted that China’s stringent policies on wealth management products were another major factor curbing Asia-focused fundraising. The country’s restrictions on banks and insurers investing in non-standard asset classes, including private equity, led to a massive decline in renminbi fundraising in 2018.
“Looking at what may happen, there will be conflicting forces: On the one hand, record level of Asia-Pacific focused dry powder may slow down fundraising growth.
“On the other hand, most investors are still below their target allocation for PE, and Asia is still an attractive region, given strong fundamentals, solid returns and diversification platform away from Europe and Northern America,” said Bain’s Dessard.
The exit momentum in the region has been rather challenging. Would this hinder private equity investors in deploying their capital in this part of the world?
Well, there is no indication that there will be a lack of capital deployment in the region, according to Rishi, as Southeast Asia is viewed as a natural hedge to China and opportunities in the region have been growing year on year.
“Despite government elections in key jurisdictions, deal flow does not seem to have been affected and I see no reason for investments to reduce any time soon. Companies in the region, on the whole, are very much in growth mode and if there is a perceived lack of exit momentum, I don&#8217;t foresee that being an issue for investment in the short term.
“If sellers can realign their exit value expectations with underlying performance and realistic growth prospects, I think there is a real possibility of the development of the secondary market, which, in turn, will further drive investment and interest in the region by increasing exit opportunities and risk perception,” said Linklater’s Rishi.
He added that the region retains a significant potential for growth and investment opportunities and this will only increase as China-US trade tensions remain, geopolitical and economic concerns elsewhere continue, and tech penetration increases within the region.
“Investment historically in SEA has been driven by the larger markets (Indonesia, Malaysia, Singapore) but we are seeing increased activity across the wider region now, with Vietnam seeing increased attention and activity and countries like the Philippines and Thailand seeing a significant interest.
“Some of the lesser players in the market (Cambodia, Myanmar, Laos) still have significant potential although deal volume remains subdued. I also expect green investment or impact investing to grow significantly in the region following the trend of the more mature markets. Lastly, infrastructure opportunities, especially in the renewable energy space, should see increasing levels of attention, especially off the back of the Equis sale last year,” added Rishi.
Southeast Asia saw an exceptional exit year in 2017, with $18 billion in exit value. In contrast, exits hit their lowest value in 2018 since 2007, which may partly be a cyclical consequence of such a good 2017. There were just fewer companies to exit, noted Dessard.
“Almost two-thirds of SEA-focused investors we surveyed mention that they saw lots or some attractive opportunities in 2018. More fundamentally, Southeast Asia remains extremely attractive as an investment region, with returns expectations being amongst the highest observed compared to other emerging countries,” she said.
Also Read:
<a style="color: #ff0000;" href="https://www.dealstreetasia.com/stories/asia-pacific-pe-bain-125560/">Tougher times ahead for PE in Asia Pacific, warns Bain &amp; Co report</a>
<a style="color: #ff0000;" href="https://www.dealstreetasia.com/stories/private-equity-se-asia-114740/">Private equity in Southeast Asia ready for the next phase of growth</a>

How should smaller and first-time funds differentiate themselves then? The key is specialisation.

Smaller, first-time PE funds need to carve their own niche to attract capital

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