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Asian Fund of Funds Flowering

The launch of two new Asian funds of funds underscores a groundswell of global institutional interest in Asian private equity, says the APER. They argue the time appears to be ripe for establishing Asian private equity fund of funds.

In the course of a month, two Asian funds of funds have been launched, one in Australia and another in Singapore. The establishment of the vehicles testifies to surging optimism on the future prospects of Asian private equity.

The Sydney-based ING Investment Management's initiative to sponsor ING Private Equity Access Ltd ('ING PE Access') marks a milestone in the growth of fund of funds in Asian private equity. The concept behind ING PE Access - to provide liquidity to its investors in private equity assets - bespeaks a growing investor base in Australia that possesses a deepening understanding of the complexities of private equity investing in one of Asia Pacific's most developed economies.

ING PE Access will be Asia's first publicly-listed fund. Scheduled to be listed on the Australian Stock Exchange ('ASX') at the end of November, it plans to raise A$120 million (US$87.7 million) from the market. The minimum investment amount is A$2,000, and investors can elect to subscribe to stapled securities at A$2 apiece. Each of these latter securities consists of two shares and one option to subscribe for an additional share at an exercise price of A$1 each. The stapled securities will subsequently be traded separately on the ASX as shares and options. The mechanism behind such a complex structure is to provide share price stability and net tangible asset backing for ING PE Access over a period of time.

To provide a level of comfort to those who are prepared to pledge capital to this new concept in a country-specific fund of funds, ING PE Access will initially be invested in a selected group of Australian listed stocks so as to demonstrate competitive returns in its early phase. Ultimately, private equity assets will take up 90% of the fund pool, with the remaining 10% for listed securities or cash. ING Investment Management believes it is the first listed fund of funds vehicle that can achieve a return of 20% per annum over the long-term.

Buoyed by economic growth in recent years, the launch of ING PE Access is a reflection of the sustainable private equity investment model that Australia has been able to demonstrate in recent years. It is not surprising that ING PE Access has received strong support from the local market. ING PE Access is its sponsor's third fund of funds. It will reflect whether retail investors in Australia are prepared to take a long-term gamble with private equity and its industry's future fund sources.

Soon after the launch of ING PE Access, the Swiss-based Partners Group added fuel to the momentum in announcing its maiden Asian fund of funds, Asia Pacific Limited Partners ('Asia Pacific LP'). With a target of between US$150 million and US$200 million, it has already achieved a first closing at US$50 million. One of the largest fund of funds houses in Europe with over US$6 billion under management, the Partners Group's public statement coincided with the establishment of its first Asian office in Singapore.

Unlike ING PE Access, however, Asia Pacific LP is a pan-Asia fund and is the embodiment of a traditional fund of funds vehicle. It will direct approximately 80% of its capital to the buyout segment, with the residual going to venture capital. One of Asia Pacific LP's first investments was an allocation to Sydney-based Ironbridge Capital's first buyout fund, the Ironbridge Capital 2003/4 Fund.

As an indication of global institutions' intense interest in Asian private equity, ING PE Access and Asia Pacific LP are seen as a prelude to arrival of other global fund of funds houses. The Chicago-based Adams Street Partners LLC is widely understood to be following the Partners Group's footsteps in setting up a Singapore office. With US$9 billion under management, Adams Street Partners has recently committed capital to two Asian buyout funds.

The respective announcements of ING PE Access and Asia Pacific LP has drawn the spotlight to fund of funds houses in Asian private equity that have a long established, albeit low profile, presence in the region. Australia houses Asia's largest fund of funds community, with at least seven active players (fig 8). One of its most recent entrants is Quay Partners which was established in 2000 and has so far successfully secured commitments of over US$350 million. So far, Australia's fund of funds have yet to display interest in forming partnerships with Asian private equity fund management firms. Instead, their focus has been either the domestic market or those in the USA and Europe. Outside of Australia, currently there are eight such firms that fall into this category (fig 9).

In 1993, Pantheon Capital Asia set up its office in Hong Kong and has since launched three Asia-dedicated funds to seek opportunities with Asia-based fund managers. Three years later, in 1996, HarbourVest Partners, a pioneer in the fund of funds concept and the largest of its kind in global private equity, established HarbourVest Partners (Asia) Ltd. in Hong Kong. Courted by virtually every Asian private equity fund management firm, HarbourVest Partners (Asia) adhered to a very selective allocation programme and has largely abstained from deploying capital to Asian private equity funds in recent years. In 1997, a third global fund of funds house, Capital Z Investment Partners, arrived. Backed by Zurich Financial Services, Capital Z Investment Partners established its Asian office in Hong Kong.

It sets itself apart from others in providing funds to promising fund management firms, that would benefit from its expertise and global network.

Following Hong Kong, Japan became the second market to welcome private-sector fund of funds initiatives. In late 2000, Alternative Investment Capital, jointly sponsored by Mitsubishi Corp. and Daido Life was the first Japanese fund of funds house. It currently has over US$250 million under management. Tokio Marine & Nichido Fire Insurance, which was among the earliest investors in Asian private equity, soon joined in. Its Tokio Marine Asset Management focuses on private equity allocations for the parent organisation, the largest non-life insurance house in Japan. Tokio Marine Asset Management recently took an active role in Asian markets outside of Japan and set up an office in Hong Kong to search for appropriate fund houses.

The most recent entrant to the fund of funds community in Japan is WestLB Asset Management. Established in late 2002, WestLB Asset Management currently manages a fund pool of US$840 million. Its third fund, the Special Private Equity Partners III has achieved its first closing. WestLB Asset Management's allocation to Asia, including Japan, comes from its global capital pool and takes up no more than 10% of its funds. The listing of ING PE Access will add a new dimension to fund of funds management in Asian private equity.

It will also be a valuable reference point for other markets in the region in broadening Asian private equity funds sources. The arrival of Partners Group on the Southeast Asian market, meanwhile, foreshadows an enlarging group of investors who believe a new set of opportunities are emerging in South Asia. A new chapter on Asian private equity funds is waiting to bloom.

Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com