Limited partners (LPs) in Asia-Pacific have been treading cautiously, declining to re-invest with at least one of their current general partners (GPs) over the last 12 twelve months, due to a liquidity crunch.
According to Coller Capital’s Global Private Capital Barometer report, 67% of Asia-Pacific investors and 79% of global investors cited factors such as institutional capital availability, performance concerns, and change in strategy as reasons for this decision.
This sentiment is expected to deepen, with nearly nine in 10 (88%) LPs anticipated to decline re-investing with some existing GPs over the next 12 months.
“Recent disruptions, such as the liquidity crunch and a slowdown in M&A activities, have made it harder for investors to receive timely distributions, challenging the traditional reinvestment process. Facing these challenges, many investors become more cautious, leading to a growing appetite for asset classes like secondaries, which provide attractive returns on a risk-adjusted basis,” said Zhan Yang, Investment Principal, Coller Capital.
The Coller Capital Global Private Capital Barometer survey gathered insights from 107 private capital investors, who collectively manage $1.9 trillion in assets globally.
Across regions, the report pointed out, most LPs have received fundraising extension requests from their GPs over the past 12 months, with nearly two-thirds observing funds closing below target. While fund sizes have generally increased in recent years, not all have met their targets, suggesting a possible inflection point as LPs scrutinise fund size increases more closely.
Nearly four-fifths of LPs are comfortable with their GPs’ current alignment. 32% believe most of their GPs demonstrate adequate commitment to the funds. This confidence varies across regions with 38% of the North American investor base sharing this view. In sharp contrast, only 26% of European LPs exhibited this perspective.
The decision to decline to reinvest is unsurprising as operating in a negative cash flow environment has become a familiar experience for LPs.
Looking ahead to the next 12 months even if almost two-thirds of LPs may opt out of re-upping with a small number of their current GPs, a further 12% don’t expect to decline reinvestment opportunities at all. This is indicative of an improving sentiment and investor confidence across private markets, according to the report.
Still LPs continue to show a strong appetite to expand their allocation to private markets.
Looking ahead the report points to 96% of investors planning to increase or maintain their overall allocation to alternative assets. Specifically, 90% intend to increase or maintain their allocation to private equity, while 89% plan to do the same for secondaries.
Emerging Opportunities
Notably Asia Pacific markets are becoming increasingly attractive to global investors for private equity investments.
Percentage of LPs that believe the attractiveness of the risk / reward balance for PE is improving:
| Region | India | Japan | South Korea |
|---|---|---|---|
| APAC | 67% | 60% | 27% |
| Europe | 65% | 38% | 35% |
| North America | 71% | 59% | 28% |
| Average | 68% | 50% | 30% |
India led the pack among Asia’s emerging private markets, with two-thirds of respondents highlighting an improving risk/reward equation for private equity investments. Japan and South Korea follow closely behind in attractiveness.
68% of the respondents believed that in terms of the attractiveness of the risk/reward equation of PE India was improving.
“India,” explained Yang, “has become a focus for many investors in the APAC region, driven by favourable demographics, a thriving technology sector, and expanding service industries. These factors have created an attractive investment landscape. While geopolitical challenges in China have influenced regional capital flows, India has emerged as one of the preferred destinations.”
According to the report, 50% of respondents believe Japan offers an attractive risk/reward equation for PE investments.
“The private equity and venture capital market in Japan has seen cycles of high expectations and retreats. In the past five years, interest in Japan has resurged, driven by increasing corporate carve-outs. Pressures on conglomerates in a competitive global market have led to notable divestitures, including high-profile acquisitions we are seeing in the market. While investors are finding opportunities, concerns over the yen’s depreciation contribute to a mixed sentiment,” explained the executive.
In contrast, South Korea saw 30% of respondents highlighting the attractiveness of the risk/reward equation for private equity investments, while 68% expressed a less favourable view.
Yang explained that political stability in South Korea has generally been steady despite temporary uncertainties from recent events. “The Barometer findings suggest that LPs believe the market is becoming more attractive for PE investments. This reflects investors are seeing potential in Korea’s sizable PE market and its economy,” he added.
That said, the market also has its own set of challenges. The number of established PE managers in Korea remains limited, and the dominance of large conglomerates causes change to occur at a more gradual pace.
There are hurdles to investing in Asia-Pacific.
The report highlighted that in India, the scarcity of private equity talent and competition for deals are top concerns for LPs, in addition to a challenging exit environment.
Rationalising, therefore, the importance of the emergence of pan-Asian funds as the key avenue for investment in Asia (ex-China), as they are likely to offer an optimal balance between risk and exposure.
However, building investment capability takes time. The diversity of Asia adds an extra layer of complexity, requiring a deep local knowledge of various economic, cultural, and regulatory environments.
“As a result, the growth of the talent pool in Asia will be gradual, and it may not progress as quickly as people might hope. But over time, it will continue to improve,” opined Yang.
Market maturity
The Asia Pacific private market is maturing and Yang believes that one key indicator to assess the maturity of the private equity industry is its size. The emergence of larger GPs in Asia, raising funds up to $10 billion, signals clear industry growth.
Talent pool is another indicator. The private equity industry in Asia increasingly consists of professionals trained in-house or with experience in established managers in the US or Europe, reflecting a more specialised and mature workforce.
And finally, the maturity of the industry is evident in the ecosystem of service providers, feels Yang. He pointed to a full range of services—investment banking, tax, legal, commercial due diligence, and background checks—that now supports the PE sector, ensuring efficient operations.
“These factors—size, talent, and services—demonstrate that the PE industry in Asia is growing and maturing, though at a different pace than more established markets like the US or Europe,” said the senior executive.
Touching upon the evolving mindset of Asian LPs and the Western LPs, he explained that global institutional investors typically take a ‘top-down’ approach when allocating to Asia.
They view it as a region they cannot ignore, and maintain a certain level of their portfolio exposure to the market. They may invest through fund-of-funds, managers, or even set up local direct investment teams.
In contrast, many APAC investors often exhibit a home bias and are particularly active within Southeast Asia and China. This is a common strategy among some local investors, who, while learning from global institutional investors, still allocate based on portfolio considerations to build up their regional exposure.
Alternatives
Looking ahead, 37% of LPs plan to increase their overall allocation to alternatives. Among specific strategies, private debt leads with 37% of LPs intending to boost their investments, reflecting growing enthusiasm for the segment, followed closely by private equity and infrastructure with planned allocation increases of 34% and 33%, respectively.
For nearly half of LPs, secondaries is seen as a core pillar of their alternative assets strategy. Yang explained that secondaries-focused investment funds, especially those with a global mandate, can offer investors good diversification and attractive risk-adjusted returns.
Continuation vehicles (CVs) are gaining acceptance and demand as a viable exit strategy and a path to liquidity. Many investors now have a deeper understanding and exposure to these funds, with appetite expected to grow steadily.
Interestingly, Asia-Pacific LPs have shown the strongest appetite for secondaries, with 42% planning to boost allocations, ahead of Europe (38%) and North America (13%) according to the report.
“APAC LPs have already built up exposure to this asset class through managers or direct investments over the years. Secondaries is a mainstream strategy among APAC LPs,” emphasised Yang.
Touching upon the local secondaries market in APAC, he explained that it has also gained traction in recent years due to the accumulation of private market assets.
As the inventory of assets increases, the demand for liquidity rises. Coupled with a growing LP base, the APAC secondaries market presents significant growth potential. “Also, as the market remains newer compared to the global market, many APAC investors are looking for early mover advantage to drive returns, in part explaining their strong appetite for this asset class,” added the executive.
Exit transparency
According to the report, 91% of LPs supported the introduction of “Exit Committees” to assist in decisions regarding exit timing and overall portfolio strategy. With 63% of investors feeling that current exit timelines communicated by their GPs are ‘optimistic,’ this idea could provide an additional layer of objectivity to the process from the investors’ perspective.
An exit committee, explained Yang, plays a critical role in steering the manager towards a more holistic, strategic approach to exits, considering the timing and the fund’s operational strategy.
It should be designed to ensure the GP’s ability to realise gains and return capital to LPs. “To achieve that, it must make strategic decisions based on the need for distribution, especially as the fund approaches its later years. While holding an asset longer could yield better returns, the exit committee ensures that the fund’s timing and strategy maximise returns for LPs,” he stated.
