Limited partners or institutional investors investing into Asian private equities become more realistic about their expectations from Indian and Chinese private equity as they face a reality check in the region's giant markets.
Around two thirds (69%) of LPs think investors were too optimistic about India, and over half (54%) say the same about China, reveals the latest Coller Capital's global private equity barometer, a semi annual global private equity survey of over 131 institutional investors (LPs) based in Europe, North America and Asia-Pacific. Political and regulatory risks are believed to have been the most frequently underestimated risk in both countries, the survey suggested.
Such findings come at a time when India's economy is growing at its slowest pace in nine years, the rupee is the worst performing currency in Asia this year, inflation remains high, industrial production has stalled. While poor infrastructure, low per capita income, high government deficit and debt ratios, a complex regulatory environment and a tendency towards inflation continue to constrain the country's growth potential, political uncertainty in the period leading up to national elections scheduled for 2014 is an additional risk.
India, whose seven per cent plus benign growth rate helped make it one of the most popular destinations for private equity investments in the region between 2003 and 2008, has suffered primarily due to its inability to meet investor's return expectations.
The other Asian giant, China, which claimed the lion's share of funds from institutional investors, is seeing a slowdown of sorts too. According to an article in The Economist China's economy had grown by 7.4 per cent in the third quarter -- its slowest rate of expansion since early 2009 and a "pale shadow of the 9-12% rates it recorded back in 2010".
While clearly the go-go days of Indian PE is over, LPs are coming to terms with reality in the Chinese PE industry too.
Chinese PE Risk-reward worsens; India balanced
As per the report, 43 per cent of LPs believe the risk/reward equation for Chinese private equity is deteriorating. However, the picture for Indian PE is more balanced with 28 per cent of LPs believing the same. As Hiro Mizuno, head of Asia and Partner at Coller Capital very aptly puts it, "LPs return expectations for Indian PE are now fairly accurate. In China, the picture is different – 43 per cent of LPs believe the risk/reward equation is worsening." It, thus, appears that Indian PE has finished the phase of correction of LPs return expectations while China is in the middle of it. Such correction is only healthy for the Indian private equity market in particular as it will take away the unnecessary froth surrounding the industry.
Flight to nascent markets
Consequently, 20 per cent of LPs say they are focusing more attention on newer private equity markets such as Indonesia and Vietnam. Industry experts, however, add that finding good quality managers on-the-ground in the region is still a challenge. Having experienced reality check in the large markets of the Asian region, LPs want to tread cautiously in the nascent markets, they add.
In other findings, the survey revealed that private equity investors (LPs) whose remuneration is tied to the performance of their portfolios have achieved significantly higher returns than their peers over the last five years. Over half (55 per cent) of LPs with performance-related pay have achieved net annual returns more than 11 per cent over the last five years, compared with less than a fifth (19 per cent) of other LPs. Asia-Pacific buyouts, which topped the chart three or four years ago, are somewhat less popular today. Most LPs have increased due diligence since the crash and prefer backing GPs on a deal-by deal basis.
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(Edited by Prem Udayabhanu)