How do you view investment opportunities in Asia given some rockiness in markets tied to worries about growth?
This may be the optimal time to invest in Asia, especially in small and mid-sized private equity funds. Overall, valuations in Asia are quite attractive, especially compared to what you see in the developed world. With a slowdown in fundraising in Asia, it could make the region more attractive from a supply and demand perspective. Private equity has historically been a better place to capture value, because the stock market doesn’t always reflect the rate of economic development in Asia. Despite the headline news and rockiness in the public market, on the ground there is still very solid, fast growth, especially around the consumer-related sector, which has been driven by the growing middle class and rising disposable income. There are a few sectors where we get excited about, including consumer discretionary, healthcare, information technology and agriculture. Private equity is a superb vehicle to invest in these areas because there are so many more options available.
How should investors think about Asia, in terms of geographies offering the best returns?
Asia exposure has always been a critical component of a global portfolio. There is still growth potential in China and in Southeast Asia. That’s where we’ve been focused. We are bringing in two more team members to focus on China and Southeast Asia. China is a most attractive emerging market because it accounts for about 50 percent of the total private equity investment activity in Asia. Moreover, China is very cheap right now. The public market currently trades at 10x P/E multiples despite solid economic fundamentals. Concerns over shadow banking, the real estate bubble, industrial overcapacity—we think they’re already priced into the market. Private equity is much less exposed to these.
What kind of activity are you seeing around co-investments?
Large investors are looking to participate and get direct access to investment opportunities in the Asian market. We’re doing a number of things to address that. FLAG has really tried to strengthen its co-investment activities. I’ve had a long history of direct investing experience, including as head of alternative investments, CIO Asia, at JP Morgan Chase Bank prior to joining FLAG in April. We try to avoid the passive co-investment approach with its risk of adverse selection. We have strengthened the team with more co-investment resources. That’s changed our deal flow and increased it significantly.
How do you tackle issues around the extra layer of fees in funds of funds?
We do understand this is a concern for some investors. However, if you tie this into the value that funds of funds offer, plus regional and sector diversification, as well as GP coverage, it’s more appealing. For a large base of limited partners, a fund of funds offers a more efficient and effective approach when compared to building a single team to cover Asia. We also don’t charge additional fees for co-investments. By offering up to 25 percent of a commitment for co-investments, we are significantly reducing the funds-of-funds fees and the carry drag on a blended basis. We’re offering our investors an optimal solution.
Any risks that you’re keeping an eye on in Asia right now?
I don’t think there’s one singular event that stands out. There is always risk for market disruption such as geopolitical risks in the region. That might derail economic development for a short period of time, or we may see a market correction in the developed market that might spill over into Asia. Investors will want to pay attention to heated sectors that could impact exposure to Asia. One such sector that comes to mind in which we have small exposure is TMT (telecom, media and technology). When these events happen with short-term flight to safety, it’s possible we’ll see market disruption. This could create more attractive investment opportunities for long-term investors like us. Unlike hedge funds, we tend to take a longer, structural view toward investments. Portfolio diversification is the key and can substantially mitigate short-term risks.
Edited by Steve Gelsi