The more foreign the market, the more funds-of-funds

The world’s largest institutional investors are increasingly building their own home-region private equity programs, but turning to fund-of-funds for the rest of the world particularly when it comes to Asia, says a Hong Kong-based partner of the first fund-of funds to ever build a product covering that region.

Sally Collier, who recently moved to Hong Kong as a partner of Pantheon Private Equity, said the “mega buy-out” managers who enjoyed a heyday in 2006-7 often had global presences, large capacity and were relatively accessible for researchers.

However, those managers were “no longer flavour of the month”, and demand had now shifted to the less-leveraged players in the middle market.

“The challenge here is that these players might only be raising $1.5 to 2 billion per fund, and they are becoming oversubscribed,” Collier said. “They’re the ones that take serious resources to find and access.”

Many of these “growth-oriented” mid-market private equity general partners were popping up in China and India, Collier said, where there was really no buy-out market to speak of.

Pantheon launched its first Asian private equity fund-of-funds in 1994, and raised its last one in 2006, closing it at $800 million for the seven-year closed-end vehicle.

Collier defended the private equity practice of charging fees on committed capital before it was invested, saying that to do otherwise would encourage general partners to make deals no matter what.

“As 2007 progressed our managers slowed down on new investments, and it was that fee structure which allowed them to do that.”

The Pantheon partner did allow that more “fee discussions” were happening in the cost conscious age following the global financial crisis.

She cited the recent example of a Missouri-based institution bargaining a private equity manager into paying 80 per cent of transaction costs for deals made on its behalf, where the historical norm has been a 50:50 split between the general and limited partners.