Private equity follows the money: away from China

Axiom, a private equity fund-of-funds, explains why it is putting more of its new $1 billion fund to work in markets such as Thailand and South Korea than ever before.

The Japanese have a word for the market-defining impact of Chinese tourists: “bakugai”, which means explosive spending.

Trends in the behvious of Chinese tourists, such as the shift from buying high-end toilet seats towards cosmetics, are big news for retailers. Those who misjudges their changing tastes issued profit warnings last year, including Japanese department store operator Isetan Mitsukoshi.

Private equity funds and their investors are looking to get ahead of these money flows and back businesses that get it right.

Axiom Asia Private Capital, a fund-of-funds, is shifting gears for its newly-raised fourth fund of $1.03 billion and looking for more private equity investments across Thailand, South Korea and Japan: the top destinations for Chinese tourists in 2016 according to the China National Tourism Administration. 

“Instead of investing in China we are investing in what China wants to buy,” Edmond Ng, a managing partner at Axiom, told FinanceAsia

This is a very different tactic from the one it adopted for its first fund, which closed in 2007, which it invested mostly in China (as did the vast majority of managers at the time).

“The trick of our business is to look where the customers are going, how they are spending their money, and put capital to work before the flow of M&A dollars goes there,” said Marc Lau, a managing partner at Axiom.

Singapore-headquartered Axiom’s shift comes as the backdrop for Asian companies buying US and European peers darkens. Asian capital appears to be less welcome in, say, the US following the election of Donald Trump as president.

Axiom argues Asian companies will redirect at least some of those investment dollars into their own back yard because they don’t have to look so far to find the brands and technologies they need these days. “Asian companies will come to realise that time zones, distance and cultural affinity mean it is probably easier to manage a business closer to home,” Lau said. Prior to Axiom Asia, Lau ran an auto components manufacturing business in Zhejiang, China for Danaher Corp.

The trend towards more localised investment should lead to greater opportunities for private equity managers in terms of buyers and pricing, and higher returns for investors in the asset class. “If you throw one more buyer into the mix then you get more attractive pricing,” Lau said.

“What is a private equity company? It’s been cleaned up, rolled up, and professionalised,” said Lau who started his career in private equity at GIC Special Investments.

Money men
This strategy-shift has been supported by the Axiom’s existing investors, a mix of pension funds, sovereign funds, and asset managers, who made up the bulk of its fourth fund, Axiom Asia IV, L.P. 

Axiom targeted $750 million for its fourth fund and raised $1.03 billion including a greater amount of capital from themselves, the general partnership.

The total was a little bit smaller than Axiom’s previous fund of $1.2 billion in 2012.

Across its funds Axiom has about 50 to 60 about relationships. Among the investors in its fourth fund was AP-Fonden 3 (AP3), one of Sweden's six national funds, which has assets worth $35.3 billion.

The Montana Board of Investments invested $25 million in Fund IV, its third investment into Axiom funds. Meanwhile the Michigan Department of Treasury, Bureau of Investments, committed $50 million, with some of the capital already drawn down.

London-listed Caledonia, a self-managed investment trust, committed $50 million (£34.8m) to Axiom Asia IV.

Axiom, which has 14 investment professionals, launched its fundraising at the tail end of last year and has already put almost a third of the fund to work. It invests in buyout, venture capital, growth capital and other private equity funds.

However for all Asian managers looking to raise funds, 2016 was a tougher slog than say 2009 and 2010. 

The world's largest limited partners, as investors in private equity are known, come from the US and Europe. Axiom is typical in this regard. About two thirds of its investors come from the US and a third from Europe.

US limited partners have enjoyed a bull-run in their US investments for the last few years – so need convincing to direct money overseas, given the added foreign currency risk. Also, given that the US dollar is appreciating on expectations US interest rates will rise, they calculate any foreign investments will suffer in 2017.

“There are a lot of headwinds for a manager trying to raise capital from US LPs to invest outside of the US,” said Chris Loh, another Axiom managing partner.

Axiom's latest fund raised $688 million from US investors according to an SEC filing.

Somewhat compensating has been greater interest from Japanese and Korean investors building out their private equity programmes in Asia.

Axiom charges a 1% fee and 5% carry fee. While it raised less than in its previous fund the managing partners say they have beome more efficient, recycling investors' capital within the fund's lifespan. "Our firepower is not diminished in any way," said Lau. 

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