Survey Shows Demand for Asian Private Equity Funds Leads to Higher Fees

(April 7, 2011) — Large Asian private equity funds with assets under management over $1 billion are not slashing their fees like their global peers in the United States and Europe, a new survey from Hong Kong-based Squadron Capital shows.

The Squadron study reveals how, since the financial downturn, pension funds and other large investors have been able to exert an increasing amount of authority on private equity funds in Europe and the US to reduce fees. However, according to the firm’s findings, rising demand to invest in Asia has led to fees that are still above an average of 2% a year.

“I agree with the survey,” Ross Ellis, Vice President of Marketing and Client Experience at Pennsylvania-based mutual fund manager and administrator SEI, tells aiCIO. “Supply is limited and demand is great. So, if there’s less competition, there’s no reason to cut fees” he says, adding that over time, the average fee will fall to global norms. But for the meantime, “Asia is hot now,” he states, noting that while large investors have been able to wield more authority over fees following the financial crisis, they have also gained more liquidity and transparency.

“We believe that this is a matter of supply and demand: demand from investors for Asian funds is growing and many institutional investors are more comfortable investing in larger, more established funds,” says David Pierce, Chief Executive Officer of Squadron Capital, in a statement. “On the supply side, the number of such funds is limited and so their managers are able to continue charging premium fees.”

Squadron Capital undertook its annual survey of a sample of almost 100 Asian private equity funds that were actively fundraising during 2010 and open to investment by international institutional investors.

“In an environment of increased focus on appropriate incentivization and alignment of interests, private equity fund terms are under scrutiny, with limited partners globally demanding what they see as a more consistent and equitable approach, so a survey such as this is an important tool to monitor trends and developments in the industry,” says Pierce.

While Asia has attracted the most attention among investors, a recent study reflects a greater level of confidence among institutional investors globally as their private equity programs develop. In January, findings from Coller Capital’s semi-annual Global Private Equity Barometer survey of 120 LPs showed heightened confidence among institutional investors as their private equity programs develop. The results revealed that just over 40% of limited partners in Europe and Asia are still growing their private equity investments, compared to only 10% of North American investors. All regions, however, shared an effort among investors to find new relationships.