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Asia PE fundraising: Tapping into the strategic objectives of family offices

  • Family offices often ask which asset class is best to access a specific opportunity
  • Groups setting up a presence in Asia do so for strategic, governance reasons
  • Asian families trail US, European peers in reliance on professional management

Oppenheimer Generations is the family office Nicky and Jonathan Oppenheimer, scions of a business dynasty that founded mining giant Anglo American and helped De Beers maintain its dominance of diamond production. The family exited the mining business on selling control of De Beers to Anglo American for USD 5.1bn in 2012, but traces of the industry mentality remain.

Describing how the family manages its wealth, Edoardo Collevecchio, a managing director at Oppenheimer Generations Asia, drew comparisons to the mining industry of old. Sites would be scattered across the globe, and in the absence of modern communications, individual management teams had a high degree of autonomy – a “sandbox” in which they could operate freely.

“They have kind of taken that approach to the family office. Even though the velocity of communication is different, they basically say, ‘The leverage we have is people, so hire the management and give them capital,’” he told the AVCJ Private Equity Forum Singapore 2024 last month.

“I have a pool of capital, and as long as I play within [my sandbox], the investment committee is straightforward, and the team is empowered to make a lot of decisions. The principals have a veto check. They see everything, they can shoot it down if they don’t like it, but they are saying, ‘We are not in the business of re-underwriting every decision you make.’”

Collevecchio was despatched to Singapore three years ago to build an ecosystem across markets with which the family had little familiarity. It recognised an on-the-ground presence was necessary to get comfortable with the risks presented by emerging economies, and the willingness to invest in this was driven not only by prospective returns but by the long-term strategic relevance of Asia.

The notion of an in-region beachhead, as Collevecchio described the Singapore base, is increasingly a feature of family office thinking. Asia is not necessarily expected to deliver an immediate dividend. Rather, they want to watch and learn, forging lasting relationships that transcend asset classes – an approach that impacts when and how private equity firms should seek to engage with them.

“We came to Asia because, in our opinion, it was largely families that owned businesses, and without those relationships we weren’t really able to execute a proper long-term strategy,” said Roxanne Davies, who has run the Asian arm of Parly, a 900-year-old European family office that previously owned multiple operating businesses with a presence in the region, since 2011.

“We were also hoping we could add some value to the portfolios of these families with our relationships and networks around the world. We are really all about collaboration.”

Meeting of minds?

With private equity and venture capital fundraising in Asia hitting a 10-year low in 2023 – an amplification of a global trend – much has been made of the reduced role played by traditional institutional capital. Pension plans, endowments, and insurers either lack budget for alternatives or lack the appetite for Asia, so managers are looking elsewhere. Family offices are a logical target.

Sean Low established Singapore-based Golden Vision Capital, which invests globally on behalf of a single-family office and through fund-of-funds and co-investment programmes, in 2021 after a 17-year career at GIC. Initially, he found his negotiating power was significantly diminished, but the situation has since turned on its head as private equity fundraising became more difficult.

“Distributions haven’t come back, so many LPs aren’t in a position to commit what they used to commit. For the first time, I can get them to reduce the minimum cheque, I can get them to show me co-investment that is more than one-to-one [co-investment to fund commitment],” he told the forum.

“It depends on the geography, depends on the GP, and depends on the LP, but it’s a great time to be a small LP because finally you get attention.”

Low pointed to a top-tier European private equity firm that saw a one-third drop-off in its US investor base – while European LPs held steady and Asian LPs re-upped significantly – and was in danger of falling short of its target fund size. The fundraising period was extended, and LPs were offered favourable terms, such as access at cost to warehoused co-investments that had already been marked up in value.

Even when funds are oversubscribed, family office representation is rising because of wider – and sometimes planned – shifts in LP bases. For example, North America still accounts for the largest geographical share of Kedaara Capital’s fourth India fund, which recently closed above target. However, several other investors, including family offices, are at near parity in terms of individual commitments.

Regardless of incentives and outreach, family offices don’t always bite. This is where the individual characteristics of family offices come into play – their maturity, their reliance on professional management teams, their strategic and economic mandates, and their appetite for risk.

Parly, for instance, is innately sceptical of fund investments because of discomfort with illiquidity and lack of control as well as past experience of underwhelming distributions to paid-in (DPI). Only managers with unquestionable expertise in a hard-to-access market niche – and, typically, a willingness to create clear alignment of interest through sizeable GP commitment – are considered.

The fundamental question is whether a fund investment is the easiest and simplest way to capitalise on a certain kind of opportunity, and by extension, whether that resonates with the family office principals.

“With this family, or many families I know in Asia that have operating businesses that are compounding at 20%, it is very hard to sell them a product with a really safe 7%-11% return, and an ACR [actual cash return] of 6%-7%,” said Davies, noting that Parly went from a fund-of-funds setup to seeding managers and making direct investments, and more recently, to focusing on cash flow-yielding private debt.

“In our family, the art collections and the real estate portfolio are compounding at far higher rates over time. We have to think about the entire portfolio and what type of risk and liquidity we want to take.”

Flexible, but deliberate

Catamaran, an investment vehicle established by the family of Narayana Murthy, founder of Indian IT services giant Infosys, has less than two decades of history. Nevertheless, it has shifted between early-stage direct deals, local joint venture partnerships with Amazon and Aon, and LP commitments to VC funds with a view to participating as a co-investor when portfolio companies reach the growth stage.

To some extent, this follows the arc of Indian venture investment. Catamaran had abandoned early-stage investment because the market was too nascent. On returning, start-up activity had exploded. It wasn’t set up to address the velocity of opportunities – assessing 1,000 companies per year, sending out 80-90 term sheets, making 40-45 investments – so it made sense to support VCs that do this heavy lifting.

Catamaran has also dabbled in fixed income and public equities, parking the proceeds from the now-exited joint ventures into positions that can easily be liquidated when private market valuations correct. Much like Parly, through these experiences across multiple asset classes, it looks at the opportunity and asks what the best way is to get access. A private equity fund commitment might not be the answer.

“We get funds pitching to us on how they have performed better than other funds, but in my mind, it is more a question of public equity versus private equity,” said Deepak Padaki, president of Catamaran.

“Having that perspective when you approach family offices is important. How is what you are pitching in your performance and strategies going to give me confidence that, despite the illiquidity risk, this is the better place to put money?”

This also points to a flexibility beyond that of traditional institutional investors. Family offices are typically guided by preservation of wealth and reputation, ensuring sufficient liquidity for philanthropic and other expenses, and the need to generate long-term returns. How they get there is up for debate. But flexibility shouldn’t be conflated with fleetness of foot, at least not in an Asian context.

Vulcan Capital, an investment entity established in 2003 by Microsoft co-founder Paul Allen, who died in 2018, spent five years deliberating whether to enter the region as a diversification play. The Asia debut came in 2019 with a focus on early-stage deals – in contrast to the multi-stage, multi-strategy global mandate. Most investments are direct, although five out of 50 GP relationships are in Asia.

“To be active in emerging markets, you have to set up a local team,” said Tommy Teo, a managing director at Cercano, which was formed last year through a spinout from Vulcan. “The goal was always to make sure we entered as the right time and built a material enough team to be a meaningful player in Asian markets and deploy an early-stage strategy in a meaningful way.”

Oppenheimer Generations took a similar view. The family office had endowment-style exposure to private equity globally and some direct investment experience in Africa, its home market. An Asia presence was necessary for strategic and governance reasons, but the relationship networks that underpin its operating DNA and comfort with illiquid assets in Africa were absent.

“[Our attitude was] let’s learn, let’s work with partners, and that could include funds, could include founders, could include local families. We do primarily privates – venture capital and early growth – because it’s a market that grows over time, you can write relatively small cheques as you learn, and you build that network from day one,” Collevecchio explained.

“We can do that and have a high-risk portfolio because other teams manage other objectives. As long as it all joins up from a treasury and an investment allocation perspective, it makes sense.”

Local empowerment

What Oppenheimer Generations, Parly, and Cercano have in common is a relatively federated model that empowers teams to build relevant local infrastructure and embark on the learning process. Formally or informally, the contract with the principal is renewed every five or six years, but there is usually a clear understanding of the mandate, and top-level decision making is streamlined.

“There’s a formalised IC [investment committee], there are meetings and structures around it, but there is a lot of flexibility in terms of decision maker to decision maker,” said Davies. “These are people who understand you need authority and responsibility to go hand-in-hand. This is your sandbox, and you will get a bigger sandbox if you do well and a smaller sandbox or no sandbox if you don’t deliver.”

Family office management teams also endeavour to ensure these structures and processes remain intact from generation to generation by educating and engaging those who will inherit the capital. With Asian families, the dynamics are different. First generation founders tend to be heavily involved in investment decisions, advocating direct deals over fund commitments.

According to Low of Golden Vision, family office principals in their 70s and 80s are resistant to 10-year lockups because they don’t want to invest in anything that might not pay out before they die. Even when the generational wealth transfer point hits home, they might opt for semi-liquid products over traditional private equity funds. The children and grandchildren of these principals are more receptive.

“If you deal with second or third generation, family offices will more likely be professionally run by managers,” En Yaw Chue, CEO of Azalea Investment Management, a Temasek Holdings-controlled asset manager that in part targets the mass affluent, told the forum. “Then you have a proper asset allocation: how much into funds, how much into venture, how much into bonds, how much into listed equities.”

Catamaran’s Padaki noted that certain Indian family offices are already well progressed on this journey. At Catamaran, management is responsible for day-to-day decisions and in certain cases – for example, when deals are particularly large or risky – he pushes back and demands family involvement.

Patience is paramount

The federated model employed by Cercano took multiple iterations to execute properly, but Teo credits it with removing many of the friction points in investment processes because counterparties can communicate directly with decision makers. However, this does not necessarily mean private equity firms will receive commitments any faster, if at all.

“Find a way to work with us and, over time, develop that relationship,” Teo said. “At the right time, that conversation will naturally occur.”

Sometimes, it’s a long wait. North-East Private Equity Asia, part of a family office established by the founders of jewellery retailer Pandora, has 20 GP relationships in the region. It spent five years getting to know 17 of them, said Sam Robinson, a managing partner at North-East. His on-and-off dialogue with another firm lasted 15 years, but the family office has now backed three vintages.

While this stickiness is a key selling point, private equity firms might find that the amount of time spent securing a relatively small commitment doesn’t represent good return on investment (ROI). In this sense, managers should consider the strategic value of such LPs as much as the other way around.

“It’s not necessarily always a high ROI game, so for it to work, there has to be genuine interaction on both sides,” said Collevecchio of Oppenheimer Generations, who also noted that most family offices have limited bandwidth.

“If we are one-man, two-man, even 10-man shops, we can only do so many meetings in a day. We try to be transparent. We say we don’t want to waste your time, that a meeting isn’t necessarily going to monetise, and that we can have a catch up and get to know each other as people.”