Poor diversification has been a leading cause of disappointing performance in private equity in recent years, Warburg Pincus CEO Jeffrey Perlman told the AVCJ Private Equity Forum 2024.

Perlman, who succeeded Chip Kaye as CEO of the firm in September, described diversification across geography, sector, and vintage as a core investing principle at the private equity firm yet not in vogue in the past five to six years industrywide.

“I think everyone is now waking up and saying, you want a consistent liquidity profile of your managers, and I think the only way to do that is to be diversified,” he said, noting that Warburg Pincus had generated USD 11bn of realisations in 2023, including USD 1bn from China and USD 2bn from Asia ex-China.

“If you’re only in one country and one sector in that country, there are going to be periods of time that could be extended where you can’t actually get liquidity. That’s one of the biggest contributing factors to why the DPI [distributions to paid-in] has been so poor for the industry for the past few years.”

The comments were largely in reference to a global retreat from Asia. Perlman, who recently served as Warburg Pincus’ head of PE for Southeast Asia, added that, excluding India, valuations in the region were the most attractive in the world, creating an inviting environment for building out local teams and pursuing countercyclical strategies.

“A lot of our peers are pulling back from Asia. When I look out and see that two-thirds of global growth is going to be in Asia over the next decade, and I think about some of the US exceptionalism that’s gone on – that may not play out necessarily in the same way that it has played in the last 10-20 years,” he said.

Warburg Pincus’ plans to further diversify its Asian PE footprint include expanding a historically developing markets focus to include more of the region’s most mature economies. The firm is currently setting up a Tokyo office, having engaged Takashi Murata, formerly of Goldman Sachs, as head of Japan earlier this year.

On a broader strategic level, recent diversification efforts have included launching a capital solutions strategy, with a debut fund closing on USD 4bn in September. The aim is to expand deal flow and deepen existing relationships by offering structured investment options combining debt, equity, and asset-backed financing components.

Perlman identified his firm’s global geographic coverage as a differentiating right to win in this space, although the new fund will lean toward the US and Europe. This agenda, coupled with the push into more developed Asia, reflected broader economic and market-level concerns.

“We used to be able to live with reading the articles and staying informed. Everything was about the micro – the business you were investing in, the entrepreneur you were backing,” Perlman said. “The reality is the macro is going to be much more relevant going forward and we’re going to have to be more mindful of it than we have been in the past.”