Private Equity Firms Have Set

¶ … private equity firms have set their sights on Asia given the downturn in economic activity in Europe and the U.S. This is perhaps aided by the understanding that Asia's fundamentals are more likely to bring about accelerated economic growth going forward. Analysts speculate that such a trend is highly unlikely in Western economies. However, even amidst such optimism, some risks still abound for private equities seeking to set base in Asian markets. In this text, I examine the risks associated with starting a logistic related private equity in Hong Kong while taking into consideration the existing market in Asia and globally. In so doing, I will further concern myself with the particular risks for both the limited and general partners.

Discussion

For China, and more so for other countries in Asia; the star for private equity has been shinning bright in recent times. As an indicator of this, for the fifteen years preceding 2009, there was a nine fold increase in PE assets under management (INSEAD 2010). Hence it would be quite in order to note that relative to the rest of the world, Asian PE has experienced much stronger growth. However, a logistic related PE seeking to start operations in Hong Kong may wish to take into consideration the fact that when it comes to long-term returns; Asian PE has not been performing exceptionally. Indeed, long-term PE returns in Asia lag behind those of Western Europe. Hence for a logistic related PE with its sights in Hong Kong, it may be prudent to take into consideration that much of the acceleration in regard to PE in this market could principally be driven by the mainstream view that markets considered emerging are highly lucrative.

For limited partners and general partners, the advance into Hong Kong is a perfect mix of optimism and concern. While Asia's and most particularly Hong Kong's positive direction in regard to development in this case is generally undisputed, there are concerns over pricing. That is, currently, what is being priced by the markets is the expected economic growth. In my opinion, this has led to risk being relatively ignored. In developing Asia (India and China), a survey carried out by INSEAD showed that there was a relatively high risk premium expected by limited partners (INSEAD, 2010). This is in comparison to Western PE. The INSEAD report states that on average, the risk premium expected by limited partners investing in China and India for their investments stood at approximately 6.5% higher. This in one way or the other cannot be taken to be a risk-free strategy especially given the challenges associated with investment valuation as well as pricing in emerging markets. Further, it sometimes proves difficult to obtain benchmarks and valuation efforts are in most cases advanced not by the general partners themselves but by either the firm itself or the venture capital side entrepreneur. For that reason, a logistic related PE in Hong Kong in our case may find it challenging to align itself with certain standards embraced either in the United States or Western Europe in regard to due diligence.

It is also important to note that for the logistic related PE, general partner returns variability is yet another risk factor. It can be noted that for the eight years preceding 2005, Asia's fund returns variance was relatively higher in comparison to the U.S. And Western Europe variance (INSEAD 2010). While the variance in the U.S. And Europe stood at 15% and 13% respectively, Asia's fund returns variability was registered as 23%. Though this could be driven partly by manager-selection skills, such a selection could turn out to be an uphill task for such a logistic related PE given the nature of the market.