2. April 2011
Survey highlights: Fund sample by investment strategy
• Annual management fees in the Asia Pacific are Distressed /
special situations / other
higher than the global average, likely reflecting
smaller average fund sizes in Asia and certain fixed 12% Venture
costs of fund management irrespective of fund size; 14%
Buyout
• Almost three-quarters of the respondent Asia 11%
Pacific funds currently grant a 100% management
fee offset, compared with less than half in the 2009
Survey, reflecting the greatest year-on-year shift in
fund terms;
• Demonstrating best practices as per the ILPA
Growth
guidelines, 84% of Asia Pacific private equity funds
follow a European-style “fund-by-fund” distribution 63%
waterfall and 91% have a key person clause in place; Fund sample by geographic focus
• Over half the funds surveyed lack a no-fault divorce Pan-regional Australia/New Zealand
clause, although voting thresholds for those which 14% 14%
do make such provisions compare favorably to the
global average; and Southeast Asia
13%
• Of the 44% of China-focused GP respondents that Greater China
manage parallel Renminbi and US Dollar funds, 60% 21%
allocate investments between the two purely at the Korea
discretion of the GP. 9%
Japan
Survey information:
2%
Indian Subcontinent
The information in the Survey has been derived from
responses to a questionnaire sent by Squadron Capital 27%
to over 450 Asia Pacific GPs, with the Asia Pacific region
defined as including Australasia, Greater China, the
Indian subcontinent, Japan, Korea and Southeast Asia Fund sample by target fund size
(“ASEAN”). Following the removal of GPs that were not
actively fundraising during 2010 and largely incomplete $1 billion and
responses, the Survey results cover 94 Asia Pacific GPs above
$500-999 Less than
that either achieved a final closing during 2010 or were 4%
actively fundraising as at 31 December 2010. million $100 million
13% 20%
For funds which were still being raised as at 31
December 2010, the terms stated by the relevant GPs
may not reflect what are or will be the final versions
of the limited partnership agreements or constitutional
equivalents thereof. Accordingly, the actual final terms
and conditions agreed upon for such funds within the
Survey - and therefore for the sample size as a whole –
will likely be more LP-friendly than the study suggests.
$100-499
The summary details of the sample funds have been million
displayed in the charts on this page. 63%
58%
2
3. April 2011
Management fees Comparative management fees
Management fees (%)
Management fees continue to be a key area of
focus for LPs globally, particularly with respect to
the alignment of interests and incentivization of >2%
GPs to earn their fees through carry rather than
annual management income.
Annual management fees in the region are in 2%
general higher than those elsewhere in the world,
though this may reflect the overall smaller fund
sizes in the Asia Pacific. Despite higher fees, funds
<2%
in the region might not necessarily be generating
annual fee income levels in excess of their GPs’
likely cost bases, or what the ILPA Principles
refer to as “reasonable operating expenses and 0% 20% 40% 60% 80%
reasonable salaries,” as the majority of funds that % of funds
are charging annual fees in excess of 2% are sub- Asia Pacific average Global average*
$250 million in size.
* Source: 2011 Preqin Global Private Equity Report
Management fees by fund size
Management fees (%)
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
0-99 100-499 500-999 > 1,000
Fund size ($ million)
Note: Private equity fund fees have two components – an annual management fee and a share of the profit.
3
4. April 2011
Management fee offsets Fee income offset (%) against management fee
“Transaction, monitoring, directory, advisory, % of funds
80%
exit fees and other consideration charged by the
general partner should accrue to the benefit of 70%
the fund” 60%
50%
(ILPA Private Equity Principles) 40%
30%
Management fee offsets has been the category 20%
that has seen the greatest shift since the 2009 10%
Survey, with almost three-quarters of Asia Pacific 0%
funds now granting a 100% fee offset, compared 59% or less 60-99% 100%
with less than half in the previous Survey. Fee income offset (%)
Asia Pacific average Global average*
This proportion is also significantly in excess of the
global average, where less than 40% of funds are * Source: 2011 Preqin Global Private Equity Report
currently in line with what ILPA regards as best
practice.
Note: In addition to management fees, GPs in some cases also derive income from underlying portfolio companies
(through advisory fees, directors’ fees and so forth) as well as from other sources.
4
5. April 2011
Distribution waterfalls
Carry structure (Asia Pacific sample)
“A standard all-contributions plus preferred-
return-back-first model must be recognized as a Deal-by-
best practice” deal
16%
(ILPA Private Equity Principles)
One issue where Asia Pacific private equity fund
terms are already by and large in line with best
practice is the distribution waterfall, where
market practice in the region follows a European- Fund
style “fund-by-fund” rather than US-style “deal- level
by-deal” approach. This varies according to fund
84%
strategy, however, with a disproportionate number
of venture capital funds in the Survey applying
deal-by-deal waterfalls.
Carry structure (Global sample*)
Deal-by-
deal
28%
Fund
level
72%
* Source: 2010 Preqin Global Private Equity Report
Note: Distribution waterfalls govern the order in which the proceeds from the sale of investments is distributed.
Under a fund level distribution waterfall, investors would be repaid all of the amount they invest into a fund
plus a minimum profit hurdle before GPs start becoming eligible for their carry (the term used for incentive
payments). Under a deal-by-deal distribution waterfall however, LPs could theoretically have to start paying out
carry to GPs even though the LPs themselves have not been repaid all of their original capital investment.
5
6. April 2011
Preferential fee terms Equality of fee/carry terms versus preferential deals
% of funds
There has been an incipient trend in the private
100%
equity industry globally for certain GPs to offer
differential fee or carry terms to a subset of 80%
investors for reasons of relationship (such as fund
sponsors or parent organizations), commitment 60%
size (in the case of large anchor investors) and/or
timing of entry (in particular for first close LPs). 40%
20%
The adoption of such an approach may well
enable a GP to kickstart a fundraising process
0%
and/or attract large commitments, but at the
Yes, all LPs pay the No, certain LPs pay No, certain LPs pay
expense of potential difficulties further along in
same fees and carry a lower management a lower carry
the fundraising process as some LPs may view the fee
existence of such deals adversely. For a GP, there
are also obviously the financial implications of
offering such fee or carry discounts.
While the vast majority of funds in the Survey offer
all LPs consistent fee and carry terms, there are
a small number which have granted preferential
terms to a subset of investors. Interestingly, of
the funds which offer differential carry terms
for certain LPs, the majority of these are India-
focused funds.
6
7. April 2011
No-fault divorce No-fault divorce clause in place
“No fault rights upon a two-thirds in interest vote
of limited partners for the removal of the general
partner”
(ILPA Private Equity Principles)
No Yes
51% 49%
The presence and nature of no-fault divorce
clauses in the Asia Pacific region as a whole is a
matter which is still significantly short of what the
ILPA regards as best practice.
Over half of the funds in the Survey lack a no-fault
divorce clause, though closer analysis of the data
set indicates that this is disproportionately the
case amongst funds which have not yet achieved a
final close as at the end of 2010.
Even for those funds that do have such clauses,
the voting thresholds are generally higher than
the ILPA’s recommended two-thirds figure (though
lower than the global average), with 75% being the % vote required for no-fault divorce
most common threshold. Vote required (%)
90% +
80-89%
70-79%
50-69%
0% 20% 40% 60% 80%
% of funds
Asia Pacific average Global average
Note: A no-fault divorce clause refers to the ability for investors to terminate the management agreement
between the fund and the GP, which in the ordinary course can often run for 10 or more years.
7
8. April 2011
Key person provisions Key person clause in place
Key person clauses remain a key area of focus in No
many of the Asia Pacific private equity markets, 9%
perhaps more than elsewhere. The high volatility
of Asia Pacific markets combined with the fact
that many Asia Pacific GPs have not as yet gone
through a full investment cycle means there is a
lower opportunity cost for teams or team members
leaving or spinning out of their existing firms.
Indeed, a significant number of spinouts have
occurred during the course of 2010 and 2011 to
date.
Yes
In addition, a greater proportion of GPs in the 91%
region continue to be overly dependent on a
single founder or individual compared with the
more institutional partnership structures of GPs
in established markets, which increases the risk
of problems should such an individual leave or be
unable to continue with the GP.
While the majority of funds within the sample size
are in line with the revised ILPA Principles on this
matter and have a key person clause in place, a
minority of funds are not.
8
9. April 2011
Fund suspensions on trigger of key person
Automatic suspension of investment
clause period if key person clause is triggered
“Automatic suspension of investment period,
which will become permanent unless a defined
super-majority of LPs in interest vote to re-
instate within 180 days, when a key-person event
No Yes
is triggered or for cause”
51% 49%
(ILPA Private Equity Principles)
What happens in cases where the key person clause
is triggered?
If suspension is automatic:
Approximately half the funds within the data set % of LP interests or advisory board required
apply best practice automatic suspension of the to lift the suspension
investment period, while the other half requires
an LP or advisory board vote in order to suspend or
% of funds
terminate the fund.
35%
30%
For suspensions which are not automatic, the
25%
median threshold of 75% is a surprisingly high 20%
figure. 15%
10%
Where the suspension is automatic, lifting of 5%
the suspension can generally be achieved by the 0%
approval of either a simple majority or two-thirds 51% 67% 75% 80%
of LP interests or the advisory board. Practice in
% LP interest or advisory board vote required
the Asia Pacific region is thus broadly in line with
standard practice elsewhere in the world.
If suspension is not automatic:
% of LP interests or advisory board required
to suspend/terminate
% of funds
60%
50%
40%
30%
20%
10%
0%
51% 67% 75% 80%
% LP interest or advisory board vote required
9
10. April 2011
Annual limitations on capital calls
Annual restrictions on investment activity
Vintage diversification is a key tenet of private
Yes
equity investing. This is arguably even more true 11%
in the case of many of the markets within the Asia
Pacific region, where historically higher levels of
market volatility imply that timing has an even
greater than usual impact on returns.
Despite this, barely 10% of Asia Pacific private
equity funds have per annum limits on capital
calls - approximately the same percentage as last
year’s Survey (8%) – with most GPs and LPs taking
No
the view that full temporal flexibility in investing
89%
becomes more rather than less important in the
volatile markets within the region if they are to
invest opportunistically to maximize returns.
10
11. April 2011
Ability for / limitations on public market Investment restrictions in
investing publicly listed companies
Private investments in public entities (“PIPEs”)
remain a topic of significant debate within the
region, being viewed by members of the private
equity community – both GPs and LPs – either
with disdain, reluctant acceptance or as unique
No
opportunities to generate value.
41%
A majority of funds (59%) in the 2010 data set have Yes
formal restrictions on PIPEs, which is a statistically 59%
similar proportion when compared with the 2009
data reported in last year’s Survey (57%).
Where restrictions are in place, there appears to
be a polarization of the market between funds
with ceilings of 10% or less and those with ceilings
of 20% or more (at the expense of those with a 15%
ceiling).
Limitation of investments in listed companies
% of funds
35%
30%
25%
20%
15%
10%
5%
0%
0% Up to 10% 15% 20% 25% or
higher
Public investments ceiling as % of fund
Note: Where applicable, the ceilings above represent the proportion of each fund that can be invested in publicly
listed companies, beyond which any such investments can be made only with the approval of the fund’s LP
advisory board.
11
12. April 2011
RMB fund managers’ potential issues relating
to allocation policy Do you manage RMB-denominated private equity
fund(s) as well as USD-denominated fund(s)?
As it becomes increasingly common for China-
focused GPs to manage parallel Renminbi and
US Dollar funds, the topic of managing potential
conflicts of interests between parallel funds has Yes
become a key matter of concern for LPs globally. 44%
No
56%
In excess of 40% of China-focused GPs who
responded to the Survey now manage parallel
Renminbi and US Dollar funds. Of these, 60%
allocate investments between the two funds at the
discretion of the GP.
The fact that a large proportion of China-focused
GPs managing parallel funds have discretion over
the allocation procedure could indicate on the
positive side that LPs have taken a pragmatic view
of the issue, and on the negative side that LPs may
in certain cases be too willing to accede to these
points in order to ensure access to certain GPs in What is the basis of allocation of opportunities
the market. between the RMB and USD funds?
Strictly pro rata for all
encouraged/permitted
sectors
40%
Purely at the
discretion of the GP
60%
Note: The pro rata category also includes GPs which to a large extent avoid the potential conflicts of interests
issue by having entirely separate teams managing each of the Renminbi and US Dollar arms.
12
14. April 2011
ABOUT THE EMERGING MARKETS PRIVATE EQUITY ASSOCIATION (EMPEA)
The Emerging Markets Private Equity Association (EMPEA) is an independent, non-
profit, global industry association that catalyzes private equity and venture capital
investment in the emerging markets of Africa, Asia, Europe, Latin America and
the Middle East. EMPEA’s more than 250 members comprise a broad array of fund
managers, institutional investors and other industry stakeholders, representing
more than 50 countries and over US$1 trillion in assets under management.
The Emerging Markets Private Equity Association (EMPEA) was founded in 2004 by a
handful of visionaries at the heart of the industry who shared the belief that private
capital has the potential to unleash economic growth in emerging markets while
simultaneously generating strong returns for investors.
EMPEA is unusual among membership associations in producing proprietary research
that provides an authoritative global view of the market in support of our mission.
We leverage the scope and connectivity of our membership to help deliver research
and insight built on solid empirical data. We also organize conferences and unique
member events around the world, often in partnership with global media brands
where the EMPEA network facilitates powerful business networking opportunities.
EMPEA provides the asset class with a voice on key public policy issues to global
regulators and policymakers, and works to advance the dialogue on emerging
markets opportunities and challenges among institutional investors.
For more information, please visit www.empea.net.
Emerging Markets Private Equity Association
EMPEA Headquarters
1055 Thomas Jefferson St NW
Suite 650
Washington, DC 20007, U.S.A.
Tel. +1.202.333.8171
EMPEA Asia Headquarters
Suite 3205
No. 9 Queen’s Road
Central, Hong Kong
Tel. +852.3713.4879
14
