Going East – What Asian private funds need to know about European investors

A complex range of factors inform European LPs investment decisions, including:

• Returns: Returns play an important role but are not the only key factor.
• Risk profile: These investors want long-term stable income sources with a risk profile to cover their own liabilities to policyholders and pensioners. Their risk appetite therefore tends to be lower than that of other global investors.
• Diversification of asset classes:
  Since these investors' portfolios are still dependent on sovereign debt and listed equities, they have sought to diversify via alternative investments such as real estate, infrastructure, private debt and renewables. On the latter category, many investors already have large European renewables portfolios and are now trying to diversify by unlocking new asset classes and regions.
• Unlocking new regions:
  The desire to unlock new regions is amplified by fierce competition for suitable assets and projects in Europe, in particular, infrastructure and renewables, which has intensified over recent years so that it has become difficult to win projects.
• Confidence:
  European LPs are generally less experienced in investing in markets outside Europe.
• Regulation
  European LPs face comparatively heavy regulatory restrictions such as investment allocation limits, reporting obligations and prescriptive requirements for the fund structures in which they invest.

In the past, the focus has been on more traditional asset classes such as listed equities and the corporate bonds of large companies.

Also, many European institutional investors have extensive experience in real estate investments and have felt comfortable extending their exposure to selected Asian countries.

Lately, we see growing interest in high-quality infrastructure and renewables projects, including PV plants, biomass energy, e-mobility or toll roads and bridges. Several global asset managers are convinced that the most exciting opportunities related to the energy transition will be in Asia, from energy infrastructure to new consumer goods and sustainable built environment. Investors are also looking at private equity and private debt to support the wider economy, including utilities companies, tech solutions, service providers and companies developing new consumer products.

European insurance and pension fund money – whether invested directly or via fund or other structures – is subject to additional restrictions that will strongly influence investment decisions.

These investors typically operate within guardrails established by external or internal investment guidelines, with a focus on mitigating investment risks and maintaining adequate diversification. For example, there will be quotas for individual asset classes or investments that must be observed, sometimes requiring a bit of creativity to allocate an asset to a quota where the investor still has sufficient room.

Driven by regulation and solvency capital requirements, investors will also be intent on maintaining a certain risk profile – such as an investment grade rating for listed assets or adequate collateral for private lending. Investors will often require specific investment structures, for example, to profit from tax exemptions granted to these investors in many European countries.

These investors typically need detailed and up-to-date reporting at fund and asset level for their risk management systems, solvency capital calculations and regular reporting duties.

Generally, this information must be delivered on a "look-through" basis, ie. on the asset ultimately held in the structure (regardless of whether it is a fund or a fund-of-funds). This can lead to issues where GPs are bound by confidentiality obligations not to disclose data on individual assets. Data must also be delivered more often (usually quarterly) and in a specific machine-readable format (such as the European Tripartite Template (TPT) developed for the data exchange between insurers and asset managers). European institutional investors may also need additional information to safeguard their special tax status.

The main point of contact for Asian GPs will be the CIO/investment function. However, due to the requirements mentioned above, it is likely that the risk management, accounting/reporting and tax functions will be involved as well – sometimes indirectly via the investment function but sometimes directly, in particular for investors with a relatively small investment function.