Going West – What European private funds need to know about Asia-based investors

• Superior, stable returns: Asia investors are looking for superior returns in stable, developed economies. Take Asian sovereign wealth funds as an example – traditionally they were established to invest state assets in a diverse portfolio that is not correlated with the development of the domestic economy and achieves attractive returns with relatively low risk. Likewise, Asia family offices have long sought returns outside Asia to hedge against risks to their Asian assets.
• Currency movements: Investments in Euro-denominated assets are particularly attractive when local Asian currencies are strengthening. At the same time, such investments can be a hedge against depreciation of local currencies. The timing and volume of investment in Europe by Asia investors is often affected by exchange rate movements. Asia investors are alert to these dynamics and make investment decisions accordingly.
• Large, nation building opportunities: Asia sovereign investors often need to balance two competing objectives: supporting development of the domestic economy and diversifying the national portfolio. As Asian economies mature, we are seeing an increasing focus on nation-building, where sovereign wealth funds build portfolios of domestic investments to support capital intensive industries in the energy transition, but also critical industries such as healthcare and technology.  Appetite for overseas investments remains however, as domestic and regional investment opportunities are still relatively small for the large portfolios managed by some Asia investors.
• Geopolitics: There has been a perception among some Asia investors that their investments in US funds in particular are not as welcome as they were, making European investments potentially more attractive. There is a global trend towards broader foreign direct investment (FDI) regimes, and this is slowing down commitment to funds across continents.

To balance the early stage and higher risk opportunities in developing Asian economies, Asia investors are interested in stability when investing abroad. Marquee assets in strong European industries are popular for that reason.

We have seen continued Asian investment in infrastructure and real estate as well as traditional private equity strategies in Europe.

• Infrastructure assets in Europe remain highly attractive because of the region's mature market conditions and high degree of legal and political certainty. However, Asia investors must compete with local capital coming from large institutional investors such as insurers or pension funds who have a strong appetite for high-quality infrastructure on their doorstep.
• Real estate has been a particularly interesting asset class for Asia investors, with a focus on prime or landmark assets. However, real estate has also been a sector where Asia investors have encountered comparatively more issues. While construction, building components and technology are similar to Asia, other important topics such as tenant behaviour and expectations or financing practices can be very different and difficult to manage without local expertise. In private equity, the focus is more on growth, mid-cap and large-cap investments in reputable companies and "hidden champions" and less on venture capital. Early-stage venture capital investments in Europe are most often made by universities, corporate VC arms or family offices looking for synergies, rather than the established Asian sovereign wealth funds.

Given the competition for assets and the need for local expertise, there is a strong case for Asia investors to invest via European private funds rather than directly.

Asia investors typically operate in lightly regulated environments. There are generally no legal restrictions for these investors on:

• the fund domiciles in which they may invest (these can be offshore or onshore structures);
• the regulatory status of the GP
• the strategy of the fund to fit it into any particular quota

One limiting factor for Asia investors can however be local capital controls. While this is less of a concern for sovereign wealth funds, corporate and family office investors may have limited quotas to convert their domestic currencies into Euros (or US Dollars) for investment abroad.

Specific restrictions are more likely to come from investment policies. Many Asia investors require excuse rights for certain investments, for example tobacco- and alcohol-related investments.

Asia investors often do not have extensive reporting requirements. While some have reporting templates, these are typically less complex than the reporting required by European investors.

ESG reporting in particular is an area where requirements are far simpler for Asia investors than for European investors. Very often their ESG requirements are policy-driven and relatively easy for GPs to satisfy. Because they do not have an equivalent in most Asian legal frameworks, European GPs may need to explain why Asia investors are "bombarded" with unsolicited ESG reports that are mandatory under European regulations (e.g. EU Sustainable Finance Disclosure Regulation).

The main point of contact for European GPs will typically be the CIO/investment function who are often also tasked with coordinating back-office reviews by relatively lightly staffed risk and compliance functions.

Bearing in mind their coordinating role, European GPs should aim to build rapport with the investor's business function teams as they can be very helpful in progressing subscription processes.