Money, Wealth Accumulation and Societies: Raising Capital for PE in Asia

3 dimensions
- Societies
o Role of state
o Sustainability
o Patterns of wealth accumulation
- Key players
o Pension funds
o Sovereign wealth funds
o Chaebols  large industrial South Korean conglomerate run and controlled by
an individual or family
 Family wealth and private wealth – not government wealth
 They are also LPs (investors and asset owners)
PE & fundraising
o Legal insider information
o Control premium
o Track record

SWF
- Capital pools backed by countries
- Operates commercially to maximise investment returns
- Makes acquisitions
- What drove the rise of SWF?
o Trade surplus
o FX reserves  could use it to buy foreign government bonds or use capital to
pursue higher returns through equity
o Natural resource surplus reserves
o Budget surplus
o Privatisation of state-owned enterprises
o Capital inflows
o Public savings
o Take equity risk that is more than just buying government bonds
o More state-owned companies mean higher likelihood of having SWF
- Different objectives of SWF
- Commodity-driven economies are very rich but also have a worry about the
commodities running out so they want to manage cash flows for investments in non-
commodity items
- Japan – second largest  long period of economic growth, ageing population with
high saving rates compared to rest of the world so have higher pension assets 
trillion something of assets
- Wealth accumulation in Europe and North America is more gradual + the state
doesn’t play a very big role because proceeds go to the private sector, not to the
government
- More allocation to Private Equity over time
- Allocation of 34 largest SWFs
o 26% PE, 37% cash, 37% equities
- Key features of SWFs
o No liabilities  unlike banks which have to do asset-liability matching
 o Long investment horizon thus can invest in PE
o Large size – hundreds of billions
o Strategic objectives
o Domestic holding and international investments
- US have a very large pension market
o Do have liabilities because they are pension funds
o In terms of size and risk-taking, they are similar to SWFs

Private equity
- On the commercial side
o Key players are GPs and LPs
o PE & fundraising: legal insider information, value creation, J curve
- Buy and sell privately owned companies
- Significant stake
o Majority or significant ownership
- Active players  create value by making company run better, having more
sophisticated financing strategy, having acquisition strategy  sell in 5-10 years
- Want PE investments to double or triple the money
- Public markets
o Liquidity
o Transparency: Information is public
o Involvement is passive
o Easy access
- Private markets
o Can only be bought and sold in large complex transactions between private
parties
o Transparency is only for shareholders
o Active involvement
o Difficult access
- Why has PE outperformed?
o Inefficient markets
 Privately negotiated transactions
 Limited information on private companies create inefficiencies
 Proprietary deal flow
o Better information
 PE firms conduct in-depth due diligence which can give more
information and greater access to management than public market
investors
 Increased transparency leads to taking well-informed investment
decisions
o Improved governance
 PE firms control strategic decisions
o Operational LT focus
- PE value creation
o 3 factors: leverage, multiple arbitrage (better reputation and perceptions etc –
multiples increase but maybe EBITDA remains), operational improvement
(maybe EBITDA increases)
o Less leverage over time
 o more attributed to operational improvement over time (largest share of value
creation)
- LP
o Asset owners eg. SWF, whoever has money (investors)
o Pay fees to hire GPs for managing the PE funds
- GP
o KKR, Blackstone  asset managers (have knowledge to manage investors’
money)
- PE market is between LP and GP
- Relationship between LPs and GPs
o LPs pay GPs the fee – management fee (2% annually typically), 20% for profit
(carried interest or the performance fee)
o Hurdle rate – a minimum annual return that the LP should get before GP will
get carried interest
o Clawback provision

PE ratios and IRR

- Investment multiple or TVPI
o Eg. buy for $1, sell as $3 – that’s 3x investment multiple (but not realised yet)
- Realisation multiple or DPI
o More tangible (realised)
- IRR

Higher IR environment
- Harder for PE firms because higher cost of capital + less availability of capital
because banks are shrinking the amounts they are willing to lend

Initial reasons for governments to set up SWF might change over time to meet different
objectives or gain funds from different sources

Session 2
- A lot of changes in the IPO market – from matured companies to companies that are
riskier, more tech-driven, many are not even cash-flow positive
o % of IPO-ed companies with positive earnings have declined over the years
o 63% of IPOs were SPACs in 2020-2021
 SPACs – sold to the market as a blind pool – money is raised before
investment is made into a company
o 26% are IPOs in the traditional sense
- Public market is funkier, private market is becoming more traditional
- Private market capital formation for the last 5 years has been bigger than public
markets / global equity issuance
- Private equity is not really the alternative anymore, it has become so prevalent, even
more so than public markets
- Who is providing private equity capital?
o Sovereign wealth funds – no underlying liabilities, come from capital,
exchange or trade surpluses, growing allocation to PE as it matches their LT
horizon, large size, might have strategic objectives beyond financial returns,
domestic holding and international investments
 Temasek has a large domestic holding but also international
  GIC is a pure play SWF – investing international, not local
 Fundraising implications
 SWFs might have a much larger private market allocation, will
ask for co-investment (after you invest in PE, might have
overflow that can be offered to LPs – eg. big investments that
the PE can’t invest in alone)
 If the fund raises the money, it’s discretionary to GP to invest
how they like
 If co-investment, not discretionary  they would need to go
through the DD as well and decide when and what to invest in
 LPs who co-invest won’t pay as much management fees and
other fees
 Net return is 6-7% higher for the LPs that co-invest
 SWF can have direct investment capabilities – know how to
invest but the GPs are still the main investor in PE
 Extremely relationship-driven
 Can be very aggressive in reducing the fees during negotiation
o Pension funds – employee, employer contributions, public pensions, no
corporate pension, liabilities
 Is it public/ private pension funds?
 What are the liabilities underlying the pension funds?
 How many pensioners are going to claim – what’s the future liabilities,
how much money is needed so that every pensioner will get their
checks?
 Who is contributing to the pension funds?
o Endowments – charitable donations, organisational contributions, rise in
philanthropy
o Banks – manage private wealth
o Family offices – surge in Asia private wealth, tax considerations, single vs.
multi-family offices
o Asset management/ PE firms
o The allocation of such investors to the private market has grown
- 30 trillion private market AUM estimated by 2030  3x increase every decade 
funding real economy companies, attracting a lot of capital from the investors
- Through a fundraising process, the LPs provide their capital to the GPs which invests
in assets like companies, infrastructure projects
- How do LPs decide to give money to GP?
o Investment strategy
 What are you doing with the money?
 Early-stage/ growth/ late-stage?
o Team
 Who has accumulated track record?
o Track record in IRR and multiples
 Telling LP to trust you based on past track record even though you
have no company in mind for investing in yet
o Global vs regional vs country footprint
 Sometimes investors want diversified or specific exposure
o Sustainability of track record, including handling downturns
 What happened in the last financial crisis?
 o Deployment capability
 How quickly can you deploy the funds?
o Fees and terms
o ESG/ sustainability
 Now a central part of the DD process, not just a side-lined concept
 Not just neutral, but positive impact investing
o Co-investment
o Brand name
o LP’s plan to invest directly
o Reporting
 How do we report back?
 What’s the quality of information shared with the LPs?
- LPs might go through intermediaries such as distribution partners eg. banks, or
investment consultants
o Direct clients
 LPs
o Distribution partners
 Distributes Partner Group’s products to the clients
o Investment consultants
 Don’t have money to give like LPs, no ability to invest like GPs
 But can provide third-party advice to institutional investors
- LPs would not want to do all the DD just to invest in a small amount
- The investment side isn’t just about number crunching, have to source investment
opportunities – also relationship-driven to a certain extent; have to do DD, win the
transaction and the target; after you make the investment, how do you create value for
the portfolio companies – sell better, make acquisitions, operate more efficiently…;
involved in the fundraising, researching
- The fundraising side – you have to provide thoughtful answers and maximise the
chances to raise money
- Objectives and dimensions considered by large LPs including many SWFs
o Speed of capital deployment
o Ability to take advantage of market conditions
o Do co-investments boost return?
o Veto or not to veto?
- Unique objectives of large SWFs
o New frontiers
 LPs like to support managers with a long track record
 Most sophisticated LPs – GP moving into new frontiers that other GPs
don’t do but the new frontiers are related to what the GP is experienced
in

Session 3:


o Chaebols in South Korea (Samsung as 20% of South Korean GDP)

o Taiwan
 Mainly large life insurance companies, which are family businesses
 Cathay Financial Holdings has been doing 15 years of private equity
 Impact investing in private equity

- Majority of Partners Group fund does ESG integration

- Market-rate
o Want to ensure positive ESG impact with competitive financial returns
o PG Life generates the same return as the buyout fund
- PG Life
o only invests in 1/5 of the buyout fund companies
o 80% of funds invested
o Big platform, capital scale
o Now the 20th place, but started out as one of the few private market funds in
the impact investing space
 - Kevin Lu is a Partner and Chairman of Asia at Partners Group, a global private equity
firm with $127 billion AUM. He chairs the Impact Committee of PG LIFE, the firm's
$500 million sustainability fund.

Top questions for PE Impact Investing

- Real impacts vs. greenwashing
- Impact at scale
o Move the needle, make an actual impact
- Dual return
- Global standards vs. innovation
o Buyout space is very established but impact investing is still nascent or new,
attempts to standardise for greater comparability but you also want innovation
in how to measure or how to make a more effective impact with the same
given capital
o No dominant strategy for ESG right now
  UN PRI

Louis
- Invest in the pay-as-you-go in Sub-Saharan Africa space
- Off-grid energy – risky, not a lot of capital flowing into it
- Standardisation process?
o Tricky
o Consumer data is collected differently, would have to standardise and internal
discussion for definition of terms and integration of data into the system

When you raise money from family offices, how do you make sure you’re not taking the
money to fund their competitors?
- One-LP structure  family office can dictate which industries they want to go in
- Doesn’t stop in investing competitors but it can have some authority to choose their
investments
- Economic swap – whatever goes into something that they don’t want is swapped with
something else

IMP framework – accessibility and how you source capital?

Greenwashing, different standards, regulations for family offices, regulations for ESG
- Private markets benefited from little regulatory scrutiny, benefits from legal insider
information (not tricking money from retail investors)
- Regulations for ESG will not be in the near future – still trying to come up with ESG
standards and assessments

James Gifford
- UN PRI not in a co-share fashion
- Move from policy into private markets
- Long head forest activist previously
- 2002 forest activism in Tasmania Australia on company knocking down growth
forests and poisoning wild animals  not allowed to happen since 80s or 70s on
Mainland Australia
o Company was owned a third by pension fund (Australian’s money)
o Filed shareholder resolution at the AGM of the company
o Got 1% of the vote
o The majority of people would agree but only got 1% of the vote – wakeup call
 market failure, information asymmetric, pension fund members have no
idea what the funds are allocated in, don’t know which company the fund is
holding, pension fund managers know but are incentivised to deliver financial
outperformance so they just invested in what would make the most amount of
money
- Shareholder activism PHD
- Mobilise pension funds and put pressure on these companies to improve
- UN as an intern
- How do we use UN’s reputation and convening power to bring the pension funds
along the sustainability journey?
o Develop principles around pension funds doing shareholder engagements
through fund managers or with companies – using political and ownership
power of the pension funds to reflect the people whose money it is
 o Global principles for global pension fund engagement
o Led the drafting process
o After 10 years, UN PRI was and still is the largest initiative in sustainable
investing
- Buying or selling stock on a highly liquid stock market isn’t impact investing
- ESG  bucket of issues that could be financially material to financial returns
- Need reasoning that resonated with fiduciary duties (need to engage big investors on
financial terms)
- ESG was created as a financially relevant subset of material issues
- ESG is thinking about serious issues and mitigating those risks that might arise in the
future

Divestment effectiveness – could be effective to own stakes to change the company from
within; fossil fuel companies of doing research in renewable energy but does it make sense to
invest to change from within?
- Divestment vs. Engagement
o Personally a big fan of engagement of using your voice
o If you don’t own something, you can’t use the power
o If you own it, you have the ability to make it the most sustainable version of
what it could be
o Eg. tobacco – how could you ever have it as an acceptable investment?
 Health is their own user’s responsibilities
 Low-income farmers producing it
 Some tobacco companies look after their farmers more
 Most divested sector but you could make a big difference between a
good company vs. a not good one, especially if not going to ban such
products; can make significant improvements to the company itself

Short-comings of ESG frameworks, where does it go forward?

- ESG isn’t impact investing
- It’s a financial lens to look at financial investments
- Could push companies to go through changes as a shareholder
- But more money in a private market investment, especially early-stage  emerging
and developing markets might actually have to resort to fossil fuels for greater
economic development as they cannot afford other sources of expensive power so you
might have to invest in innovation in those economies (money can be received from
wealthy individuals, but the government has other incentives and goals to fulfil)

Adaptation or mitigation
- Focused on tech – need improvements in battery storage, renewables are unreliable
and need more storage or gas to compensate, costs have to come down dramatically
- Adaptation is important but tricky because most of what needs to happen is what is
already done in Western countries like The Netherlands or New Orleans eg. flood
defences, dredging, mangrove swamps, forests to be replanted, better housing
- Adaptation should still happen – climate change will increase frequency or worsen
severity of storms and natural disasters but even without, still would have storms

ESG in US, heavily criticised – breach of fiduciary duty in the news

- Ironic because ESG is meant to be aligned with fiduciary duties
 - ESG issues can be financially material to investment returns and should be taken into
account by fiduciaries
- ESG movement would not have grown so big if there wasn’t some material aspect for
financial returns
- Backlash is the use of shareholder activism eg. getting green board members is what
is getting people upset – buying and selling stock isn’t making a difference but
shareholder engagement is what can drive change

Ways of investing: exclusion investing, impact investing, thematic investing, ESG integration

Premise on the public and common good – how to make impact investing competitive?
- Most impactful investments are early-stage investments into companies that could
make fortune, that’s where you can make scale
- Does intellectual property, trademarks etc. stifle innovation?

David Hobson at GIC

- PPE at Oxford
- Investment world combines different facets of the world around us
o Think from macro environment to the micro eg. pricing power of the
businesses
- McKinsey as a training ground
- Buyside at GIC, 2008 – on the cusp of different type of environment
o Northern Rock in UK went down, Lehman went down
o Did private equity at GIC
o Public investment, direct investment, private credit, tech investment, special
opportunity… 6 different divisions?
o Huge variety which he enjoys – no scope to be bored, always scope to be
learning
- Shift from public credit to PE investment
o Started with mezzanine funds
o Public credit wasn’t a focus
- GIC Singapore and London

US and China
1. Agreement
a. Economic prosperity
b. Environmental sustainability
2. Catch up
a. China is playing a catch-up, still a developing country
b. Eg. intellectual property, labour conditions
3. Convergence
a. Market access
b. Trade imbalance
c. Hope there will be an equilibrium
4. Disagreement
a. Regarding role of state
b. Need to curate/ manage information

Andrew
- World Bank
 - Mission-based organisation
o Around infrastructure
o Believed that investing in infrastructure makes a difference in people’s lives
o 100 billion dollars by 57 shareholders, now 105 shareholders; 400 staff
o Need to know individual shareholders
o China 25% of the bank, followed by India and Russia
- Was in Merill Lynch as investment banker
- Infrastructure gap in Asia is 3-5 trillion dollars  how do you mobilise your capital
of 100 billion then?
- Infrastructure is the hardest asset – takes 3 years to build; downward spiralling cash
flow; not a financial asset; can’t easily trade it

Pitches
- What is the actual strategy?
- Allocation in terms of region, sectors and segment?
- Early stage, growth stage?
- Who are the players?
- What were the player’s track records?
- Terms and conditions
- What are the risks and return profile?
- Pipelines
- Examples of how you improve

Gordon Brown
- Led Britain G20 out of the global financial crisis
- 2008 GFC
- Food energy crisis on top of covid and climate change
- Perma crisis
- Absence of international cooperation & failure to prevent famine by sorting food,
preventing energy crisis by bringing the producers and consumers together – one
element that is missing from the response in this poly crisis
- Each country is taking care only their self-interests
o Vaccine nationalism
o Limited cooperation in climate change
- Dominant ideology is nationalism
o Supply chain nationalism
o Tech wars
o Tech nationalism
- We would have less trade and growth
- Every company is going to perform at a less optimal level, overall growth is also
stunted
- Britain’s economic prospects; will it succeed with economic renewal?
o Britain compared to Italy exacerbated by Brexit; phrase: has to become
Singapore
o Britain’s problem is that everyone is facing the inflation and energy crisis, war
in Ukraine, for the last 10 years, low growth and productivity, growth of 1%
and productivity is about 0.5% a year; while America is facing the same thing,
Britain is facing greater problem
 o With Brexit, no more trade agreement with the European region that
previously accounted for 50% of trade?
o Britain needs to operate like America in 1980 – cut taxes, add to debt, run a
deficit but not possible without suffering a loss of investment, major funders
are foreign investors and so the confidence of investors can vary
o Optimism
 Huge productivity advancements possible eg. digital and medicine,
high tech, creative industries
 English language
 Need to turn innovation into growth
o US is in a position to be fiscally irresponsible as the global currency but the
UK can’t afford to do the same things
o When America stops raising interest rates, there needs to be cooperation
- Would deglobalisation continue and would it cause systemic risk?
o Globalisation lite – trend to come  massive increases in trade in services but
less in manufacturing
o People are more resistant to open trade, more protectionism, shortening supply
chains, reshoring or friends shoring, nationalism became important – national
trade and tech; little cooperation
o Now politics is dictating economics, not the other way round
o Things are more politicised now essentially eg. asking central banks to freeze
reserves aka Russia
- Collapse of lehman brothers
o No way for the British regulator to take on debt of Lehman brothers
o Might take on the ongoing work, but what America wanted was for them to
take on the liabilities of Lehman brothers – stability of British banking system
would be at risk  wanted to transfer the regulatory risk in American banking
system into the British
o Issue in GFC was that banks were undercapitalised and highly leveraged so
they couldn’t cope with the fallout when the crisis happened
o Now, banks are well capitalised but shadow banking isn’t  and they aren’t
subjected to the same capital adequacy rules
o Shadow banking has attracted more funds and is responsible for mortgages so
there is a huge risk there
- How do you consume the news? Rise of co-investment; Cryptocurrencies
- Impossible to grow the economy; GDP most widely used but it’s not possible to
infinitely grow; can this view be accepted by the government?
o Need new measures of quality of life and wellbeing
o Not realistic to talk about feeding off growth for environmental objectives
o Most countries are playing catch up – cant tell someone in developing
countries that they should suffer these living standards
o If we impose these policies then most of the richer world would have to be
worse off but they wouldn’t accept that
o Need to balance 3 objectives in economic policies – growth, sustainability
and equity
o At first there was only 2 objectives – economic prosperity, fairness and equity