DealStreet Asia Q&A: Kerrine Koh

There is significant interest in Asia from limited partners (LPs), many of whom have indicated plans to focus on the region in 2025.

However, they want more clarity before committing capital, especially as Distributed to Paid-In Capital (DPI) and returns have been suppressed, said Kerrine Koh, Managing Director, Head of Southeast Asia, Hamilton Lane in an interaction with DealStreetAsia.

Until recently, most exposure to Asia's private markets was through closed-ended funds.

However, a significant shift is happening as private wealth increasingly joins institutional investors in funding. The rise of evergreen funds across private equity, private credit, and infrastructure asset classes globally signals a shift to flexible, long-term, investment structures. While many Asian managers lack expertise in evergreen funds, this may change in 2025 as fund managers refine their abilities and diversify geographically, said Koh.

Asian investors are known for their strong home bias, often allocating 30-50% of their portfolio to Asian public equities. While they are eager to invest in Asia's public markets, they tend to have little to no exposure to private markets. This is largely due to a lack of accessible investment vehicles, particularly in the private equity space.

“Even a small allocation from wealth investors can substantially boost capital flow into private markets. Yet, these investors have primarily directed their capital toward global funds due to a lack of vehicles tailored for Asia, leaving many with little to no exposure to the region,” explained Koh.

“When I think about undervalued markets, Asia stands out, including China. If you look at the current entry multiples, these markets present more attractive opportunities compared with most others,” she added.

Speaking to DealStreetAsia, Koh touched upon not just how evergreen structures can boost the private markets but also on the resilience of the Asian private capital market in the face of geopolitical and other risks and opportunities.

Hamilton Lane is among the largest private market investment firms globally, providing solutions to institutional and private wealth investors around the world. As of September 2024, the firm had over $947.6 billion in assets under management and supervision.

Edited excerpts of the interview with Koh:

Geopolitical tensions continue to take centre stage. How are limited partners (LPs) underwriting this risk? 

With major elections out of the way, regardless of what pans out, there is more certainty. As LPs, we see certain pro-growth elements emerging, especially in the US, which brings a lot of optimism for our industry. However, the impact on Asia remains unclear. While uncertainty is lied in some areas, it intensifies in others. Beyond tariffs and the US-China dynamics, there are rising concerns in countries like Japan, where a sense of cautious optimism prevails, given the tensions surrounding Greater China and Taiwan, which are too intricate to predict at this moment. However, one thing that stands out is the resilience and adaptability of Asia-based players, who are incredibly skilled at navigating these challenges.

Many investors interested in Asia are adopting a wait-and-watch approach, with some even reducing allocations. What are the implications for the region?

There is still significant interest in Asia, with some LPs indicating that they plan to focus on the region next year. However, many of these investors are waiting to see concrete developments before committing capital, especially as many are still awaiting DPI [Distributed to Paid-In Capital] and returns have been suppressed.

Some of our general partners [GPs, or fund managers] are addressing this by structuring continuation vehicles or showcasing partial exits to generate buy in. LPs would generally like to see a couple of successful exits before investing.

This wait-and-see environment is challenging for GPs, as they usually want to secure capital during the first close to have that certainty before sourcing deals. However, in periods of heightened uncertainty, this extended cycle becomes the norm. There are still standout managers in specific regions, like India and Japan. However, these cases are not the norm for most managers in Asia.

With increased scrutiny, how has your approach to managers evolved? Are you prioritising excess returns, downside protection, or both?

It's a fine balance. We typically look for 18-20% IRR and at least a 2x multiple for buyout funds, with growth or venture funds potentially requiring slightly higher returns. In Asia, there is less consistency of track record compared with some of the other markets where we are. While many GPs hold winners for longer and as GPs tend to focus more on multiples than IRR, we also need to balance both aspects.

We also communicate to our GPs that achieving both strong multiples and IRR is essential, and we need to balance both objectives.

At Hamilton Lane, we have one of the largest emerging managers programmes in the industry. While Asia doesn't have as many mega-managers compared to other regions, our Emerging Managers Program allows us to engage with, and scout for, promising managers.

Through this programme, we focus on various profiles, including managers targeting specific localities. These investments can include Fund I, Fund II, or even Fund III.

With leverage in the hands of LPs how are terms negotiated and how receptive are the managers?

As fiduciary LPs, we aim to secure the best terms for our investors. We've always sought favourable terms such as fee terms, size / early closing discounts and other legal negotiations. A key point for us is securing a Limited Partner Advisory Committee (LPAC) seat. We believe being on the LPAC is valuable, as it allows us to actively contribute and ensure the fund stays on track. We also require approval for any deviations from existing terms, such as fund life extensions. These are the areas we typically focus on during negotiations.

What has changed is that we are now pushing much harder for co-investment rights. Co-investment helps us reduce the overall cost of our investments by lowering the fees for our clients. Additionally, for younger, emerging funds, we often also seek co-investment opportunities before even committing to a fund. This allows us to gain a much better understanding about the team and their philosophy, which may bring us to invest in their fund subsequently.

GPs are more open to co-investment requests, especially in the current capital-scarce environment. Co-investors are seen as strategic partners, not competitors, making this approach mutually beneficial.

How is smart money capitalising on undervalued markets like China and onshore Asia for long-term growth?

In my view, smart money in private capital should always be invested with a long-term perspective. In private markets, investors are not investing in the current market, but are investing in the potential for outsized returns over the next 5-10 years. This means that entry valuations are important, and this is where investors may have to 'go against the grain' to invest in areas that may be undervalued and receiving less capital today.

For investors curious about the region, how would you recommend approaching Asia?

In general, we believe in the power of portfolio construction and a diversified, measured approach. For investors new to Asia, it is wise to approach the region with a balanced and diversified strategy. Instead of focusing on a single country, consider a pan-Asia approach. For more conservative investors, a portfolio blending both buyouts and venture growth can be a good approach.

Even in Southeast Asia or India, buyout opportunities exist, it's just a matter of finding the right funds. For those unsure about holding investments for 10-12 years, exploring evergreen or open-ended vehicles is a good option. They allow for a shorter investment horizon, if needed, giving investors time to understand the market before committing to longer-term funds.

What people often don't realise is that you can gain exposure to Asia beyond just closed-ended funds. At Hamilton Lane, our evergreen platform today has about $8 billion in AUM, and offers a variety of funds to a broad swath of investors globally. As we look to bring new investors to Asia, itʼs important to go beyond the traditional investor base. A lot of private wealth and individual investors, for example, have very little exposure to private equity in Asia.

The rise of evergreen funds globally—spanning PE, private credit, and infrastructure—signals a shift toward more flexible, long-term investment structures. However, most evergreen funds have been US-focused, making up roughly 70% of global exposure. As evergreen funds require greater sophistication in managing liquidity and long-term value creation, many Asian managers lack the resources and expertise to manage these funds effectively. Yet, as Asia gains more focus, this may change by 2025, offering a prime opportunity for GPs in the region to refine their ability to manage evergreen structures and diversify geographically.

The appeal of open-ended funds lies in their flexibility, lower minimums and easier administrative processes. The liquidity profile is much different compared to closed-ended funds, which typically include a lock-up period of about 10-12 years. For high-net-worth individuals (HNWIs), the evergreen or open-ended fund model reduces the hassle of capital calls and long investment periods. Investors can be fully invested on Day 1, when they go through an evergreen fund. Furthermore, open-ended funds offer transparency, allowing investors to conduct due diligence on existing deals within the portfolio, unlike blind-pool funds.

For Hamilton Lane, the open-ended funds within our Evergreen Platform also allow us to reach a new, broader set of investors, such as individual investors from regions like the US, who may be more open to Asia. We've seen that the increased flexibility, transparency, and accessibility make open-ended funds an attractive option in fast-growing markets like Asia.