Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

With investors around the world facing zero to negative interest rates, the amount of money flowing into Asia's private-equity firms is gathering pace. According to the Center for Asia Private Equity Research, some $34.7 billion has been invested in the region this year, up from $32.2 billion in the same period of 2015.

Is Greed Good?
The amount of money flowing into private-equity firms in Asia is picking up again
Source: Centre for Asia Private Equity Research
Note: 2015 and 2016 year-to-date figures are for Jan. 1 through Sept. 28.

This is despite existing monies raised, but not yet put to work, soaring to a record $208 billion in September, Preqin data show.

The attraction becomes clear when you look at returns in Asia versus the U.S. One-year internal rates of return for private-equity funds in the region averaged 15.8 percent in the year to Dec. 31, compared with 9 percent in North America.

Gaining Ground
Asia-focused private-equity firms are increasingly outperforming their North American counterparts
Source: Preqin
Note: Asia refers to the region including Japan but not Australia. Data show one-year internal rates of return for private-equity investing for the 12-month period.

But with greed comes temptation, and that's something yield-hungry investors ought to be more aware of.

Just last week, it transpired that the U.S. Department of Justice is investigating Standard Chartered over allegations that MAXpower Group, an Indonesian power company controlled by the bank, paid bribes to win contracts. People who poured money into the London-based lender's private-equity business, which first invested in MAXpower in 2012, may be asking themselves whether there are any other questionable transactions waiting to come to light.

Much has been done to crack down on improprieties in Asia. Take Chinese President Xi Jinping's vow to catch both tigers and flies, or South Korea's tough new anti-graft legislation. Yet paltry returns make investors willing to stomach all kinds of risks, and on the other side of the fence, that avarice can spell opportunity.

In Mumbai, the Securities and Exchange Board of India recently tightened regulations around compensation payments made by private-equity funds to promoters that had the effect of cutting other shareholders out of the loop.

"Instances of private-equity funds entering into compensation agreements with promoter-directors and key managerial personnel of listed invested companies, based on the performance of such companies, have recently come to light," Sebi said in a statement. "However, when such reward agreements are executed without prior approval of shareholders, it could potentially lead to unfair practices."

It would be naive to think similar dealings aren't taking place elsewhere.

Data from Transparency International show that Singapore is the region's only country that makes it into the top 10 least-perceived corrupt nations globally. China ties with Liberia and Columbia at 83, while Indonesia keeps Egypt and Algeria company down at 88.

Double-digit returns are tempting, especially in this day and age. But the region's regulators can't be everywhere. A little restraint and a bit more due diligence could save investors a lot of pain later.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. According to people familiar with the matter, Standard Chartered itself informed the U.S. Department of Justice about the allegations of bribery involving MAXpower back in May.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net