Hong Kong-based Squadron Capital plans to raise a $400 million fund this year to pour into Asia private equity funds, hoping for fat returns from investment in firms tapping a consumption surge in the region.

Squadron's chief executive David Pierce said the fund of funds, to be launched in May, would particularly target India and China, where retail sales are rising at around 20 percent annually.

"Our growth capital managers in both places are looking at the consumer story very hard," Pierce told a Reuters hedge fund and private equity summit in Hong Kong.

Pierce admitted the domestic consumption theme was nothing new and ran through many investment strategies in Asia, but he said few investors had the local knowledge and connections to push through deals.

"There are a lot of players relative to the past, people know what these themes are and what can be done, but it comes down to who has the ability to source and execute transactions," he said.

"Our managers are now rolling up their shirt-sleeves and working these transactions through," Pierce added.

Squadron, which closed a $300 million fund of funds in February, has already funnelled around 70 percent of that investment through 14 private equity fund managers in the Asia-Pacific region.

They include Hony Capital, a specialist in privatisation of Chinese state-owned assets, Australian buyout fund Archer Capital, and India's Avigo, which invests growth capital in small manufacturing and engineering services businesses.

Many investors believe a global credit crunch, stemming from the U.S. subprime mortgage crisis, will throw up even more opportunities to invest in distressed companies this year. But with banks also unwilling to lend heavily to private equity funds, big leveraged buyouts have become difficult.

Pierce said Squadron's new fund would not lower expectations for internal rates of return, which he hoped would surpass 20 percent, net of fees. Squadron typically takes a 1 percent base fee and 10 percent performance fee.

"Clearly there has been some return compression in the United States and Western Europe but it has a lot to do with the large role leverage has to play in those markets," Pierce said.

"Here it's a little different, with growth as a major driver, so we still should be able to achieve the returns we're looking for."

Squadron, an affiliate of Hong Kong's Search Investment Group, has drawn investment from endowments, family offices and other institutional investors, including the San Francisco Employees' Retirement System.

And Pierce said global investors wanted to increase their exposure to Asian private equity.

"As a percentage of total portfolios, allocations to Asia are still pretty small in the private equity area," Pierce said. "They're not making huge leaps, just going from miniscule to starting to become meaningful."