Impressive but challenging: private equity in Asia-Pacific


Financier Worldwide Magazine

June 2017 Issue

The Asia-Pacific private equity (PE) market is a magnet for international investors – a vibrant region flush with international capital and underpinned by well-established PE fund managers with proven track records.

Moreover, despite facing considerable geopolitical uncertainty at home and abroad, the Asia-Pacific PE space has shown remarkable resilience in recent times, with 2016 one of the best years on record based on deal value ($92bn), second only to the unprecedented levels of activity seen in 2015 ($124bn).

“PE deal activity in Asia-Pacific remains extremely buoyant, with China a key driver of growth,” says Benjamin Quinlan, CEO and managing partner of financial services strategy consultancy Quinlan & Associates. “Given the low interest rate environment in the past few years, PE funds amassed swathes of capital as limited partners (LPs), in search of enhanced returns, shied away from traditional asset classes toward PE.”

With the uptrend in PE activity expected to continue, bolstered by internet and consumer-oriented deals, venture capital and early stage transactions, not to mention $136bn of ‘dry powder’, according to Preqin, the opportunities in Asia-Pacific are attractive and considerable.

Fundraising and buyouts

Investor interest in Asia-Pacific remains strong, notes Suvir Varma, a partner and Asia-Pacific private equity leader at Bain & Company, with healthy returns the norm. “PE in the region has outperformed LPs’ expectations, being cash positive for three years in a row,” he confirms. “Asia-Pacific PE assets under management are also reaching a record high – 11 percent vs. global private capital – and most LPs surveyed plan to allocate more capital to the region.”

However, Mr Varma warns that the gap between the top and bottom quartile funds is widening in Asia-Pacific, resulting in a flight to quality that benefits large, experienced GPs. Indeed, 67 percent of large funds with proven track records met their targets in 2016, compared to only 36 percent of first-time funds.

The outlook for PE in Asia-Pacific is viewed as broadly positive, with fundamentals strong, ample capital available, attractive opportunities and solid returns the likely result.

In terms of buyouts, although fundraising slowed in 2016, this was offset due to the number of firms sitting on the substantial stockpiles of capital that they had already raised. “As such, priorities moved from fundraising to acquisitions, as well as further optimisation of existing portfolio companies,” explains Mr Quinlan. “There was a particular appetite for tech and internet companies in China and Southeast Asia, as well as for advanced manufacturing companies, particularly in China, and the consumer retail sector, particularly online retail.”


Despite the positivity surrounding fundraising and buyouts, PE practitioners operating in the region do face a number of key challenges – increasing competition, Chinese debt levels and shifting sources of value among them. “Rising Chinese debt levels are a concern which could lead to a realignment akin to 2008,” says Neil McFerran, a vice president at AlixPartners. “Similar to Europe, valuations appear to be high with numerous auction processes. This leads to the concern of equity being underwater if cheap debt dries up and there has not been the focus on portfolio value creation.”

In addition, given the abundance of capital in the region, competition for assets remains fierce, which puts upward pressure on valuations and impacts acquisition appetite. “There is growing competition from corporate buyers seeking out inorganic growth opportunities, particularly cashed-up Chinese corporates,” notes Mr Quinlan. “Rising interest rates are also going to have an impact on appetite for leveraged buyouts and highly leveraged deals. Other, broader concerns include a slowdown in economic growth in China and ongoing political volatility offshore, which is creating a somewhat more cautious investor sentiment.”


Challenges known, the outlook for PE in Asia-Pacific is viewed as broadly positive, with fundamentals strong, ample capital available, attractive opportunities and solid returns the likely result. That said, there remain areas of concern around macro uncertainty and increasing pressure on returns.

“Best-in-class PE investors will develop a differentiated angle across the value chain to remain ahead of the pack,” suggests Mr Varma. “This includes smarter sourcing to build a robust pipeline around their deal sweet spot, enhancing due diligence capabilities to develop proprietary views on their targets and doubling down on portfolio value creation so they can get a head start.”

Expecting a continuation of the uptrend in PE activity is Mr McFerran, noting that technology investments in Asia are still hugely attractive and show no sign of abating. “There is an increasing focus on developing markets such as Vietnam and the Philippines. Vietnam, for example, saw $6bn of transactions in 2016, with more to come,” he affirms.

According to Mr Quinlan, another likely scenario is that LPs will become more selective around their capital commitments, choosing to back funds with the strongest track record with a mix of portfolio companies that generate strong positive cashflows.

While recent geopolitical and economic turbulence has undoubtedly been disruptive for PE activity in the Asia-Pacific region, the overall momentum seen over the past few years is being largely sustained, with impressive fundraising results and market-beating returns having the potential to become the new normal.

© Financier Worldwide


Fraser Tennant

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