In contrast to the mixed measures in both the U.S. and European markets, deal flow, exits, and fundraising are all up in Asia-Pacific private equity markets. While these trends are positive, many of the Asia-Pacific economies are substantially dependent on exports, which makes them very sensitive to economic performance in other regions of the world. The unresolved geopolitical situation associated with North Korea induces additional uncertainly across the region and is particularly problematic as reasonable outcomes are difficult to characterize. Investors focused on Asia-Pacific face the continued challenge of investing in companies that can be successful even in the event of a decrease in global demand.
Many of the Asia-Pacific economies are dependent on exports, which historically have made them sensitive to the economic performance in other regions of the world, particularly the United States. The Asia-Pacific economies remain susceptible to global headwinds such as weaker external demand, rising protectionist sentiments, and global systemic shocks with uncertainties arising from events such as Brexit in Europe, the Trump administration in the U.S., and the geopolitical situation in North Korea. Investors focused on Asia-Pacific will face the continued challenge of investing in companies that can be successful even in the event of a decrease in global demand. However, Asia-Pacific intra-regional trade and domestic consumption have increased at 9.6% and 32.0% respectively over the last six years, leading businesses to shift their focus to regional markets. The strong shift towards domestic consumption within the region is supported by resilient domestic demand and government policies. In 2014, household consumption made up 35% and 58% of the GDP of China and India, respectively, and increased to 37% and 59%, respectively, in 2016. This trend is expected to continue with domestic consumption as an increasing contributor to the GDP of the two fastest growing Asia-Pacific economies, which recorded GDP growth rates of 6.7% (China) and 6.8% (India) in 2017.
The unresolved geopolitical situation associated with North Korea induces additional uncertainty across the region and is particularly problematic as reasonable outcomes are difficult to characterize. The escalating tension in the Korean peninsula, triggered by North Korea’s recent nuclear tests and missile launches, led to the resulting bilateral U.S./North Korean political leaders’ rhetoric. However, the latest developments and North Korean provocations have had minimal impact on South Korean markets. For example, the KOSPI has been one of the better performing indices in the region and has returned over 21% in 2017. In addition, stock markets in the region, including countries in close proximity to North Korea such as China, Hong Kong and Japan, have also continued their steady appreciation over the course of 2017. Overall, local market participants perceive the geopolitical risks to remain low and a catastrophic war scenario to be unlikely.
Asia-Pacific private equity markets continued
to reach new heights in 2017 as fundraising,
investments and divestments in the region have increased.
Set against this backdrop, Asia-Pacific private equity markets continued to reach new heights in 2017 as fundraising, investments and divestments in the region have increased significantly by 36.3%, 38.2% and 15.0% respectively in 2017, as compared to 2016. In 2017, KKR Asia Fund III raised the largest pool of private equity capital across the Asia-Pacific region, closing at $9.3 billion. Affinity Equity Partners, one of the region’s most established managers, closed its fifth fund at $6.0 billion in December 2017. Although more capital is being placed into private equity, many LPs are looking to consolidate their GP relationships, committing more capital to a smaller set of larger fund managers. The increase in minimum check size means smaller funds cannot be considered. Moreover, while many investors believe they are underweight in Asia-Pacific and want to increase their allocations, a relative lack of familiarity with the region means that investors tend to stick with familiar global names or large, established regional managers.
The strong growth in private markets is underpinned by several key underlying trends. One is a shift towards more control transactions as private company owners are getting older and have no succession solution. Buyout transactions across the Asia-Pacific region increased from $66.8 billion in 2016 to $82.5 billion in 2017, a 23.6% increase. Another trend is more innovation within the region, which is driving up venture investments such as the uncharacteristically large $5.5 billion commitment to Didi Chuxing Technology co-led by Softbank Group in 2017. Finally, Asia-Pacific offers relatively attractive valuations considering the growth potential, especially in markets such as China, with a real GDP growth rate of 6.7%, but average P/E multiples trading at a 37% discount to the S&P 500 as of June 30, 2017.
Asia-Pacific private equity has ample room to grow.
We expect Asia-Pacific private equity markets to continue to grow over the coming years. Measured against U.S. and European markets, Asia-Pacific remains relatively small at only 16% and 26% respectively, by value of investments made in 2016. Asia-Pacific private equity has ample room to grow and is expected to benefit from structural changes and the forces highlighted above, with potential headwinds and external risks coming from developed markets.
Inquiries or comments concerning this article may be addressed to:
Managing Director, Head of Asia-Pacific Advisory Services
Pavilion Alternatives Group (Singapore) Pte. Ltd.
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