Persistent inflationary pressures and weak economic growth are having a strong impact on investor appetite for private equity and created a generally difficult fundraising market, according to Shirley Ma, who heads private equity in Asia-Pacific for the $577 billion AUM Dutch pension investor APG Asset Management.
Nevertheless, there are select pockets of interest even now for discerning investors.
“Over-allocation [to private equity] issues and risk aversion under an uncertain macroeconomic environment have caused some global investors to pull back from Asia. GPs with good track record are taking more time to raise; and some less successful GPs are struggling,” Ma told AsianInvestor.
Asia-Pacific’s private equity market plummeted towards the end of last year, as rising consumer prices and global geopolitical tensions took the wind out of investors' appetite for risk.
Fundraising activity in China was muted in 2022 as deal volume slowed significantly on the back of China's zero-Covid-19 policy.
Still, other emerging markets like India and Southeast Asia are attracting increasing interest from global investors thanks to good growth prospects, favorable demographics and more neutral geopolitical positions, Ma said.
“Investors are closely watching China’s speed and magnitude of recovery from COVID since its re-opening. The market may see revived interest when there is clearer visibility on the central government’s priorities and consumer sentiment post-Covid-19,” said Ma.
“More GPs are chasing investments with sustainability themes, an area where GPs see regulatory tailwinds and increased demand from LPs. LPs are pushing for formalisation of an ESG framework, including risk assessment, value creation, as well as KPI (key performance indicators) measurement and reporting.”
European investors including APG have been leading ESG development of the industry, she said.
While exceptions are few and far between, certain sectors and themes are weathering the market downtrend, she said.
"Select sub-segments of the healthcare sector appear to be holding up well,” said Ma. “Also, advanced manufacturing to some extent has proven its relative resilience during Covid-19.
“Not to mention, investments with clean tech, environment and sustainability themes are attracting increasing interest,” she said.
LIMITED FED IMPACT
The ongoing high inflationary environment and interest rate increases by the Federal Reserve are having a limited impact on Asia’s private equity scene, as China’s monetary cycle has become largely decoupled from the US, said Ma.
“While interest rate hikes have had some negative impact on the credit availability in leveraged buyout markets like Australia, Japan and Korea, the use of leverage is relatively modest in Asia when compared to US or Europe. Additionally, leverage has not been the return driver for most parts of emerging Asia,” she said.
In Ma’s opinion, a higher rates environment may, in fact, be viewed favorably for Asia as it may imply a more level playing field for private equity markets across the globe.
“Asia private equity has not been able to benefit as much on the highly favorable financing environment as the Western markets during the past decade,” said Ma.
“However, the region remains vulnerable to capital outflows and hence currency depreciation.”
COUNTING ON RECOVERY
A significant re-rating of public and private market valuations has occured across most sectors and is probably most notable in the once very heated consumer internet sector, said Ma.
“Unsurprisingly, most consumer-facing businesses, especially consumer discretionary, are challenged by both deteriorating performance and contracted multiples,” she said.
Barring any black swan events -- unpredictable events with extreme consequences -- Ma expects deal activity to recover gradually from the exceptionally low levels seen in 2022, helped by an improving outlook for China and stabilising interest rates.
“Positive surprises could be ... an easing of Sino-US geopolitical tensions, and the Chinese government’s priority on promoting economic growth, among others,” she said.