Asia-based LPs brace for headwinds after spectacular year for private equity
Limited partners (LPs) in Asia Pacific can expect strong headwinds in 2022 from geopolitical and economic uncertainties as well as a slowdown in China after a record-breaking year that saw the region's private equity (PE) market close $296 billion of new deals, according to a recent Bain & Company report.
The booming Internet and technology sector, primarily in India, South Korea, and Southeast Asia, and the growing interest in ESG (environmental, social, and governance) investing may, however, offer some respite for investors, said the Asia-Pacific Private Equity Report released in March.
The total Asia Pacific investments in 2021 were up 50% over 2020 and 82% over the five-year average between 2015 and 2019, while the Apac share of global assets under management increased to 30% at the end of 2021, outpacing the growth of North America and Europe.
Greater China contributed the lion’s share of $128 billion, or 43% of the total investments, while India weighed in second with $61 billion or a 20% share. The latter grew faster in deal value than China for the first time – 47% vs 23% - raising hopes of new investment opportunities.
Investments in Japan, South Korea, and Southeast Asia in 2021 more than doubled compared with 2020, while Australia and New Zealand grew 46% year-on-year.
The PE market in Asia Pacific is expected to grow despite the uncertainties, but investors must have clear ideas to take advantage of the opportunities, said Jacqueline Zhuang, KKR’s client and partner group director and head of Southeast Asia Wealth.
“In regard to private equity, in the long term, we expect the asset class to perform well, and one big way to mitigate the uncertainty we see in the market today is to get the long-term investment themes right,” she told AsiaInvestor.
Such themes include digitalisation, automation and logistics, energy transition and security, cyber, defence spending, and the rise of the global millennial among others, she said.
According to the Bain report, internet and technology and advanced manufacturing and services made up 60% of the total deal value in 2021, with healthcare, energy and natural resources, retail, financial services, and other sectors making up the rest.
Growth deals dominated the markets in Greater China, India, South Korea, and Southeast Asia, making up 59% of total investments, while buyouts - the more popular deal type in Japan, Australia, and New Zealand – accounted for 25% of the total.
Exits recovered after two years of sharp declines, rising 107% to $172 billion mainly through initial public offers (IPO) – 47% of all exits - abetted by buoyant stock markets.
Meanwhile, Asia Pacific-focused funds raised $144 billion in 2021, up 7% over 2020. The dry powder of unspent PE capital rose by nearly 30% to a record $654 billion - a level that will fuel investment activities in the region in the years ahead, said the Bain report.
THE CHINA FACTOR
Despite the strong 2021 showing, global LPs are increasingly worried about China’s slowing economic growth and increasing investment risk, given the rising geopolitical tensions and tighter industry regulations.
Funding activity in China was disrupted by the government’s crackdown on the tech sector, including the once-thriving edtech sector, as the authorities sought to ease pressure on parents and children.
Meanwhile, China’s exit value fell 50% in the second half of 2021 from the same period a year ago as weak stock markets in mainland China and Hong Kong contributed to the unattractive exit environment.
The popular IPO route through US capital markets has narrowed due to US disclosure requirements and China passing laws restricting the transfer of customer data to foreign countries.
“China’s private equity market, in particular, may lose momentum after years of superheated growth,” the report said, adding it could drag down the region's overall performance this year.
INTERNET AND TECH SECTOR
LPs in the Chinese market might be eyeing the growing Internet and technology sector – 48% of the overall APAC deal value in 2021 – in India, South Korea, and Southeast Asia.
India – 62% of all deals done in the country in 2021 are Internet and technology-related – is best placed to benefit from the shift in investor interest in China, given the similarity between the two countries in population size, growth rates, and state of development.
According to the survey by Bain and the Institutional Limited Partners Association (ILPA), global LPs are raising the ESG (environmental, social, and governance) bar for General Partners (GPs), including those in the Asia-Pacific region.
Two-thirds of global LPs say they will avoid investing in funds at the bottom of the ESG performance scale, while nearly 50% think it is important to evaluate GPs’ ability to provide ESG-related key performance indicators (KPIs), and more than 80% of LPs plan to increase ESG demands on GPs in the next three years.
Corroborating this finding, KKR’s Zhuang said that investors are expecting their fund managers to take ESG matters even more seriously than themselves.
“They want to see processes implemented in the pre-investment process, are more frequently asking about opportunities that have been passed on due to ESG considerations, and are focused on the impact and change we can bring to accelerate ESG awareness.”
This shift in attitude is expected to have a significant impact on the PE market as LPs' demand for ESG assets such as renewable energy, cleantech, and fintech projects with social impact grows.