Asia investors seen growing cautious about private equity

Investors based in the Asia-Pacific region are less optimistic about private equity markets in 2019 than in other regions, according to a new S&P Global Market Intelligence survey.

Growing economic worries are cited as a principle factor behind their gloomier outlook, although valuation concerns are also stalking the sector.

The survey of "over 1,000" private equity professionals published on Tuesday by S&P Global showed 14% of total respondents think that private equity activity will deteriorate in the coming year, with those based in the Asia-Pacific accounting for more than two-fifths of these relative pessimists.

The study also showed a 15 percentage-point drop to 44% since end-2017 in the proportion of respondents expecting an improvement in private equity activities in the coming year. 

Barry Tong, joint APAC head of transaction advisory services at consultancy firm Grant Thornton, agreed that private equity investors seem to be harbouring growing concerns and that the market might be nearing a peak.

“High purchase-price multiples ... could damage future returns,” Tong told AsianInvestor. 

That chimes with concerns aired elsewhere that too much money might be chasing too few deals, and pushing valuations up as record amounts of capital for private equity investing are raised. Data from Preqin shows that the amount of private capital raised globally and ready for investment reached $2 trillion as at the end of June 2018, the highest since 2006. By asset class, private equity funds accounted for 58% of this so-called dry powder figure.

A survey by Grant Thornton released in late January, showed activity still bubbling along, with total mergers and acquisitions across Asia up more than 20% by deal value in the first nine months of 2018, compared with the same period a year earlier. 

And more growth looks on the cards in 2019, according to S&P Global. 

“With an appetite for further investing and a record amount of dry powder [available], we expect [General Partner] investors to accelerate deal activity in 2019,” noted the survey.

Those surveyed by S&P Global, even so, indicated their growing disquiet with the market's extreme valuations and with the increasingly shaky trade, monetary and economic backdrop.

More than 70% of the Asia-Pacific respondents said the changing economic environment, in particular, posed the biggest challenge to their portfolio companies as growth slows.

Close to 40% of these respondents said they considered protectionism the second-biggest risk. The report noted, though, that this is “largely isolated to professionals directly exposed to the global trade spat by being located in either China or the US.”

HEALTHCARE INTERESTS

On a positive note, the survey showed that the healthcare sector continues attract interest. 

An S&P Global spokeswoman told AsianInvestor that 50% of the respondents from Asia plan to invest in the sector in the next 12 months. 

“[The] healthcare sector is one the favourites among APAC investors due to its high margins with strong growth characteristics,” Tong said. “With the socio-economic factors including ageing global populations and rising income levels, demand for quality healthcare services ... [and] continuous drug and medical devices innovation are high.” 

Asia Pacific-based investors are not alone in this.

“Healthcare is an area to watch over the next four to five years,” one executive director at Canadian pension fund who declined to be named told AsianInvestor. “We have done a deep-dive analysis on hospitals, single specialty clinics and pharmaceutical companies. We haven’t fully decided where to put our money but these are the areas we are open to investing in.”