Market Views: Are investments in Asia’s private markets drying up?
Fundraising in capital markets globally has fallen by more than $900 billion in the first quarter from the same period in 2021 as surging inflation, war in Ukraine and volatile asset prices delayed stock listings and hampered bond deals, according to the Financial Times.
In the first three months of 2022, businesses raised just $2.3 trillion overall through equity sales and loan markets, down from $3.2 trillion just one year ago. It was the smallest sum for the last six years, according to data provider Refinitiv.
A new set of risks for Asia’s private markets also emerged at the beginning of 2022 with the potential to undermine growth and performance: rising interest rates, and supply chain and labour shortages have already increased volatility in the first half of the year.
The growing political and market risks of Asia’s largest economy have seen China-focused private equity firms struggle to find new cash, as scepticism about China's investment landscape among US pension funds and endowments increases.
The US has also slapped sanctions on Chinese firms and is paying close attention to its relationship with Russia and any hints that it is trying to help the country subvert the sanctions placed on it following its invasion of Ukraine. Travel restrictions due to a “dynamic zero Covid policy” in mainland China and Hong Kong are adding to the growing risks for investors.
This week AsianInvestor spoke to experts about their predictions for Asia's private markets for the rest of the year and to find out if they believe investment in Asia’s private markets is drying up.
The responses have been edited for clarity and brevity.
Prashant Bhayani, chief investment officer, wealth management, Asia Pacific
On the fixed income side, we witnessed the largest foreign monthly outflow in two years in March. For example, the recent sell-off in Treasury yields is one of the fastest in history. This impacts Asian issuers, as only the better-quality issuers of bonds with attractive yields are able to be issued. Investors also want a yield “cushion” and have not yet tried to call the top in the yield moves in Asia dollar bonds.
However, we still see some appetite in this space. Property developers are significant issuers in the Asia fixed income space. With the China State Council’s statement about stabilising the property market, the existing rate cuts, and the loosening of property restrictions in more regions within China, investor are watching this space for these catalysts for the second half.
We have also seen bond issuance in other sectors in China and Asia. With better yields, investors are more keen to look at selected issues. However, the terms will need to be attractive. Furthermore, fears over stagflation cap any near-term pick up in investor interest but the yield levels are much more attractive in Asian dollar bonds for investors.
On the equity side, the events in Ukraine, inflation, and worries over recession have hit the IPO market as we have seen outflows, in particular in Asian equities, from foreign investors. Nevertheless while there is a slowdown in IPOs, activity hasn’t stopped. Sectors including telecommunications, energy, industrials, and materials have seen listings. Dual listings in the Hong Kong market should continue into the second half of the year given the tensions on listing in the US. We have also seen the launch of the largest IPO in southeast Asia in 2022 this week in Indonesia which traded successfully. If the Asia economy does not go into recession, issuance should continue at a better pace as the year progresses after the recent volatility.
Richard Surrency, head of relationship management and client services, Asia
Increased volatility in financial markets leads to lower investor participation, and recent events have been no exception. Public and private markets have seen considerable reductions in activity as investors become increasingly risk-off, however we have continued to see a high degree of interest in several private market strategies and believe that investors will remain active as they search for market entry opportunities over the course of the next few months. Private credit has proven its resilience in risk-off environments, as demonstrated in the first half of 2021, with strong outperformance when markets rebounded. The inflation protection private credit should also remain a draw for investors.
Hedge fund strategies have generated investor interest as long/short equity and credit strategies have outperformed traditional long-only benchmarks so far in 2022, with some esoteric strategies such as cat (catastrophe) bonds demonstrating their low correlation to wider credit markets by posting positive returns in Q1 2022. We continue to believe that hedge fund strategies will be a target of investor interest throughout 2022 and have seen positive momentum YTD across our key strategies.
Liang Yin, director, investments Asia
Willis Towers Watson
It is premature to say that we are now in a reverse gear in terms of investor’s interest in the Asia private markets. The slowdown in equity fundraising activities in recent months is primarily driven by two factors, one impacting funds globally and the other one more specific to the region. Propelled by the pandemic and the war in Ukraine, the inflation outlook has shifted dramatically. Prospects of rising interest rates pose a real danger to one of the most important drivers of private equity returns over the past decade – multiple expansion. It also creates a macro headwind for strategies heavily reliant on cheap financing to deliver returns.
In the Asia Pacific region, capital raised in China accounted for more than two-thirds of the total capital raised in the past decade. However, China fund raising activities have slowed down substantially since the second half of last year. A confluence of factors contributed to the dry spell. These include regulatory crackdown, uncertainty around the VIE (variable interest entities) structure and future exit routes, compounded by Covid lockdowns more recently. Despite that, investors should not lose sight of the longer-term trend here. As we have seen, PE fund AuM in the APAC region has grown significantly, in fact more than two times, faster than North America and Europe over the past decade, and this trend will likely continue.
Manmohan Mall, head of private markets
There has been some slowdown in investor participation on private market deals as investors have become rather selective in terms of which assets to consider after a significant jump in valuations last year, as well as recent correction in the public markets, especially the technology sector. ?This market correction should bring some rationality around valuations for many high-growth technology assets, given their listed counterparts are now available at much attractive valuations. As such, for the right assets, there is a better investment opportunity to take exposure at more reasonable multiples, and more informed investors are seeing this as a good time to participate or increase their exposure to this asset class. Company fundamentals and performance metrics have again become more important than just the overall growth trajectory which was the key investment decision driver over the last few years.
Client preferences are becoming more selective now. We foresee a slower investment decision process as they demand more details around the fundamentals before committing. Lower risk appetite also makes smaller deal sizes more palatable.
Betty Yap, corporate partner
The short answer is “no.”
We have observed a slowing in the pace of dealmaking and a more cautious investment sentiment in Asia private markets in the first quarter of 2022. This is against the backdrop of geopolitical tensions, policy uncertainties, a resurgence of Covid and global market volatility. These have contributed to a valuation gap. While investors may be expecting a drop in asset prices, which has been pushed up in recent years in part due to the positive outlook on economic growth and consumer demand particularly in the emerging markets, sellers’ pricing expectations have not reflected a similar downward adjustment.
Despite these challenges, there remain some bright spots in the market. Certain sectors, particularly those fuelled by the changes in lifestyle due to the pandemic, such as data centres, digital infrastructure, logistics and warehousing businesses, remain active. Certain sale processes involving disposal of non-core businesses and carve-outs as a result of corporate restructuring or strategic refocussing by corporates and financial institutions, and certain exits by private equity investors, are still ongoing.
Numbers available in the market show that the amount of dry powder among Asia-focused investors has reached a record high at the end of 2021. The need to put this dry powder to work and the growing pent-up demand for deals are expected to convert into increasing deal activity in the market as we progress through the year.