2019 wasn’t exactly a banner year for private equity, but the industry has continued to attract interest from institutional investors in the current low-rate environment. The third quarter of last year saw $163 billion in aggregate capital raised, according to alternative data provider Preqin.

The Ontario Municipal Employees’ Retirement System, for example, has just expanded its private equity team by adding a Blackstone veteran to its team in Singapore. Thailand’s Government Pension Fund is also stepping up its private equity game to boost returns.

As the fear of an imminent recession ebbs – judging by the Federal Reserve’s dovish stance – private equity could well be a main beneficiary.

Having said that, the asset class has come under fire for frothy valuations that, at times, were dashed by investors after companies went public. Ride-hailing company Uber, for example, has lost more than 20% of its $45 per share IPO price as of yesterday’s close. The company was valued at $76 billion in May before it was listed.

Given that companies are staying private for longer, allocating to private equity is inevitable for investors who want to capture growth and returns. Six experts share their thoughts on which sectors or geographies investors should look out for, and which ones asset owners should avoid.

The following extracts have been edited for brevity and clarity.

Robert Jones, managing director
FCL Advisory

Robert Jones
Robert Jones

I continue to recommend that investors consider taking secondary stakes in PE funds, either via Secondary PE Funds of Funds or by working with brokers to purchase secondary interests in brand name funds. I’ve had clients invest in secondaries over the years and sell some of their PE fund LP interests to secondary buyers and both have worked out well. Buying secondary interests at discounts that range as high as 25% gives a solid margin in case deal valuations come down. 

Regarding areas to avoid, as you know, late-stage valuations in the private markets are very frothy even for companies that have no profits. I recommend avoiding late-stage venture funds and direct deals except in rare cases where valuations can be justified based on current profitability.

Yang Wang, partner
Dechert

I anticipate more in-bound transactions in China’s financial service industry in 2020 as it relaxes some of its restrictions on foreign investment banks. I’m also seeing activity in the education, fintech/technology and electric vehicle industries, including areas such as solar battery and car parts.

Yang Wang
Yang Wang

The economic backdrop in China presents some interesting restructuring deals and alternative investment opportunities, where business owners need cash to survive at the moment.

Internationally, I expect to see more China-Europe deals than with the US in 2020, with a focus on Europe’s financial services and high-tech sectors, particularly given China’s sustained appetite to bring European technologies to China. A tightening China-Russian relationship could also lead to more deals between these two countries, most likely in big-ticket industries such as the utilities, energy and commodities. Southeast Asia will also continue to be a hot area for Chinese investors, in particular, Thailand and Vietnam.

The geopolitical backdrop has an increasing influence over business. The US-China trade war and some concerns around CFIUS [Committee on Foreign Investment in the United States] approval have impacted Chinese deal flow into the US.

In terms of sectors, generally speaking, private investments in industries that require heavy capital expenditure will not be popular next year. We may continue to see SOEs and sovereign capital investing in these industries, but we will see fewer private players. This includes real estate, energy, utility, airlines, etc. Logistics, however, appears to be an exception, as we will continue to see large private companies investing heavily in this sector.

Alexander Traub, head of Asia Pacific
Alter Domus

Alexander Traub
Alexander Traub

The trade war continues to be an overhang. There's still interest even from US LP [limited partners], but certain types of LPs have dimmed their appetite and funds are still being closed. It hasn't been carried through to the data just yet but going into next year you will start to see the fundraising cycle lengthen out. 

In China, TMT and healthcare are still very hot sectors even if the valuations look to be relatively high, which hasn’t affected investor appetite. US investors are still the bulk of the allocators in Asia.

There's a lot of appetite for Japan in private equity and real estate, which is perceived to be lower risk relative to other parts of Asia – there has been a huge amount of deal flow. Funds raised by Japanese GPs for investments in Japan are starting to raise significant amounts of capital from European and US LPs. Almost everybody that's in the market now is raising two sleeves, one from Japanese investors, one from offshore. Previously fund raising was heavily skewed towards the Japanese sleeve. That's starting to even out with more capital being raised offshore.

Regional Southeast Asia-focused funds, particularly out of Singapore, and Indonesia is clearly a growing market. Vietnam is starting to pick up as well.

Paul Gambles, managing director
MBMG Investment Advisory

Paul Gambles
Paul Gambles

Wealthy investors and family offices can now more readily invest overseas – the maximum permitted offshore transfer for general investment was increased last month from US$1 million to US$5 million. Recent years have also seen increases in outbound Thai foreign direct investment, including investments in John West Foods, and English football clubs.

Another less obvious change has been in the transition of businesses. Now, we’re encountering situations where subsequent generations are increasingly pursuing their own interests. Consequently, we’ve recently built a pipeline of mature, profitable businesses across a broad range of sectors that previously would have rarely (if ever) been available for sale but are now willing to listen to offers.

This recent phenomenon represents an opportunity to acquire fully-established and operational slices of ‘Thailand Inc’ at reasonable prices. This is unique in my 25 years in Thailand. In many cases, the commercial risks are limited and even before any rationalisations, relocation, or improvements, acquisition of sustainable businesses might be expected to yield attractive returns.

One other consequence of the shift of newer generations away from established family business models has seen a significant increase in activity in areas like e-commerce and fintech. These present attractive access into Thailand’s millennial markets.

Michael Chin, partner
Simmons & Simmons

Michael Chin
Michael Chin

While the fintech sector has been dominated by early-stage and venture investors, the surplus of private equity capital has been and will continue to be attracted to this sector. A number of the largest players have raised fintech specific funds to position themselves for this. Payment companies will start to see consolidation activity and private equity will be competing for these deals as valuations start to cap out.

The biggest challenge will be the overall malaise of the Chinese economy. China has traditionally been seen as a growth investment play so with the economy in China slowing down significantly, this model of investing becomes less appealing to investors.

The current US-China trade tensions continue to impact deal flow given the decoupling of these two countries. This, and other current geo-political uncertainties in the world, create an environment of uncertainty which usually gives rise to price discrepancies between buyers and sellers and as such, an inability to conclude deals.

Scott Peterman, partner
Orrick Hong Kong

Scott Peterman
Scott Peterman

In 2020, we are likely to see infrastructure commanding large and strategic investments. Investments in this sector are not keeping pace with economic growth. Sovereign initiatives such as China’s OBOR can address some of the funding gaps, but governments are generally straining throughout the EU, and the US has missed several opportunities to patch its dated roads and bridges, not to mention other more strategic initiatives such as providing high-speed wireless connectivity in rural areas.

There are also likely to be aggressive investments in disruptive technologies that change the way the world works. Think of innovation platforms in AI, robotics, energy storage, transportation systems, genomics, FinTech, Web x.0 companies, and so on. Some are quite concerning and scary, while others afford nearly miraculous outcomes.