The Japanese have a word for the market-defining impact of Chinese tourists: “bakugai”, which means explosive spending.
Trends in the behaviour of Chinese tourists, such as the shift from buying high-end toilet seats towards cosmetics, are big news for retailers. Those who misjudged their changing tastes issued profit warnings last year, including Japanese department store operator Isetan Mitsukoshi.
Private equity funds and their investors are looking to get ahead of these money flows and back businesses that get it right.
Axiom Asia Private Capital, a fund-of-funds manager, is shifting gears for its newly-raised fourth fund of $1.03 billion and looking for more private equity investments across Thailand, South Korea (pictured below) and Japan: the top destinations for Chinese tourists in 2016 according to the China National Tourism Administration.
“Instead of investing in China, we are investing in what China wants to buy,” said Edmond Ng, a managing partner at Singapore-based Axiom, told AsianInvestor.
This is a very different tactic from the one it adopted for its first fund, which closed in 2007 and invested mostly in China – as did the vast majority of managers at the time.
Marc Lau, a managing partner at Axiom (pictured left), said: “The trick of our business is to look where the customers are going [and] how they are spending their money, and put capital to work before the flow of M&A dollars goes there."
Axiom’s shift comes as the outlook darkens for Asian companies buying US and European. Asian capital appears to be less welcome in, say, the US following the election of Donald Trump as president.
Axiom's thinking is that Asian companies will redirect at least some of those investment dollars into their own backyard because they don’t have to look so far to find the brands and technologies they need these days.
“Asian companies will come to realise that time zones, distance and cultural affinity mean it is probably easier to manage a business closer to home,” said Lau said, who prior to Axiom ran an auto components manufacturing business in Zhejiang, China for Danaher Corp.
The trend towards more localised investment should lead to greater opportunities for PE managers in terms of buyers and pricing, and higher returns for investors in the asset class, suggested Lau. “If you throw one more buyer into the mix, then you get more attractive pricing."
“What is a private equity company? It’s been cleaned up, rolled up and professionalised,” added Lau, who started his career in private equity at GIC Special Investments, part of the Singapore sovereign wealth fund.
This strategy shift has been supported by the Axiom’s existing investors – a mix of pension funds, sovereign funds and asset managers – which made up the bulk of its fourth fund, Axiom Asia IV.
Axiom had targeted $750 million for its fourth fund and raised $1.03 billion, a little less than Axiom’s previous vehicle of $1.2 billion in 2012.
Across its funds Axiom has about 50 to 60 about relationships. Among the investors in its fourth fund was AP-Fonden 3 (AP3), one of Sweden's six national funds, which has $35.3 billion under management.
The Montana Board of Investments invested $25 million in Fund IV, its third investment into Axiom funds. Meanwhile the Michigan Department of Treasury's Bureau of Investments committed $50 million, with some of the capital already drawn down.
London-listed Caledonia, a self-managed investment trust, committed £34.8 million ($50 million) to Axiom Asia IV.
Axiom, which has 14 investment professionals, launched its fundraising at the tail end of last year and has already put almost a third of the fund to work. It invests in buyout, venture capital, growth capital and other PE funds.
Fund IV raised $688 million from US investors, according to a filing by the Securities and Exchange Commission. Still, there has been greater interest from Japanese and Korean investors building out their PE programmes in Asia.
But for Asian managers looking to raise funds, 2016 was a tougher slog than, say, 2009 and 2010.
The world's largest limited partners, as investors in private equity are known, come from the US and Europe. Axiom is typical in this regard. Some two-thirds of its investors come from the US and a third from Europe.
American LPs have enjoyed a bull run in their US investments for the last few years – so they need convincing to direct money overseas, given the added foreign-currency risk. Also, because the US dollar is strengthening on expectations that US interest rates will rise, they calculate any foreign investments will suffer in 2017.
“There are a lot of headwinds for a manager trying to raise capital from US LPs to invest outside of the US,” said Chris Loh, another Axiom managing partner.
Axiom charges a 1% fee and 5% carry fee. While it raised less than in its previous fund, the managing partners said they had beome more efficient, recycling investors' capital within the fund's lifespan. "Our firepower is not diminished in any way," said Lau.