The Covid-19 pandemic is having a big impact on the strategies of global private equity allocators, who see Asia Pacific as the least attractive region for investment currently, found a survey of limited partners (LPs) to be released today.
Four in 10 LPs globally, and 61% of those in Asia Pacific, plan to review their co-investment policies, while two-thirds are set to take more account of structural risks in portfolio construction, such as pandemics, climate change or geopolitical tensions, according to Coller Capital’s global private equity barometer.*
Moreover, investors see corporate defaults as a potentially bigger issue for Asia Pacific private debt funds than those elsewhere, according to the survey. One-fifth (22%) of LPs said default rates would be a major problem for strategies in the region, compared to 10% in North America and 17% in Europe.
Respondents gave these views despite the fact that Asian economies dealt with the coronavirus outbreak more quickly and decisively than many in the West and are on the whole emerging from the crisis earlier.
In line with concerns about businesses struggling, appetite for turnaround and distressed investments has accelerated. Three in 10 LPs are set to increase their exposure to such strategies in the next two to three years, compared with 20% in Coller’s survey a year ago.
“Some investors are picking distressed and turnaround strategies in response to the pandemic,” Yang Zhan, Hong Kong-based investment principal at Coller Capital, told AsianInvestor.
Among the LPs polled globally, nearly one-fifth (17%) saw Asia Pacific as an unattractive private equity market for the next two to three years, compared to just 4% for North America and 10% for Europe. It should be noted, of course, that 83% still view Asia Pacific as attractive, and that only one-fifth of the 113 survey respondents were based in the region.
Yang did not comment specifically on why Asia Pacific would be seen as less appealing, but said North America’s attraction was mainly driven by the region’s consistent returns in previous decades.
Perhaps unsurprisingly then, it is the region that LPs are most optimistic about when it comes to returns, predicting stronger performance from North America buyout and venture strategies than those in Asia and Europe (see graph below).
It’s worth noting, however, that the survey took place in September and October, before Donald Trump lost the US presidential election in November. How this might have affected the poll results is open to question.
When it comes to LPs changing their investment approach, nearly half (45%) – and some two-thirds of those in Asia Pacific – plan to be more targeted in their sector focus in the coming years
“Private equity funds are becoming more specialised in different sectors such as TMT [technology, media and telecommunications] and logistics, to get a better understanding of the industry,” Yang said. Healthcare- and tech-focused funds in China have become a bigger focus post-Covid, he added.
One area where private equity investors are being more cautious is real estate. Nearly one-fifth (16%) say they plan to reduce their allocations to property in the next 12 months, compared to just 5% saying the same a year ago (see figure below). Only 19% plan to increase their real estate exposure, while 36% intend to raise their alternative investment allocation overall.
Covid-19 has raised big questions about how much office space may be needed in the future in the face of an expected rise in hotdesking and remote working. And it has further burnished the prospects for online shopping while dampening interest in physical retail property.
Another notable trend is that 77% of LPs expect to see more take-private deals is over the next two years. Amid the pandemic-related market uncertainty, corporate owners may take the opportunity to de-list companies seen as undervalued so that they can focus on value creation, Yang said.
“We may see more take-private transactions of Asian companies, especially Chinese ones from US stock exchanges, as geopolitical uncertainties continue,” he added.
*The report polled 113 investors in private equity funds between September 14 and October 16. The regional split was 40% from North America, 40% from Europe and 20% from Asia Pacific.
The article has been updated to reflect the proportion of LPs who planned to review their co-investment policies and the proportion that planned to increase their exposure to turnaround and distressed investments last year.