Private equity saw an uptick in interest among family offices in Asia-Pacific last year as public markets underwhelmed investors. PE’s appeal for family offices in the region is likely to endure in the coming year, regardless of challenges that have seen even low-hanging fruit become more difficult to pluck, according to Singapore-based single-family office JRT Partners.
Tuck Meng Yee, JRT Partners' founder, said despite the more difficult operating environment, some of the innate features of PE investment will ensure it remains in sharp focus for family offices in the region.
“The trend for more companies being private for longer seems to be continuing,” he told AsianInvestor. “The amount of capital that's now available for private investments versus publicly listed investments seems to be growing.
“PE should outperform, because in locking money away, compared to being publicly listed, there should be a liquidity premium – that's number one. Number two is once you say, ‘Look, we’ll make you more money than public’, people tend to look at what's happened historically, and historically, that’s been proven.”
ASSET VALUES TO FALL
The PE industry had something of a bruising year internationally in 2022, with fewer investments made, lower levels of fundraising and a slump in exits by almost a third, according to S&P Global Intelligence report citing Preqin data.
PE allocations by family offices and other investors dropped as the dismal performance of both equities and bonds had a knock-on effect. Yee said JRT had been no exception.
“We’ve not been putting more funds into private equity,” he said. “If anything, we’ve actually been holding back and looking at better levels to invest at. If you look at the last 12 months, the fact that we expect a recession to depress asset values makes them better placed to invest in, going forward, so we’ve been preparing for that expected rewriting of values downwards.”
Yee was unfazed by the increased cost of borrowing as a result of monetary policy tightening in most developed economies, saying that the decline in asset values could offset the higher cost of credit used to fund PE deals.
“Some prices have dropped so much that it makes sense to buy even if the cost of financing is higher. In buying cheaply to drive returns, you don't need leverage to boost those returns,” he said.
Harmen Overdijk, chief investment officer at the Hong Kong office of multi-family office Leo Wealth, also saw opportunities amid the higher interest rate environment, but pointed out that although the cheap credit of the past decade had driven high returns in PE, investors would now have to put in more work for their money.
“Over the past 10 years, the trick was to invest in a company perhaps relatively early on, or buy a number of companies, and your return was made not so much by the growth of the company, but by the increase in valuation – the increase in price to sales,” he told AsianInvestor. “I think that’s going to be a lot harder.”
BACK TO THE FUTURE
Speaking in particular about the technology sector, which has been a keen PE focus for a number of years, Overdijk said: “If you take the ARK Innovation ETF as a proxy for high-tech, that's down, peak to trough, almost 80%, similar to the dotcom bust in 2000, so private equity is going to be more traditional, more the type of private equity seen in the 1980s and 90s. It's going to be more old-fashioned – buying companies, making them more efficient, making them better, maybe combining companies and then selling them on because they’re better and bigger. But you're not necessarily going to get much higher valuations.
“It's running real companies again. Private equity is not going to go away – just the nature of it will change a bit, and given the fact that we’re so used to leverage almost for free, we’ll have to adjust, because interest rates are not going to come down anytime soon.”
Yee echoed that sentiment and emphasised the importance of PE investors actively engaging with their portfolio companies.
“You add to the value of companies by helping them grow,” he said.
“Typically, these growth companies are tech companies, and we expect their prices to go down, but we can help them grow. Not only are they in a growing market, but also we can help them grow because we have a whole ecosystem of portfolio companies we can introduce them to for additional synergies. You can't do that if you're a fund manager – buying stock in Google, you don't get to tell Google what to do.”
SUPPLY CHAIN DIVERSIFICATION
Yee said tech and healthcare continued to offer family offices and other PE investors prime opportunities, but that changes in the global environment beyond commerce and even macroeconomics had come into play.
“Healthcare has a tech angle, and leverages a demographic expectation that healthcare services will be more in demand – and tech in general has always been a staple,” he said. “But if you look at themes over the last few years, particularly given politics, we're also talking about deglobalisation as a real theme driving a lot of PE.
“As supply chains reconfigure to provide more inventory closer to destinations for products, to factor in geopolitics and their impact on trade, it means that infrastructure needs to move. Multinational companies that want to diversify supply chains away from China are probably the most visible example.”
Yee said that such considerations, along with demographics, had fed into JRT’s interest in niche real estate and the green energy transition. But he said that overall resilience in potential PE investment targets was the most critical variable amid the prevailing market dynamic.