By Samuel Lau – Business Development Manager, AVCJ
In Mid-November, Hong Kong saw the largest gathering of private equity and venture capital professionals in Asia at the 25th AVCJ Hong Kong Forum. Over 1000 delegates attending and 180 industry speakers from across the globe gathered to discuss trends and issues critical to the continued growth of the industry in Asia.
1. GP’s see strong Asia deal flow despite macro headwinds
Asia’s leading PE investors remain bullish about investment prospects in the region despite an increasingly challenging macro environment and a weak public exits market.
“We have completed some large deals in Japan and we also see more transactions coming out of Australia, Southeast Asia and Korea,” Jim Hildebrandt, managing director at Bain Capital Asia, said during the opening panel at the 2012 AVCJ Forum.
While the US is still Bain’s largest market, Asia now accounts for 20% of global deal flow and Hildebrandt expects this to reach 30% in due course.
Speaking about the IPO market, H. Chin Chou, CEO at Morgan Stanley Private Equity Asia, said he expects a rebound, although not a replication of the seven years of uninterrupted growth seen between 2004 and 2010.
“The market will come back, but what was unusual about the last cycle was how long it lasted and we won’t see that again,” he said. “Normally it is three years on, three years off.”
Chou expects Asia’s IPO market to be among the top performers globally but he warned of the risks involved in basing a portfolio company’s capital structure on going public within a certain period. Managers should prepare themselves for exits to strategic investors and other private equity firms that are keen to boost their business in Asia.
Hildebrandt agrees that, while multiples exposure is still available in the region, strong deal sourcing and value-add deliver the best returns. “In Asia you have the potential for explosive growth if you execute properly.”
2. LPs are wary about raising Asia PE allocations above 10%
Institutional investors are generally happy to deploy 10% of their private equity allocation in Asia, but they say it is difficult to justify increasing this portion until risk factors ease and local managers build up stable teams and more substantive track records.
“The flow of capital to emerging markets is such that it’s pricing out the emerging markets premium,” said Steve Byrom, head of private equity at Future Fund, Australia’s sovereign wealth fund. “Asia will probably get us the same returns as other emerging markets, which will probably be about the same as the US and slightly better than Europe on an IRR basis.”
The consensus among participants in the LP panel at the AVCJ Forum was that geographies with more developed capital markets – where control transactions are available – have delivered the best returns.
“Our best performing segment in the last 20 years has been the US mid-market – funds of less than $1 billion in size. We have seen net returns of 19%,” said John Schumacher, chairman, New York Life Capital Partners.
“At some point it has nothing to do with risk and return and everything to do with alpha generation. We are still allocating 10% to Asia because there is growth in the region but every time a Chinese company de-lists we get phone calls asking why we continue to invest in the region. There are some endemic issues that need to be addressed for us to deploy any more capital.”
Schumacher also expressed concern about the lack of experience and instability in many Asian private equity firms, asking whether there was a single GP in the region that could match New York Life Capital Partners’ roster of eight partners with an average tenure of 16 years.
“We see many managers that have less than median returns and then two of the five principals leave and raise their own fund and then two more leave and they each raise their own fund,” he said. “It’s nothing like the US model where they raise $600 million every time.”
Scott Parrish, private equity portfolio manager at the State of Wisconsin Investment Board, echoed these sentiments. “You have a number of groups that have done well but how big will they become?” he asked. “Do they grow out of their sweet spot that is driving most of the returns?”
The AVCJ Forum is organized and produced by the AVCJ (Asian Venture Capital Journal), which has been supporting the industry in Asia for over 25 years.
LinkedIn Group: AVCJ – Asia Pacific Private Equity and Venture Capital
Samuel Lau – Business Development Manager, AVCJ
Now based in Hong Kong, Samuel is working for a content brand known as the AVCJ. The AVCJ has been supporting the Asian private equity & venture capital community for 25 years.
He is a social media practitioner and loving everything to do with social media and all its possibilities for marketing, branding, recruitment, engagement, & community building