PE investments in Asia lags behind US despite higher growth prospects

    Asia, the next growth engine of the global economy

    In a quest for returns, global investors are looking to Asia, a region that offers strong prospects for future growth. According to the International Monetary Fund, Asia is expected to account for 60% of growth in the global economy. Despite current geopolitical and financial market volatility, the Asian market with its large population, growing incomes, young demographics, and rising consumption, represents high growth prospects compared to the rest of the world. With larger Asian economies moving away from a predominantly export-oriented model and increasingly powered by domestic demand, the reduced economic exposure to US and external trade risk makes the region even more attractive.

    Private equity, a growing industry in Asia

    According to the Asia-Pacific Private Equity Report 2017 by Bain & Compay, 2016 marked the third year in a row where the Asia PE industry performed at near-historic levels. The private equity deal value across the Asia-Pacific region reached $92 billion in 2016, a pullback from 2015’s all-time high of $124 billion, but the second-best year on record. The investment thesis for Asia is strong, and there’s demand from investors. However, Asia private equity remains a younger and less developed market, compared to established markets of North America and Europe.

    Private equity gravitating towards mid-market and growth capital investments in Asia

    The increasing underlying opportunity set benefits buy and build strategies, with more opportunities for private equity managers to create value through efficient operational management, and to ultimately deliver enhanced returns. Private equity investments across Asia are also likely to be growth equity investments. From 2010 to 2015, growth equity accounted for approximately 50% of the private equity/venture deals in Asia, a much higher proportion compared to other key regions and the global average.
    Nearly 50% of PE investments in Asia focused on growth equity comparative to markets like Europe and North America which averaged between 20% and 30%. At the end of 2016, Asia-focused private equity & venture capital fund managers held US$179 billion in dry powder. With an abundance of dry powder and more investors entering the market, with more than 800 active GPs in Asia, there is increased competition for growth equity deals.

    Challenges in Asia’s mid-market

    According to a survey by Preqin, fund managers looking to deploy this capital will have to search widely for opportunities. Among the Asian-based GPs surveyed by Preqin, the proportion (32%) of fund managers that said that they had noticed an increase in competition for transactions compared to 12 months ago is twice that of those that said competition had decreased (16%).
    Furthermore, the characteristics of the Asian market make it more challenging to identify opportunities. Diverse cultural, linguistic and political environments, additional competition from strategic investors, market fragmentation, and poor private company information means that private equity funds have to employ more effort and creative methods when seeking out target businesses to invest.

    Conclusion

    It is very clear that the Asian mid-market represents tremendous opportunities for private equity investments. The question for private equity fund managers is therefore whether they are leveraging the most efficient methods that allow them to do identify these opportunities before the competition does.
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