Overview of Private Investment Trends in Asia-Pacific

Posted on November 8, 2014


Overview of Private Investment Trends in Asia-Pacific

Recently, we explored the private equity investment climate in Southeast Asia in Next Stop, Southeast Asia and took a look at the potential implications of the Shanghai Free Trade Zone in Shanghai Free Trade Zone – A New China Paradigm for Western Investors? This time around we are providing high level overview of the Asia-Pacific Region more broadly.


As the world economy continues its rebalancing with the gradual rise of the East, the Asia-Pacific region is increasingly becoming a center of attention for many global investors. Asia-Pacific now appears on many PE firms’ strategic agenda. The region has witnessed remarkable growth in private equity as investment increases year-over-year in almost every sector. A large number of international firms are moving into the region while the number of local firms continues to multiply.

This trend is likely deep-rooted and sustaining, though unlikely to be straight-line. The level of influence the Asia-Pacific region has within global financial markets has increased steadily confirming the trend. Asia-Pacific is a priority for many global firms for good reason. Many are drawn by the prospects of the large economies like China and India, others by the potential of Japan to revitalize and South Korea to continue to expand, and still others by the opportunities to be found in the emerging markets of Southeast Asia.

Asia-Pacific, a Diverse Region

A few years ago, global investors might have started with an “Asia fund.” Today, many have divided their operations to focus more specifically Asia Pacific Map 2on China, Japan, Australia and other countries in the region as they realize that the local specifics matter and the region comprises many unique markets with different growth paths.

A comparison of the historical data and various sets of more recent data we have examined shows the landscape in Asia as constantly changing, particularly since the financial crisis. Despite more volatile markets, China remains the leader. China’s growth rate is trending lower than past years, but the overall positive macroeconomic environment in the intermediate term is difficult to ignore despite the incessant talk about misallocated investment or overinvestment in some sectors. Currently, private equity in China is dominated by venture and growth capital deals, rather than leveraged buyout transactions. The launch of bigger private equity funds in China is expected as some successful GPs have announced that they will launch funds targeting multi-billion in commitments with a predominant focus towards investments in China.[1] In addition, large Chinese companies are emerging as significant global players. We’ll discuss this trend in an up-coming report.

India’s markets exhibit some similarity to China’s in terms of deal types but is a tougher market for investment. As in China, most private equity transactions in India are focused on supporting growth. In addition, there is lots of capital deployed to improve infrastructure, in keeping with the government’s stated ambition to invest heavily in new roads, power plants, and so on.[2] However, PE investments in India have been lower in the past year or two, $5 billion to $7 billion in 2013 according to Bain Capital LLC in Mumbai, due to a lack of investment opportunities. There are relatively fewer companies looking for capital in India because of where the country is in its economic growth cycle. The loss of value of rupee against the U.S. dollar also didn’t help and, as in China, few exit opportunities make it even harder for investors to show profitable returns.

Southeast Asia expects to see the highest degree of growth outside of China. Although China and India absorb large capital flows, more and more investors are willing to explore new opportunities in Southeast Asia, with Indonesia and Vietnam at the top of the list. Singapore is also Halong Bay 6well placed to capitalize on this trend with its strategic location, accessibility to the rest of the region, established financial infrastructure and attractive tax regime. The private equity market in Southeast Asia is not as crowded and valuations are lower compared to neighboring countries. Southeast Asia is fast becoming a primary destination for private equity. For more information, you can read our report entitled “Next Stop, Southeast Asia” and a clip from the Bangkok Post entitled “Making the Most of the Mekong”.

Japan and South Korea are the more developed private equity markets in Asia. Attention in Japan centers on the energy, mining and utilities sectors. As Japan abandons nuclear power, the search has begun for new energy sources to meet the country’s energy needs. Energy companies are looking to invest in renewable energy and other conventional forms of energy. Unsurprisingly, private equity firms are trying to explore this new opportunity in Japan. South Korea is seeing the bulk of deal flow in industrials and chemicals sectors. Now South Korea is the leading provider of new generation technologies, which are in great demand. A perceived lack of access to sufficient debt finance will place private equity investors in a good position to capture the opportunity.

In Australia and similarly situated New Zealand, private equity firms are investing in the middle market. Investments in that sector are seen as more profitable. Australian and New Zealand assets are usually thought “safer” though that only means they don’t carry developing country risks and the financing and regulatory climate is highly developed as in other developed countries. The result is increased competition for good quality assets which significantly impacts valuations.

Challenges Remain

As investors have learned over the past several years, Asia-Pacific presents unique cultural, regulatory, and organizational risks. For example, the investor base in the region is unique as corporate LPs dominate the landscape while foundations and endowments represent the smallest portion.

And the decision-making structure is sometimes difficult to understand, even if one has a local counsel or team working on a deal. Sometimes the complexity and lack of transparency of the decision-making structure can even lead to poor deals or the breakup of a deal. There are no short-cuts here. Proper due diligence early in the deal process and thereafter continued due diligence is the key.

Another challenge is the competitive environment, between private equity investors and corporate acquirers, between local and global GPs, and among global GPs themselves. Since the Chinese government allowed foreign GPs to raise RMB funds in 2010, arguably excessive amounts of capital has flooded the country. The oversupply of capital inevitably drives up valuations. At the same time, many large LPs have noted the rise of the locals. Global LPs that traditionally have only looked at bigger funds, such as KKR and TPG, are increasingly looking at local GPs. And many of them now have a greater level of comfort with local funds rather than mega funds. However, navigating that landscape can be difficult as the recent JP Morgan investigation has taught us. There are also inherent risks in investing with these first-time funds, as most local funds in Asia are so called emerging funds without significant history or track record.

Perhaps the biggest competition comes from strategic corporate acquirers. Many multi-national corporations, often with deep pockets, are looking to Asia-Pacific as the engine to drive growth for the foreseeable future. Private equity firms are competing with these cash-rich companies for good deals but without the ability to extract the same perceived “synergies”.[3]

IPO, the major exit in China, had been suspended by the China Securities Regulatory Commission (CSRC) for many months. More than 700 companies were waiting to go public and the estimated waiting period was more than 4 years.[4] This period has now ended, with the result that many companies that were not ready for IPO were culled by the regulator or left the pipeline on their own which was one of CSRC’s goals. Nevertheless the pipeline and waiting period is still significant. As a result, companies continue to hunger for cash have to go to Hong Kong and other overseas stock exchanges for listing. But tight regulations in China means that most domestic companies cannot take advantage of foreign listing unless they have off-shore structures or have acquired shells for back-door listing.

Generally speaking, government interventions are much more common in Asia than in Europe or the United States. Changing regulations in some markets around the region are changing the rules for private equity investors, leaving fund sponsors wary of what is to come in certain markets, particularly given uncertainty in the global economy. In China, foreign firms are prohibited from investing in some sectors that are deemed impacting “national security and core interests”, and restricted by percentage in many other sectors.[5] On the other hand, foreign investors can receive substantial tax benefits if they invest in the “encouraging category of industries” or in specific geographic locations. Such industry categories and tax benefits are being updated frequently. With respect to the divergent treatment of local and foreign investors, China is not the alone. We also took a look at how the developing Shanghai Free Trade Zone might impact foreign investors in “Shanghai Free Trade Zone – A New China Paradigm for Foreign Investors?

Understanding the hidden rules in some countries can also be challenging. Talking about China, one LP goes so far as to say that “there is an unwritten rule that you should invest in domestic GPs.”[6] While this may be an exaggeration of the self-serving variety, it is nonetheless true that firms must understand both the official regulations and the unofficial ways of working in a country to be successful. In order to really understand what is expected or is coming next, it is important to effectively network with the business community and government, especially in countries with less transparency.

For these reasons many international private-equity firms choose to cooperate with local firms. Of course, both sides will still have to gain the trust of their counterparts. Trust is an important factor in Asian culture. So developing a well-entrenched network is the key to success in the region.

Strategies for Global GPs

In order to compete with local funds in Asia, global GPs need to balance localization and globalization. Some global GPs are trying to develop a hybrid model that comprises the best of their global capabilities and investing experience with the entrepreneurship and cultural savvy of local firms.

Global GPs also need to be flexible with investment scope and deal size. They must be able to invest along a range of investment themes: traditional domestic growth, helping Asian companies expand or acquire outside of Asia, and helping foreign or Asian firms do domestic acquisitions. Looking for a single type of deal is unlikely to keep a firm in enough conversations. Deal size also matters. There are many Asian companies that are too small for large global investors to take seriously, but still represent good investment opportunities. In countries like China, small companies can become large ones very quickly.

The ability to source deals effectively at the regional level is also essential. In China, for instance, most Western firms concentrate on Beijing and Shanghai. However, many investable deals do not originate in the ministries of Beijing or the office towers of Pudong, but rather at the local level.

Asia-Pacific is a large, diverse region, and market contexts differ across countries. Private equity firms must develop tailored strategies relative to the specific market conditions.


[1]Private Equity International, Special – Asia Private Equity Report

[2] McKinsey & Company, Private Equity Asia-Pacific – Rebounds, Glocalization and Other Tales

[3] Ernest & Young, Asia-Pacific Private Equity Outlook 2013

[4] Bloomberg News, IPO-Eager Chinese Companies Await New Regulations

[5] Ministry of Commerce, People’s Republic of China, Catalogue for the Guidance of Foreign Investment Industries

[6] China First Capital, Private Equity in China 2013 – The Opportunity & The Crisis