The crystal ball: Predictions for 2021

SHUGE JIAO, FOUNDING PARTNER AT CDH INVESTMENTS, ON CHINA:

Many people are talking about the internal circulation of the economy especially for the China market which has huge consumption power. But if you only serve the domestic market, you will lose your competitiveness. It is equivalent to playing football only in your half of the field, you cannot win. Even during the pandemic, a global company with a diversified supply chain is far more flexible than a company in a single market. In the long-term, the trend of globalization can’t be reversed. If you do not enter other markets, others will enter your market. Some investors find that the “China go abroad” theme has lost its attractiveness in the current environment, but if your products and services are irreplaceable, overseas markets will still be open for you. It’s important to think about China’s unique advantages and the value that others really need.

On the exit side, the A-share and Hong Kong markets will be the main channels. There will be fewer Chinese companies listing in the US. As to whether there is a valuation bubble in the Star Market, we must consider possible future inflation, but these listed companies still have to prove their value. For example, when a semiconductor company goes public at a valuation of RMB40-50 billion ($6.1-7.6 billion), everyone expects billions in profits within five years. If at that point it is still losing money, the market capitalization will shrink to maybe RMB1 billion. For the entire Star Market, if 60% of companies can meet expectations in five years, the bubble will disappear. If 80% can’t do that, it’s a problem.

I think we will see fewer growth-stage funds in China, while the number of early-stage venture capital and late-stage buyout vehicles will increase in the long-run. There were so many growth funds in the past because China was in a period of rapid growth. Today, competition is fierce, you need to add operational value, but you can’t do that as a minority shareholder. Some investors gravitate towards buyouts for stable returns; others will move towards start-ups, where the risks are higher but assets are cheaper.

In terms of sectors, there are two key driving factors. The first is government expenditure in areas like new infrastructure and public security. Some artificial intelligence companies can benefit from that. The second is consumption, which follows people’s needs, including healthcare. It’s worth paying attention to changing consumer habits. For example, Chinese people don’t like cheese. But they didn’t like yogurt 20 years ago, and now yogurt is a huge market. Change doesn’t happen overnight, but it does happen. For hot industries such as online education, much depends on whether there will be fundamental or technological breakthroughs that bring new opportunities next year. Hot industries don’t necessarily present the best opportunities. Sometimes you want to find an industry in bad shape with cheap valuations. Your return is the difference between the entry price and what you can sell it for.

MARCIA ELLIS, PARTNER AT MORRISON & FOERSTER, ON COVID-19:

I think 2021 is going to be a very big year for private equity because there is still a huge amount of dry powder allocated to Asia and it looks like we’re going to continue to have low interest rates for quite a while. Finally, now that investors can see the end of COVID-19, they feel more confident about making investments. Given all the announcements about vaccines, investors believe they can see the end of the pandemic and thus begin to understand which companies are going to come out of it well-positioned. Knowing with some certainty that these vaccines will be fully rolled out by mid-2021 also makes it easier to predict EBITDA and business plans for the year, which makes a huge difference. Anybody who wants to dig into the details can understand, for any country, when the vaccine will be widely available. It’s not 100%, but compared to only a month ago, the level of clarity has risen considerably.

As the level of uncertainly goes down, asset prices will go up. Private equity deal-making is going to be intensely competitive in 2021 in sectors seen as reaping benefits from the pandemic such as internet data centers (IDCs). We have multiple clients that are acquiring IDCs and undertaking greenfield development of IDCs all over Asia and raising funds dedicated to investments in IDCs. That’s going to continue to be a hot asset class in 2021.

The extent to which in-person due diligence can be done varies from country to country. In China, it’s basically business as usual. In India, no. But even during the height of the pandemic, we worked with people all around the world on a $40 billion transaction that was all done through VDRs [virtual data rooms] and Zoom calls -- so it can be done. In fact, legal due diligence in Asia has migrated online since SARS. But the big impact of COVID-19 has been on business due diligence. PE investors can do Zoom calls with company management, but it isn’t the same as meeting in person where you can get a real sense of the true character and values of the target’s management.

In terms of deal documentation, COVID-19 has resulted in some additional complexity around MAC [material adverse change] clauses and other provisions, but I doubt the focus on these issues will last for long. I’m always shocked by how fast investment professionals forget. That was certainly the case less than a year after the global financial crisis. As they evaluate potential targets, smart investors will be considering how companies have reacted to COVID-19, how quickly they can make decisions, deal with lenders, and cope with these kinds of traumatic events. But unfortunately, most will likely quickly forget the lessons of COVID-19. PE investors are not known for looking at what’s in their rearview mirror. Fundamentally, they are execution people, and that’s a very forward-driven mentality. They are always looking for the next deal.

VINCENT NG, PARTNER AT ATLANTIC PACIFIC CAPITAL, ON FUNDRAISING:

I would estimate that 80% of LPs are only mandated to do re-ups or make commitments to GPs they are able to meet. If travel restrictions extend deep into 2021, a good chunk of that 80% would have to rethink their policy on backing new managers based on due diligence that is fully virtual. They must understand the issues and find ways to mitigate them, because they can’t just keep doing re-ups. There will be parts of their book where they don’t have exposure, they’ve missed out in 2020 and they don’t want to miss out in 2021 as well. There will be a tipping point where an individual LP sees that four or five of its peers have started to adapt and so they feel they must do the same. We’ve seen some LPs make commitments having only done virtual due diligence, but in most cases, they have met the GP in the past. There’s been less than a handful of tickets written this year where the LP has never met the GP. It’s mostly consultants and family offices that do it.

The flight to safety and the scarcity of choice based on situations where LPs have met the GP before means some managers will raise funds even faster than before. As for first-time managers, it’s a tough journey with an uncertain outcome. However, there are multiple ways to get it done. We are seeing more stand-alone asset-by-asset vehicles, which allow GPs to convert their pipelines and get AUM [assets under management] with investors paying fees and carry. It is an easier, interim step than going for a full blind pool in a difficult environment. But there needs to be true value add – some evidence in the track record that a manager can do these deals – and the GP commit must be big. If you’re a first-time fund and putting in 1% on a single asset deal, that’s not going to fly.

We will be launching a few second and third funds in the new year. In those situations, the quantum of the first close is important – you need at least 30% of the target with a decent number of re-ups. A lot of the new guys will look at the re-ups and the profiles of those re-ups before even contemplating a commitment. Co-investment and secondaries will be used to facilitate those fundraisings as well.

NITISH PODDAR, NATIONAL PRIVATE EQUITY LEADER AT KPMG INDIA, ON INDIA:

Private equity firms were waiting and watching for about three months when the pandemic started, but the past six months have been an active period. Given the amount of dry powder they have and the fundamentals for growth in India, I think we have just touched the tip of the iceberg. Indian corporates are divesting what’s non-core to shore up cash, and private equity is stepping in. This trend will continue for the whole of 2021. Once things start to come back to normal in the second half of the year, global financial investors will still be the dominant force, but it will not be easy to do deals because smaller local funds and strategic players will come back to the market. Valuations may therefore become a bit richer, but they never went down very much during the pandemic, so it’s not like they’re going to suddenly rise by 50%. Another driving factor will be that China and India are the two dominant countries for global investors. Given the unpredictability around China, India will receive more investment.

We are also going to see many more exits as strategic players that were sitting on the fence come back and buy PE assets. The capital markets have evolved a lot in India in the past five years, and I think that will continue. One of the exit avenues that is still not very actively used in India is international listings, but I think that is going to start happening over the next few years.

Meanwhile, venture capital has continued to be strong, and I think that will continue irrespective of the pandemic given the culture of entrepreneurship in India. The main thing that’s changing is the sectors in which VCs are investing. Hospitality tech and e-commerce have taken a beating, but we’re seeing upticks in hyperlocal delivery, medical tech, agriculture tech, and gaming. Educational tech especially makes sense in India, so that’s going to be huge. It’s not just the VCs looking at education, it’s the traditional funds too, which will make it even more interesting. At the same time, India’s major business houses are taking big bets on society moving toward technology, which only fuels the appetite of financial investors.

WILLIAM YEA, PRINCIPAL AT COLLER CAPITAL, ON SECONDARIES:

It’s an interesting time for secondaries, both in Asia and globally. Global secondary volumes roughly halved in the first half of 2020 versus the first half of 2019, totaling around $19 billion. As things have recovered in the second half, it has helped investors get to the point where they can make transactions happen. September valuations were better than in June, so in a sense, that marks a point of valuation and price stability. To a large extent Investors now know where valuations dipped and where they recovered to. They can now enter the new year with knowledge of where the NAV levels have been with some visibility of how things will recover. It will be a more level playing field where buyers and sellers can agree on a path to liquidity.

We’ll probably see a multispeed recovery in Asia because different countries have experienced COVID-19 in different ways, and the private equity markets don’t represent full cross-sections of each country’s economy. But there’s reason for optimism secondary volumes will increase as we head into 2021. A lot will depend on how the year starts, and that will be influenced by a number of trends. In our recent global private equity barometer survey, we found that 84% of the LPs looking to sell on the secondary market in the next two years want to increase their liquidity. As we start the new year, LPs thinking about risks and opportunities will also be looking to change their allocations to public and private strategies, and even between different strategies within the private space. Some of that will be rebalanced within the same geography, and some will be between different geographies.

We could also start off the first quarter of 2021 with opportunities coming from the GP-led space. We’ve increasingly seen strong performing GPs take their destiny into their own hands by proactively approaching the secondary market in recent years, but many of them didn’t have the right opportunity to do so in 2020 due to the COVID-19 dislocation. With the slow pace of exits this year, there has been a storing up of assets. After the global financial crisis, secondary volumes really took off as dislocations eased and pricing levels stabilized. The secondary market has evolved since then with different types of participants and a wider breadth of transaction types, but it has the same hallmarks in terms of lower liquidity, price uncertainty, and general economic volatility. That’s why I think we’re going to see the same kinds of behaviors after COVID-19.

RAVI BHATT, VICE PRESIDENT AT APIS PARTNERS, ON ESG & IMPACT:

ESG and impact strategies have been thrown into sharp focus this year with the pandemic, the social movements that have come to the fore, and the growing body of research that shows that responsible investing can enhance longer-term risk-adjusted returns. For those that have yet to recognize the value of ESG and impact-led approaches, it will become abundantly clear that the economic case for ESG is tangible. The question is now ‘why not?’ as opposed to ‘why?’ Along with the increased recognition of the value of ESG and impact-led approaches, in 2021, fund managers will be required to provide evidence of their credentials, with tightly integrated ESG and impact methodologies sought by LPs. This will include a move beyond the simplistic approach of purely negative screening towards viewing ESG through the lens of value creation also.

Regarding the environment, net-zero carbon emissions has been stated as an explicit – and in many cases a legislated – objective by a number of countries. investors, both impact-first as well as mainstream, will need to assess how their portfolio companies are positioned for this transition, with the need for specific climate-related disclosures becoming more important. In terms of social issues, the business case for inclusive products and services has never been stronger. This is especially true in the context of financial services, where financial inclusion remains a key priority in developing markets and is often a necessary condition for broader economic development benefits such as social mobility and women’s empowerment.

A key aspect of the ESG focus in private markets is working conditions and employee welfare. Equal pay – including the gender pay gap – living wages, and non-discrimination and equal opportunity will remain incredibly important. These topics will also be increasingly relevant in the context of new business models, such as in the gig economy. In addition, with pandemic-related uncertainty set to continue, investors must be mindful of diligence and portfolio management considerations on COVID-19 safety protocols in the workplace. Traditional site visits are more difficult with ongoing restrictions, and the move to remote working in a number of industries means that new approaches will be necessary. Private equity and venture capital investors have long been a driving force for the adoption of good governance in portfolio companies, and there is likely to be further focus on diversity-related considerations at the board and management level. Creating diverse governance structures is essential to reflecting the real world and generating a wide range of perspectives on the diverse sets of stakeholders that organizations have.

The pandemic has served to accelerate a number of trends within the PE and VC industry in 2020. ESG and impact issues are definitely one of them, and this is set to continue in 2021 and beyond.

MIN FANG, MANAGING DIRECTOR AT WARBURG PINCUS, ON HEALTHCARE:

Enthusiasm for healthcare investments will continue. Some short-term phenomena such as virus diagnosis and personal protection equipment are turning into long-term structural changes. But the margins in these areas are being squeezed. Next year vaccines will remain a hot spot, especially with breakthroughs like mRNA vaccines. Gene therapies focusing on rare diseases caused by genetic mutations are also riding the wave, with several US companies getting approval for product commercialization. It’s a bit like cell therapy – best exemplified by CAR-T – several years ago. In general, personalized therapies will create many new opportunities because they cure diseases that have never been overcome before. Another key investment theme will be treatments for autoimmune system diseases. This is because technological improvement has accumulated over the years and it is getting crowded in the cancer field.

Meanwhile, there will be more healthcare IPOs on Shanghai’s Star Market, by newly listed companies and by those already trading in Hong Kong or on NASDAQ. Homogeneity of biotech companies in Hong Kong is quite serious, creating a kind of aesthetic fatigue in the secondary market. Moreover, Hong Kong isn’t as capital sufficient as the mainland. All this means the Star Market will be more popular than Hong Kong next year. ChiNext in Shenzhen is also encouraging listings by innovative biological companies.

For private equity investors like us, the pandemic hasn’t changed our healthcare strategy. We focus on longer-term trends and ignore short-term noises. The pandemic, to some extent, has accelerated some long-term trends. Taking China as an example, new drug entry is getting faster and the speed of approvals has doubled. Enthusiasm for innovative drug R&D is unprecedentedly high as well. Healthcare infrastructure and medical services – which includes public hospitals and private medical care – will also be highly sought after post-pandemic. But again, this is a long-term trend.

Another change is increased local government involvement. Previously, local government initiatives such as health industry parks and biotech parks were more of a concept. Now, a lot of good policies have been implemented, from rapid review channels to tax concessions to free rent, and I think they will continue for a long time.

RICHARD FOLSOM, CO-FOUNDER AT ADVANTAGE PARTNERS, ON JAPAN:

Things have really picked up in the fourth quarter – there should be three announced in December, taking us to five for the year – and I expect that to continue into 2021. Some of these are situations we have been working on for some time that slowed down over the spring and summer due to COVID-19. We are now seeing COVID-19 itself become a driver of deal flow as companies find themselves challenged and in need of financing.

It is still carve-outs and succession, with similar motivating factors as before, but the current situation might validate a decision to sell or cause sellers to accelerate processes. With founder-owners, there is always an underlying potential need for them to exit. Now they might be motivated to move sooner, either because they don’t have the resources to weather the storm or because the challenges of the environment are beyond what they feel they are comfortable working with. A lot of consumer retail and food services deals are coming out; whether those can get done immediately remains to be seen. As for carve-outs, we have one coming up in the consumer sector, but they are mostly still traditional industrial and manufacturing businesses.

We had one IPO just before COVID-19, but since then our exits pipeline has taken a break. We have the luxury of saying this is not a good time to sell, let’s wait until we get a better look at value. There was one situation where we ended up with a reasonable valuation, but it came down at the end because of a couple of weak quarters. We had binding offers on the table and could have executed at the end of November with a good return. However, we could see the trajectory for next year and we thought we would be leaving value on the table. That and some others will probably resume in the second half of next year.

ALEX BOULTON, PARTNER AT BAIN & COMPANY, ON SOUTHEAST ASIA:

A lot of private equity investment was put on hold in 2020 in Southeast Asia, and there was a freezing of buyouts. That receding wave revealed what stays around when the fixed-life funds pull back. Shadow capital, with almost metronomic pace, has continued to deploy over the course of 2020. It just highlighted the fact that institutional investors can keep up that drumbeat of deployment through cycles to drive value over the longer term. This was mostly coming from regional sovereign wealth funds, with GIC and Temasek the most prolific investors. That confidence has had a stabilizing effect for many of the fledgling start-ups experiencing capital crunches and the business models still refining their path to profitability in digital health, e-commerce, and ride-sharing. Instead of seeing a spate of bankruptcies, we saw continued investment for the future, which is exactly what Southeast Asia needed.

More than 90% of the highest-funded start-ups in the region in 2020 had some sort of shadow capital placement in them. Hopefully, the stabilizing value proposition of shadow capital will not be as important next year, and that opens the door for more private equity, which could lead to a multiplier effect. But there will still be some latent value in having blue-chip investors rubber-stamping businesses and this creates challenges for private equity firms in terms of competition for direct deals. We were already experiencing high multiples in Southeast Asia, but when you have one more player in the mix, pushing up the prices, that can be quite difficult. Our research shows that one in three GPs in the region are worried about increasing competition from shadow capital.

Median multiplies for M&A transactions have been hovering around 11-12x in recent years. They will probably be pushed up by momentum in the amount of dry powder and competing capital, as well as an increase in secondary exits. There will also be a sector lens – we’ve seen healthcare transactions taking place with multiples north of 20x. The future for private equity and venture capital investing in Southeast Asia is bright, but it will become an even tighter market when it comes to investing talent. Going forward, a lot of investors are going to have to focus on certain skillsets. It will no longer be acceptable to say that you’re are generalist. You’re really going to have to pick your battles and decide where you’re going to go deep.

WANLI MIN, FOUNDER AT NORTH SUMMIT CAPITAL, ON DEEP TECH:

We hear a lot of hype around quantum, blockchain and cybersecurity, and they will still receive a lot of investment next year. At the same time, many countries will put more money into infrastructure after the pandemic. For example, it used to be troublesome to maintain crude oil pipelines or pumping stations in remote areas. Now you just send drones to take pictures and use artificial intelligence (AI) to detect problems automatically. In this way, checks can be done daily instead of monthly; a pipeline leak can be found in real-time. The stability, safety, and reliability of infrastructure will improve.

As such, China’s “new infrastructure” initiative will continue to be a prevalent theme. The value no longer needs to be proven, so it doesn’t matter if officials stop talking about it. People didn’t take part in the gold rush because of policy encouragement. New infrastructure answers a fundamental question. In the intelligent era – where it is intelligent manufacturing, intelligent agriculture, or intelligent consumption – where does the intelligence come from? It is calculated by a CPU. Where does the data for calculation come from? It is generated from new infrastructure. From this perspective, today’s new infrastructure is the foundation of all future intelligence. The application is clear – industrial intelligence – so it’s like we know how many floors we need to build on these foundations.

Meanwhile, online education and collaborative software will continue to attract investor interest because online meetings and classes may become the new normal. AI and big data will also remain hotspots, but pure technology companies might be pushed to become scenario-oriented. In the end, only technologies that serve specific scenarios can create real value.

GEORGINA VARLEY, DIRECTOR AT ADAMANTEM CAPITAL, ON DIVERSITY:

From an industry perspective, the main shift that we’ll see next year will be a refocusing of the narrative from diversity to inclusion. Initially, the Australian Investment Council diversity and inclusion committee [established in 2014] focused on how to attract more women into the private equity industry in absolute numbers, and we’ve done a fairly good job, with women going from about 10% in 2015 to now about 13%. A lot of that is at the junior level, however, and recent research suggests that despite an increase in absolute numbers, the attrition rate for women leaving the industry is double that for men. So, we will be shifting our focus towards retaining and promoting women by trying to encourage initiatives centered around inclusion and making private equity an industry where women can thrive. AIC is exploring options to help the industry arm itself with the tools to do this such as inclusion programs. It also runs a highly successful mentoring program that pairs women at junior or mid-levels with senior people in the industry and it has introduced a program where senior leaders commit to driving change within their organizations and in the industry more broadly.

Adamantem believes that we will make better investment decisions if we have a diverse set of views around the table. Some of our internal initiatives include reporting on an annual basis to our investor base on our internal diversity statistics. We’ve recently run firm-wide inclusion training and we have set a target of 40% female across the firm, including at the leadership level, by December 2024.

But from a broader industry context, one trend I think we’ll see going forward is investors will not just be looking at diversity through the lens of policies and targets, but also by focusing on cultural awareness. Whether it’s in the next 12 months or longer, I think the narrative will continue to shift, and awareness that diversity and inclusion is part of a wider set of initiatives will grow. It’s about how you design your jobs internally and what kind of flexibility you give your staff, which is increasingly an issue in a post-COVID-19 world. Taking it from a diversity focus to an inclusion focus is one way of doing that; the next is to look at how diversity and inclusion initiatives operate within an organization.

There is so much research now showing that diversity brings a vast suite of advantages to an organization in terms of improving competitiveness, decision making and financial returns. As such, there’s an increasing recognition that this is not an HR issue. It’s seen as a value creation strategy that builds more resilient and sustainable businesses.

YIPIN NG, FOUNDING PARTNER AT YUNQI PARTNERS, ON CHINA VC:

For venture capital investors, enterprise services will offer a lot of opportunities in the next five years. This industry is mature in the US, but in China it’s just starting to take off. We’ve seen a couple of local players do well. Ultimately, China will have its own set of cloud-native software providers. Giant players will emerge in different verticals with high ceilings.

Another key investment trend is domestic brands. The generational shift in consumption and so-called consumption upgrades have created huge potential in this area. Young people have higher disposable incomes than ever before, and they are no longer chasing overseas brands. Rather, local brands are more agile and responsive to their needs. The success of [online beauty products retailer] Perfect Diary is proof of this trend. We are seeing many new brands emerging, from self-heating foods to healthy snacks.

Finally, we are tracking deep tech. On a national level, this is crucial to China’s core competitiveness. Whether it’s semiconductors or materials science or computing software, China will put a lot of emphasis on core technology over the next 5-10 years. 

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• Topics
• Greater China
• North Asia
• South Asia
• Southeast Asia
• Fundraising
• Buyouts
• Secondaries
• Technology
• Healthcare
• China
• India
• Japan
• covid-19
• ESG
• Impact investment
• diversity & inclusion (D&I)
• CDH Investments Management
• KPMG
• Coller Capital
• Apis Partners
• Warburg Pincus Asia
• Advantage Partners
• Adamantem Capital
• Yunqi Partners