The crystal ball: Predictions for 2015

RUPERT CHAMBERLAIN, HEAD OF TRANSACTION SERVICES AT KPMG CHINA, ON CHINA AND SOUTHEAST ASIA DEAL ACTIVITY:

We have witnessed a very busy year with strong fundraising activity, investment and realizations. It puts Asia on a par with more mature PE markets as the full investment cycle becomes visible on a scale not seen before.

In terms of investment themes ahead, the focus is still on the China macro story. Opportunities related to general economic growth and mega trends are prevalent, for example the healthcare needs of an ageing population and the growing demand for consumer and leisure-related products from an increasingly wealthy middle class. Investment in the energy sector, a focus in the last few years, however, remains uncertain due to oil price volatility.

I don't think we are at a stage yet where we will see a significant number of buyouts. In terms of exits, we are seeing more trade sales and secondaries.

China continues to offer good opportunities for private equity but it is a comparatively higher risk market. Exits remain challenging - over the past few months, for example, we have seen a number of cases in which investees were not able to opt for planned IPOs or refinance debt as a fall back. As pre-IPO deals are not materializing to the same extent as before, GPs are spending more time on their investment thesis and due diligence. This should continue into 2015. They realize that the market has changed and this can impact the types of businesses they invest in, as well as time horizons for realizations.

Southeast Asia has moved higher on the agenda for a number of larger funds. Some PE firms have relocated professionals to Singapore in order to serve that market. They realize there is potential for ASEAN as an economic group and so they are buying into ASEAN-based businesses. Meanwhile, we also see greater opportunities for buyout and control deals, as opposed to the minority positions that have dominated in the past.

We have also found that LPs are also looking much more closely at GPs' environmental and social governance (ESG) policies. Many want to deploy larger sums of capital with fewer managers. And some larger players are moving into multi-asset classes, including credit, private equity, hedge funds, real estate and infrastructure. Additionally, some are investing from their own balance sheet.
We therefore expect 2015 to be an exciting year, especially on the investment front, given the sums raised and the number of GPs looking to deploy capital.

GREG HARA, CEO OF J-STAR, ON JAPAN:

I am cautiously optimistic about the macro environment, but there are mixed signs in the Japanese private equity market right now. There has been a lot of talk about the recent technical recession but the feeling is still that market sentiment and GDP growth will pick up sharply. Many economists expect this will be a one-time hiccup and, based on the strong support he still has, Prime Minister Shinzo Abe will even push harder with his economic reforms.

The Bank of Japan's monetary policy will continue, and a cap on corporate tax should be realized in the new year. We will still have a weak yen and, while no one is hoping it goes to JPY150 to the dollar, most assume that the rate will be stabilize at around JPY120, which should help exports as well as earnings from overseas. I also hope that the political tensions with Japan's neighbors will ease; if these relationships are going to get better then there should be more trade between the countries. That said a good macro environment does not always equate to a good PE market.

Without question, corporate M&A is picking up and this offers some good exit opportunities along with secondary deals. The IPO market is also reopening, which will prompt GPs to take their portfolio companies public.

The entry market on the other hand is not so good. It is getting tougher to execute new transactions because of higher pricing and increased competition - especially in the small to mid-market. Meanwhile, company owners are becoming more bullish and they are not in hurry to sell. As a result, auctions have become the standard and finding propriety deals is more difficult.

DAVID IRELAND, SENIOR PARTNER AT NAVIS CAPITAL PARTNERS, ON SOUTHEAST ASIA:

It has been a good year for Navis in Southeast Asia. Our businesses and geographies have been stable with the possible exception of Thailand. Obviously, the political turmoil earlier in the year was an issue but I think the Thai business environment has improved in the second half of 2014. There are some opportunities coming forward but this year has generally been challenging.

In other parts of the region, there were no huge external events that negatively impacted the overall economic picture. The ASEAN region saw a fair amount of growth and we have found lots of interesting companies in which to invest.

Next year hopefully the investment environment will remain attractive, although everyone is keeping an eye on certain issues. Firstly, a stronger US dollar will impact some companies, particularly in Southeast Asia. There will also be a lot of focus on China and its economy. If there is a hard landing or growth slows dramatically that would have a knock-on effect in Southeast Asia as the trading relationship with China has grown substantially. The substantial fall in the price of oil will also be a major theme for 2015 - helping some companies and economies, but hurting others. It will be a key consideration when assessing investment opportunities.

Finally, the ASEAN Economic Community (AEC) is supposed to come into effect in 2015 and this process will be interesting to watch. Our sense is that most countries in Southeast Asia aren't ready for the AEC yet, so there will be still quite a lot of work to do on implementation. However, ultimately it will be positive for ASEAN businesses and for cross-border investing. Cross-border transactions will become more common once investment barriers are relaxed. It is unclear how quickly liberalization will occur in 2015 but there is definitely a trend for more ASEAN integration.

As a whole, I don't think the turning of the calendar will make a huge difference. Things right now are reasonably stable, and there continue to be opportunities for us.

XIANG GAO, CO-FOUNDER AT BANYAN CAPITAL, ON CHINA VC:

This year there are many new faces in China's venture capital industry. We spun out from IDG Capital Partners in January and a number of other funds have been set up since then.

There is a two-year window of opportunity for Chinese start-ups. Since the second half of last year, a wave of Chinese companies has gone for IPOs overseas. The overall market for technology firms has picked up, and this is inspiring more entrepreneurs to start their own businesses. This will benefit to VC investors too, because there are more projects in which we can invest. Venture capitalists, in particular those that have been active in the market for more than 10 years, are excited about this new opportunity.

The last decade of Chinese venture capital was dominated by foreign players, such as IDG, Sequoia Capital and Matrix Partners, although the people who run their local operations are Chinese. To certain extent, the VC landscape has changed, with more local firms participating. We have established ourselves at IDG and it was the right time to look for the next stage of development. One of the reasons the timing was right is we have built up strong relationships with local entrepreneurs. Not only have they put capital in our debut fund, but they are also sharing resources, such as management skills, with our portfolio companies. On the exit front, they will become an option for us through M&A transactions.

The internet bubble doesn't scare us. In some ways it is an opportunity. Chinese internet giants - Alibaba, Tencent and Baidu - were on the rise during the dotcom bubble in late 1990s. As a VC investor, the most challenging part is how to identify the best deals when the bubble is emerging. That also differentiates us from other VCs.

Valuations have definitely gone up a lot compared to two years ago, but we should look at the situation in the proper context. The big increases usually happen after the Series B round when a company reaches a market valuation of more than $100 million. And then capital is coming from different kinds of investors, such as private equity. Traditionally, they focused on pre-IPO deals for real estate developers but now they are flocking into tech, media and telcom. We focus on Series A rounds and the valuations are still reasonable.

JAVAD MOVSOUMOV, EXECUTIVE DIRECTOR OF UBS' PRIVATE FUNDS GROUP, ON FUNDRAISING:

From the fundraising perspective this last year can be characterized by a robust appetite for pan-Asian funds, and if you look at the larger end of the market a lot of firms have been in the market and raised quite a bit of capital.

However, one of the struggles over the same period has been the returns that US mid-market funds delivered - especially in the 2008-2009 vintage - which are significantly better than Asian PE returns. A lot of investors have therefore committed the majority of their capital outside of Asia. If you have a PE fund investing in emerging markets in Asia - and not performing as well as its US counterparts - you have to make a pretty sophisticated argument as to why those investors should commit to Asia.

The reason why the pan-Asian funds have enjoyed a degree of success is that they provide a safe pair of hands in an Asian market that has been challenged by limited exit activity in places like China and India. If you are an investor looking to deploy capital in Asia right now you will have a tough time trying to pick a country-focused fund that is able to deliver the same risk-adjusted returns.

What is interesting is that because the majority of the large pan-Asian funds have raised capital, there definitely won't be much choice for investors looking to back pan-regional strategies, so the fundraising stats will trend down. If you put China funds and pan-Asian funds to one side, most of Asia's markets are pretty niche, so much of the fundraising among country-focused funds will be driven by the handful of high quality GPs raising at that particular point in time. For example, I think we will see an uptick in fundraising in countries like Korea where a couple of quality managers are coming to market.

It will be interesting to see what happens in China. The market has been going through some pain on the exit side but it seems the back log is somewhat unplugging itself - so we expect China fundraising will start to pick up. There was a "wait and see" attitude that will hopefully translate into commitments in the coming year.

In India there are already a number of established managers raising capital right now and we expect there will be an abnormally high number of GPs in the market in 2015 as many of them have been waiting for a better macro backdrop. On the other hand, I think the investor sentiment hasn't shifted just yet, and so a number of these managers will be disappointed.

JONATHAN ENGLISH, MANAGING DIRECTOR AT PORTFOLIO ADVISORS, ON FUNDS-OF-FUNDS:

Seasoned Asian fund-of-funds have benefited from healthy exit activity over the last 24 months with significant liquidity from China, Australia and pan-Asia managers. There are also a large number of private equity and venture-backed listed companies that should provide more distributions in 2015. Next year we expect further exit activity as the A-share and H-share markets improve.

I expect the fundraising environment to improve for Asian fund-of-funds as investor appetite normalizes for US private equity. Western-based LPs' dynamics have been positively impacted by the amount of capital returned over the last several years. I'm optimistic that the fund-of-funds segment of the market will be a viable option to provide attractive risk-adjusted returns. The sample size of fund-of-funds managers with a mature or maturing first fund track record has increased, providing prospective LPs the ability to benchmark the opportunity set.

As the market matures, fund-of-funds will seek to further differentiate themselves against their peers. The value propositions range from GP access plays to niche regional or sector-focused offerings to co-investment or secondary-heavy portfolios.

I think secondaries are an interesting component of Asian private equity portfolios and we have witnessed the market developing in terms of deal flow and executable transactions. The last 12 months have been challenged by sellers' pricing expectations for quality assets, but nimble buyers are afforded unique purchasing opportunities, which will progress throughout 2015.

MARTIN MOK, PARTNER AT EQT CAPITAL PARTNERS, ON CHINA DEALS AND EXITS:

I don't think we are either extremely bullish or extremely bearish for 2015. The local IPO market in China has opened up and on the whole it is getting a bit more traction; the secondary market has also improved. I think the local IPO market will open up further throughout 2015 to point that we might get as many as 10 offerings a month. If that is the case it will release pressure on a lot of renminbi-denominated funds - especially those focused on pre-IPO deals - so there will be more money going back to LPs.

Aside from more listings, and a more vibrant secondaries market, I expect improvements in government policy that will help exits. Trade sales will continue to do well, as they have over the last few years, but they are likely to take a greater percentage of the total exit pie - as much as 30-40% - as more companies are willing to buy from private equity to consolidate their positions in China market. For example, this month a unit of Swire Pacific bought our portfolio company Chongqing New Qinyuan Bakery in order to build up its presence in China's food and beverage sector.

Overall, I think corporates increasingly seeing private equity portfolios as a place to look for deals. They recognize that we serve a function in terms of cleaning up businesses, putting in a stronger corporate governance culture, and improving key performance indicators and reporting systems. A lot of corporates still just don't know how to do it, and they don't have the risk appetite to buy these companies directly.

On the more negative side, deal activity has increased this year and will probably continue to increase next year. So you will have a lot of GPs running into each other, which means there will be fewer attractive companies that have not had private equity money.

The issue is how do you crack the secondary market and take out the minority investors who often have even higher price expectations than some entrepreneurs. At least with entrepreneurs there is some kind of alignment of interest; minority investors are just focusing on their redemption rights.

BOBBY PAULY, PARTNER AT TATA OPPORTUNITIES FUND, ON INDIA:

Over the last couple of years Indi has seen its lowest GDP growth since 1991, with the economy expanding at less than 5%. But we have started to come out of that in 2014, and my prediction is that over the next few years growth will be around 6-7%.

Our focus will be preparing out portfolio companies for growth in three ways: getting balance sheets in top form; setting up new capabilities, whether it is acquiring new technology or competences, so we can capitalize on growth opportunities; and helping companies building strong teams. If we put these strategies into place in the first half of 2015, we will be well positioned for the second half of the year.

Also from a macro perspective, the last quarter has seen a fall in the price of crude oil, which I expect will stabilize at below $70 a barrel over the next year or so. The implication for India is far reaching. In 2015, the consumer price index is likely to fall to 5-6% and, as a net crude importer, the drop in prices will have a positive impact on our current account deficit.

The currency has also been fairly stable compared to other emerging markets at INR60-62 to the dollar. This has been reflected by a better investment outlook for people taking longer term bets where the worry of the currency depreciation has been reduced. Needless to say, this has had a big impact on public markets - India's are the best-performing in the region.

Overall, 2015 will be a year of stabilization as underlying earnings growth starts to drive public market valuations. I think investors in Europe and North America are now looking at India more seriously now - we have had substantially more requests for meetings than in the past. Many large institutional investors are interested in Tata as a group and some of our companies are also looking at growth opportunities where these investors can participate directly.

HUGH MASON, CO-FOUNDER OF JFDI.ASIA, ON ACCELERATORS:

Over the next year or so accelerators are going to become more specialized. We are no longer the only accelerator in Singapore, so as more people come into the space we will see more players targeting particular verticals. At the same, a lot of accelerators will go bust and people will get ripped off, but that is all part of the accelerator model evolution.

One of the things worth considering is that 2-3 years ago there were many cities in Asia that didn't have a travel booking site, or tax service app, but now a lot of those low hanging fruits are gone - even if you go somewhere like Cambodia you are likely to find an app for booking buses. Now, start-ups are focusing on the next level up; businesses like e-commerce where you need boots on the ground, fulfillment, logistics, payments - the kind of thing Rocket Internet is doing.

There are three layers of start-ups. At the bottom is all the low hanging fruit - apps, anything that a bunch of guys can just have a go at. The next level is things like e-commerce and above that is the harder stuff like financial technology and healthcare, which is regulated. Then you have areas that are very scientifically differentiated - where you work with research institutions and look for ways to build technology.

Just as private equity investors have to become more hands-on and act smart to add value, accelerators can't just say: "Hey guys, come and hang out here and build a start-up." That is over. People have to up their game and that is good thing.

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• Topics
• North Asia
• Greater China
• Southeast Asia
• South Asia
• Fundraising
• Investments
• Exits
• China
• Banyan Capital
• EQT Partners
• KPMG
• India
• Tata Capital
• Fundraising
• Portfolio Advisors
• UBS
• JFDI.Asia
• Exit
• Growth capital
• Navis Management
• J-Star
• Japan