GPs see the Asia risk premium narrowing - AVCJ Forum

"We are comfortable that in Japan there is enough stability," said Mark Chiba, group chairman and partner at The Longreach Group, a North Asia-focused mid-market buyout firm. "We don't see versus what is going on in the US and UK particularly much reason for demanding a premium. If I was investing in Vietnam or Indonesia it would be different."

The risk premium is generally divided into two elements: legal, political and governance risk, which must be addressed on a highly local level; and currency risk, which Chiba said could largely be managed through diversification. Hans Wang, a partner with CVC Capital Partners, added that - in terms of the first element - Japan might be the exception in an Asian landscape that still presents challenges.

"We price [the risk premium] into our deals and our investors demand it," Wang said, noting that the beta in Asia is still much higher than in the West. "The argument that the premium is no longer warranted would only work if you have a prolonged period in which this beta is not as pronounced."

South Korea also falls within the realm of Asia's more developed markets and the country has seen a degree of political volatility recently due to a corruption scandal surrounding President Geun-Hye Park. According to Jason Shin, managing partner at Korean mid-market GP VIG Partners, there has been little movement in the local bond and currency markets despite the numerous calls for Park to resign.

Rather, the risk premium in Korea is most visible in the fact that public equities tend to trade at a discount to those in neighboring markets. "The perception is that the Korea discount is warranted because of the shareholders and level of corporate governance - Samsung is a great company but it is run for the benefit of the Lee family," Shin said. "But if you eliminate that by taking control of a company and putting in the best management so there is an alignment of interest with shareholders, maybe the risk premium goes away."

The primary objective for VIG, Longreach and CVC is pursuing control transactions that leverage developing consumer demand in their respective target markets. In this respect, Wang said CVC's sector focus would likely narrow from the current remit to a handful of sectors: fast-moving consumer goods, business services, consumer services, and technology, media and telecom (TMT). The fundamentals in these areas are seen as strong enough to outmatch the drag effect of most external pressures.

"There is an enormous opportunity to fund platforms and businesses to grow into that," Chiba said. "No matter what disruption happens in Western markets, this structural middle class growth theme over the next five years has to be what we focus on."

The AVCJ Forum is being held in Hong Kong on November 15-17. For more information, go to www.avcjforum.com.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• Greater China
• Southeast Asia
• Buyouts
• GPs
• AVCJ Events
• Asia
• Japan
• South Korea
• CVC Capital Partners
• The Longreach Group Limited
• VIG Partners