Investors weigh maneuvering options in response to global volatility – AVCJ Forum

A generally increased level of industry wariness around volatility since the global financial crisis has sharpened in recent months due to turbulence in equity markets, some erratic currency exchange movements, and in particular, political changes signaled by the UK vote to leave the EU and the US presidential election.

"Since 2008-2009, global trade has really slowed and it's going to be more slow because of this increase in protectionism," said Ming Lu, head of Asia private equity at KKR. "That's why we're saying we should focus on businesses that tap a domestic market and focus on Asia. There are many uncertainties, but we should be focusing on the underlying trends that have been moving - and this election may reinforce that trend."

Other approaches to dealing with volatility include an emphasis on diversification. This strategy is aimed at accounting for potential investor overcrowding in volatile areas, due to pressure on investors to achieve large returns.

"The key is to build a businesses that can handle complexity and can go into different places," said Ilfryn Carstairs, partner and co-head of corporate traded credit at Värde Partners. "You don't want to be captive to single markets, and you don't want to be captive to where the crowd is. We spend a lot of time thinking about building a global platform that can really go deep."

On the deal level, effective manager selection and sector targeting are seen as important risk mitigating strategies. Investment segments expected to exhibit durability through difficult cycles include areas connected to Asia's rising middle class demographic such as healthcare, financial services, education and agriculture plays related to food quality.

Another opportunity to manage portfolio risk is secondary investments. Ernest Boles, vice chairman of private equity and real estate for HQ Capital, said his firm included about a 20-25% allocation in most of its programs to this space. "Pricing can be high, but if you find the right deal and put the right structure in place, you can find very good assets reasonably priced," Boles said. "We're looking at discounts on average from the deals we've done of about 20%."

Panelists appeared to come to a consensus that although there are significant unknowns, the latest political movements in the UK and the US will have implications for the industry, particularly with respect to free trade. However, a push toward seeking stability instead of embracing volatility is seen as a potential pitfall since it could result in poor returns by causing overpricing and destabilization in traditionally stable assets.

"Volatility became a bit of a bad word coming out of the global financial crisis whereas in the long term sense for investors, volatility should be our friend," said David Gross-Loh, managing director for Bain Capital. "If you define volatility as potential for great transformation in earnings of companies, then I think is good. As long as you price it right when you buy it and you have a patient view, you can capitalize on it. It shouldn't be something we're avoiding as an industry."

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
• Greater China
• GPs
• Advisory
• AVCJ Events
• KKR
• HQ Capital
• Bain Capital Asia
• Japan
• Asia