Asia PE technology tilt not to be feared - Hamilton Lane

Strong performance has fueled renewed bullishness among GPs globally. Three-quarters of respondents in Hamilton Lane’s annual manager survey expect private markets to outperform global listed equities by at least 300 basis points in 2020, despite robust public markets from the second half of last year onwards. This compares to fewer than half in 2019. Roughly one-quarter of GPs predict a 500-basis-point gap; in 2019, it was 15%.

Delgado-Moreira notes that a “huge percentage” of the strong IRRs can be tracked back to late-stage technology. Liquidity has been satisfactory, and many investors are looking to take more money off the table in the second half of the year.

“In the US, a lot of the huge IRRs are tech-driven. I’ve never seen so many value-oriented mid-cap GPs in the US sitting in 5x, 6x, 7x money deals,” he said. “It’s a combination of cost reduction, operational improvement, a snapback in demand, and fundamental growth. There are a lot of gains in the system.”

In Asia, the picture is somewhat different. PE investment reached $211 billion in 2020, the second-highest annual total on record, according to AVCJ Research. This was driven by growth capital hitting an all-time high of $119 billion, up 37% year-on-year. The buyout total was up 11% at $51 billion. The growth-buyout disparity has only emerged in the past four years. In each of 2015 and 2016, investment came to about $150 billion, and the growth and buyout shares were roughly equal.

These changing dynamics can be tied to the rise of growth rounds for tech and tech-enabled companies. Delgado-Moreira observes that tech, media and telecom (TMT) specialists are raising larger funds, while generalists are doing more TMT deals. “Both sides are trying to develop their growth investment business because growth commands a significant premium,” he said.

Nevertheless, he plays down the notion of private equity taking on venture capital risk, claiming that generalists tend to target more mature companies, characterized by sizeable recurring revenues and broad EBITDA margins. In this sense, they are more likely to be de-risked.

Proceeds from private equity-backed IPOs involving Asian companies topped $56 billion in 2020, nearly twice the 2019 level. By proceeds and number of offerings, 2020 represents the fourth-highest annual total to date.

Both 2006 and 2007 were stronger, but Delgado-Moreira believes parallels between the pre-global financial crisis period and the present are misguided: back then, it was more momentum-driven and holding periods were shorter. Listing candidates are also increasingly sophisticated and their business models defensible, especially in China.

“It was forecast that buyouts would come to dominate China. That hasn’t happened yet, even though it is growing significantly in US dollar terms. Investment now is much more about tech than before,” he said. “The industry used to do pre-IPOs for toilet paper manufacturers. Pie charts don’t help you appreciate just how much China has changed.”

The survey, which covered 170 managers, threw up several incongruities. Notably, no respondents said that mergers with special purpose acquisition companies (SPACs) would be their most likely exit option in the next 12 months, flying in the face of recent SPAC fundraising activity.

Perhaps less surprisingly, only 23% of respondents said that more than half of LPs request information on environment, social and governance (ESG) initiatives. Asked whether a majority asked GPs for diversity statistics, only 11% responded in the affirmative.

The survey also found that operating partners are becoming relatively less important in terms of what managers regard as differentiating factors. Delgado-Moreira contends this is because most GPs that want operating partners now have them, although attempts are being made to accentuate the impact of operating partners, for example, through the addition of functional expertise or increased specialization.

“They are trying to become more sophisticated as to what [the term operating partner] means,” he said. “There is a push towards specialization in the middle market, with GPs just doing two or three sectors. Operating teams want to do the same things time and again. If the operating team is good at sales, they want to be able to improve on that with every deal.”

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• Topics
• Performance
• Technology
• IPO
• Expansion
• Asia
• TMT
• Hamilton Lane
• Operating partners
• Growth capital