COVID-19 validates sector lens strategies – AVCJ Forum

Healthcare, technology, and consumer were flagged as increasingly convincing investment themes in the past two years. In terms of geography, India was highlighted as the most exciting market, especially amid regulatory headwinds in China, but the sectoral lens was seen as most relevant.

“There’s a period of time when the geography is more important. In the last few years, I really think it’s all about sector specialization that cuts across geographies,” X.D. Yang, a managing director and Asia chairman at The Carlyle Group, said.

“We all know local teams are important. But to build up a very deep sector [specialization] is one of the most important trends in private equity in Asia in the last few years and for the future.”

Health Zarin, founder and CEO of EmergeVest, emphasized strong traction in the logistics sector, noting that a stark drop-off early in the pandemic was followed by an equally dramatic rebound. He said his firm’s portfolio – a mix of companies at the nexus of supply chain, technology and financial services – has seen profits increase 50% to 100% in the past 18 months.

“The industry focus is also incredibly important in order to make new investments during this period of time when travel is more restricted,” Zarin said

“Understanding the companies that are available for new investments, understanding the sectors closely, and having a team of industry specialists spread around – that has really been key to us in helping us to continue to transact during this period.”

The advice was tempered by warnings that a sectoral approach should not be conflated with investing based on a pandemic lens.

Brian Hong, a managing partner at CVC Capital Partners, observed that COVID-19 has prompted investors to rethink portfolio construction with a willingness to invest in sectors seen as survivors despite sometimes excessively high valuations.

In these scenarios, companies targeted because of their stability are at risk of multiple compression if there is a reversion from a historically low interest rate environment to something more moderate. For companies targeted because they are seen as high-growth winners during the downturn, it is a matter of overpricing their role as risk mitigators.

“You have seen businesses that have flourished during COVID, partly as a function of the acceleration of trends – a lot of these are technology-based businesses – and you’ve seen people say, ‘I’m going to have my disruption hedge by putting this into my portfolio so if there is another pandemic, this will offset other businesses that are impacted.' These strategies have become very crowded,” Hong said.

“When you look at some of these opportunities, the implied growth that you have to assume is actually quite ambitious to the extent that if there is any reversion to any pre-COVID type of behavior or trend, then those businesses will have been grossly overvalued.”

Hong added that in this light, the pandemic showed the true importance of investing in market-leading businesses. “Those are the businesses that have the resources and ability to adapt because they have the strongest management teams,” he said.

The ability to adapt was a strong theme in the panel discussion. In most cases, this was seen as a matter of technology adoption and digitalization. Meanwhile, the ability to make improvements in overall resiliency was tied to environmental, social, and governance (ESG) initiatives, a recurring talking point at the forum more broadly.

There was also scope to think about ESG not only as a way of ensuring portfolio resiliency but also as informing sectoral strategies. When asked how he approached sectors differently in light of the pandemic, Ganen Sarvananthan, a managing partner at TPG Capital in Asia, described ESG as one of his firm’s core priorities, pointing to the establishment of impact platforms such as the Rise Fund and Rise Climate.

“While our other funds are officially setting impact criteria for every investment, we’re certainly dialing up our thresholds around how we invest in businesses. We certainly want a portfolio that is net positive,” said Sarvananthan. “We’re avoiding any form of business that might have that negative connotation, in the environment or having issues around labor and the like.”

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• Topics
• Greater China
• South Asia
• GPs
• Investments
• China
• India
• The Carlyle Group
• EmergeVest
• CVC Capital Partners
• TPG Capital
• covid-19
• ESG