PE investors wary of inflation in 2022 - AVCJ Forum

“Right now, we have a big focus on inflation,” Shane Lauf, a principal at Permira, said on the conference sidelines. He noted that ensuring portfolio companies – especially those in the consumer sector – are resilient against inflation will be a key priority in the coming year.

John Toomey, a managing director at HarbourVest Partners, added that most markets have not been forced to manage inflationary risk in a long time. How it impacts wages and other business costs must be watched carefully, he said.

Inflation is joined by COVID-19, global supply chain pressures, and geopolitical and regulatory risks among the issues preoccupying the private equity industry.

X.D. Yang, Asia chairman at The Carlyle Group, said there is “still a considerable amount of uncertainty looking forward in the next 12-18 months.” He observed that “scenario planning is very important for ourselves and our portfolio companies.”

Private equity investment in Asia stands at $275.8 billion year-to-date, comfortably surpassing the record annual high of $214.1 billion set in 2017, according to AVCJ Research. It remains a growth capital-led market. Early and growth-stage deals account for 69% of all investment activity – with India replacing China as the focal point halfway through.

This has come despite escalating US-China tensions and concerns about decoupling. However, Kyle Shaw, a founder and managing partner at ShawKwei & Partners, expects balkanization – the clubbing of countries in non-global partnerships – will become another source of disruption.

China is now effectively closed [through COVID travel restrictions] and disengaged from the world, Shaw observed. As a “different type of China” emerges in 2022 and thereafter, GPs must adjust how they manage portfolios in terms of opportunities and risks, he said.

The swing in momentum from China to India is not restricted to investment. The exit environment in India, a longstanding bugbear for private equity players, has been turned on its head. Part of this is technology-driven – domestic stock markets have become more receptive to pre-profit start-ups – but Carlyle’s Yang believes the impact is broader.

“Before, if you wanted to do a block trade or IPO of $300-400 million, it would take two years whereas now, you can do a $500 million block trade in half an hour,” he said, adding that Carlyle has invested about $800 million in India in 2021 but realized $2 billion.

Investors have generated $18.8 billion in proceeds from India deals so far this year, compared to $16.2 billion in China. The last time India bettered China in terms of PE exits was in 2008.

Buoyed by several multi-billion-dollar transactions, India has seen $11.2 billion in trade sales this year, up from $2.2 billion in 2020, while sales to other financial sponsors have risen from $2.3 billion to $6.6 billion. Proceeds from PE-backed IPOs have reached a record $5.4 billion.

Exit constraints and poorer returns in China could mean that India catches up in the next few years in terms of deal activity relative to GDP, said Ganen Sarvananthan, an Asia managing partner at TPG Capital.

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• Topics
• Greater China
• South Asia
• Buyouts
• Expansion
• IPO
• Trade sale
• Asia
• Economy
• AVCJ Events
• The Carlyle Group
• Permira Advisers
• HarbourVest Partners
• Shaw Kwei & Partners
• TPG Capital