Asian private equity: The state we're in

The result of the recent US presidential election has made the global markets very uneasy, with most Asian indices going into turmoil. This will definitely be a topic of discussion over the coming months. What does this mean for the region's private equity industry? While it will certainly have some impact on investment decisions in Asia and elsewhere, making predictions is difficult at this point.

To provide a baseline for these discussions, I would like to share some data points from AVCJ Research on private equity activity in the first nine months of 2016. A total of $93.2 billion was invested across the region, well short of the $142.7 billion deployed in 2015 as a whole. Similarly, exits - which generated proceeds of $35.8 billion - were down on the totals for 2015 and 2014 ($59.3 billion and $66.4 billion).

The fundraising data bear a more favorable comparison to last year, but they also feature a massive anomaly. As recently as July, the picture was bleak, with $23.6 billion committed to Asia-focused funds during the first six months, less than one third of the record $91.3 billion raised in 2015.

However, between July and September a further $55.3 billion was added to the coffers, making 2016 look more respectable. Unfortunately, this is not an indication of stronger institutional investor interest in Asia - the spike was almost entirely due to two giant policy funds established by the Chinese government to achieve growth and restructuring objectives.

It is also worth digging into the investment data in order to test that often repeated complaint that there is a lack of good deals in Asia. The chart below captures investments of $20 million or more (to avoid distortion created by numerous VC transactions).

China leads the field in both volume (229) and value ($32.9 billion), with Australia just behind in the latter category with $32.5 billion. Both countries benefit from sizeable non-traditional deal flow, whether it is late-stage technology rounds in China for the likes of Ant Financial and Didi Chuxing or bumper infrastructure deals in Australia such as Asciano Group and Port of Melbourne. The combined value of the latter two transactions account for more than half of Australia's total for the period.

While investment in Australia has comfortably surpassed the total for 2015, China is unlikely to replicate the $62.7 billion committed last year. It should come as little surprise that deal volume is also down substantially on 2015 (229 versus 348), contributing to decrease of similar magnitude for the regional as a whole. Japan is the only market to have seen a jump in value and volume on last year, which appears to validate claims from mid-market GPs that they are seeing more opportunities come to fruition.

Certain trends remain prevalent despite the apparent slowdown: co-investment, horizontal diversification and cross-border strategies, with the latter drawing considerable attention in a China context. But what of 2017 and the ripple effects of the new US administration? Should those ripples lead to macroeconomic waves in Asia that would present a problem, but long-term investors would hope to find ways to ride out the storm. The private equity opportunity in Asia is ultimately dependent on the fundamentals that underpin it.

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• Topics
• Fundraising
• Investments
• Exits
• GPs
• Performance
• Asia