A schizophrenic industry?

Fundraising is dramatically up on the first half of last year, and proceeds from IPO exits have similarly rebounded by a staggering percentage. Yet concurrently, we have at least one authoritative global private equity survey citing the worst quarter for fundraising worldwide in 2Q10 since 2003. Meanwhile, we have another respected global service provider warning of an “IPO crisis,” and counseling that: “companies can no longer rely on the US capital markets for an infusion of capital.”

So what is going on with the industry? Are we really witnessing a decoupling like the one often predicted – but never fully realized – between the broader Asian and Western economies, where the Asian ecosystem develops its own China-centric dynamic and cheerfully goes on its way powered by local markets, indifferent to the situation in the West? Equally, are we seeing a divergence in global LPs’ attitudes towards the different private equity regions, where indifference or retrenchment in traditional asset classes in the West is countered by feverish, headlong – even headless – enthusiasm for China and Asian propositions? Or are we seeing the growth of an entirely autonomous private equity cluster in China particularly, with local LPs supporting local RMB funds, which then go on to invest local companies – often state-connected – to list on local bourses?

Yes, there is no question that Asia is to some extent running on its own as a private equity environment, in a way it never did before 2008. There is no doubt also that the scale, success and survivability of the industry have been vindicated by its performance through the GFC, and it has shown itself able to survive not only the region’s own notorious volatility, but also the worst global macro shock in decades.

Yet despite the signs of doublethink around Asian private equity, especially among some LPs, there are reasons to feel that the industry, though schizophrenic, may not yet have a completely split personality. For one thing, the dramatic upsurges in activity since 1H09 are rebounds from one of the lowest periods the industry has seen in recent years. Temasek Holdings, for instance, has demonstrated in its annual report that it has completed its own V-shaped recovery – but that simply takes things back to 2008 levels.

Also, it’s easy to forget that Asia Pacific still is a small, albeit growing, percentage of the industry worldwide. LPs globally are in the process of addressing historic underallocation to the region in all asset classes, and need to continue doing this for years before private equity approaches the share of the broader economy it enjoys in the West.

More significantly, and worryingly, these data points appear as China is already showing the first signs of some economic uncertainty, with its first slowdown in real estate prices in 18 months and the government reportedly aiming for a soft landing as its stimulus measures ease. That uncertainty has been enough to depress public markets somewhat: if it continues and worsens, an Asian private equity industry overly dependent on China, or on various kinds of plays on the China market or China demand, could find itself not just schizophrenic, but also heading for a breakdown.

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• Topics
• Fundraising
• Exits
• Performance
• Greater China