Partners Group in Asia

The global middle class thesis

According to Dr. Marcel Erni, founding partner, Executive Vice Chairman and CIO at Partners Group, who recently spoke to AVCJ TV, the firm’s core hypotheses, particularly post the GFC, where the ‘emerging’ markets have now fully emerged – as “the substantial winners of this crisis” – are driving it to support Asia Pacific.

This section of the global economy, likely to experience some 3x the growth of the mature, developed world, is distinguished by a still-developing consumer sector, low national debt levels, high currency reserves, and healthy trade balances. And in Partners Group’s view, “all of this [is] driven by this one big structural organizing theme: the coming of the global middle class.”

This global escalation of some 2.5 billion people into the $6,000-30,000 p.a. income bracket over the next 25 years is skewed overwhelmingly towards the BRIC economies, with this income band scheduled to double, from some 800 million to over 1.6 billion between 2010 and 2020, according to Goldman Sachs. Dr. Erni compares the impact of this change to the 20-30 years of high growth in the US and Europe post World War 2, leading to “an unprecedented consumption boom,” with “China growing from around 6% of world consumption to 28%” by 2025. The resulting investment drivers range from cars and communications – “the biggest growth market for Facebook is emerging markets,” – to enabling infrastructure, and even museums.

Asian PE as a growth vehicle

In contrast, developed Western economies face sustained economic stress driven by unprecedented levels of public debt. Growth in the BRIC economies’ middle class will therefore become increasingly self-sustaining. “We’re going to see decoupling of emerging market growth: this is structural and fundamental.” And Asia Pacific private equity offers a very attractive way to play the resulting macro environment.

From its historic roots providing smaller consumer growth companies in Asia, Erni argues, “private equity seems to have arrived with bigger deals and bigger companies.”  And in Partners Group’s view, funds raised versus investments in Asia Pacific is in “a very healthy balance,” especially when the $40 billion of un-invested, uncalled capital the group estimates for the region is set against $400 billion for US and European PE. Also, average leverage across Asia Pacific PE is currently very low at some 1.5x EBIDTA, Erni affirms, with average entry valuations keeping to roughly the same low levels over the past five to six years.

China and the other markets

These healthy underpinnings sit alongside the strong macro growth story, but also, “you see potential to formulate the Asian champions,” Erni avers. With even China’s largest sector champions, such as Lenovo for computing and Huiyuan Juice for beverages, still with market caps in single-digit USD billions compared to Western peers like Coca-Cola and HP, PE investors looking to build high-value businesses have everything to play for.  And at the SME level, China also offers broad opportunity: “In China you have 400,000 private companies potentially open for investment.” Partners Group is responding by, “building up our Chinese investment team and going directly into those deals with our investment partners.”

Partners Group sees a far smaller market in India. “In the whole of India last year, only $4.5 billion us invested last year through private equity,” Erni cautions. However, “the big potential is PE-style infrastructure investing,” but with careful attention to how this is done, and especially avoiding exposure to longer-term, high-capex, lower-return project finance exercises.

Asia’s more mature markets, such as Australia and Korea, should also form part of a regional PE portfolio, Erni agrees. Companies there offer the indirect benefits of plays on the Asian macro story, with mature buyout market characteristics; “UK buyout with Asian growth,” as Erni styles them. But these markets, especially Australia, are pricey. Exposure to the growth potential comes at a price, Erni warns. “The big challenge in Asia is: at what price?”

LPs bet against growth?

Given the region’s size, growth and economic potential, “you would think that most people would have more than a third of their assets allocated to Asia and emerging markets,” Erni argues. “The reality is that in the West, most people are at less than 5%. This is a fundamental bet against the biggest and the fastest-growing part of the world economy.”

On top of this, he continues, “PE is a good way to capture the growth premium that is in the market.” The growth premium manifests as an equity premium, and private equity offers smaller companies with high growth and lower volatility than in Asia’s public markets. Therefore, “with all the challenges that there are, Asian private equity needs to have an overweight in a portfolio.”

But this popularity, like the growth, comes at a price. Erni admits that what keeps him awake at nights worrying is “that I see a fast yield compression through the system again: people are throwing money at anything looking for yields.” To him, this feels, “like people have forgotten 2008-09.” 

Further reading

Marcel Erni of Partners Group

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