"The best time to come to Asia was 30 years ago, and the next best time ... is today." One of the headlines from this September's Super Return conference in Hong Kong was Ontario Teachers' Pension Plan setting up in Hong Kong to focus on its Asia portfolio. We spoke to many other limited partners at Super Return who are travelling to Asia on a regular basis. Asian markets are a hot topic as alternative asset managers look to capture the best returns in the growing economies around the region. Of course there are challenges to doing successful business, particularly with growth slowing across Asia. The conference reinforced the need to understand the risks, the importance of local relationships and a longer term view.
Hong Kong has historically been the largest centre for funds in Asia, serving China, Korea, Taiwan and Japan. Singapore has emerged now as a fund management centre for South East Asia, with tax and other incentives for fund managers establishing a presence here. In 2012, KKR, the US private equity giant, opened an office in the Lion City (a few months ago KKR's Asia II fund raised US$6 billion). Collas Crill Singapore targets clients in the ASEAN network but we are also seeing business from Hong Kong and China.
WHY ASIA
For the past three years, the Emerging Markets Private Equity Association has reported more than 60% of investors intending to increase allocations to emerging markets. The driver comes from a stark contrast between emerging and developed markets: 61% of investors expect returns of 16% or more in emerging markets funds versus only 27% in developed markets funds. And most investors expect funds focused on Southeast Asia to have the highest returns compared to other emerging markets.
GROWTH STORY
Investors talk about "stronger demographics, higher growth rates, growing consumer markets, inter-emerging market trade linkages, underinvestment..." when describing their attraction to emerging markets. The majority of deals in Asia are in the venture capital and growth areas, reflecting the emerging nature of businesses. In fact, the top three types of Asia-focused funds raised since 2000 were venture capital, growth and real estate. China, India and then ASEAN (the Association of South East Asian Nations promoting trade and regional cooperation), in that order, are the biggest target markets for private equity activity.
Since 2009, 10% of all private equity deals globally were completed in Asia. But Asian GDP is growing faster than PE activity. The IMF forecasts that the combined GDP of developing Asia will catch that of the G7 developed nations by about 2020. Private equity investments (as a % of 2012 GDP) are about 0.08% in China, 0.14% in India and 0.1% in Indonesia, compared to 0.86% in the US and 1.05% in the UK. So, room for growth here as the market creates new opportunities.
The average size of Asia-focused funds has grown steadily and is currently at a peak of US$422 million, since the low of US$197 million in 2009. Fund raising for Asia continues to dominate the capital raised in emerging markets as a whole. It is interesting to note that around 40% of the funds currently raising capital in Asia (excluding Japan and South Korea) are first time funds.
THE CHALLENGES
Managers, in particular first time funds, have found capital raising to be difficult and lengthy with Preqin reporting 19.2 months as the average time to reach final close by Q2 2013. Fundraising and deal activity in Asia has slowed over 2012 and into 2013. After a 15% increase in Q1 2013, aggregate deal value in Asia dropped to just $2bn in Q2 2013, the lowest since Q3 2008. This is not entirely surprising given the amount of dry powder (capital) waiting to be invested. Overshadowing all of this has been slower growth in China with concerns over local bank credit, and government and regulatory challenges to investing in India.
Exits have been a major limiting factor in recent years, with IPO markets quiet. If money cannot be returned then investors are unwilling to commit to new funds. However, there have been signs of recovery. Bain & Co reported a tripling of exits in South East Asia in 2012 to US$15.6 billion over the previous year. Recent large exits included CVC Capital Partners US$ 1.3 billion IPO of Indonesia's Matahari Department Store in March 2013 and TPG Capital agreeing to sell up to 40 per cent of Jakarta-based Bank Tabungan Pensiunan Nasional to a Japanese bank in May 2013. IPO activity in Hong Kong also rebounded to US$ 5 billion in the first half of 2013. Saratoga Capital, one of Indonesia's leading PE firms, carried out a US$151 million IPO of part of its assets in June 2013.
These are some large deals carried out by the more established players, however the rest of the PE universe is still in a growth phase. Some practical considerations when investing in South East Asian markets include a smaller universe of local managers to choose from, smaller deal sizes, and particularly in Indonesia, high asset prices. Firms spend more time and cost on due diligence. Many deals across Asia are also structured as minority investments due to the need for a local partner or regulatory issues.
OUR APPROACH
Amongst the challenges, we are seeing activity from new managers wanting to invest in private equity and real estate opportunities. They are often backed by one or two cornerstone investors. These mid-market funds have to tap a more diverse and increasingly Asian investor base like development finance institutions, family offices and local limited partners.
Guernsey and Jersey have a clear role to play in winning such new business. We speak to clients in Singapore and Hong Kong about the benefits of using the Channel Islands, and have won business, but more can be done to increase their visibility and tailor their products for the region. Capturing business in the fast-growing Asian community will require a flexible regulatory framework which is appropriate to investor needs and the ability to carry out functions in Asia.
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