1. Introduction and Background

The attraction of seeking out superior investment returns from well-structured investments in Asia's unique markets has never been stronger. Economies in countries such as China, India, Japan, Korea and Southeast Asia all show the tangible potential to continue their strong track records of economic growth in the years ahead. Savvy investors aiming to capitalize on Asia's growth story therefore look set to continue doing so.

But dig a little deeper and—as those with real in-depth Asian investment experience will tell you—the keys to success in this region's markets are important to grasp; yes, you need the right relationships, but perhaps more importantly, you need to understand and position yourself optimally in terms of the investee's other stakeholders and its regulatory structure.

In this alert, we analyze some of the key areas where investors can seek to develop and capitalize on their own "Asian advantage."

2. Trends and Opportunities

Besides the favorable economic fundamentals of many growth-stage economies across the region, there are a number of important factors and trends in key Asian jurisdictions that—if accessed correctly—can provide tremendous investment opportunities.

China – The Powerhouse Opens Up

The emergence of China onto the world's economic and political stages has been accompanied by corresponding reciprocal imperatives—under the auspices of international trade agreements, the World Trade Organization (WTO) and other multilateral agencies—for Asia's largest economy to open up its markets to further foreign trade and investment.

Last year, China shortened its "negative list" of industries into which foreign investment is restricted and introduced a newly liberalized foreign investment law, promising (i) the treatment of foreign investors on no less favorable terms and (ii) the strengthening of other foreign investment protection measures, including for capital inflows, outflows and technology transfers. On the outbound side, China's Belt & Road Initiative continues to further extend its global reach and influence.

Cash-rich Balance Sheets

Reflecting Asia's famously high personal savings rate, many of the region's corporate groups carry significant levels of cash on their balance sheets. While this can drag down ongoing equity returns, it provides a natural hedge to overall market downside risk, as well as representing a field of opportunity for well-positioned and more active investors, particularly where promoters may seek to access cash balances via privatizations or similar deals to rationalize group structures.

Structural Discounts to Intrinsic Corporate Value

Asia's well-established large-cap listed equity markets in Japan, Hong Kong, Singapore and Korea all feature a significant number of corporate groups that have complex, multilayered listed holding structures—for reasons that in many cases are now purely historical.

These types of structures often obscure the intrinsic value of their underlying businesses, as well as presenting a challenge for their promoters and managers, in terms of their objectives in streamlining returns and maintaining practical control. On the other hand, investors who are able to position themselves as instrumental to these promoters in achieving those objectives can generate significant returns for themselves.

Promoter-led Transactions

Many Asian promoters are super long-term investors. They are often in the best position to properly price in the real ability of their businesses to perform and deliver equity returns over the longer term.

Market down-cycles, event-led downturns (think COVID-19) and other push factors (think United States (U.S.)–China trade tensions), as well as family succession planning events, provide significant scope for promoter-led privatizations and other transactional reorganizations. For well-prepared and well-advised investors, these can be attractive opportunities to share in the premium valuations that can accompany those market moves.

The Migration of Equity Listings from the U.S. to Asia

Many Chinese companies have in the past opted to list on NYSE (New York Stock Exchange) or NASDAQ (Nasdaq Stock Market), tapping into overseas capital at the historically higher U.S. equity valuation levels. However, this trend has now reversed to some extent, given geopolitical and other considerations. The likes of Alibaba, JD.com and NetEase have started to "come home" by way of successful secondary listings on the HKEx (Hong Kong Exchange) for these commercial behemoths that are classified as "large innovative companies" under the listing rules.

There has also been a steady flow of Chinese companies being privatized and de-listed from U.S. markets, with many of those businesses later re-listed on one of the Asian exchanges, often at superior valuations. For example, the formerly NYSE-listed Qihoo 360 was taken private for US$9 billion in 2016, listing on the Shenzhen Stock Exchange just two years later at a valuation of US$62 billion.

Policy-led Initiatives

Governments around the region have formulated important initiatives designed to achieve policy-led goals and encourage further globally linked growth through greater market efficiency.

For example, in Japan, the Corporate Governance Code has provided an official stimulus to shareholder engagement activities, including shareholder activism. Meanwhile, across Asia there is increasing focus on matters such as environmental, social and governance (ESG) imperatives, as the region's markets and corporates compete for globally allocated capital. In Hong Kong, there are near-term plans for the launch of the Sustainable and Green Exchange (STAGE) finance platform.

The Growth of Private Equity

Asia-Pacific makes up around a quarter of the global private equity (PE) market, with approximately 15–20 percent of all Asian mergers and acquisitions (M&A) deals involving PE players of one type or another. In this context, investors are able to access PE-led investment opportunities as backers of buyout funds or as selling stakeholders in target businesses.

One standout sector in recent years has been India's rapidly expanding internet and tech sector, which has attracted ever-greater amounts of PE capital. Based on the development and current profiles of the more mature U.S. and European PE markets, the size and participation of PE investors in Asian markets looks set to grow significantly, with an increasing proportion of control deals likely.

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Originally published July 1, 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.