THE ongoing impact of the Covid-19 crisis and geopolitical tensions are seen as the key risks for deal-making in Asia Pacific.
But private equity (PE) investors still regard the region as an attractive market, offering a huge opportunity for the PE industry, according to a survey by financial data provider Mergermarket on behalf of Dechert LLP.
“Not only does Asia Pacific have an unmatched economic profile – both in size and growth – it is significantly under-penetrated by PE, ” Dechert/Mergermarket explains in the recently published Global Private Equity Outlook 2021 report.
The report notes that Asia Pacific currently represents just 25% of the global PE industry. This, it says, leaves headroom and runway for significant growth for the next decade at least.
“These fundamentals will ensure that PE investors remain compelled by the Asia-Pacific growth story, in spite of current geopolitical tensions, ” the Dechert/Mergermarket report argues.
In general, Asia Pacific remains the world’s fastest-growing region, driven by favourable demographics and a growing consumer class. Citing the World Economic Forum, Asia’s gross domestic product (GDP) is expected to have overtaken the GDP of the rest of the world combined, and by 2030, the region is expected to contribute to 60% of global growth.
The region is also expected to account for about 90% of the 2.4 billion members of the middle class underpinning future demand. This will largely come from China, India and South-East Asia’s high-growth developing markets.
Deal activityAccording to the Dechert/Mergermarket report, Asia Pacific recorded a total of US$80.5bil in buyout deal activity in the nine months to September 2020. This represented a growth of 13% over the corresponding period in 2019. Volume over this period, however, fell 8% year-on-year (y-o-y) to 379 deals.
Still, the region performed much better than the rest of world.
Globally, the value of buyout deals fell 12% y-o-y to US$382.7bil, while volume fell 21% y-o-y to 2,260 deals. The decline in global deal activity was due primarily to the Covid-19 crisis.
In Asia Pacific, the technology, media and telecommunications segment fared the best during the first nine months of 2020, with US$33bil invested. This was followed by the pharmaceutical, medical and biotechnology sectors, with US$13.4bil invested.
These deal totals set the region’s PE market apart as the least affected by the ongoing Covid-19 crisis.
“In certain industries, the pandemic is still having a large impact, but by and large, in Asia, Covid-19 is quite contained and well dealt with. In many countries in the region, people are more or less going about their lives as normal and restrictions are loosening, ” Siew Kam Boon, a partner in Dechert’s Singapore office, says.
In generally, the report finds that respondents in Asia Pacific are marginally less concerned by the effects of Covid-19 on the PE market than executives in other regions.
Respondents in Asia Pacific are more concerned about the Sino-American diplomatic relations, and that is their biggest concern, with half of them saying the unresolved US-China trade conflict is expected to have the biggest detrimental effect on dealmaking over the next 12-18 months.
“There are various dimensions to current geopolitical tensions beyond just the trade war between China and the US, ” says Boon.
“Depending on the jurisdiction of the acquirer and the target as well as the industry the target is engaged in, certain crossborder deals are taking longer within the region because of these frictions. India, Japan and Australia have imposed new foreign investment rules and certain others within the region have developed informal policies along similar veins. Factory production is being repatriated by Japan and India or moved out of China into South-East Asia, ” she adds.
Minority stake investment
Meanwhile, PE investors are increasingly open to making minority-stake investments, especially in the current market environment. They see that as an opportunity to lower or diversify risk, increase their pool of potential investment targets, and make their entry more palatable to company founders who are resisting a control investment.
PE investment is typically associated with the acquisition of majority positions in companies via leveraged buyouts, and management teams retaining a minority stake to ensure their interests are aligned with the general partner (GP).
Although this established model continues to constitute the majority of PE investment activity, 98% of firms surveyed said their firms made minority investments, the Dechert/Mergermarket report notes.
“There is potential for this investment type to increase over the next 12 to 24 months in light of current circumstances. For one, owners who might not have previously been willing to accept PE investments are more likely to seek financing options as earnings come under pressure, ” the report explains.
“Even in a benign economic environment, minority deals have the advantage of allowing the current owners to retain control over their business. The minority alternative is comparatively more appealing, ” it adds.
For GPs, the report argues, the flexibility to make a minority investment can increase the likelihood of securing a deal and a meaningful foothold in an attractive asset at a favorable valuation, since sellers are not risking selling most of their equity at a bargain price.
As it stands, PE funds still have dry powder to invest. With an estimated US$1.7 trillion at their disposal, PE investors continue to face pressure to be creative in building a solid portfolio of assets.
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