Finding value in Asia Pacific

Asia-Pacfic flags

Asia Pacific’s private market attracted USD117 billion in net capital inflow in 2019, led predominantly by private equity where fund raising topped USD94 billion according to McKinsey’s Private Markets Review 2020. This represented a 25 per cent reduction year-on-year, led principally by closed ended real estate, which closed 2019 with a modest USD13 billion in fundraising; down 39 per cent on 2018.

The big question for the region now, among global investment groups, is where strategic value opportunities might reside in light of the fall in market valuations caused by Covid-19. One only has to look at oil prices moving into negative territory, crashing to the lowest demand levels seen in 25 years, to appreciate the scale of ongoing macro disruption.

Understandably, this has impacted confidence levels in the markets, as institutional investors scramble to manage their portfolios.

“The governments in each country are fighting hard to overcome this, and hopefully there will be some light at the end of the tunnel very soon. But how long this takes remains uncertain at this stage,” says Rajindar Singh, Head of Fund Services, TMF Group, based out of the group’s Singapore office.

E-commerce deal opportunities

Singh makes the observation that in such a populous continent – Asia is home to 4.6 billion people – the result of the lockdown has led to a huge shift towards people using e-commerce. This could mean an acceleration of the existing trend and as such present investment opportunities for global fund managers, “and in particular, how this relates to supply chain logistics management,” says Singh. “We could well see different dynamics in this area going forward. India, for example, has already seen a lot of investment in logistics as it continues to build out a number of large logistics/industrial infrastructure projects.”

According to the IMF, China’s share in global e-commerce retail transaction value has risen to more than 40 per cent today from less than 1 per cent a decade ago. Asia’s 12 per cent share of retail sales that occurs via e-commerce surpasses the respective shares of 8 per cent for Western Europe and North America. India, China and Indonesia, for example, lead the world in e-sales growth, yet less than 50 per cent of APAC’s population is online. The potential for funds to back the right e-commerce companies to ride a further wave in e-commerce growth over the next decade represents a highly viable value proposition.

“Innovation in Asia is on the rise in terms of Fintech, which could pique the interest of global asset managers,” says Patrice Lo, Commercial Director for Fund Services, TMF Group. “Overall, the population in most Asian countries is quite young. If you look at the size of mobile payments for instance, it far exceeds what you see in developed countries. India and China have led the way and there has been a real boost in Fintech. Many big multinational technology firms have a significant presence across Asia, and this has helped build a robust infrastructure. So I think this Fintech trend is something investors will be paying close attention over the next few months, and beyond.”

To support investors and fund managers, TMF Group is one of the only providers servicing investment structures and assets across the region, with 28 offices in 15 countries, providing a holistic suite of entity administration services; while also providing fund administration services in Singapore, Mumbai, Shanghai, Hong Kong & Sydney.

Take private deals

In many respects, Asia Pacific has been maturing strongly over the last decade, in the sense that returns and capital inflows coming into the region’s capital markets have been on the rise. This is not necessarily true for its private markets, where fund raising has contracted for the last two years. That being said, this could be due to the high level of dry powder available to deploy, which totalled USD419 billion at the end of 2019.

“If you look at some of the biggest fund houses such as CVC, Blackstone and Soft Bank, they’ve accumulated a lot of dry powder over the last couple of years,” says Lo. “Over the next few quarters, we hope things will start to settle down and this could present good opportunities for asset managers to find yield; especially with the reduction in valuations.

“There were talks recently of Soho China, the Chinese building developer, going private. We might see more take private deals happening in the market given the current situation.”

Singh thinks that if private deals do start to increase, in response to increased M&A activity, another sector of interest for funds could be in Asia’s healthcare sector.

“Fund managers will be looking at Asia’s healthcare sector not only at the micro but macro level. Clean energy will also likely be an investment theme in the region.

In terms of putting the USD419 billion of dry powder to work, one word of caution for fund managers – be they domestic or global managers – is that competition to put that capital to work and complete on deals, could be challenging.

Singh notes that for established markets like Japan, there has been significant interest from private real estate fund managers on logistics and residential sectors applying their own asset management expertise to manage large scale developments.  In China, over the last 15 to 20 years, there has been a lot of real estate development but going forward there could be a possibility to look at tech start-ups, fintechs and pharmaceuticals.

“India is still some way behind,” he says. “Pension funds are looking at hospitality, logistics and industrial investment opportunities, aside from their commingled fund investments. And in SE Asia, countries like Malaysia are focusing on integrated infrastructure development and logistics.”

Increased buyout activity in Asia...?

GPs are using the cessation period caused by Covid-19 to strategise and prepare to put forward their investment objectives to LPs when there is a period of calm in the market. During ’08 global financial crisis, a number of investment managers didn’t survive due to liquidity issues and the largest players came through on top. A similar period of consolidation could happen again, and some smaller fund houses might get absorbed by larger groups.

This offers the potential for greater buyout activity in the region, which still lags substantially behind the US and Europe. Traditionally, private equity activity has centred on VC and growth investing, making up in excess of USD800 billion in AUM, compared to USD238 billion for buyouts; that is surely going to change at some point.

“Under the right conditions we may see an acceleration in buyout activity in Asia, relative to the US and Europe which have long been very established markets,” suggests Singh.

“The M&A activity in Asia has not been as high but I think now there will be a lot of opportunities in terms of the fall we’ve seen in market valuations. Especially in the health sector, where there could be opportunities for consolidation across the region. Other sectors which could see more M&A activity are the aviation industry and shipping.  A number of Asian shipping companies have historically been funded by private groups but some might look to re-strategise towards private equity capital.”

Lo further adds that “at TMF Group, we are gearing up internally to support more M&A deal flow with our teams globally”.

Private debt outlook

One other potential area of finding value in APAC relates to private debt, where distressed debt opportunities could be significant in the wake of the economic shutdown.

Lo explains that while average returns for private debt funds have been on the low side for the last few years, compared to private equity or real estate funds, investors have still remained satisfied. Indeed, according to Preqin’s Alternative Assets Investor Outlook H12020 report, only 11 per cent of investors surveyed in November 2019 said they were disappointed with their private debt portfolios.

“It is dependent on the expectations of the individual investor, and finding the right opportunities in the market. In the current environment, investors are looking for ways to deploy their capital effectively; especially in Europe, where investors have to deal with negative interest rates.

“I think global investors will look to the region to see if there are good opportunities for distressed assets. We expect to grow our private debt business over the next 12 to 24 months,” states Lo.

Private debt was a bright spot for the APAC region last year, growing 23 per cent according to McKinsey’s report.

Sectors like aviation are likely to be the target of private debt investors, with air fleets around the world literally grinding to a halt. This is going to place huge financial pressure of airline carriers.

“For example, some of the major airlines in this region, which have been severely affected by the current environment are thinking of ways of raising new capital through rights issues, convertible bonds etc. It depends how long the recovery takes but this could present an opportunity for private debt funds to step in, as well as international banks, to provide financing in the capital markets.

“We might see a gravitational pull of private debt to support the aviation industry,” concludes Singh.

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