2019 in Asia: China shapes the region

Asia private equity in 2019 will see a reshaping of dealflow, strong investment activity in China and Japan, and a decrease in capital commitments from Asian insurers.

What can Asia private equity expect in 2019?

The region’s private equity industry saw record fundraising and witnessed a whirlwind of developments in the last year, from the drop in China outbound dealmaking to new multibillion PE entities set up by Japanese institutional investors. Here are three things to watch for in the next 12 months, according to market participants and research.

Intra-Asia trade grows

Greater scrutiny by US, Australian and European governments into China-backed deals has dampened the country’s cross-border dealflow. In the US alone, Chinese direct investment into the country slumped by 35 percent in 2017 to $29 billion of completed deals, compared with $60 billion in 2016, according to Rhodium Group’s China Investment Monitor. The value of newly announced Chinese acquisitions in the US plummeted by 90 percent compared with the previous year.

South-East Asia, Japan and Korea are likely to benefit. Private equity investors are taking a fresh look at South-East Asia, which is well-placed to benefit from the growing divergence between the US and China. While it isn’t clear whether the trade war will result in a rise in private equity investments in the region, there is more likely to be a rise in strategic outbound M&A from Chinese investors as they seek to buy and build production capacity, said Siew Kam Boon, a Singapore-based partner at law firm Dechert.

China and Japan continue to attract LP interest

China and Japan were singled out by LPs surveyed in Probitas Partners’ Private Equity Institutional Investor Trends for 2019 as the most attractive Asian markets (47 percent and 25 percent, respectively). Although liquidity in China has tightened as the escalating trade conflict between Washington and Beijing has stoked market volatility, private equity opportunities abound especially in consumer, healthcare and TMT sectors. According to Peng Yu, a Hong Kong-based partner with Ropes & Gray, experienced sponsors are also looking at other markets such as Europe with a China angle – bringing products, expertise, supply chain or customer base to China.

Japan, meanwhile, has much untapped potential with its small and medium-sized enterprises as well as in mega deals from the restructuring of large conglomerates. South-East Asia also remains a top-ranked geography due to a rapidly increasing urban population and improved corporate governance.

Expect fewer alternatives allocations from Asian insurers

The amount of capital that Asia (excluding Japan) insurers was a whopping $4.5 trillion in 2017, according to Boston-headquartered advisory firm Cerulli Associates. While their allocation to alternatives saw a fourfold increase in the last five years – from $242.2 billion in 2013 to $973.8 billion in 2017 – commitments to alternatives is likely to decrease in the near-term due to revised capital and regulatory frameworks in China, Taiwan and Korea.

In addition to being conservative investors, insurers “typically take considerable time to evaluate investments or potential deals before ploughing in money”, Cerulli managing director for Asia Ken Yap said. And even within alternatives they may look mostly for safer assets, such as public-private partnership infrastructure projects or senior debt.