Aberdeen Standard: US-China tensions will provide opportunities

Graham McDonald and Wen Tan discuss LPs' fear of missing out and how large tech private equity managers are influencing the market.

Graham McDonald, global head of private equity, and Wen Tan, co-head of Asia private equity at Aberdeen Standard Investments, sat down with Private Equity International to discuss the growing influence of tech managers, sector specialisation and the impact of the US-China trade war.

Has the US-China trade tension had any knock-on effects on your investment decisions?

Graham McDonald

Graham McDonald: We believe in the persistency of the asset class. Sometimes in periods of volatility, private equity has actually performed better. There will be opportunities afforded by the trade tensions; we continue to watch it closely.

Wen Tan: While the trade war does come up in conversations, our house view is that things will probably get worse before they get better in terms of the geopolitical dynamics.

Does it affect sentiment? Yes, it has affected sentiment in the market. Will it affect underlying performance? I think it all very much depends. If you are a small, lower mid-market domestically focused services-oriented company in China compared with if you are a large exporter based in China that’s part of a global supply chain into the US, the impact will be different for those two organisations.

The way that we invest in China has historically been with a bias towards domestically focused businesses. Globally whilst we invest across the full spectrum, we do think that the lower mid-market space offers greater opportunity for upside as well as protection against any market correction.

How has the firm’s Asia team changed post-merger?

GM: Our team has remained consistent. Post-merger there was little or no overlap between Standard Life and Aberdeen in respect of Asia. We did have overlap in Europe which we dealt with.

WT: There has been a fundamental difference in how we work now as part of a very large organisation – we believe that’s a big advantage. With co-investments, we work very closely now with the public equities teams. For example, when we look at a healthcare co-investment, we have the ability to tap healthcare-focused experts; if we are looking at an Indonesian opportunity, we can call up our Jakarta office and ask about local dynamics and regulation.

Watch McDonald’s video on Asia’s rising influence in private equity

What are some trends in private equity investing in Asia and globally that stand out?

GM: I think we have seen a real explosion in operational partners as opposed to purely financial partners. As a result, we spend a lot of time understanding how to potentially create value and trying to understand how various GPs differentiate themselves, as opposed to a more generalist-type model.

We are also seeing a proliferation of sector-specific funds. Sometimes these are teams that spin out from bigger managers, frustrated with succession issues or with the size and scale of the business. And you can argue in a way that these smaller teams, smaller fund sizes are better aligned with LPs because they are focused on better outperformance as opposed to being focused on fee generation.

Lastly, we live in the era of separately managed accounts. That plays to our strengths in that we have a fairly extensive menu, whether our clients want funds customised purely for geographical or sector reasons. LPs are also becoming more sophisticated in terms of exposure, whether they want technology, venture, growth, buyout, or a US or Asia-focus.

How about standout themes in China private equity?

Wen Tan

WT: If you look at the evolution of the [China] buyout market, you’ll see the privatisation of state-owned enterprises and more importantly, this whole cohort of family businesses where the founders are reaching the age now where succession becomes an issue.

And if you think fundamentally about how capitalism has evolved in China over the past three decades this is really the first time that we are coming up to where you get these founders who are reaching retirement age. Opportunities in this space will grow.

From an LP perspective one of the big questions on emerging Asia private equity has been the fact that TVPIs [total value to paid-in capital] remain strong but the DPIs [distributions to paid-in] take time to catch up. And part of the reason is you’ve got minority investments where your only exit route is through the public markets. When you are in a majority, control buyout situation then your optionality of exit routes becomes a lot broader – you can sell on to a large-cap private equity house, a strategic or via the public market. All things being equal, there is often an LP preference for buyouts.

How are the big tech GPs in Asia disrupting the industry?

GM: We are seeing these funds having bigger influence in the market, which is a response to investor demand. Sometimes there is a fear in the investor community of missing out. And this [fear of missing out] is alive and well in certain aspects of that.

With the pace of disruption ever increasing, I don’t see that in any way relenting and people in the industry are determined to capture that. We live in the era of the unicorn where companies are staying private longer. They are outliving the initial capital structures that were formed for them, so we do see that landscape changing in terms of how these companies are funded, certainly longer than typical 10-year fund life. That trend will continue as disruption is alive and well in every level of industry, whether it’s driven purely by technology or changes in practice. As investors we have to be alert to that or we get left behind.

Graham McDonald is head of global private equity based in Edinburgh. He is responsible for the Aberdeen global private equity business and is chairman of the investment committee.

Wen Tan is co-head of Asia private equity based in Hong Kong. He focuses on sourcing, evaluating and executing primary investments in the Asia Pacific region with a particular focus on South-East Asia.