It only takes the most cursory glance at private equity headlines in the last year to conclude Asia is the place to be.
In 2017, Asia private equity achieved its best all-around performance to date. Deal value soared to $159 billion, up 41 percent on 2016, according to a report from Bain & Company. Exit value, at $115 billion, marked the second-best year on record and fundraising rose 6 percent year-on-year to $66 billion.
Industry giant Blackstone closed its first dedicated Asia private equity fund this year on its $2.3 billion hard-cap. A week later, The Carlyle Group closed its latest Asia vehicle – the firm’s fifth – on $6.55 billion, well above its $5 billion target and 65 percent larger than its predecessor fund.
In a report published this summer co-authored by Henry McVey, head of global macro and asset allocation, KKR – which raised the largest-ever Asia-dedicated fund last year at $9.3 billion – predicted the Asian millennial generation, particularly the Chinese, will reshape traditional consumer markets in the region and around the globe, creating significant opportunity for investment.
Today, a swathe of pan-Asia managers are in the market with large-cap funds that are expected to add at least another $26 billion of dry powder to the region. As of the end of 2017, Asia dry powder was at $225 billion, according to estimates from Bain & Company.
As a development finance institution, the Asian Development Bank has played a key role in developing the private equity asset class in Asia by investing in and supporting first-time fund managers since the 1990s.
Now that the market has matured, ADB has shifted its focus to support the more established and experienced general partners with demonstrated track records across multiple cycles.
Janette Aguto Hall, the director of investment funds and special initiatives division of ADB’s Private Sector Operations Department, says the bank is looking for GPs engaged in the same verticals that align with ADB’s areas of expertise and focus: infrastructure, financial services, healthcare, agriculture and education.
For example, in 2012 ADB partnered with Macquarie Group’s Macquarie Infrastructure and Real Assets and other limited partners to establish the Philippines’ first infrastructure fund: the Philippine Investment Alliance for Infrastructure. The $625 million fund focuses on infrastructure projects including mass transit, water and alternative energy.
ADB forecasts 2019 economic growth in developing Asia will be 5.8 percent – slower than the 6 percent seen this year, due to a pick-up in inflation. Still, that’s faster than the World Bank’s estimated global growth rate of 3.1 percent this year and 3.0 percent in 2019.
ADB is seeking general partners working on investments within the borders of its 67 members, 48 of which are in the Asia-Pacific region, ranging from Armenia and Afghanistan in the west to the Pacific Island nations of Nauru and Vanuatu.
Hall says PSOD pursues a dual mandate of both development impact and financial returns. ADB is working on investing in several funds – including some specialised vehicles – in South-East Asia, China and India, she says, adding that the bank typically would like to come in early as an anchor investor in these funds whenever possible.
“It’s more about investing [at] a consistent deployment pace in growth funds that are supported by established platforms, which over time ADB would re-up [with] as the fund manager evolves,” Hall says. “We are also opportunistically looking at some earlier stage funds, but that will very much be on a selected basis.”
ADB has also acted as a co-GP in one investment vehicle, Hall says, teaming up with the UK government to establish the region’s largest clean energy fund, Asia Climate Partners. The fund makes equity investments – primarily in China, India and South-East Asia – in the renewable energy, resource efficiency and environmental protection sectors. Aside from direct private equity investments, ADB is looking at credit funds, including direct lending, mezzanine and distressed debt, where they fit ADB’s development mandate.
“ADB generates new fund investment opportunities by proactively approaching and engaging with qualified and experienced fund managers, including those that may not typically approach ADB,” Hall says.
Since 2014, PSOD’s funds team has performed a comprehensive market mapping of the private equity landscape in Asia, which includes players in China, India and South-East Asia, to find potential partners. This is an ongoing effort to continuously monitor the available fund opportunities and market trends.
“With the efforts spent, we have now established our presence in the market as an active private equity fund investor in Asia,” Hall says. “We have a fairly good idea of the universe of growth fund managers in Asia – and this understanding was obtained through a combination of those GPs approaching ADB, plus those who are referred to us or those whom we proactively sought through various channels.”
Focusing on returns
At the end of 2017, ADB’s portfolio totalled $10.9 billion, of which 40 percent was allocated to finance projects and 38 percent to infrastructure. In 2017 alone, the bank approved more than $3.1 billion for the private sector – $2.2 billion in loans, $526 million in guarantees and $390 million in equity.
Yee Hean Teo, senior investment specialist in the private sector investment funds and special initiatives division of PSOD, says the bank has established methods of calibrating required returns based on different factors, including instrument type (debt or equity), tenor, liquidity, country and counterparties, among others. Given the decline in interest rates since the 2008 financial crisis, the mid- to long-term expected return for many asset classes, including private equity, has similarly fallen, he says.
Teo says in the next five to 10 years, ADB is looking at an expected net internal rate of return anywhere in the teens on a percentage basis. “We would be quite happy if ADB could achieve a 15 to 18 percent net IRR at the portfolio level in steady state, given current market conditions,” he says.
ADB can only invest in its member countries, which are in Asia and the Pacific. Increasingly, ADB is looking to do more in frontier economies such as Myanmar, Bangladesh and Pakistan.
“For a period, ADB was not as active on the funds business, investing at an inconsistent investment pace,” Hall says. “However, we have now adopted a more disciplined investment approach since we view private equity funds as a critical component and complement to our direct equity business. Private equity funds are useful intermediaries for ADB to support since it allows us to invest in a portfolio of companies through a single fund investment while increasing our access to underpenetrated markets and sectors where ADB’s presence and/or experience may be limited.”