Friday Letter: Asia's Fast Forward

One question private equity professionals are presently very fond of discussing is this: how far behind is the industry in Asia when compared to more mature markets. Five years? 10 years? Maybe 15 even?  

Granted, relative to North America and Europe, the Asian market is still small and immature. Sources suggest that around US$17.5 billion of institutional capital was raised last year for the whole of Asia – by far the largest such amount ever committed to the region, but still a fairly negligible figure if compared with the much larger pools of equity capital that are available in the West.

Nevertheless, one of the images most commonly conjured up in any discussion of where in the world the most compelling private equity opportunities exist right now is that of a rapidly closing gap between Asia and those more established markets. Never mind that the term ‘Asia’ is notably unhelpful when it comes to classifying and quantifying the potential that exists in the different parts of this vast continent – individual countries are simply too different from each other to think of them as a homogenous whole. But one thing that Japan’s gradual embrace of the buyout concept, Korea’s restructuring, the emergence of a mass consumer market in India and the economic explosion of China do have in common is the immense promise that the world’s private equity investors see in all of them – despite the fact that private equity has yet to define a permanent, well-understood role in any of them. 

This is why capital is in the process of migrating east. In the late 1990s, Europe witnessed the arrival of North American groups eager to help accelerate the establishment of private equity investment techniques on that continent – and to generate big profits in the process. Today, the same thing is happening in Asia – except that people and money are moving in from North America and Europe this time and arguably at a faster pace.

Inevitably this is causing concern among some. Speaking at a conference in Singapore this week, Chris Heine of major buyout investor CVC Asia suggested that in terms of financial infrastructure, Asia today is where Europe was eight years ago; looked at in terms of the competitive landscape however, as reflected by asset valuations, things felt more like they did in Europe only four years ago. Given the current abundance of liquidity, Heine said, the prospect of a proliferation of expensive, poorly structured deals was certainly a worry.

This is the old ‘too much money, too few deals’ dilemma that industry practitioners the world over are so familiar with. And amid the exuberance currently attached to all things Asian, it is indeed important to bear in mind that private equity as an asset class has yet to prove its merit and sustainability in the region. There simply needs to be more strong exits [not just some exceptional, stellar ones] to evidence the compelling nature of the entire private equity proposition – harvesting returns being the essential corollary to investing a fund’s capital.

On the other hand, there is the equally forceful argument that global demand for Asian assets is bound to increase further. Reminding delegates at the same conference of the progress that European private equity has made over the past ten years, Max Burger-Calderon, head of Apax Partners’ China operations in Hong Kong, suggested: “If you think things are expensive today, have another look five years from now.” In other words, now is as good as any a time to take calculated risks. Burger-Calderon went on to predict that in ten years’ time, private equity in Asia may well have outgrown private equity in Europe.

This may seem a rather bold prediction – but an intriguing one nevertheless. To buy into it requires faith in the broader notion that Asia’s long-term economic rise will continue unabated. And that of course is a proposition that many find credible. For example, according to data published last week by the Economist Intelligence Unit, China’s GDP is set to overtake America’s in 2020. Given private equity’s prominence in business and finance today, it is hard to imagine that the industry could somehow fail to flourish in Asia while its economies march on.

PS: Another key aspect of Asian private equity’s rapid maturation is the increased institutionalisation of the private equity firm in the region. That’s why sister publication Private Equity International is hosting the Asian Private Equity Partners Forum in Hong Kong later this month: it’s the only event that engages with the real issues facing these firms today. Click here for more details.