Looking forward: Asia in 2018

Asia private equity insiders expect larger pools of capital coming to market, growth in shadow capital and an increase in China technology deals.

The stars aligned for Asia-focused private equity firms in 2017, with strong exit activity, increasing levels of dry powder and more buyout opportunities in developed Asia.

Here are five predictions for the new year.

1. Shadow capital is here to stay

From sovereign wealth funds to family offices, more investors will engage in direct investments in 2018. LPs are getting savvier and deploying capital directly because of the cost advantage and the potential for higher returns.

A September report from UBS and Campden Wealth also revealed that global family offices plan to expand their co-investment efforts in the next year, driven by access to qualified prospects through trusted networks and a chance to collaborate with like-minded investors.

The Canadian pension funds and Singapore’s GIC and Temasek, as well as China Investment Corporation remain at the forefront of direct investing in the region.

2. Technology deals will pick up

Of huge interest to private equity firms in Asia is how disruptive technology is changing businesses and consumption patterns, especially in China. Technology as an investment theme will continue to attract huge amounts of capital in 2018 mostly in venture and growth capital.

Mingchen Xia, managing director at Hamilton Lane, expects the number of unicorns in China to keep growing next year in line with the trend in the US.

“We’ve observed the unicorns tend to stay private a longer time than before. These five to 10-year old companies traditionally would have listed by now but there’s so much capital raised from private markets. Private equity funds, venture funds, insurance companies and even government funds want exposure to these companies earlier and participate in financing. That’s a first in history.”

3. Corporate carve-outs will drive Japan and Korea dealflow

Private equity will only get bigger in Japan and Korea as underlying economic trends, corporate governance awareness and growing reception to the asset class boost dealflow.

Japan’s corporate governance code, which took effect in 2015, continues to push large conglomerates to think about how to increase returns and make core businesses more competitive. Meanwhile in Korea, the government’s view on chaebols, or family-run conglomerates, is steadily shifting. No longer is the government buying out big chaebols with taxpayers’ money; instead it is encouraging self-reform via a market-oriented approach, offering fresh investment opportunities for private equity.

4. Funds will get larger

Large funds getting larger will drive Asia fundraising statistics. The Asia market has been resilient through China’s economic slowdown, demonetisation in India and even political scandal in Korea. A lot of capital is being returned relative to money being drawn, resulting in new investors entering the asset class, such as North Asian insurers, Indian financial institutions and Chinese government-backed funds. Veteran LPs will also continue to increase relative allocations as they gravitate towards private equity’s promise of double-digit returns.

5. China buyouts will rise

China’s private equity market today offers a lot of potential in control buyout opportunities as the economy is transitioning from a planned to a market economy. It is also being transformed by disruptive technology, thereby forcing businesses to adopt to newer consumption patterns and technologies.

Doug Coulter, partner at LGT Capital Partners, noted: “The rise of more buyouts in China is a long-term trend that we like for 2018 and beyond. And these are growth buyouts with generally less leverage than the four to six turns you see in western markets.”

That provides more capacity for GPs to do dividend recaps down the road and also gives managers more flexibility, Coulter adds. “If economies turn and businesses don’t grow as strongly as expected, obviously having less bank debt is better than more.”