Annual Review 2015: Asia's rising spenders, falling market

    Nowhere was the Asian appetite for consumer brands and goods more obvious than in the giant Chinese marketplace last year.

    Derek Sulger, partner at China-focused firm Lunar Capital, told Private Equity International in December that the best opportunities would continue to emerge in Chinese consumer businesses with strong established brands and products that represent compelling value.

    “We foresee quality of life issues driving Chinese consumer behaviour moving forward, and very strong growth for mass market premium products,” he said.

    Myron Zhu, co-head of private equity Asia at Aberdeen Asset Management, drove home the point. “The Chinese want to upgrade their lifestyle, eat better and live well,” he told PEI.

    China has more than 1.4 billion people to feed, clothe and house, and state planners hope they will help re-orientate the economy from exports to consumption. The consumer economy will account for 60 percent of China’s gross domestic product by 2020, according to US research firm International Data Corporation.

    “Private equity is about shopping around and finding the right opportunity,” Peggy Wang, Hong Kong-based White & Case partner and head of Asia private equity, told PEI in December. “When you are looking at sectors, [especially China] what you are looking at is anything consumer – whether it’s education, healthcare or food. We are talking about the basics now, feeding your family, educating your children, putting shelter above their head.”

    However, 2015, was not without its ups and downs, notably the waves of volatility on the Chinese stock market which sent local and global bourses on a rollercoaster ride.

    But the news was not all bad. “Public markets hurting tends to benefit private equity in the mid- to long-term,” Hamilton Lane managing director for Asia Juan Delgado-Moreira told PEI in October.

    Rather than short-term public market shudders, the over-riding investor concern across the region focused on the long-term implications of slowing Chinese growth.

    Delgado-Moreira said that the fund of funds manager was keeping a watchful eye on the impact on portfolio companies. “We are talking to our managers closely about what they see in the earnings of their portfolio companies. It is too early to tell, but the main way private equity will be affected is [through] a slowdown in growth rates.”

    The International Monetary Fund projected a slowdown from 6.8 percent growth in 2015 to 6.3 percent this year – much lower than envisaged at the start of 2015.


    While high volatility meant that the pace of investment and fundraising would be slower, Delgado-Moreira expected that if there was any resilience, there might be some buying opportunities, particularly in the consumer-facing sectors.

    Several heavyweight investors appeared to agree. In December, the Canadian Pension Plan Investment Board (CPPIB) invested about $500 million in the Postal Savings Bank of China alongside JPMorgan, DBS Group, UBS group, Temasek Holdings, the International Finance Corporation and state-owned enterprises China Life and China Telecom.

    The bank is the largest in China by customer base with more than 400 million retail customers and 40,000 branches across China.

    “China is an important market for a long-term investor like CPPIB and we view this investment as a great opportunity to work alongside a highly respected financial institution to participate in the future growth and rising consumption patterns of the Chinese population,” said CPPIB president Mark Wiseman.

    However, regulatory restrictions continued to pose a challenge for any international private equity investor in China. Some sectors remained off-limits to foreign investors and required finding alternative ways to make those deals possible.

    “Certain types of financial services companies remain difficult to invest in and in certain industries you need a Variable Interest Entity structure to get around regulatory hurdles,” Xuong Liu, managing director at Alvarez & Marsal’s Transaction Advisory Group in Shanghai told PEI. “The fact that you can only hold contractual rights instead of direct ownership over Chinese companies remains a challenge.”

    Asia-Pacific LPs will become the most active players in the secondaries market in the next two years, according to a survey by secondaries house Coller Capital, published in June.

    The poll of 113 private equity investors globally found 59 percent of LPs expected to buy assets in the region, with 50 percent saying they expected to sell assets there. China and India, in particular, have been identified as markets offering the greatest opportunities in part due to a tough exit environment in recent years.

    A report published in March by Houlihan Lokey and Mergermarket said the closing of China’s A-Share IPO market had left fund managers with one less exit option. Participants in the region say investing in secondaries there is not straightforward. Local knowledge and a local office are important if you want to take advantage of the right opportunities.

    “You really need to do a lot of work on the ground to not only source your deals but to analyse them properly and close them properly,” says Frederic Azemard, a partner at Hong Kong secondaries firm TR Capital. “Deal size here is growing, volume is growing, but you need to be equipped quite well to be able to do them, and for sure you need to be local.”

    Asia can present other challenges as well. A limited partner in Europe or North America who has never invested in somewhere like China before may give up or have second thoughts if fund managers can’t allay their fears.

    “You wind up with an investor who is more likely to sell because they lose faith,” says Justin Pollack, managing director in the private funds group at PineBridge Investments in New York, which also has offices in six Asia-Pacific locations. That might not be a reflection of the manager, but because investors lose confidence when they can’t see their investments on a regular basis, he adds.

    Month: March
    Year: 2016

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