What to expect from Asian private equity in 2021

Vietnam, continuation funds and Chinese IPOs will be on the menu for Asian private equity this year.

Asia’s private equity markets proved something of a bellwether for global recovery in 2020; industry participants in countries yet to emerge from the covid-19 crisis will be watching the region with interest as we enter 2021.

Here are three private equity trends to watch out for in the coming year.

A good morning for Vietnam

If travel restrictions ease across Asia, deal activity in Vietnam could skyrocket.

Private equity and venture capital firms have developed their appetites for Vietnam, deploying $1.8 billion across 139 deals in the country between 2017 and 2019, compared with $1.1 billion invested across 71 transactions in the preceding three years.

Pan-regional firms are particularly bullish. KKR has identified the country as one of its top priorities in Asia and led a consortium that acquired a minority stake in Vietnamese real estate developer Vinhomes for $650 million in June. Warburg Pincus made three investments there in 2018 and SoftBank’s Vision Fund completed its first Vietnamese transaction in 2019.

Others are interested. PAG, one of Asia’s largest homegrown firms, is among those keen to get involved. Chief executive and group chairman Weijian Shan told Private Equity International in November last year that its lack of activity there to-date is not for want of trying.

“We focus mostly on buyouts, control investments, and in Vietnam to get a buyout is rather difficult,” he said. “I think it’s a very attractive market because it’s growing, including [in 2020]; it has 90 million people; and it reminds you of China 20 years ago.”

Vietnam’s appeal is driven by increased foreign investment amid the US-China trade war, which in turn looks set to boost wealth among the already burgeoning consumer class.

Local firms have enjoyed some respite from this regional feeding frenzy while the country has been closed to outside visitors, as PEI reported in its emerging markets special last year. This pent-up demand could spark a wave of dealmaking once those with a presence elsewhere in Asia are permitted to return.

GPs get inventive with fund structures

The relative isolation and nascency of some Asian GPs, versus those in more established markets such as the US and Europe, could lead to some innovation around fund structures in 2021.

“In the event travel doesn’t actually open up next year, that’s going to pose a major problem for many GPs,” Vince Ng, a Hong Kong-based partner at placement agent Atlantic-Pacific Capital, told PEI.

“A derivative of that would be Asian GPs that are already out of capital or soon to be, would need to seriously think about what they do in that scenario. We’re already seeing a lot of groups looking at continuation funds and single asset, deal-by-deal, vehicles, which would probably become even more pronounced next year.”

GP-leds became a familiar sight in Asia last year. LGT Capital Partners is lead investor on a GP-led process involving Temasek venture capital subsidiary Vertex Holdings and its continuation vehicle, Vertex Legacy Fund, sister title Secondaries Investor reported in December. Asian buyout firm The Longreach Group tapped PJT Park Hill last year to lift Taiwan’s Entie Commercial Bank out of its 2006-vintage fund into a continuation vehicle backed by secondaries capital.

“To avoid giving a negative signal to the markets, some GPs would rather not do a continuation fund and focus on doing a traditional fundraising, but certain conditions would need to have been met in order to make that viable,” Ng added. “One example is under the LPA they’d probably need request a longer fundraising horizon, say a year-and-a-half to two years, rather than the usual one-year period.”

More exits through the list shop

Private equity firms in Asia-Pacific could opt for more exits via an initial public offering in China or Hong Kong as the US becomes less hospitable towards Chinese businesses.

The Holding Foreign Companies Accountable Act, which passed the US senate last year, will require listed companies to disclose information proving they are not owned or controlled by a foreign government or face delisting – a requirement potentially at odds with China’s restrictions on overseas access to company records.

Scrutiny has been driven in part by specific instances of questionable bookkeeping. US-listed Luckin Coffee, one of Chinese private equity’s banner success stories, was delisted last year following an accounting scandal relating to alleged fraudulent revenue figures. TAL Education, another US-listed Chinese company, probed for sales fraud and others have been accused of similar issues.

Last August, the US State Department warned university endowments to consider divesting Chinese stocks lest these enhanced standards spark a wave of delistings from US exchanges.

Carlyle Group – which has pedigree listing Chinese companies in the US – is among those anticipating more listings in China and Hong Kong.

“If you have a company that doesn’t have the proper track record but has the momentum and concept that people believe in, the US market is sometimes still the preferred market, but Hong Kong is increasingly becoming a major market,” Carlyle Asia’s chairman and managing director Yang Xiang-Dong told PEI in November.

“A couple of companies are going to list here that maybe a few years ago would have chosen to list in the US, and I believe [in the] next five years there’s going to be more listings in China.”