Private equity in Asia: is the East living up to its promise?

31 March 2020
Otto von Domingo, Head of Commercial, South East Asia, and Albert Ming, Head of Alternative Assets, North Asia, discuss the state of play across the region and the findings of the Vistra private equity study

In Vistra’s recent research study ‘Private Equity: Where Challenges Meet Opportunities’, there were some notable differences in responses depending on where participants were based. This was particularly true when it came to Asia, which arguably has the broadest spread in terms of emerging versus established markets.


Here, Otto von Domingo and Albert Ming put some of the survey findings into context.


What would you say is the general health of the private equity industry in Asia right now?

Otto von Domingo: It’s always worth noting that Asia as a whole is very disparate, with some countries far more established than others with regard to PE. But it is a region that is growing in significance. According to the latest figures from Preqin, Asia-Pacific now accounts for a quarter of the global PE market.

From a South East Asian perspective, PE investment has been growing, albeit at a modest rate compared to China which has contributed significantly to the growth of PE in Asia. Latest figures show that in 2019, PE investment value in South East Asia was up 19% on the average for 2014-2018, but down 9% on 2018 alone which, like for most of Asia, was a very strong year.

This general growth is mainly driven by large global buyout firms with a pan-Asian strategy deploying a significant proportion of their PE allocation to South East Asia.

What we have seen in the last 24 months or so, however, is a bifurcation of the industry – large PE players have continued to be successful in raising billion-dollar funds while mid-market PE players with regional or country-focused strategies find fund raising challenging. This has resulted in a massive delay in fund launches while some have been unable to raise new funds.

There are two reasons for this – either their current fund hasn’t performed as well as the big PE players or they haven’t demonstrated a strong exit for investors to re-up their commitments. This is why most global allocators from the US and Europe allocate to Asian funds managed by large global GPs such as KKR, Carlyle, Apollo and TPG.

Having said that, venture capital (VC) investments in South East Asia have grown significantly, particularly in Indonesia, Singapore and Vietnam. This is largely driven by start-up tech companies operating locally that have grown to ‘unicorn’ status (>US$1bn valuation) such as Grab, Go-Jek and Tokopedia. This has created a vibrant start-up ecosystem in the region.


Albert Ming: While PE investment in mainland China fell significantly in 2019 – down 38% on 2018 – the country has been the hotbed of ‘new economy’ venture opportunities over the last 10 years. Recent IPOs such as NIO, Xiaomi and Meituan-DianPing are just a few examples of such rapid innovation taking place.

The number of unicorns out of China alone is now second only to the US and represents 25% of the global total. ByteDance, famously known for TikTok, is now the world’s largest unicorn with a $75bn valuation. Needless to say, these developments have had significant implications for the PEVC industry in terms of GPs and LPs capitalising on the size and scale of this growth.

Additionally, alternative investments have become more mainstream in Asia and sought after by family offices and the high-net-worth (HNW) and ultra-high-net-worth (UHNW) segment. As a result, intermediaries such as private banks have seen a surge in HNW flows into private markets.

Unfortunately, the biggest challenge over the last year has been the US trade war with China. Political overtones have cast a pall over Chinese investments worldwide and heightened scrutiny over technology-related deals.

On the brighter side, structural reforms in China are increasingly favourable for FDI and the country still represents a high-growth opportunity for investors looking to leverage attractive demographics.


In the Vistra research study, co-investment was one of the trends that respondents said are shaping the industry. Does that reflect your experience?

OvD: This is especially true in South East Asia. The rise of co-investments is a notable trend we have seen in the past few years, and is primarily driven by large LPs wanting to participate in direct deals in a cost-effective way, rather than sourcing deals themselves; and for GPs who want to participate in larger transactions and build stronger relationships with their LPs.

AM: Access to exclusive direct co-investment deals has always been an incentive to encourage LP participation in larger funds. These structures are more focused, cost effective and tailored to LPs with specific strategies in mind. Family offices in Asia have also been increasingly keen to participate co-investment opportunities for the same reasons. 


In our study, a global average of 59% felt that market trends were making investors more cautious, yet this figure was only 49% in Asia. Do you get a sense that Asian investors are more optimistic than in other regions?

AM: Although there have been concerns over late-cycle indicators, most Asian investors have tended to deploy capital in their home markets due to both familiarity and, more importantly, an optimistic long-term view of the higher growth opportunities within the region. China’s ‘new economy’ continues to attract and represent a compelling proposition for PEVC investments across industries ranging from healthcare and e-commerce to Big Data and AI.

OvD: I think there’s a sense that LPs in Asia are maturing, therefore their appetite to risk can be managed more effectively. This maturity aligned with quality data and developed partnerships are what is steering them to do more deals coupled with a strong appetite and openness from other regions such as the US and Europe to attract and bring Asian money.


Increasing demand for information was seen by 71% of respondents as the largest trend affecting investor behaviour – what sort of data and information demands are you seeing from clients in Asia?

OvD: When it comes to transparency, I think Asia lags behind developed markets such as the US and Europe. This is one of the biggest reasons why global allocators haven’t been pouring significant allocation into Asia. Data quality is improving, however, especially from China where information is key in unlocking value. Managers are participating more in providing information to data providers such as Preqin, but data collection remains challenging.


AM: As Otto says, the quality of data is improving quickly, but the lack of transparency across firms in China has presented challenges for investors. This is most evident in China where a majority of GPs are less institutionalised and still rely heavily on their own back office administration. Many offer little transparency on fund information as well as past performance data.

Having said that, larger and fast-growing firms, especially those that are seeking high-quality institutional investors, have been increasingly acknowledging and embracing better governance by outsourcing their administrative functions to reputable service providers like Vistra.

Are there any other particular challenges that regulation and transparency are posing in Asia?

OvD: In South East Asia, availability of data and quality of data is definitely a challenge particularly when operating in frontier markets. Cost of compliance due to frequent regulatory changes continues to be a major concern. For instance, the recent Private Funds Bill and economic substance requirements in the Cayman Islands, where most Asian funds are domiciled, are creating uncertainty amongst GPs.


Across GPs surveyed, an average 72% currently outsource one or more functions to a third-party service provider, but the figure for Asia is lower at 64%. Why might Asia be less keen on outsourcing?

AM: We’ve seen many small to medium-sized firms in Greater China rely on their own administration for two reasons – low cost of labour and concerns over control of their data. However, as GPs increase in size and sophistication, they also realise that complete or ‘bundled’ solutions provided by fund administrators with best-in-class technology such as Vistra may offer significant economies of scale especially when accessing niche enterprise applications.


When it comes to emerging markets, Asian respondents favoured Mexico and Brazil combined, followed by India, with China in third – does this indicate a desire to invest outside of the region?

OvD: Yes, there is definitely a strong interest in investing outside of Asia. We see a couple of reasons behind this. Firstly, for diversification purposes – investors have already captured a large market in Asia therefore they need to de-risk their portfolios. And secondly because they want exposure to assets that are a bit more mature, for instance in infrastructure, which fits their risk profile.  

AM: While diversification may be one element, Asian investors are also driven by where they can find the best opportunity on a relative value basis. Anecdotally speaking, ‘sought after’ deals in China are known to be competitively priced and difficult to get as they aren’t short on funding.

Finally, are there any developments that you think will boost the PE market in Asia?

OvD: It’s worth noting the introduction of the Variable Capital Company (VCC) earlier this year. This is the new fund structure which, in our view, will catapult Singapore as a major fund centre in Asia. Vistra is one of the few service providers that will service the first VCC funds in Singapore. Given this exposure, we would be able to offer our expert guidance to GPs that are considering using the VCC.

In addition to that, the Hong Kong Government recently proposed the introduction of a tax concession for carried interest. This “game changer” will make the city a highly competitive private equity hub.

AM: There is no doubt that we live in challenging times right now, but with regard to the long-term, private equity still provides considerable investment opportunities, and Asia is a particularly fascinating region to observe and be part of.


The full report Private Equity: Where Challenges Meet Opportunities can be viewed here