A Conversation on the State of Private Markets in Asia

What does the current private markets landscape in Asia look like, particularly on the GP side? 

I’ll divide this into the developed Asian markets and developing Asian markets. In the more mature countries in North Asia, it is all about buyouts, particularly in the case of succession where an entrepreneur has reached the age of 60 or 70 and many of their kids have been educated abroad or don't really want anything to do with the business. There is also a very punitive estate tax regime in North Asia where, if you pass a business down, it's taxed 50% as opposed to if you were to cash out a business to private equity before being charged at a more amicably lower capital gain tax. 

So, we do see a lot of funds of successions and conglomerates simply just as a function of the maturity and status of the markets. In our minds, the private markets managers are differentiated by their access and network. The GPs need to be very plugged in to this local market, particularly if they want to capture the outsized growth verticals such as healthcare and some specific consumer sectors. The GPs also need to develop much deeper playbooks for operating a first-time, institutionally owned asset. 

In China, outside of the macroeconomic progress, overseas listings continue to be very challenging and risky, while domestic, or what we call Asia markets, is really picking up. Shanghai and Shenzhen Stock Exchanges are essentially sucking up the activities on the Nasdaq and Hong Kong listings. It is actually a record year in terms of IPO activities on the onshore markets; however, with that said, we will likely see more controlled opportunities and exits. Similar to the market maturity throughout the countries where IPO markets trade, sales and secondaries are all on the table in terms of providing liquidity, I think we are entering the phase where all three of these exit outlooks are becoming more prevalent in China. It's no longer just an IPO story or growth equity thesis, so we need to be more flexible. We need to find a way to take advantage of the onshore listing or find GPs with which to partner. 

When it comes to China, we really focus on the fundamentals. At the same time, the beta of the observed PE return is about 0.4, which means that PE returns decrease less when there's a sell-off in the public markets (which certainly has occurred in China) and they don't rebound as quickly if and when there's a recovery. 

Q3 2023 Fair Market Value Estimates

More importantly, the relative performance per market increases in the periods where the public markets have struggled. For example, the 2009 to 2016 cycles in China were followed by some of the strongest performing vintages.  

South Asia, Indonesia, Vietnam and the Philippines, which have GDP per capita hovering around $4,000 to $5,000 per capita, are at an inflection point of growth. As a result, these markets are comprised of mostly venture and growth equity, although exits in the domestic markets are hit-or-miss given the depth of the capital markets in those countries.  

In India, there's a lot of similarity in terms of macro undertones and the secular tailwinds, but otherwise it's also mostly comprised of venture and growth equity markets. Although in the case of India, the capital market has outperformed and we have seen more successive exits in its own domestic markets. 

Index Outperformance in India

PE/VC Exit Value in India ($B)

Asia accounts for close to 50% of global GDP, which is still shy of 10% of global private markets exposure. When you layer in the GDP growth rates, you'd certainly expect this market to grow pretty quickly over the coming years.

It is actually one of the things that many of our existing investors and prospects in Asia are asking us. Let's take the most sophisticated LPs in the world. Asia, as a contribution to the overall private markets exposure, is nowhere close to the GDP numbers. We’ve actually seen a lot of inbound interest from Asian investors or non-Asian investors essentially trying to “time the markets,” which is what we advise our clients and investors not to do, as it's more of a longer-term journey as opposed to an opportunistic one. Nevertheless, I think there's a lot of attention that has been drawn to this region centered around the story of growth and demographic trends where many of our investors and prospects think they have a chance to tap into this market, but it's extremely complex and diverse. 

The global deal-making environment showed signs of improvements when we emerged from the pandemic. It was a very active market. Fundraising has proven to be a bit more challenging, though, particularly in 2022. Is it any different in Asia? What are the implications for GPs?

I think fundraising remains challenging in general. I believe there are a couple implications for GPs, the first one being strategy. Venture and growth, especially the more recent vintages, experienced a more meaningful drop in terms of performance. The performance of our more mature growth funds, however, are generally still tracking close to or above 20% net IRR. For buyout, it is all about contribution pacing and how much dry powder is left to take advantage of the current prices.  

In terms of deal making, GPs are exercising caution, and we should see an uptick when it comes to interactions, possibly through discussions in continuation vehicles or co-investments. Similarly, GPs are actively and eagerly managing distribution and exposure, and possibly remaining in the market for a little bit longer.  

We certainly believe that the current market environment does present some pretty attractive opportunities and risk-adjusted returns in secondaries, private credit and infrastructure. Is the same thing playing out in Asia?

I think, in secondaries, many of the macro trends that are playing out globally, such as the denominator effect, the overabundance of deal flow and GP-leds/LP-leds are playing out in Asia. There are only a handful of secondary players, us included, that are spending enough time familiarizing themselves with the GPs and, more importantly, tracking assets in the regions.  

Let's take China, for example. Today, the whole secondary market in China is only 1/7 of the world. We certainly expect that figure to pick up. Because of that, we opened a Shanghai office recently.  

In the credit market, China represents ~1/3 of the world’s GDP and 50-60% of the total growth. Today, private markets in Asia only account for 7% of the global private credit universe. I think some of the impediments to growth have historically been the risk-adjusted returns, with investors pursuing a much higher level of risk in the Asia markets. The performance has been mixed. However, for markets such as Australia, Singapore and Korea that are more creditor-friendly, we are certainly seeing better deals and more friendly terms coming to market, particularly in our pipelines, when historically those have been more bank intermediated. So, as a result we are seeing a handful of equity GPs building out their credit solutions to allow for more flexible deployment of capital across the capital structures ranging from senior secure to venture credits. 

We've also seen global credit managers opening offices in Asia over the last few months, which further expands the opportunity set. The one thing that might be a bit different than our global market view is buyouts. We have always believed that buyouts are an all-weather strategy because of the control and optionality available around their exits. Much of the universe for value creation, either in consolidations or cost takeouts, simply does not depend on market conditions. As such, it really provides more favorable conditions for buyouts as valuations come down, more sellers become willing to sell their control, and the shift of the economy moves from high growth to quality growth. We’re seeing this firsthand in China, Japan and Korea. 

How should investors think about private markets performance in Asia relative to their Western counterparts and Asian public markets?

Just given the size of the economic block, Asia cannot be ignored. I think that's pretty clear. If you look at the historical data or the observable private equity metrics that we've been tracking in the last 10-15 years, across all vintages, private markets in Asia continue to outperform that of public markets. 

Private Markets vs. Public Markets Performance in Asia End-to-End Pooled Net Internal Rate of Return

So, private equity is still the best alternative when it comes to accessing economic growth and demographic trends, particularly when it comes to lifestyle upgrades, consumption upgrades or even business outsourcing trends in Asia.  

Number two is a combination of the players, the thesis and the vintages – even geography and sector. These five selection criteria are ever-changing. They are changing and evolving as we speak. Active portfolio management is paramount. Your ability to observe the dynamic when it comes to macro indications, fundamental growth and demographic trends, as well as the ability to tap into this very robustly growing market is essentially the premium that you have to pay to get into this vibrant region of the world that's so heavily world centric. 

We like the fact that it is very diverse, very heterogeneous and very complex. A winning formula in Malaysia may not necessarily transfer to its neighboring state of Singapore. So, all of that complexity means that access is paramount. We have been building our presence in Asia from the ground up to now six offices in the region and 40 different professionals with local knowledge and networks.* That is something that we are really excited about. Selection is paramount, as I said, but selection is a moot point when you don't have that deal flow to choose from. And our deal flow has seen record levels. We've also seen plenty of general partners who are revolutionizing and reinventing themselves when it comes to operational knowledge and access to local markets. They are also are coming back to the market with reasonable success. We are still seeing one-and-done fundraising in Asia. I know that is rare in general, certainly in the U.S., but we are seeing it. And that is a pretty positive sign. 

^{*As of June 30, 2023}