Asia’s growing appeal

Asian markets are increasingly attracting LP attention. But where do investors see most opportunities in the region? And how are they allocating their capital?

The Asian private equity and venture capital market may be young relative to its US and European counterparts, but it is rapidly catching up. And while many LPs have allocated capital to GPs targeting the region’s different economies since the early days, the past few years have seen newer investors – both international and local – increasingly drawn to Asian private markets investments. So what’s driving their allocations to the region? And how are private markets opportunities opening up?

Perhaps unsurprisingly, given the size of the economy, the majority of LPs with Asian exposure have a heavy bias in the region towards China. The market represents 50% of StepStone’s Asian exposure across its clients in dollar terms, for example. “The Chinese private equity and venture capital markets have evolved a lot over the past 20 years,” says Weichou Su, Partner and Head of Asia at StepStone. “The rise of the RMB players changed the market. We have also since seen the huge success of Chinese venture capital, which has generated some very strong returns to investors. Private equity players, meanwhile, have learned some of the best practices globally and have upgraded their skills and operational capability.”

“China continues to be the most interesting market in Asia-Pacific,” says Alessandro Silvestro, Managing Director, Asia Pacific, Lemanik Asset Management. “The funds there are still doing extremely well. It was the first to recover from COVID and the country looks to be a real winner, notwithstanding the new common prosperity programme. If anything, this is likely to make investments in smaller businesses, start-ups and innovation more attractive.”

The recent regulatory announcements by the Chinese government aimed at curbing big technology are certainly giving some investors pause for thought, yet many remain positive over the longer term around China’s private markets potential. “The regulations raise a few fundamental questions around whether China’s policies have changed for private markets and whether the country still welcomes foreign capital,” says Su. “I think the answer to these is no, although transparency around the policy-making process is lacking.”

Beyond China

Yet China is far from the only attractive market for LPs in Asia currently. The variety of economies with different characteristics, levels of private markets maturities and strategies can help investors create highly diversified exposure across Asian countries. South Korean private equity and venture capital firms, for example, have seen a steady stream of LP capital over recent years: AUM for the two strategies in the country nearly doubled in the two years to December 2020, reaching a record US$113bn, according to Preqin. Of this, 41% is dedicated to buyout strategies, a high proportion relative to many other Asian markets.

“There is a strong bottom-up element in our portfolio construction,” says Brian Lim, Partner and Head of Asia and Emerging Markets at Pantheon. “But we also take account of different vehicles and geographies. China makes up a good proportion of our investment in Asia because there is a deep pool of talent that continues to deliver strong returns, but Asia has so many aspects that add up to more than the sum of its parts. There are some strong opportunities coming out of Japan, Australia, India and Korea, and we’re seeing interesting VC opportunities in Southeast Asia.”

Su agrees, saying that the continued development of markets is constantly adding new areas of potential. “We look at which geography is the best fit for each strategy,” he says. “We’re seeing venture capital in Southeast Asia, for example, become much more favourable than it was five years ago – there’s a much more mature ecosystem there.”

Secondaries on the rise

The deepening and maturing of Asian markets is also increasingly giving rise to investments beyond primary fund investments. Secondaries activity, while still much lower than in the US and Europe, is picking up: Asia-Pacific-based secondaries deal value in H1 2021 was up 226.5% on the same period in 2020, totalling US$3.16bn, according to Setter Capital figures.

“Our overarching priority in our Asian secondaries exposure is to capture the growth available here that we don’t see in the US or Europe,” explains Paul Newsome, Partner and Head of Investment Solutions at Unigestion. “That means in China, we’re looking at healthcare and domestic consumption, in India, we see a strong technology talent base for global markets and in Southeast Asia, late venture capital and early growth technology.”

There are also some deals that are very specific to certain Asian markets that are not available elsewhere – RMB funds in China, for example. “There is a lot of secondaries dealflow around RMB funds restructuring to US dollar funds,” says Newsome. “You do have to be very selective – we’re only doing a small fraction of the deals we see in this part of the market – but there are some very interesting portfolios.”

The type of secondaries deals available in many Asian markets have also moved quickly in step with developments in the US and Europe. “We’ve seen a surprising growth in GP-led deal volume in the region,” adds Newsome. “There is usually around a two to three-year lag on what’s happening in Western markets, but the GP-led deals have moved quickly up the curve. GP-leds are now the majority of secondary deals available at our end of the market.”

Yet there are some distinctions. “We’re seeing less of the single-asset deals that are currently so prevalent in the US,” he says. “In Asia, it’s largely multi-asset continuation funds and some side-car funds. But the LP-leds haven’t gone away – in fact, we’ll end up doing more of these in Asia than in Europe or the US in our current fund because there are some very attractive diversified portfolios where you can come in at a nice discount and where there is still growth to capture and good liquidity profiles.”

Deal partners

Co-investment activity is also robust. “In the first stages of COVID, things naturally slowed down a bit,” says Amit Sachdeva, Managing Director at AlpInvest Partners. “GPs focused on making sure their existing portfolios were well protected from the effects of the pandemic, but since then, activity has come back strongly, often driven by the pace at which COVID measures were implemented.”

Competition for co-investment is fierce, however, which can make it challenging for LPs to gain access to the deals they would like to complete. “Co-investments in China are quite common nowadays,” says Sharon Liang, Vice President of Siguler Guff & Company. “Chinese GPs are aware of LPs’ desire for quality deals so more sweeteners are offered at fundraising stage. Competition among LPs is definitely heating up, especially when it comes to those ‘jewel-in-the-crown’ portfolios, and it does require in-depth industry know-how and insights from LPs to form independent judgement and to pull the trigger swiftly.”

The Asian market is clearly on an upward trajectory, even despite some of the geopolitical and macro trends in evidence today. The variety of markets, increased experience of GPs and growing pool of different investment options are some of the major attractions. “Asia-Pacific is a rich tapestry of opportunity and risk,” says a Managing Director at a global asset manager. “That’s across and between regions and countries and beyond. Regulatory oversight or politics may affect or support factors such as entrepreneurial spirit and the growth focus in individual markets, and there are pockets of significant opportunity. It’s our job as investors to find them in in the right regions, the right sectors and with the right partners.”

This article was first published in the LP magazine.