M&A is set to gain traction as global private equity players seek local tie-ups to expand in the region, tapping into a new capital base
Preqin predicts that private capital AUM will nearly double over the next five years, hitting $18.3tn by 2027. What trends do you see within that growth?
APAC should see an expedited increase in private capital allocation, as much of the world continues to face challenges, including recessionary fears, geopolitical tensions, high inflation, and interest rates. Although not immune, APAC could be less affected by those headwinds.
M&A will be one of the most interesting trends in APAC, particularly for global firms looking for partnerships, acquiring stakes, or acquiring local players to build their APAC presence. More international private equity groups are looking to expand in Asia through local tie-ups to succeed in the region's heterogeneous markets.
A major trend we're beginning to see gaining pace in APAC is firms diversifying their capital base towards more private investors and wealth platforms, sometimes referred to as the democratization of private assets. This has excellent potential as a valuable source of funding given the region's large and increasingly wealthy population.
What key challenges do private markets in APAC face?
From a recessionary perspective, historically the post-inflation environment is usually short lived. However, the private equity industry has been taking stock and modelling the risks, resulting in a slowdown in dealmaking and fundraising. This could, however, be positive for APAC if the macroenvironment in the US and Europe looks less attractive for investors targeting higher returns.
Within APAC though, China is a significant factor. Many investors have pressed pause on China while geopolitical tensions and Covid-19 restrictions persist, so dealmaking there is still difficult. There’re certainly investors still allocating in China, but we're seeing those with diversified offerings consider other markets like Japan, South Korea, or Southeast Asia.
What strategies do you see as having the best prospects?
With climate change as the greatest theme of the next generation, strategies in decarbonization, energy transformation, and renewables have been growing strongly. Several clients have launched such funds recently, and we expect the trend to continue.
Perhaps most noticeably, we're seeing firms focusing on quality assets. With capital getting more expensive for GPs and portfolio companies, there's a shift away from multiple expansions to growth and value creation. Firms are looking for good balance sheets and means to improve revenues and margins.
What challenges does Apex face when factoring ESG into its services? Do investors see ESG as a benefit or a burden?
With venture and growth stakes being more prevalent in Asia, the lack of a controlling stake makes it challenging for GPs to impart meaningful suggestions. Access to information in our emerging markets can also be tedious, as many companies have never produced such findings. Concerns about data quality have made investors pull back on improving standards in Asia.
Allocators and LPs see ESG as a benefit, as risk management and governance are intrinsically linked to sustainability. However, there is no harmonization of regulatory standards in Asia, such as the Sustainable Finance Disclosure Regulation ("SFDR") in Europe, which creates dislocations. Nevertheless, we're seeing more regional firms leaning towards global standards, and LPs' requirement for data and reporting on sustainability metrics increasing quickly.
About
Liam Woods is the Head of Sales for Apex Group in APAC. Apex Group is a leading private capital fund administration, corporate services, and financial services firm in the region with locations in China, Hong Kong, Singapore, Japan, Australia, New Zealand, and India.