Analysis

ROUNDTABLE

SPONSORS DEBEVOISE & PLIMPTON • EVERCORE • HAMILTON LANE • LGT CAPITAL PARTNERS • SHAWKWEI & PARTNERS

Worlds apart

The Asian private equity market was grappling with geopolitical rifts even prior to the introduction of global travel bans, yet there are reasons to be optimistic. Alex Lynn reports

t seemed likely in January that Asia at LGT Capital Partners. “And then it was destined for a troubled year went global pretty quickly.” relative to the western markets – a Private equity rainmakers have had dynamic that has been turned on to adapt to global travel bans that have its head in recent months. Several made the traditionally people-orient- countries in the region – notably ed fundraising process often entirely IChina – are now serving as bellweth- $29.1bn digital. ers of economic recovery for those still Capital dedicated to Asia-Pacific “We made a call quite early on that raised by private equity funds in grappling with various stages of lock- H1 2020 we didn’t think this was going to go down caused by the global coronavirus away any time soon and instead of wait- pandemic. ing for markets to normalise we were Yet it would be an overstatement to going to have to sort of pivot to being say Asia is enjoying business as usual. a specialist in virtual fundraising,” says Not only are these markets just start- $17.5bn Ian Bell, a partner at placement agent ing to understand the implications of Amount collected by pan-regional Evercore. the pandemic, but escalating geopo- giants MBK Partners, Baring Private “We’ve found after some initial iner- litical tensions also threaten to have a Equity Asia and CVC Capital Partners tia from LPs, generally people are em- in H1 2020 profound impact on regional private bracing this new virtual world. We’ve equity. even had an LP on the day before an In late August, five - IC meeting ask if we can take a current based executives gathered over Zoom photo of the GP’s team so they can say, to discuss how global and local trends 0.8x ‘These are the people we are investing are helping to shape the Asian markets. DPI generated by venture hundreds of millions of dollars with.’” “When this started back in January capital vintages between 2007-11, Fundraising in the first half of 2020 it seemed isolated to Asia, so our col- versus 1.35x for their US peers was barely impacted by the pandemic leagues in Europe and the US could as the bulk of money gathered reflect- not really relate to the issues we were ed efforts that preceded the crisis. Pri- facing,” says Doug Coulter, partner and vate equity funds collected $243 billion head of Asian private equity investments through June, $9.3 billion more than

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Mingchen Xia

Managing director and co-head of Asia investments, Hamilton Lane

Based in Hong Kong, Mingchen Xia has responsibility for primary and secondaries investments. Prior to joining Hamilton Lane in 2014, he was a senior fund manager at Tokio Marine Asset Management in Japan responsible for private equity fund investment globally.

Ian Bell

Managing director and head of private funds group in Asia-Pacific, Evercore

Prior to joining Evercore, Ian Bell spent eight years at in both its Hong Kong and Sydney offices.

Gavin Anderson

Partner, Debevoise & Plimpton

Based in Hong Kong, Gavin Anderson is a member of the firm’s investment funds and group, advising sponsors and investors on issues including fund formation, co- investment, fund restructurings and arrangements.

Doug Coulter

Partner and head Kyle Shaw of private equity for Asia-Pacific, LGT Founding partner and managing Capital Partners director, ShawKwei & Partners Doug Coulter joined Kyle Shaw founded ShawKwei the firm in 2007 and & Partners, an Asian and has more than 20 strategic firm, in years’ experience in 1999. Based in Hong Kong, he has private equity and more than 25 years of private equity . experience in Asia, including at Security Pacific National Bank.

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the equivalent period last year, accord- course, we have some concerns such says Gavin Anderson, a fund formation ing to PEI data. Of this, $29.1 billion as the geopolitical tension between US partner at Debevoise & Plimpton. was dedicated to Asia-Pacific, dwarfing and China in the short term, but fun- Less established firms, of which the $19.2 billion raised for Europe. damentally we still feel very confident.” there are a plethora in the more nas- “We feel more confident about The large sum raised for Asia re- cent emerging Asian markets, and Asia’s private equity market,” says flects an ongoing trend of capital flow- those who are not cycle-tested may suf- Mingchen Xia, co-head of Asia invest- ing to pan-regional giants, with MBK fer as a result. ments at Hamilton Lane. Partners, Baring Private Equity Asia “We’re generally cautious about “Generally speaking, Asian busi- and CVC Capital Partners collecting new relationships in this environment,” nesses are more driven by underlying more than $17 billion between them in Xia adds. “We’ve moved most of our growth and don’t use as much lever- the first half. The pandemic could ex- due diligence sessions online and for age, so I think long-term this market acerbate this dynamic. diligence work on the GPs we know will be more resilient. The handling “There’s been an acceleration of a very well or existing GPs it’s had less of covid-19, which was better relative trend that’s been there for a while, in of an impact because we have known to many other countries and regions, terms of a flight to quality or people these people for some time. If the man- plus the quicker economic recovery going to managers they’re comfort- agers have just started to raise Fund I in Asia has also given us comfort. Of able with in existing relationships,” or Fund II and we haven’t met them before, then we would take some more time to get to know the team.” Asia’s uncertain fundraising envi- ronment has prompted some creativity, Anderson adds. “Generally speaking, “We’ve done, for example, some separately managed accounts that have been set up specifically to take advan- Asian businesses tage of dislocations created by the cov- id situation in the debt space,” he says. “We’ve also seen interest in things like are more driven by annex funds and co-investment funds because people who maybe aren’t able to raise new capital as quickly as they underlying growth wanted to are trying to eke out the old fund as a result.”

Conscious decoupling and don’t use as much Pandemic aside, politics might also impact LP activity in Asia during the second half of 2020 and beyond. leverage, so I think US-China relations have deterio- rated to their lowest point in nearly 50 years, ’s ambassador to Wash- long-term this market ington Cui Tiankai told NBC News in August. The situation has prompted concerns in Asia that US investors will will be more resilient” face government and public pressure to reduce their exposure or allocations to MINGCHEN XIA Chinese private equity funds. Hamilton Lane This dynamic is already playing out in public markets: in May, US president Donald Trump ordered the Federal Retirement Thrift Investment Board, a government agency manag- ing $594 billion, not to back an index

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“We’ve done some separately managed accounts that have been set up specifically to take advantage of dislocations created by the covid situation in the debt space”

GAVIN ANDERSON Debevoise & Plimpton

containing Chinese stocks over nation- domestic STAR board have become more impacted by these headlines and al security concerns. In August, the US good IPO markets for Chinese tech it’s become a little bit harder.” State Department warned university companies, which have been proven in Endowments don’t appear fazed by endowments to divest from Chinese the last two years.” the recent public markets warning. stocks lest enhanced listing standards Tensions aren’t isolated to the US “I was recently on a Zoom call with spark a wave of de-listings from US and China; several other nations, in- a US university endowment that’s very exchanges. cluding Germany, the UK and Aus- interested in dialing up China exposure Technology has been at the heart of tralia, have also ramped up scrutiny of because they feel underexposed rela- much of this decoupling, with concerns Chinese investors in certain sectors. tive to the domestic market,” Coulter over Huawei’s ties to the Chinese gov- “There’s been a lot happening be- recalls. ernment and ByteDance’s use of con- side covid-19 in Asia this year that US institutions have been active sumer data both touchpoints. our LPs want to know about,” says participants in Chinese private equity. “For Chinese private equity funds, Kyle Shaw, founding partner of Asian Hong Kong-headquartered Boyu Cap- the technology decoupling can lead to mid-market firm ShawKwei & Part- ital and Beijing’s Primavera Capital, another wave of investment opportu- ners. “North American and Europe- DCP Capital and Centurium Capital, nities because Chinese companies will an LPs also want to speak to us about which raised four of the five-largest have to use local suppliers in terms of what’s happening in the geopolitical China-based funds last year, between hardware and software,” Xia says, not- arena regarding China.” them collected at least $540 million ing the dynamic is unlikely to impact Investor responses to these tensions from five US public plans, PEI data exits. are likely to be mixed. show. New York State Teachers’ Re- “For exits, Chinese entrepreneurs “I would say there’s probably a cor- tirement System was particularly bull- might be more thoughtful on the IPO relation between the sophistication of ish, committing $100 million to each market selection given US listing can the investor and the current willingness of the $3.4 billion Primavera Capital be under a stricter scrutiny going for- to stay the course,” Bell notes. “Larger Fund III and $2.5 billion DCP Capital ward, but we still see successful IPOs of institutions are generally continuing to Partners I. Chinese companies continue to happen deploy but for the private bank or high- “The first new GP relationship there. In addition, HKSE and Chinese net-worth channel it was perhaps a bit Evercore signed up post-lockdown has

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Protests: China’s proposed extradition law is prompting fears Hong Kong may lose its reputation as Asia’s pre- eminent asset management hub

Spotlight: Hong Kong in a way that frankly Hong Kong hasn’t had to, because it has natural advantages of being the gateway to China Last year’s Asia roundtable was held and the community of investment managers and service against a backdrop of social unrest in providers,” Anderson says. “It was the natural default Hong Kong, with protesters having taken choice, but Singapore has been eating some of Hong to the streets in opposition to China’s Kong’s lunch.” proposed extradition bill. Hong Kong’s new structure is intended to lure fund managers who were previously The situation in 2020 is much changed following using Cayman structures, which are now subject to Beijing’s introduction of the national security law in June economic substance requirements. criminalising acts of secession, subversion, terrorist activities “It’s maybe not quite as light-touch as Cayman – and collusion with a foreign country. The move has sparked you’ve got to appoint an auditor for example – but overall reports of a potential exodus of capital and talent overseas – it works,” Anderson says. “The question is whether they fears which may be unfounded. have done enough to move people away from Cayman “You couldn’t possibly move the financial services or Singapore to Hong Kong, and I think it will get sector of Hong Kong and all the people involved with some business. The big unknown actually is the carried it,” Coulter says. “There’s not enough housing stock interest.” or school spaces. From that perspective it’s a bit like Hong Kong’s consultation on carried interest tax was London post-Brexit; absolutely there are individual launched on 7 August and ended on 4 September. How decisions being made to move locations, but I think sweeping these changes are could prove key to the Special the general viewpoint would be London remains the Administrative Region’s appeal. financial capital of Europe.” “I’ve been living in Hong Kong for 30 years and it The law comes as Hong Kong pushes hard to was an excellent choice to come here in the first place,” consolidate its position as Asia’s pre-eminent asset Shaw adds. “There’s nothing wrong with Hong Kong, management hub. Measures included the launch of but if you’re going to initiate your career today, a new Limited Partnership Regime on 31 August or Singapore might be a better choice. In the future and assurances that it will become one of the most there will likely be fewer foreigners in Hong Kong, but competitive globally on carried interest taxation. there is still a great labour pool of local people here in “Singapore has for a long time, very aggressively and Hong Kong who we can rely on while expanding our very successfully, promoted itself as an investment hub capabilities in Singapore and Shanghai.”

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actually been with a Chinese GP, which exported to the US and created about equipment, maritime, oil and gas servic- I think is a little contrarian to what a 25 percent headroom for other coun- es and renewable energy sectors. The we’re hearing anecdotally from our tries to compete against China manu- firm was established in 1999 in Hong peers, who are de-emphasising China facturing,” Shaw says. Kong with offices in Singapore and because of all the covid issues as well “There are a number of US compa- Shanghai. as the broader US-China tensions,” nies that have been deeply entrenched “It’s not going to mean people leave Bell adds. in China, and they’re not necessarily China – they’ll still want to do business “Ultimately, Americans are capi- looking to divest and exit China, but in China – but they will not use China talists and will try to get the best re- they’re looking for an alternative. We as an exporter of products or services,” turns they can. Obviously an economy spent a good part of this year with Shaw adds. of China’s scale is still going to be a our portfolio companies working with “My prediction is that Singapore is source of huge amounts of growth and European and North American cus- going to have a renaissance of advanced opportunity.” tomers who wanted to move products manufacturing. The ability to put in from China down to South-East Asia, robotics, automation and data man- Indirect access whether it was because of tariffs rea- agement has basically neutralised low- Neighbouring Asian markets, par- sons or to protect their technology.” cost labour – what’s more important is ticularly those in South-East Asia, ShawKwei & Partners targets buy- precision, supply chain management, could benefit from escalating US-Sino outs and strategic growth capital invest- technology, knowhow, all of which Sin- tensions. ments in business-to-business compa- gapore has in abundance.” “The net effect of trade war tariffs nies across the precision engineering For investors, South-East Asia could raised the cost of Chinese products and manufacturing, automotive, medical represent an opportunity to access Chi- na’s growth prospects without the per- ceived risk associated with the market. “A couple of weeks ago, a large was talking to us about a separate account that’s more focused “[People aren’t going on South-East Asia because the very highest levels of that organisation don’t necessarily want to be putting addition- to] leave China – al money into China right now,” Coul- ter says. “They’re thinking South-East Asia is a way to tap into the same Chi- they’ll still want to do na growth story but in a more indirect fashion.” The pandemic and political tensions business in China – are also driving private equity appetites for India. “One of the things we think is in- teresting coming out of covid in places but they will not use like China and India is really the rise of local brands,” Coulter adds. “When you think about the rise of Indian China as an exporter brands, whether it be a beer company or a cosmetics brand, there’s a lot of po- tential there as consumers stick closer of products or services” to home. And because India’s consum- er sector has historically been quite un- KYLE SHAW derdeveloped, it’s an interesting oppor- ShawKwei & Partners tunity to help build very local Indian brands in a market that’s quite open.” Indian was identi- fied as a particularly attractive strategy, given the boost to technology during

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coronavirus. Debevoise & Plimpton India – funds historically have under- noting that Evercore has appointed completed a “very oversubscribed” whelming distributions relative to their three secondaries bankers in Asia dur- fundraise for an Indian venture capital US peers due to a predilection for mi- ing 2020. “We see it as an opportuni- fund post-covid, Anderson notes. nority investments, which can be hard- ty that has to eventuate, to be honest, However, generating new dealflow er to exit than majority positions. because there is a need for increasing can be a challenge during the pandemic. In emerging Asia, only 2007-vintag- distributions that the secondary market “There’s been some impact on deals es have distributed more than 100 per- can help to fulfill.” already in our pipeline going into covid cent of committed capital and just two Although the pandemic could ex- but the biggest challenge has been gen- vintage years since have distribution acerbate Asia’s exit problem, there are erating new dealflow since being una- to paid in capital greater than 60 per- reasons to be optimistic. ble to see people or see the operations cent, according to data from software “There does seem to be a lot of li- has slowed down our ability to assess provider eFront. By comparison, only quidity out here both for corporates the attractiveness of new investment 2014 and 2015-vintage Europe and US and financial sponsors and of course opportunities,” Shaw says. funds have distributed less than 60 per- the banks have money to lend against “Travel restrictions are now slowing cent of committed capital. transactions, so it’s really not a bad the overall brainstorming of creative “In emerging Asia, it’s a must that exit environment,” Shaw says. “In fact, ideas about what to do with a compa- they increase distributions,” Bell says, there’s strong appetite for the right ny that may not be an obvious fit with our investment strategy but with closer inspection may turn out to be an inter- esting new opportunity.” What’s more, investors are unlikely to forget that India has been badly hit “One of the by the pandemic. “We expect that India and South- East Asia will recover later than China, things we think is Japan or Korea in terms of managers fundraising because there is still some uncertainty around covid,” Xia adds. interesting coming “Generally speaking, our GPs in those markets are being cautious, so they are more focused on portfolio manage- out of covid in places ment and making sure the portfolio can navigate this tough time.”

Second opinion like China and With the pandemic likely to prompt heightened scrutiny of managers on the fundraising trail, the secondaries India is really the market could see an uptick in activi- ty from those seeking to bolster their distributions. rise of local brands” “We’ve seen a huge amount of in- terest particularly in continuation DOUG COULTER funds, which used to be a bit of a niche LGT Capital Partners thing,” Anderson says. “Now we’ve got all sorts of GPs looking at them and that’s been even more accelerated post-covid where the exit environment is a little difficult and you’re trying to show distributions.” Emerging Asia – classified as Great- er China, Indonesia, Singapore and

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notable trend has been the emergence of yuan-to-dollar fund restructurings by Chinese GPs. In Q1, direct secondaries specialist TR Capital backed one such restruc- turing involving seven assets managed by Beijing-headquartered Kinzon Capital in a deal worth around $100 million in , as reported by sister title Secondaries Investor. A similar deal was done in 2018 by Loy- al Valley Capital, Secondaries Investor reported, and another by the same GP in 2019. Such deals can allow Chinese GPs to approach international investors with a seeded, dollar-denominated fund, which could be perceived as less risky than a blind-pool investment. Yuan investors are also restricted from participating in initial public offerings outside China, creating an opportu- nity for secondaries investors to buy them out. “You might see it as part of an evo- lution of Chinese fund managers,” Anderson notes. “They might have raised RMB funds but at some point want access to a bigger pool of capital or a USD fund, and one of the ways to do that is to put some assets in a USD structure first and people can see what they’re buying.” Pricing, however, remains an un- Building the future: Singapore could see a renaissance of advanced manufacturing certainty. “We are focusing on both LP sec- ondaries and GP-led situations, and types of businesses outside of China relative basis to Europe and the US,” post covid, our dealflow has been the today from North America.” Coulter adds. strongest that it has ever been, per- China was the best-performing ven- “We think South-East Asia is a very haps because things have been delayed ture capital market in terms of TVPI interesting market, but quite honestly, and there are a lot of pent up deals,” in 2018, delivering 1.72x versus 1.63x it’s really hard to find very many GPs Coulter says. for US funds, according to eFront. that at a fund-level have been very suc- “We certainly do not see the dis- As of May, China vintages between cessful in putting a lot of DPI on the counts and distressed sellers that we 2007-11 had generated a 0.8x DPI, board. Not to say there haven’t been saw during the GFC with both vol- versus 1.35x for their US peers, CE- some really good exits coming out of ume and pricing having recovered PRES data show. Likewise, 2011-14 South-East Asia but the jury is still a very quickly. vintages have distributed 0.21x in Chi- little bit out on whether it can compete “Just like in the public markets, na and 0.69x in the US. in terms of DPI.” earnings guidance for 2020 in the pri- “Until the middle of 2019, Asia was Asian secondaries activity has vate markets right now is somewhat really coming into its own in terms of been growing in recent years as LPs uncertain, but given we are close to its distributions really increasing not become more accepting of previ- both PE managers and assets, we are just on an absolute basis, but also on a ously taboo fund solutions. One still able to underwrite deals.” ■

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