Grant Thornton: Asian Private Equity Funds Capitalize on “Belt and Road” Initiative

Grant Thornton’s latest Asia Private Equity Insight 2017 (The “Insight”) finds that Asian private equity (“PE”) firms are cautiously optimistic about the PE market across the region for 2017 in spite of the prevailing market uncertainty and the measureable downturn in M&A activities. While the expected interest rate hikes by the U.S. Federal Reserve will likely to exert downward pressure on property price, the safe haven appeal of the real estate funds continues to underpin demand amid volatile economic conditions. In addition to macroeconomic headwinds, Chinese investors are facing the challenges of China’s tightened restrictions on outbound acquisitions and the West’s possible barriers to curb Chinese investment. Still, there is a bright spot – PE firms have been increasingly tapping into the countries along the “Belt and Road” initiative to explore the tremendous potential of the emerging markets.

“Belt and Road” countries become new hot spot

The “Belt and Road” initiative encompasses 65 economies across Asia, Europe and Africa which collectively include some 4.4 billion people with an aggregate economic value of US$21 trillion. Against such a backdrop, emerging markets along the “Belt and Road” initiative are likely to play an instrumental role because of their attractive demographics and rapid urbanization.

In search for higher financial returns beyond developed economies, PE firms, sovereign wealth funds, insurance companies and international pension funds have also thrown in on the “Belt and Road” projects. Barry Tong, advisory partner, said, “Emerging markets like Cambodia and Myanmar are gaining prominence as target destinations for PE funds, with investor interests seen in infrastructure projects and telecom sector. While investment opportunities in emerging markets can be very attractive, a solid due diligence is very important as the developing countries usually have a lower quality of financial information and corporate governance, less transparent regulatory processes and frequent off-balance sheet transactions and understated liabilities. We recommend the investors to get familiar with local customs, operational and political risks, tax risks, as well as currency risks.”

Technology sector shines amidst a challenging backdrop

In 2016, the PE environment in Asia was no doubt affected by the stalled global economy, caused by multiple factors from around the world. In the first 11 months of 2016, in terms of M&A activities in the region, deal value fell from US$758.2 billion to US$594.7 billion, while the number of deals declined from 3,371 to 3,191 compared to the same 11-month period in the previous year. Yet, buyout and exit volumes across the Asia Pacific region edged up slightly.

According to the statistics1, the technology sector dominated the M&A deals in Asia in 2016, mainly attributable to China’s ongoing transformation to a more consumption and technology driven economy. The National Bureau of Statistics of China also found that the country’s retail sales has grown by 9.6%, while online sales boomed, surging 26.2% year on year to reach 5.16 trillion yuan. Both the energy, mining and utilities sector and the financial sector saw a significant fall in terms of M&A value over the past 12 months. Stepping into 2017, with the Chinese government’s adoption of a policy aiming at abating capital outflow, the market anticipates an upturn in domestic M&A activities in the TMT (technology, media and telecommunications) and environmental sectors. Moreover, sectors such as pharmaceuticals, medical and biotechnology and environmental protection sectors will also fare well against the backdrop of aging population and rising environmental awareness in China.

Enhancing asset value through differentiation and innovation

Faced with ongoing turbulence in the world economy, as well as increasing fierce competition from sovereign funds and insurance companies, PE firms must strive to enhance their abilities in key areas such as operations, technology etc. and begin pursuing innovative specialisation strategies in fields such as industry expertise, operational focus and market segmentation to enhance their market positions.

Mr. Tong continued, “Innovative practices are proven to maximise the effectiveness of acquisition strategies. Such measures are also likely to reveal previously hidden opportunities for performance enhancement and drive value creation. Ultimately, innovation is the engine that empowers far-sighted organisations to transform brilliant ideas into sizeable returns.”

Secondary buyout exit strategy favoured as market volatility hinders IPOs

Trade sales were ranked the top PE exit strategy from 2012 to 2016 and accounted for over 50% of all exits during that period. However, the secondary buyout exit strategy has picked up across Asia and around the world in 2016, and is likely to continue its upward trend in 2017 as more traditional strategies, such as IPOs, has become less attractive due to public market volatility and stricter regulatory measures.

Mr. Tong said, “High purchase price multiples, growing global political and economic uncertainties and intensified competition from sovereign funds and insurance companies have caused PE-backed deal volumes to decline globally. The lack of worthwhile deals is also the main reason why excessive capital, or ‘dry powder’, has been kept by the PE funds in the market.”

Mr. Tong concludes with his view on the prospect of the PE sector, “Despite such an uncertain and challenging macro-environment, the outlook for Asia’s PE market remains cautiously optimistic. Ideally placed to benefit from the ‘Belt and Road’ related infrastructure opportunities, we foresee that investors looking to absorb external capital for their projects will continue to converge in Hong Kong in large numbers. We are also confident that emerging markets in Asia have great potential for growth, especially in the TMT and environmental sectors. The commencement of the Shenzhen-Hong Kong Stock Connect in late 2016 has inevitably enhanced Hong Kong’s position as a global offshore Renminbi business hub. Moreover, encouraging progress by the Mutual Recognition of Funds arrangement between Hong Kong and mainland China will also expand the distribution network of Hong Kong’s fund industry and pave the way for the territory’s emergence as a fully-fledged fund-service centre. Although 2017 might be a challenging year, we believe that Hong Kong and mainland-based PE firms are well-positioned to seize opportunities amidst uncertainty and generate favourable returns.”

Please visit our Asia Private Equity page for more information.


1 Mergermarket report on global M&A activity (Jan 2017)