Grant Thornton’s latest Asia Private Equity Insights 2020 finds that cautious sentiment prevails in the Asian private equity (“PE”) industry for 2020 amid rising economic and geopolitical uncertainties alongside slower global economic growth. The outbreak of novel coronavirus hit China hard, bringing economic activities in the world’s second-largest economy to a near standstill and spreading the knock-on effects across the globe. Nevertheless, the Chinese government has adopted an open attitude to welcome foreign investments by allowing the operations of foreign-controlled or wholly foreign-owned business in more sectors. Other Southeast Asian countries including Thailand and Vietnam, which serve as alternatives or additions to the current Chinese market, are also becoming increasingly attractive to PE firms in recent years.

The outbreak of novel coronavirus creates opportunities for new economy companies and healthcare sector

While the outbreak of the novel coronavirus could dampen economic growth in China and hamper fundraising activities in the short run, the unprecedented lockdown in the country is contributing to a change in consumption habit. As millions of people are staying home to combat virus, presenting a phenomenal opportunity for new economy companies including online medical consultation, online entertainment, online grocery shopping services and online education providers to acquire new users and boost their market penetration rates, thereby possibly helping shorten the investment cycle of PE investors.

Demand for healthcare services and pharmaceuticals also surged during the epidemic outbreak, further accelerating the growth of the emerging healthcare sector. Biotech companies racing to develop treatment for the novel strain of coronavirus and other critical diseases are set to get more government support and draw strong investment interest from private equity funds. With Chinese government’s on-going investments in promoting synthetic biology, biotechnology will be the leading sub-sector within the healthcare industry.

Private capital investment in Asia’s healthcare sector has grown significantly over the past decade as a growing middle class has created a strong demand for quality health. Barry Tong, Joint APAC Head of Transaction Advisory Services at Grant Thornton, said, “In spite of the uncertain and challenging market environment, PE firms can always figure out new opportunities out of challenges. Healthcare, especially biotechnology, will be a great trend to follow in the coming years. Co-investment strategies will help unlock future investment opportunities and spread the risk on buyouts of complex assets.”

Investors shift focus towards distressed assets for potentially attractive returns

As bad debt problems have come to the fore in the midst of sluggish global economy, the region has seen increasing interest of PE investors in acquiring companies in default or under bankruptcy protection at discounted prices. These distressed companies are becoming attractive acquisition targets, offering huge opportunities for investors or new shareholders to restructure the target’s business and make money from selling it at a premium later.

Mr. Tong said, “Economic uncertainty may prove to be an opportune moment for some PEs to invest in companies with great potentials at a lower price. Distressed deals are becoming a significant instrument for growth and expansion. However, investors have to be aware of the risks associated with distressed assets as the exits might not be easy.”

Technology remains the most popular sector in the PE market

The growing importance of technology has affected myriad industries. To meet the ever- changing demands for innovation and technology, acquisition of technology companies serves as a great opportunity in M&A strategy. New unicorns with financial technology will continue to emerge and attract growing interest from PE funds, especially in Asian countries.

Technology has remained the most sought-after sector for buyout funds in Asia, driven by the new investment opportunities unlocked in the transitioning Chinese economy and the alternative exit channel provided by the Science and Technology Innovation Board at the Shanghai Stock Exchange.
Mr. Tong continued, “Support from government is essential and will lead to a potential increase in investments or expansion in the technology sector going forward. As investors continue to pour money into the technology sector with too much money pursuing too few opportunities, the mismatch between abundant funds and limited opportunities could contribute to inflated and overvalued asset prices.”

Investors are confident about the Chinese market

US-China trade war has weighed on market sentiment and it is getting harder to raise fund due to market tightening. However, investors remain confident about the Chinese market and they expect continued growth in the domestic market.
The development of the Guangdong-Hong Kong-Macao Greater Bay Area and the Belt and Road Initiatives have continued to contribute to the Asian PE markets positively. Investors are still enthusiastic about investment in young companies. Capturing potential growth and expansion of young business are the top priorities for the Chinese dealmakers.

Mr. Tong concluded with his view on the prospect of the PE sector, “2019 was a year of turmoil for Chinese PE firms. In 2020, less competition from the affected PE firms may prove to be a boon for the well-established PE firms. Possible recession in core markets, US-China trade war and extreme market valuations are the major concerns for PE firms in 2020. We expect that top-notch and well-managed PEs will still manage to raise funds during times of turmoil. In order to bolster investment return amid heightened uncertainties over the global economy, we advise the fund managers to be more selective in their portfolio with an enhanced risk management regime.”

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