Hong Kong – Grant Thornton’s latest Asia Private Equity Insights 2021 finds that cautious optimism prevails in the Asian private equity (“PE”) industry for 2021 with Asia Pacific regions leading the global recovery. While mounting geopolitical tensions and the evolving pandemic remain the key concerns of PE investors, Asian countries, namely, China, Japan and India are considered the most appealing investment destinations given the robust opportunities. The unprecedented pandemic has brought both challenges and opportunities to the PE industry. Despite travel restrictions posing challenges for on-site due diligence and hindering cross-border deals, the crisis like no other has led to faster adoption of new technologies and sparked tremendous demand for healthcare services, thus expediting the development of technology and healthcare sectors. The pandemic also sped up industry consolidation and restructuring deals in hard-hit sectors such as the energy, mining and utilities industries. Thanks to ongoing digitalisation, PE firms have changed their normal working routines and investment approval procedures drastically with remote meeting technologies and virtual due diligence, which have greatly enhanced work efficiency and deal closing speed.

COVID-19 pandemic bodes well for healthcare industry and new economy companies
Throughout the pandemic, technology has been a lifeline to survival for businesses and it is now seen to hold the key to recovery. When it comes to technological innovation, business community and investors are seeing technology and digitisation as means to succeed. PE firms are increasingly looking to join the fast-emerging technology sector, chasing the technology ventures related to healthcare, e-commerce, online education and other new economy companies as the new technologies are transforming business models and spurring rapid growth in the post-pandemic “new normal” era.
The outbreak of Covid-19 also urges the healthcare industry to devote more resources to quality control procedures and to apply technological solutions to boost operational efficiency when demand for products and services are high. Telehealth has also become a new trend, given public mobility being restricted in many countries at the moment.
Barry Tong, National Leader of Forensic and Investigation Services at Grant Thornton, China, said, “The swift recovery of the PE industry should generate cautious optimism going forward, with significant level of capital waiting to be deployed. The technology and healthcare sectors are two of the few industries that experienced growth in investments under the economic downturn. Online healthcare service providers saw a spike in demand and AI companies showed their ability to repurpose solutions to tackle the pandemic. Technology and healthcare sectors are at the forefront of keeping the global community in order, providing investors with counter-cyclical investment opportunities in both short term and long term.”

Distressed asset opportunities on rise amid economic downturn
The lingering pandemic and the subsequent economic fallouts have spurred the surge of distressed assets. Among which, the sectors that have been hit hardest were retail, hospitality, leisure and commercial real estate. China’s deleveraging policy and the resultant credit tightening have also made the debt-laden small to medium-sized property developers more vulnerable to distress selling as they are struggling to meet debt obligations and fund new land acquisitions.

Distressed assets driven by lowered valuations are in growing demand fuelled by bank capital constraints. As companies are hanging on with limited support from banks and short-term government assistances, there could be an influx of private equity capital searching for distressed opportunities when the support runs out.
The primary distressed assets market is becoming more accessible in China, Asia’s largest PE market, following a series of financial sector reforming and opening-up measures. Investors now have more options to invest in distressed assets other than through secondary purchases from the national asset management companies.

Mr. Tong said, “Taking advantage of the persistent low interest environment, distressed asset investors could achieve enhanced returns through leveraged acquisitions. However, success in distressed asset investing requires significant expertise to assess risk and opportunity as well as sound strategies for realising value and managing through turbulent times. It is important to strike a well balance between risk and return.”

The rise of continuation funds and restructuring deals
With severe economic disruptions caused by the unprecedented pandemic, scheduled exit windows for portfolio assets may no longer be viable. Continuation funds, which allow general partners to extend hold periods for assets, have grown rapidly in the wake of tremendous uncertainties related to the prolonged pandemic and geopolitical tensions.
A continuation fund allows general partners to transfer assets from the existing fund to a newly created vehicle with limited partners given the choice to exit or rollover into the new funds alongside new investors. It provides investors an option of liquidity and a new exit window for investors in the existing fund to opt for cash-out, which could be valuable during the times of uncertainty. It also gives investors the opportunity to benefit from the upside of a second phase of value creation.
Mr. Tong continued, “In view of the COVID-induced uncertainties, we expect the current diversified exit trend to continue, with restructuring deals expected to rise in the short to medium run. It is crucial to conduct rigorous financial and other important due diligence to reveal the fair market valuation and minimise the risks of the restructuring deals. Meanwhile, investors should also seek professional advice for the legal contractual terms, tax issue and political environment.”

Lofty valuations remain the major challenge  
For the year 2021, extreme market valuations remain a major concern for investors. The elevated levels of dry powder over the last few years are likely to hold buyout price multiples at a fairly high level.
Mr. Tong concluded with his view on the prospect of the PE sector, “The key challenge for PE investors in 2021 will be how to sensibly deploy equity amid intensifying competition and manage through troubled portfolios in a volatile and unpredictable market.”

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