Demand for Asia-Focused Private Equity Funds Up Slightly in Q4
Global markets posted strong gains in the latter half of 2009 and investors returned to the alternative investment arena. Although significant opportunities existed for private equity investors in the developed markets of the U.S. and Western Europe, many looked to funds focused on China and Asia.
In the third quarter, BHA analysts noted that 8.5 percent of private equity mandates were for China-focused funds. In the same time frame, Asia-focused funds made up 23.3 percent. In the fourth quarter, 9.2 percent of active private equity investors expressed interest in evaluating funds focused on China, while almost 21 percent indicated a more general interest in some type of regional Asian exposure. Although combined demand for these funds changed less than .5 percent in the last quarter, individual demand changed more notably. Clearly, investors that were considering investing in Asia became more interested in China-specific funds.
This was not surprising considering the rallies in consumer demand and strong GDP predictions for the region, and specifically China. Highlighting China’s place in the international market, Hong Kong’s former central bank chief, Joseph Yam, insisted that in the wake of the struggling dollar and euro, the yuan should take its place as the “third pillar” of the global monetary system.1 An appreciating yuan, coupled with a depreciating dollar and euro, made direct investment in Asia and its biggest market, China, attractive for private equity fund investors.
Although it is possible that appreciation of the yuan will curtail international demand for Chinese exports, it is unlikely that the yuan’s value will gain so dramatically that importing goods from China will become unattractive. Even it if did, however, with nearly one-fifth of the world’s population, it is likely that the increase in domestic demand will far outweigh the decrease in international demand.
Given China’s growing influence in the world’s economy, it was no surprise that China-focused private equity funds were in high demand. However, many private equity investors—large institutions such as endowments, pension plans, and foundations—were not interested in country-focused funds with a higher risk profile than similarly focused regional funds. Thus, many investors seeking exposure to Chinese private equity focused on Asian funds which offer lower risk through investment diversification.
As BHA closed the books on 2009, analysts spotted another trend among alternative investors worldwide: 2010 was shaping up to be a big allocation year. That said, it is hard to imagine that funds focused on Asia, and specifically China, will diminish as we get a fresh start in 2010.
1 Bloomberg.com, “Yuan Can be ‘3rd Pillar’ of Finance System, Yam Says (Update 1),” December 18, 2009