Asia-Focused Private Equity Funds Attract Interest
Investor interest in private equity funds has been concentrated on the developed markets of the United States and Europe. However, this year, there has been a spike in the number of investors researching Asia-focused funds—in particular, growth-capital and small- to middle-market-buyout funds.
During the past week, several investors, including a foundation in Denmark and an endowment in the United States, expressed interest in growth-capital and small- to middle-market-buyout funds focused on Asia (excluding Japan). Both of these investors were searching for U.S.-focused funds when BHA analysts last spoke with them.
The recent shift of investor interest to Asia is due to the clear prospect for sustained economic growth as China and other emerging countries in the region continue to prosper. That coupled with the diminished deal flow in the region is urging investors to capitalize on opportunities now while there are still deals to be done rather than hold off and potentially end up empty handed. As a Reuters’ article noted, “Private equity fund-raising flows are returning to Asia as finding and completing deals remains much harder than in the U.S. and Europe, because of local competition, foreign investment restrictions, and unpredictable governments.”1
Investor interest in small- to middle-market-buyout and growth-capital funds can be explained by these funds’ historical ability to perform during periods of economic recovery. “If equity-driven investments see challenges, then credit-related strategies, such as distressed, special situations and turnarounds, may benefit. That being said, as the economy recovers, exposure to equity remains a critical part of a well-diversified portfolio. In buyouts, we favor the mid-cap LBO space, as funds in this area tend to be more operationally focused and less reliant on financial leverage to drive returns.”2
Essentially, buyout and growth capital funds are in the best position to invest in more stable, mature companies in the region and generate operating cash flows, which will lead to higher rates of returns for their investors.
Asia has been getting much attention from private equity firms and investors that are looking to take advantage of the region’s many opportunities and diversify their portfolios away from more developed markets. It is a safe bet that despite concerns with deal flow and foreign investment restrictions, Asia will remain a hotbed of activity for the foreseeable future.
1 Reuters, “Asia private equity fundraising bounces back,” March 5, 2010.
2 Neuberger Berman, “2010 Private Equity Outlook,” January 2010.