Private equity gets real

Private equity in Asia: these aren’t the good-old days. But the industry is more realistic today about its challenges.

I’m basing this on the annual Hong Kong Venture Capital Association conference, held this week. HKVCA is for private capital, not just VC, and it’s mostly private equity.

Over the past few years, the discussions on stage, led mostly by locally based PE bosses, has been disingenuous, more cheerleading than analysis. Tis the nature of the beast. This year, however, things were sober. Not downbeat, just realistic.

PE in Asia (like other industries) has been about growth. That growth has slowed. Now PE has to focus on returning more cash to LPs or adding value to the portfolio businesses. Financiers know how to grind out returns but lack experience rolling up their sleeves to make portfolio companies more efficient. They understand leverage and M&A, not operations, so we can expect more dealmaking.

Country-wise, Japan is today’s darling, especially its mid-sized companies whose elderly owners are finally open to selling, including to PE firms. Australia and Korea are attractive, but small, and stable (so no crazy outperformance). The bloom has come off Southeast Asia, which is too fragmented to consistently deliver the returns that PE (and their investors) require.

India is hot and exciting, but expensive. India’s long-term prospects are bright, however. Lessons from Southeast Asia show that PE does best in large markets. India is a big market with a large and growing source of domestic liquidity. Firms can find exits there.

China is a difficult market for global PE, however. Although some partners say they’re game for opportunities there – it’s still the world’s second-largest economy – most investors are shy so long as Beijing refrains from a serious consumer-macro stimulus. The one opportunity that got talked about is secondaries: managers who raised too much money for China funds are desperate to exit positions. That picking up heavily discounted portfolio companies is the main opportunity says a lot about the state of play. What hasn’t changed is the exceptional Chinese entrepreneur, but investors are more likely to find them in Singapore, Indonesia…or California.

Trump and the threat of a trade war loomed over the discussion. Another headwind for China, but possibly bad news for Southeast Asia too, especially if tariffs ‘look-through’ to determine the ultimate country of origin for what the US imports. Some people believe Trump’s anti-regulation stance will be good for M&A, which will help PE firms consolidate their portfolio companies and find exits.

That offset, however, seems likely to help American PE firms in the US, rather than firms operating in Asia. And the HKVCA event this year was notable for the absence of those big US firms: no KKR, no Carlyle, no BlackStone, no TPG. While this is good news for firms dedicated to the region – less competition for deals, at a time when valuations are attractive – it isn’t a sign of confidence.

The good news is, of course, that now is a good time to buy companies, if investors have confidence they can find an exit. But is it a good time to lend? Private credit has become a phenomenon in the US. It is muted in Asia, where banks still account for four out of five corporate loans.

There’s room to expand private credit in the region, either directly or via partnering with banks to access their relationships. More credit funds are being launched in Asia. LPs need to ask whether credit funds are retaining stringent covenants and lending terms. And they need to ask their GPs about contingency planning: are GPs practiced at handling defaults? What if interest rates go back up?

Good PE firms reliably pay out a liquidity premium, but private credit has yet to prove itself in Asia; mezzanine finance is held to be unreliable. The industry is seeing a lot of firms offer LPs (especially family offices) ‘semi-liquid’ options in credit, but LPs would be wise to understand what allows a GP to be so flexible. While talk of a disaster among credit funds seems overdone for Asia, their returns are likely to be only modest.

Finally, a tech note: AI got a little attention, both to add value (GPs are thinking more about digitalization among portfolio companies to make them more efficient) and as an investment target (data centers). For most PE firms, which operate on a partnership structure, AI seems to be for someone else. And despite Bitcoin recently striking $100,000, no one mentioned digital assets.

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