Niche Private Equity Opportunities in Asia

Although Asia still presents opportunities, excess returns are becoming more difficult to find as markets continue to develop. Growth is increasing in less developed countries, while former leaders are slowing down. Most notably, China’s GDP growth rate fell from above 14% in 2007 to below 7% in 2018. The days of achieving outperformance simply by overweighting China are gone.

Private Equity Continues to Outperform

Even as markets mature, private capital continues to outperform in Asia. The pooled internal rate of return (IRR) for private equity in Asia was 14% over a recent five year period. During that time, the comparable return from public markets would have been 8% according to the mPME measure developed by Cambridge Associates. However, the sources of private equity returns are changing.

The total value of venture capital deals in Asia soared from 26 billion US dollars in 2014 to 129 billion last year. The other significant change is the move toward fewer and larger PE deals involving more participants. The 11.6 billion USD buyout of Global Logistic Properties by a consortium of Chinese companies is perhaps the best example of this trend. 

Advanced Analytics Meet the Challenges of Growth

High expectations imply high valuation levels in much of Asia, so more sophisticated methods are needed to identify profitable niches. In China and India, there is an increasing focus on technology. Internet and technology are responsible for nearly 85% of the growth of private equity in the greater China area since 2010. It is more critical to find technology leaders early on, and advanced analytics present real possibilities.

Developed market private equity firms are able to scrape data directly from start-up websites to determine shifts in sentiment and usage in real time. Bain reports that only 7% of general partnerships in the Asia-Pacific region are consistently using these advanced analytics. English language tools cannot be directly applied in most of Asia, so the few firms with well-developed analytics have a distinct advantage.

Ashton Global uses big data and analytics to screen for undervalued assets and event driven opportunities. The ability to obtain and analyze large real-time datasets gives us an edge over other emerging managers.

New Opportunities for ESG Investing

The increasing sophistication of capital markets in Asia also holds potential for Environmental, Social, and Governance (ESG) investing. Contrary to the popular notion that focusing on ethics carries a price, ESG usually outperforms the market. The University of Hamburg and DWS found a strong correlation between ESG and higher returns in 63% of the 2,000 studies that they examined.

Consumers expect more from businesses as incomes rise, and ESG investing increases returns by anticipating these shifts. China is now entering the middle-income stage of development where citizens and governments begin to focus on quality of life.

Chinese President Xi Jinping recently created new superagencies to combat pollution and corruption, enhancing the nation’s attractiveness to ESG investors. On the demand side, there is increasing pressure from institutional investors and Millennials for more socially responsible investments.

Pockets of Value

The rise of China receives most of the attention from the media and investors, so valuations are generally lower elsewhere. For example, Vietnam’s relatively low stock prices have the potential to produce outperformance in the future. Although it is more difficult to find bargains in Asia today, value investing is exceptionally effective in emerging markets.

Floris de Groot found that country-level price-to-book ratios had a large and statistically significant effect in the emerging markets. According to de Groot, investing in emerging countries in the lowest price-to-book quartile produced a stunning 16.8% annual gain over the highest quartile between 1991 and 2014. 

There Are Still Opportunities

Private equity and credit continues to provide investors with strong returns in Asia as markets develop. From advanced analytics to ESG and value investing, Ashton Global helps investors to find niche opportunities in emerging Asia. The ability to invest in various parts of the capital structure helps provide synergies and allows us to glean insights to create additional alpha for our investors.

 

Please contact us at +1 212 514 8953 or email investor@ashtonglobal.com to learn more.

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