Despite a turbulent economic environment, investors are successfully weathering the storm
By Emily Holbrook
Asia-Pacific private equity investors have weathered the global pandemic successfully, to say the least. In fact, Bain & Company recently reported that the Asia-Pacific private equity market hit a record valuation of $296 billion for the first half of 2022. The fast rebound can be partly attributed to vaccination rollouts, which helped the area’s economy quickly recover from the economic shock of country-wide lockdowns.
Market Growth
The growth in the market can also be attributed to increasing deal activities driven by private equity’s continuous penetration as an asset class.
Frank Su
“Asia Pacific is home to some of the world’s largest and most dynamic economies,” said Frank Su, head of private equity Asia for Canada Pension Plan Investments (CPPIB). “Markets such as China, India, and Southeast Asia offer strong growth potential, while the more developed economies, such as Japan, Korea, and Australia offer sizable leveraged buy-out opportunities. I believe the continued development of deal infrastructure, such as the advisory network and capability, legal framework, and credit financing availability, will support the future growth of the industry.”
The Bain report also notes that dry powder, or total unspent private equity capital, hit a new record of more than $650 billion, something Su attributes to valuation fluctuation.
“We have seen an increase in valuation over the past few years, especially in certain ‘hot’ sectors because of an oversupply of capital in the market,” Su said. “However, we are already seeing valuation correction happening: PE investors have become more prudent and more focused on the fundamentals.”
Bain’s report notes that, in addition to increased valuations, policy uncertainties and geopolitical tensions have reduced the pool of attractive deals, adding to increases of dry powder with limited investment choices. Asian PE investors are currently faced with increased competition for high-quality deals.
Returns Prove Positive
Despite a turbulent economic environment and continuing pandemic-related disruptions, Asia-Pacific PE returns rose to a 10-year high at 14.2% median net IRR, from 13.3% in 2020, according to Bain. Top-quartile funds again delivered robust returns well above expectations of 15%. The report notes that private equity continued to outperform public markets over 5-, 10-, and 20-year horizons.
In May, CPPIB revealed it returned a net 6.8% for the fiscal year ending March 31, 2022. The firm credited private equity, infrastructure, real estate, and credit investments for the positive performance. Private equities, in particular, delivered a net return of 18.6% in the fiscal year. In terms of geographical diversification, 26% of CPPIB’s total investments are in the Asia-Pacific region.
“We believe funds with true differentiation in the market, such as in-depth sector knowledge or capability to create value to portfolio companies, can provide the best ROI,” said Su. “We are sector-agnostic. We look at all major sectors and can leverage our global knowledge base when evaluating opportunities in Asia. We also have a strong network of external partners that we work with.”
Currently, most of CPPIB’s investments are in North America (with about 36.9% in the United States, and 15.7% in Canada). However, Asia is proving to be an increasing priority for CPPIB, as it currently ranks as the plan’s largest investment destination outside of North America. Comparatively, in 2017, only 17% of CPPIB’s investments were directed to Asia.
The Asia Pacific Foundation of Canada notes that CPPIB’s allocation in Asian investments will likely continue to increase. “The fund has established more than 60 partnerships in Asia with public and private entities in sectors such as real estate, infrastructure, and credit, and has made clear that these partnerships will continue to be strengthened. CPPIB’s Private Equity Asia team, which focuses on private equity investments in the Asia Pacific, has grown from almost zero to $11 billion in exposure.”
These moves signal that the Asia-Pacific region is an important – and increasingly growing – priority for CPPIB.
Emily Holbrook serves as owner and head content creator at Red Label Writing LLC, a content studio that collaborates primarily with the insurance and financial services sectors.
