This week was the International Financial Week in Hong Kong, and the annual Asia Private Equity Forum organised by the Hong Kong Venture Capital and Private Equity Association (HKVCA) was one of the hallmark events. As a platinum sponsor, our team in Hong Kong had a strong presence at the forum. Here are the five things we took away from the event.
1. Outlook for Private Equity in Asia
The Asian economy is facing a number of macro headwinds, including geopolitical tensions, liquidity issues, rising interest rates and a slowdown of the IPO market. This environment is creating a buyers' market, and General Partners (GPs) are anticipating a strengthening supply side for investments – i.e. sellers looking to accept lower valuations in order to de-risk and monetise what they have. The fundamentals are strong and the long-term growth story for Asia is still intact, but it's still going to be a rocky year. Therefore, private equity managers need to have strong conviction, be selective in what they're buying and make sure they have downside risk protection in place.
2. Developments in Hong Kong Private Equity
To support the continued growth of the private equity sector in Hong Kong, a number of changes are being implemented. Firstly, Hong Kong's profits tax exemption for private equity funds will soon be extended to include onshore activities. The current legislation relies on 'offshore' status in order to claim tax exemption, but from 1 April (when the bill is expected to be passed) there will be no longer be a distinction between 'offshore' and 'onshore'. As long as the definition of 'fund' is met, then private equity managers can enjoy the tax benefits. The new regime is a positive step for Hong Kong. Not only does it mean more activities and decisions can be made onshore (less ferry trips to Macau!), it'll also encourage funds to invest into Hong Kong companies without any tainting implications. There are still a few issues to be ironed out with regard to carried interest and SFC licensing, but on a whole the industry is very positive about the new developments. Furthermore, the Hong Kong government also confirmed that it'll soon start the consultation phase for a new limited partnership regime in Hong Kong for private equity funds. Watch this space.
3. Rise of buyouts in China
The majority of deal-making in China over the last few years has been focused on minority or growth investments. During this period the China economy has been growing at double digit rates and the currency has been appreciating. Therefore, fund managers didn't have to do too much in order to create good returns. With the Chinese economy now slowing to single digit growth rates, to achieve the same returns, the approach needs to change. An operational enhancement or value-add strategy is now seen as core to ensure GPs can achieve the desired returns in China. Furthermore, the owners of private companies in China are getting old, and the younger generation doesn't always want to take up the reins. All of this creates ample opportunity for buy-out funds in China.
4. Hot investment themes for the year ahead
- Technology: artificial intelligence-enabled consumer devices are capturing the attention of fund managers, due to both the consumer benefits as well as the valuable data insights that can be derived from this technology.
- Healthcare: there's a big supply and demand issue in the healthcare sector, with a limited supply of hospitals and healthcare facilities and increasing demand from the aging population in China.
- Environmental protection: China's in urgent need of waste management and recycling solutions, so companies with unique solutions in this sector are being looked at closely.
- Fintech: consumers are still frustrated by traditional insurance and banking providers, so there's still plenty of room for innovation when it comes to financial services.
5. Liquidity solutions
With a slow-down in the IPO markets and general liquidity constraints, private equity funds need to be prepared to hold onto their investments for a longer period. To address this issue, liquidity from the secondary market and sponsor-to-sponsor private sales will become more commonplace (both for GP and LP stakes). Already we're seeing strong growth in the secondary market, with the number of deals and the transacted amount increasing significantly over the last few years. This growth trajectory is set to continue.
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