According to Ms. Julia Leong, Hong Kong’s Under Secretary for Financial Services and the Treasury, who spoke at the 12th HKVCA China Private Equity Summit on June 11 of this year, “the private equity industry is now a key player in Asia’s evolving financing landscape.”
Ms. Leong, in her speech, stated that private equity funds that are Asia-focused have grown by four hundred percent in the past ten years and that private equity funds were valued at US $422 billion in assets last year. Thirteen years ago, the Asian region only accounted for 6 percent of global private equity investments, but now it accounts for more than 12 percent. Interestingly, the allocation of public market equity investments in Asia is significantly lower proportionally than private equity investments.
And in Asia, China, in particular, seems to be where most of the activity in the private equity industry is taking place. Overall, Hong Kong has raised US$9.3 billion in private equity funds, around 20 percent of the private equity funds raised in Asia. Mainland China has raised 50 percent of all funds raised, and 45 percent of the funds raised were directed towards private equity investments there. This investment growth is expected to continue growing in Mainland China.
Growth is expected to continue in China’s private equity industry for three reasons:
- Institutional investors from developed countries will most likely be increasing their Asian allocations due to pension funds looking to diversify into Asia’s higher-yielding assets and higher yielding currency.
- The local population of China and other Asian countries, who are increasingly middle class and tend to save for the future, will also want to invest.
- Mainland authorities in China will be easing capital controls. This will allow Mainland funds to invest overseas and will allow international private equity funds to bring money to the Mainland that has an offshore origin.
Don’t forget ASEAN
According to the Ernst & Young publication Asia-Pacific private equity outlook 2013, most industry experts agree with Ms. Leong’s statements that the Asia private equity sector will experience strong growth, with Mainland China being responsible for most of it.
However, the private equity publication also states that private equity deals will increase significantly in Southeast Asia as well. The majority of activity in this sector is expected to be in acquisitions, raising of new capital, and improving portfolio companies’ performance.
Those who are experienced in the private equity industry are saying that in 2013 sector specialization will be of even more important than before. The sectors that are expected to attract the most investment will continue to be energy, mining, utilities, and consumer sectors, just as they were in 2012. However, these sectors will be much more active than they were just one year ago.
Regulatory environment key
Interestingly, in a survey conducted by Ernst & Young, the majority of respondents mentioned that one of the major factors concerning deal flow in the private equity industry in Asia will be the regulatory environment. Countries of particular concern will be Mainland China and India, and some of the smaller economies in Southeast Asia may cause concern as well. Australasia may also see some changes in the regulatory framework in 2013.