Since the emergence of the so-called “Asian tigers,” namely Hong Kong, Singapore, South Korea and Taiwan, Asia has increasingly become a ‘hot’ destination for international investors that strive to diversify their portfolios through new profitable ventures.

Over the past few years, the ‘alternative investments’ sector, led by Private Equity and Venture Capital (PE VC) houses as well as Hedge Funds (HFs), has proved to be particularly active in developing operations in East and South-East Asian countries, that continue to grow at solid mid-to-high single-digit rates, driven by a variety of factors: increasing urbanisation, growing middle classes, rise in disposable income, beneficial economic and structural reforms.

‘Business as usual’ in major Asian centres

The major deals appear to be still concentrated in the most important financial and economic hubs of the Asian region, such as Tokyo, Shanghai and the aforementioned Singapore and Hong Kong. This is demonstrated by transactions such as the one completed by CLSA Capital Partners, which is the PE and VC arm of the Hong Kong-based Credit Lyonnais Securities Asia (CLSA). Two weeks ago, the firm invested nearly Y100bn in the Japanese low-cost drinks maker Asamiya. Such type of deal is typical of a trend characterised by the belief of global leading PE houses, including the very well-known U.S.-born Bain Capital, that now it is a particularly suitable time to buy out Japanese small and medium enterprises (SMEs).

Their claim is supported by three main reasons – the implementation of new tax rules in the country, the weakening of Japanese firms’ marked corporate culture and, lastly, the damaging domino effect of the 2008-2010 financial crisis, which has rendered Japanese entrepreneurs well aware of the fact that indulging for too long before making succession plans is inappropriate. CLSA Capital Partners has been followed by two other main PE establishments. The first one is another Hong Kong-based PE fund, Baring Private Equity Asia, which is completing the acquisition of the British trust and custodial services provider Vistra Grou for $1bn.

The second PE firm which is adopting the same investment approach as CLSA is the American Sequoia Capital, that is backing the broker Huatai Securities‘ massive stock-market listing on the Hong Kong Stock Exchange (HKEx) at a market capitalisation of almost $5.2 billion, potentially the biggest listing in Hong Kong since AIA, the life insurer, raised $20bn in October 2010. Notwithstanding the large amount to be raised, there is substantial optimism amid investors and the parties directly involved in the deal because Huatai’s Shanghai-listed shares have risen by a surprising 118% in the past six months, lifting the amount it can expect to raise in Hong Kong. The likelihood of successful completion is also enhanced by Huatai’s additional ‘financial supporters’, which include Tencent’s founder, Yale-backed Hillhouse Capital, and various hedge funds such as Value Partners, Och-Ziff and Myriad (which invested $150m, $100m and $50 respectively).

As the deal shows, funds, though they normally avoid illiquid investments, are now prepared to accept restrictions in change for the opportunity of accessing China, which has been recently experiencing a stock market rally. In fact, average daily trading volumes in Shanghai (SSE) and Shenzhen (SZSE) reached last year RMB303.6bn ($49.7bn), which represented a 50 % rise on 2013, making the Mainland the world’s second most liquid market after the US.

New emerging locations

Even though the most established and known Asian financial markets confirmed themselves as the ‘hotbed’ of alternative investments, an interesting trend sees increasing amounts committed by both local and international PE VC funds in other Asian nations which, although still developing, possess a significant growth and return on investment (ROI) potential – Malaysia, Indonesia, Thailand and, to a minor extent, Vietnam. However, Indonesia and Malaysia currently dominate over the latter two countries. Indeed, in Indonesia, in January, CVC Capital Partners raised $295 million by selling shares of the department-store operator PT Matahari Department Store Tbk whereas now the telecommunications tower operator PT Solusi Tunas Pratama, partly owned by The Carlyle Group, plans to raise up to $400 million from a share sale, which could be Indonesia’s biggest so far this year. On the other hand, in Malaysia, helicopter services company Weststar Aviation Services Sdn. Bhd., partly owned by another American PE group, KKR Co., is seeking to raise $500 million through an initial public offering (IPO).

Contrasting trends

The upward trend of booming markets and alternative investments in Asia is, nevertheless, opposed to a downward one, which, by contrast, sees local and international PE houses and HFs either investing in Western markets directly or pulling their money out of their Asian operations to allocate it to ventures in Europe and/or North America. The main reason is that alternative investments firms focused on Asia have been the slowest globally to return cash to investors. For example, since 2006, no single year’s worth of combined fundraising at all private-equity firms, for investments outside the U.S. and Europe, has returned more than 55 cents in distributions for every dollar of capital invested, according to the PE solutions provider Hamilton Lane. Hence, investors who put money into Asia-focused funds are still waiting for cash returns. As a consequence, different PE firms looking for exits from the Asian region emerged. Striking example is the Singaporean chip company UTAC Holdings Ltd., which was privatised by TPG Capital and Affinity Equity Partners in 2007, and is now looking to list in the U.S. 

It is the Right Time

In spite of a negative trend, the fact that PE firms continue to raise money for Asia funds shows that the appetite for the region remains strong. Raised capital was $29 billion in 2014, the highest since 2012. Such an appetite is fostered especially by hubs such as Hong Kong, whose stock market increasingly seems to be springing back to life. The debut of Hong Kong Broadband Network signalled the reopening of the IPO market after China’s slowdown. The company’s PE backers – including CVC and AlpInvest – successfully raised $750m from the listing, the biggest in Hong Kong since Dalian Wanda Commercial Properties floated in December.

Taking into consideration the scenario and investment dynamics described above, it might thus be possible to conclude that now might be cyclically the optimal time to be investing in Asia, and the best route for capturing this opportunity might be through alternative investment funds specialised in SMEs. Consumer-related small and medium enterprises are in fact the most dynamic and fast-growing businesses in the region, those that are driving growth, and have generated, and might continue to generate, the strongest investment returns. As a matter of fact, in Asia-Pacific, SMEs funds have actually been outperforming those of larger companies, in an historical trend that many investors seem to ignore in a rush toward larger funds. Exposure to the Asia-Pacific region is an important element in many global investors’ portfolios, from both a portfolio diversification perspective and a potential returns generation one. The Asia-Pacific alternative investment environment – particularly with respect to PE houses and HFs focused on SMEs – is cyclically and structurally more attractive now than at any time over the past decade. Smart investors should take advantage as soon and as much as they can.

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