What private equity needs to know about investing in APAC: Part I

Josh Lewsey, EY-Parthenon Strategy & Transactions Partner, and John Levack, Vice Chairman, Hong Kong Venture Capital and Private Equity Association, join Winna Brown to help private equity investors understand how to navigate and set expectations in APAC.

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It’s an exciting time for private equity (PE) in Asia-Pacific (APAC). According to Preqin, AUM for buyout funds focused on Asia have more than quadrupled over the last 10 years and firms now have more than USD $260b in AUM. They also have almost US$100b in dry powder available for deals. Taking a larger view, when we include some of the other private capital asset classes such as growth capital, venture, and infrastructure, PE firms focused on Asia have US$1.6t in AUM.

With 4.3 billion people and a blossoming middle class, the positive growth we are seeing in APAC is a contrast to slowdowns in the US and Europe. As a result, PE investors are eager to put capital to work in the region using the LBO strategies and playbooks that have proven successful in the US and Europe. This can be problematic for several reasons:

• Because the region is dominated by small and mid-size enterprises (SME), 70%-80% of PE deals are minority investments.
• PE is often in an influential (not controlling) position, with limited ability to dictate changes in management.
• It’s difficult to find and execute a viable LBO deal due to a cultural perceptions that associate selling a business with a failure of its management.
• APAC is a fragmented market with multiple languages, cultures, legal jurisdictions and working customs.
• The region has not always been open to foreign capital, and while this is changing, legal and regulatory requirements in a fragmented market demand local expertise.

Six ways PE investors can adapt to APAC:

• Choose businesses with capable, collaborative management in addition to competitive advantage and growth potential.
• Realize your ability to use leverage is dramatically reduced.
• Prepare to influence and support rather than dictate by demonstrating how your expertise and operational value creation is accretive to the business.
• Consider walking away from attractive deals in which PE and management are fundamentally misaligned.
• Avoid an ethnocentric, “colonial” approach: instead, lead with empathy and confidence in local talent.
• Present operational value creation and ESG as positive value accretion methods that improve the quality of a business.