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APAC transition provides solid foundations for private investors
2022 was a difficult year for private markets in Asia-Pacific (APAC). Private equity deal value fell 44% to USD 198 billion, while exit value dropped 33% year-on-year to USD 132 billion1.
However, APAC remains the second largest region for private market investments2, and returns from APAC-focussed private equity funds continued to outperform public markets last year3.
Volatile markets
Across 2022, global financial markets felt the effects of slower economic growth, falling manufacturing output, high inflation, and heightened geopolitical tensions. Furthermore, economic and financial activity were greatly muted in China, due to the impact of the country's zero-Covid policy.
Yet while the macroeconomic environment remains volatile, APAC offers investment opportunities arising from commitments by regional governments on environmental, social and governance (ESG) policies and on infrastructure projects.
Read more about Asia's economic outlook for H2 2023
Diversification in uncertain times
In uncertain times, portfolio diversification is key, and private markets may offer rewards for investors who can identify more recession-resistant sectors, such as healthcare, or take advantage of government commitments on infrastructure spending and energy transition.
Such investments tend to be longer term at locked-in rates, and/or project-based with more transparent contracts, which may offer a cushion from high inflation.
Renewable energy offers key opportunities
Many countries in APAC, including China, India, South Korea, and Indonesia, have set carbon emissions reduction targets and have plans to reach carbon neutrality and net zero. This process will be costly and offers opportunities for private investors.
“Governments are keen to attract private capital to participate in green investments to alleviate the burden on their fiscal budgets," according to Moody's Investors Service. “Particularly, foreign capital investment is important to emerging markets in South and Southeast Asia, where fiscal resources may limit the pace of green development."
Find out more about Singapore heat mitigation initiatives
Smoothing the way to sustainable investing
Private equity can provide a pathway to sustainable investing because the close relationship between investor and investee company, and the long-term nature of the shareholding, can make it easier for firms to move towards more sustainable practices.
Further, a number of companies working on sustainability solutions are unlisted. “Many are young, fast-growing companies, and private assets can provide access to technology companies that facilitate energy transition," said Thierry Célestin, Head of Private Asset Investment Solutions at Lombard Odier.
Private debt and real assets offer diversification hedge
Private debt markets, meanwhile, typically have a low correlation to public markets. They allow diversification from traditional liquid bonds and make it possible for investors to increase the yield of a portfolio of private assets, especially in the context of rising interest rates.
Real assets, which include real estate and infrastructure, can also be a potential source of diversification and risk mitigation. In this respect, “real estate, particularly opportunistic strategies focussing on underperforming or undervalued assets, is of interest now, having more natural inflation hedging characteristics," said Thierry Célestin.
Read more about private assets return to fundamentals
Will China make a difference?
Should China continue to 're-open' slowly over the next 12 months, investors in private markets could discover further opportunities in the country.
In real estate, a pilot scheme is allowing private equity investment in certain projects in order to provide support for its property market4. Meanwhile, 'transformational changes' are anticipated in Greater China's private equity markets over the next five years5, with private markets continuing to expand and buyout deals outgrowing other asset classes.
Of course, like all investments, private assets carry risks, including the risk of capital losses. Past performance cannot guarantee future returns, while investments in emerging markets can also carry more risks than those in developed markets.
Find out more about China's wealth management sector
Private assets are not appropriate for every investor, due to the long-term and illiquid nature of investments. This can make them hard to price and sell in difficult markets. However, for those with the ability to stay invested and follow a multi-year investment strategy, they can be an important element in a well-balanced portfolio, and there are reasons to look towards APAC's private markets with renewed vigour.
Although the uncertainty that has beset these markets over the past year has not abated, the region's significant infrastructure and ESG spending requirements offer hope for a more attractive landscape in the years to come.
1 Asia-Pacific Private Equity Report 2023. Available here.
2 Top trends in global private markets. Available here.
3 Asia-Pacific Private Equity Report 2023. Available here.
4 China Launches Private Equity Pilot to Boost Property Sector. Available here.
5 More buyouts expected in Greater China's private equity market. Available here.
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