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Strong outlook for Asian private market in 2019
Asia’s economy represents 60% of world GDP growth, yet the Asian private market still accounts for a tiny part of the global AuM, which indicates substantial room for growth
Janette Chen 20 Dec 2018

Though much market discussion debates the risks of investing in Asia, recent trends are indisputable: the Asian emerging private markets are outperforming the global private market, with particularly strong activities and investment opportunities arising in the Chinese private equity (PE) market.

Given its ongoing and rapid growth, the Asian private market is expected to see further growth regarding its proportion of the overall global market. "The news today is meaningful enough. Not many years ago, there were questions around the Asian private market regarding its capacity to grow. By now, the question has become whether the market can grow its share," says Juan Delgado-Moreira, vice chairman and head of international at Hamilton Lane, who remains convinced that the Asian market has great potential.

Data suggests the performance of the emerging private markets has upped of late vis-à-vis developed markets. Although emerging private markets have underperformed developed private markets in mature vintages years, the situation changed in more recent vintage years, according to Hamilton Lane's research.

"The emerging markets including Asia have outperformed significantly the rest of the global private market, particularly over the last four to five years with a small exception around 2015," says Delgado-Moreira. "2017 and 2018 are here to tell the same story that the recent performance is very significantly upgraded," he adds.

The development of Asian private market is driven by the functional maturity of the market. "We do see more very experienced and high-quality managers in the market," says Mingchen Xia, managing director at Hamilton Lane.

The fundraising market in Asia is active right now, according to Xia. "For Asia, 2017 has been a busy year for fundraising. In 2018, we are on the track to reach a new record in terms of fundraising," he says.

But he acknowledges the market often discusses the risk factors involved when pondering Asian orientated investments. "People sometimes should and do focus on the downside and the risk. The downside risk among the regional managers is not as negative as people expected," says Delgado-Moreira.

"To some extent, in most cases, the risk of investing in emerging markets such as Asian private markets is somewhat overstated in our opinion," he adds, noting that the returns of many Asian private funds are quite stable. "Many Asian funds run by global franchises have been having a lower dispersion of return," Delgado-Moreira says.

Unlike the global private market - whose strategies are winning even greater market shares - the mainstream strategies in the Asian private market have changed over the past decade.

From 2007 to 2018, the breakdown by strategy in the Asian private market has changed, according to Hamilton Lane's research. The mega/large buyout strategy has almost doubled in market cap, increasing from 15% to 31%; the venture capital and growth strategy has increased from 21% to 27%. On the other hand, credit strategy and SMID buyout have notably decreased in terms of market share.

"The mega and large buyouts have increased while the SMID buyout has decreased significantly. This is driven by the increase of a lot of regional funds," says Xia, pointing out that they are seeing more large funds being raised.

One notable feature of the Asian market is the diversification of strategies: different markets utilize dissimilar mainstream strategies. "For example, in some developed markets in Asia, such as Japan, Korea, Australia, you tend to see more buyout strategies. For other markets, such as India and Southeast Asia, growth equity and buyout strategies are more popular," says Xia.

"In China, the growth strategy is seen as the mainstream strategy and this is where we see the most opportunities," Xia adds.

Turning specifically to the Chinese PE market, he notes opportunities are arising along with the challenges. "On the macro side, we see a lot of challenges in the Chinese PE market, including GDP growth slowing down and the trade tensions between China and the US," says Xia.

But these are seen as short-term challenges, according to Xia. "The fundamentals of the Chinese economy are still pretty healthy. In many sectors, we still see a double-digit or even higher growth," he says.

"If the PE funds pick the leading companies in the growing sectors, you can still enjoy a very healthy and sustainable growth," Xia says. "In China's PE sector, the activities have been very strong. We still continue to see a lot of investment opportunities in China. We don't need to change our strategy very much. We will continue to pick high-quality managers," adds Xia.

"Asian private market still accounts for a very small part of the global asset under management. We think there is still big room to grow," Xia says.

Plus, given the strong fundamentals of the Asian economy, investing in the private market is a perfect way to capture the growth. "The share of Asian GDP is about 25% of the global GDP, but Asia is contributing more than 60% of the GDP growth, which is a very significant part of the global growth," says Xia.

Xia also shares some advice for investors in this market. "Don't market-time. Be concentrated with your high-quality general partners. Prepare for the next downturn. Make an investment in your own infrastructure and understand your organization," he says.

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