Asian tigers burning bright

Recent surveys point to emerging Asia as a hub for global investment activity. But is it in danger of becoming too hot, too quickly?

Two recent surveys have confirmed what was already becoming evident: emerging Asia is where it’s at for private equity investment.

The most recent, from the US-based Emerging Markets Private Equity Association, found that although fundraising for all emerging markets dropped in line with that of developed markets in 2009, registering a 66 percent decline on the figures recorded in 2008, investment activity did not register anywhere near the drop recorded elsewhere.

In fact, although total investment value and number of transactions in the emerging markets dropped by 54 percent and 11 percent respectively; when put against equivalent decreases of 79 percent and 50 percent respectively in the developed world, emerging markets saw their share of global private equity investment activity increase to 26 percent in 2009 from 14 percent in 2008.

Of all the emerging markets, investments in emerging Asia made up the bulk of activity, accounting for 63 percent of the value and 70 percent of the number of transactions.

There are two factors behind this. One is Asia’s continued economic growth, and the other is the dominance of growth-related private equity strategies that do not have a strong reliance on leverage. 

“The growth model has been vindicated [by the global financial crisis],” said one Hong Kong-based private equity lawyer recently. “It’s a very basic structure: you put money in a company; it grows; you make money.”

With this in mind, EMPEA noted that while “dedicated pools of capital for emerging markets may be down, the level of investment activity in 2009 demonstrates that managers of more flexible capital in global funds see greater opportunities in the emerging markets than elsewhere”. They are switching their geographic focus accordingly.

Recent evidence of this includes the maiden Asian investment of US-based media and communications specialist Quadrangle Capital Partners, which led a $300 million financing round in telecom tower management company Tower Vision India in February; plans by firms including US- and UK-headquartered fund of funds Northgate Capital and UK-based private equity investor network Pi Capital to move into Asia; and emerging markets specialist Aureos Capital’s intention to set up a regional hub in Singapore as part of a “rapid” expansion in Asia.

The second survey to confirm confidence in the Asian region came from consultancy firm Deloitte and focused on Southeast Asia. Of the 25 regional fund managers interviewed for the survey, an overwhelming 88 percent predicted an uptick in investment activity in 2010 – compared to zero saying the same the year before. Confidence in Asia’s V-shaped recovery and more realistic sale price expectations were cited as key reasons for the expected growth in activity.

However, while the survey results are overwhelmingly optimistic, it did point out that with increased interest in the region will come a rise in competition for deals, and – ultimately – a run on prices.

The same could be said for the rest of emerging Asia, where markets like India and China are looking increasingly saturated. While positive for Asia’s growth story, the growing number of Western firms eyeing the region leads to some important questions: is there a danger of a bubble forming in the region’s hottest markets? Are all the newcomers to Asia taking the time to develop the right skill set and cultural approach to be successful here? Will we see some fingers get burnt?

While Asia stands out as a bright spot for global private equity right now, it could be in danger of burning too brightly for some.