[ad_1]
Investors disappointed by China’s slow recovery and lack of new growth drivers are turning to India and south-east Asia for deals, even as experts warn they face a steep learning curve and potentially limited choice of exit routes in many of these markets.
India and Indonesia have become two of the most popular destinations for private equity investors, who are under pressure as high interest rates drive up funding costs and as backers, such as family offices and university endowments, become increasingly nervous about investing in China.
There have not been “major shifts” in investor sentiment towards China in the past six months, according to one Hong Kong-based investment banker, but there has been “a higher bar for China investments”. He said clients were now looking for deals in India and Indonesia that offered “similar growth characteristics to what China had 10 years ago”.
Healthcare in China has been a relatively resilient sector thanks to its ability to address an ageing population and because cross-border deals in the segment face less geopolitical scrutiny. But even here, the country is losing its lead. In terms of fundraising volume, India overtook China as the largest market for Asia-Pacific healthcare buyout deals in 2022, according to Bain & Co data that goes back to 2012. For the first half of this year, China saw $1.9bn in such buyout deals, compared with $3.1bn in India.
Many south-east Asian companies thinking about a China angle during the pandemic are now focusing on their home markets, said Vikram Kapur, Singapore-based head of Asia-Pacific healthcare and life sciences for Bain.
This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.
Even China investors are trying to diversify by joining — and driving up — the competition for south-east Asian deals, investment bankers and deal advisers say.
But allocating capital to south-east Asia can be challenging, especially for newcomers. The fragmented landscape means applying the China investment model and expecting companies to be able to scale up quickly may not work, experts say. A less mature capital market compared with China means fewer transactions and smaller deals, putting added pressure on deal-sourcing capabilities to justify resources.
It’s “incredibly difficult” for investors to write an equity cheque up to several hundred million dollars in any single south-east Asian country, which is often a reflection of the smaller economic scale compared with China, said Xuong Liu, a Hong Kong-based managing director at consultancy Alvarez & Marsal. His company is working on healthcare deals in Indonesia, as well as precision engineering in Malaysia.
For investors who have been predominantly focused on China, entering markets where they don’t have a record is particularly challenging, and often means paying a higher price just to build up their credibility in the local market, said Andrew Huntley, a managing partner at BDA Partners, a global investment banking advisory group focused on Asia. Sourcing proprietary deals in south-east Asia without having a local team in place is another hurdle, he added.
Then there are differing business practices and norms from country to country. Doing due diligence in Vietnam, for example, is particularly difficult, legal experts say.
It is not unusual to encounter companies with “selective record-keeping” that make it hard for private equity investors to get a complete picture of their business, said Steven Tran, a Singapore-based partner at law firm Morrison Foerster.
“The situation is also not helped by the fact that the overall business environment in Vietnam tends to be less transparent than many foreign investors might be used to,” Tran said.
Private equity firm Silverhorn, which favours Indonesia’s financial technology and ecommerce sectors, has sent executives to visit the market “multiple times” this year, according to Marco Klaus, the firm’s Hong Kong-based chief investment officer.
“We have seen some capital movement from the original allocation of China shifting over to Indonesia,” Klaus said. Silverhorn has reduced its China investment from a high of 80 per cent a few years ago to 50 per cent. Singapore, Indonesia, Vietnam and the Philippines together account for about 30 per cent of the company’s investments, with 5 per cent in India and 15 per cent in the US
A less mature private market system in Indonesia means buyout opportunities are still fairly limited, Klaus said.
Indonesia is the world’s sixth-largest market for initial public offerings by amount raised this year, but most of the money has gone to companies in the domestic energy and mining sectors, suggesting a public listing may be less of an exit option for early-stage investors in emerging industries, according to a Hong Kong-based banker specialising in technology and consumer deals in Indonesia.
Some of the ecommerce investment themes popular during the lockdowns of the Covid-19 pandemic have also lost steam as many locals still prefer to shop offline, the banker added. Next year’s presidential election in Indonesia is also pushing investors to be cautious about making commitments, he said.
Then there is the geopolitical shadow hanging over investments in Asia, whether they are in China or not. Washington has restricted US private investment into China in areas such as artificial intelligence, but extra due diligence may be required for any investment around the world, since the target company may involve a Chinese person who could make the deal subject to US investment restrictions, according to Eric Jiang, a Beijing-based partner at Chinese law firm Jingtian & Gongcheng. “Regulations require compliance and that increases costs,” he said.
Some argue that Asia’s biggest economy remains a long-term investment opportunity, but for now, caution seems to be the prevailing sentiment. “We’re not seeing people right now jump headfirst [into China deals],” said Bain’s Kapur.
A version of this article was first published by Nikkei Asia on September 28. ©2023 Nikkei Inc. All rights reserved.
Related stories
[ad_2]
Source link
