Written by Adam Reza and Jason Saw of 27 Group
2018 saw continued uncertainty on the global economic front, dominated by the narrative that the West continues to be in a state of economic decline. Despite this, such caricatures depicting doomsday economic scenarios have not failed to dampen the appetite of players in the private equity (PE) space, who managed to raise funds despite a choppy global investment climate. Indeed, PE funds collectively raised USD358.25 billion in funds in 2018, higher than 2012 and 2015. Even more interesting has been the fact that a big driver of PE activity hasn’t been centred in the burgeoning economies of Asia – land of unicorns, large and tech savvy consumers. On the contrary, most of the growth has been driven by large buyout exercises, with increased activity in Western-based funds.
Figure 1
So why despite the doom of gloom have Western funds outdone Asian funds? How has Asia failed to translate its great economic story into concrete PE investments? The answer lies in one matter: complexity. Investing in Asia simply isn’t a straightforward affair. Consider the experiences of China – Asia’s largest market.
Figure 2
First, there’s a lot red tape. Concerns of swelling debt levels have seen the central government increasing red tape, making it more difficult to stimulate PE investments in China. Second, it’s hard to tell what the real deal is. Of course, there is always the allure of investing in a future Didi or Ali Baba. But on the flipside, the concern is that there’s no real and reliable way for investors to tell a unicorn from a dud. Third, the market is just overpriced. At 31 times EBITDA, median M&A deal multiples for Chinese Internet and tech companies are twice as high as those for other industries in Greater China, and 2.4 times greater than the median multiple for Asia-Pacific deals in 2016–18.
Complex, uncertain and expensive; it would seem that despite China and indeed Asia’s huge potential – in the absence of structural reforms and policy certainty – it is unlikely to present itself as a viable alternative to the West as a PE destination for now. Does this mean investors should write-off Asia on their portfolios? Just as how commentary on the West’s fortunes may be exaggerated, the same applies to Asia. It would be rash to dismiss Asia as a hotbed for fool’s gold. For sure, it may be more difficult to identify great targets but the fact remains that Asia has the wherewithal and consumer base to set the tone for regional growth. As such, given current constraints, the best way to unravel the best investment opportunities would simply be to navigate these choppy terrains better.
All of these points towards the increasing importance of good due diligence. Consider the impact of quality due diligence in say the SME front in China – a segment starving for private financing. Doing so would not only allow for gems to be discovered, in fact, it could also make PE more accessible to general retail investors who tend to look for smaller deals. Good due diligence means reliable information as well. You’re more likely to be able to weed out winners from losers; information that is especially important in a time of economic downturn where the prospect of company’s failing is bigger. Reliable information allows investors to enter deals with their eyes wide open. So long as a company is fundamentally sound and isn’t carrying too much leverage, it can still perform through a downturn.
In a nutshell, complex Asia does not mean zero returns. Rather it just means digging a bit deeper to unearth hidden gems. This concept of strong due diligence is something that should also apply to Malaysia, more so because we face the same economic headwinds. As things stand, it is encouraging to note that according to the Securities Commission, in 2018 Malaysia’s PE and venture capital activity jumped 46.8% to MYR613.3 million. However, public funds still remain the largest source of capital for Malaysian industries at 40.2% with sovereign wealth funds contributing 30.2%. Given Malaysia’s aspirations of climbing the economic ladder, it is imperative that private funds drive a larger part of investments. Like the rest of Asia there’s a great economic story to be told here in Malaysia. Getting the desired results will hinge on how available the hard facts and numbers are. On this front, good due diligence is certainly a way produce quick wins.
27Group
27Group is composed of 27 Advisory, 27 Capital and 27 Projects, each a functional building block of our unique, integrated offering across strategic consulting, financing and project delivery with a singular focus on built asset projects, driven and underpinned by our ethos of Rebuilding Humanity. The team, having more than 27 years in the transformation consulting business, is able to provide access to investors for competitive funding needs whilst providing better ways to operate business through financial and corporate advisory. We also provide project development integration to improve project returns and are committed to providing a sustainable environment for a better tomorrow. Our deliver model blends values important to humanity into business strategy through socio-economic transformation modules. We are passionate about building opportunities for the next generation to achieve their highest economic potential. We strive to achieve this through our focus on Socio Economic Transformation, Innovative Funding Models and Development Integrators. Rebuild with us.
Drop us a note if you would like to know more about what we do: jason@27capital.com.my/adamreza@27advisory.com.my
