The regional round up

What’s the word on the street in some of Asia’s most important markets?

A market that has held promise for many years, Japan is finally having its moment as economic and corporate governance reforms are taking root. “Things have fundamentally changed in Japan over the past few years,” says David Hunt, President & CEO of PGIM.

“We are now seeing price and wage increases, corporates are focusing much more on governance and the country has made significant progress in bringing more women in to the workforce to help deal with its ageing demographic profile. There is a lot of hype about the market currently and I think some of that has got ahead of itself, but Japan is one of the big beneficiaries of geopolitical tensions – many companies are using Japan now as a base for their Asian operations.”

These shifts are also now being felt in the country’s private equity market as businesses become more open to the industry’s approaches. Among the deals often cited as examples of private equity’s acceptance in the country is the 2023 $15bn take-private of conglomerate Toshiba.

“Japan is coming of age,” says Sunil Mishra, Partner Adams Street Partners. “Its economy is large, but it has historically had cultural sensitivities around private equity. That is now changing as deals such as Toshiba have got over the line – that was a defining moment for the industry there. I’m excited about Japan – there is a growing depth and sophistication of GPs there.”

And there are plenty more of these kinds of deals – along with succession transactions, given Japan’s ageing population – as the Tokyo Stock Exchange (TSE) has undertaken reforms, including requiring publicly-listed companies to form a plan to ensure their market value is greater than their book value.

“Take-privates will fuel the supply of deals in Japan,” Jun Tsusaka, CEO and CIO of NSSK. “There are around 4,000 public companies on the TSE and 3,000 of them are trading at less than $1bn and more than 30% trading under book value. These companies may not have research coverage, and many have limited public float and low market values. As a result, many are looking at whether they really should be public, given the TSE’s reforms and activist investor pressure.”

Japan

^India

India is getting a lot of attention right now. And the reasons, according to Amit Dalmia, Senior Managing Director at Blackstone, are clear. “In India, there is a lot of momentum, which is driven by the three Ds – demographic dividend, digitalisation and democracy,” he says. “Also, India’s scale is reflected in number four, five, six – the fourth largest public market, fifth largest economy and 6%-plus real GDP growth.”

And, while exits were challenging a few years ago, many believe things have changed dramatically. “Five years ago, very few in India would have said that IPO was an exit option for a venture-backed company,” says Surya Mantha, Managing Partner, Capria. “Today, the stock market has deepened, Indian participation is higher than foreign participation and it offers terrific liquidity – it’s the fourth largest in the world. There is excess and irrational exuberance, but this will sort itself out in the short term. Over the medium to long term, IPO has become a viable and a credible option for venture-backed companies.”

South East Asia

Southeast Asia was already growing, but China’s reset over recent years has boosted the region’s prospects further. “The China-plus-one story has favoured Southeast Asia more than any other part of the world,” says Nicholas Bloy, Co-Founder & Managing Partner at Navis Capital Partners. “The region has an industrial ecosystem that is half the size of, but comparable to, that of China. It has the same kind of precision engineering, complex manufacturing capability. So, we’re seeing exports from Malaysia up by about 12% because supply chain managers are saying they need an alternative to China for their sophisticated electronics, for example. It’s not easy to exit as the public markets have not yet fully woken up, but the multinational buyers, who were absent from the market for a couple of years, are now starting to return.”

And it’s not just industries such as electronics that are benefiting from geopolitical tensions or some of China’s economic policies. “China’s cost containment programme is having a serious impact on companies,” says a private equity firm founder and CEO. “Pricing of health products, for example, is among the lowest in the world – so, a well known cancer drug in China costs about 5% of the US price. Chinese companies are therefore thinking about where they can look outward for growth with relatively little geopolitical risk, so many are looking at setting up manufacturing in Southeast Asia.”

China

Yet China itself is not bereft of investment opportunities, says the founder and CEO. “Investor interest in China is the lowest we’ve seen it. But from our perspective, now is probably the best time we’ve seen for investing because there are higher quality deals, lower valuations, less competition and there are now a lot of attractive opportunities because of the economic slowdown. There’s consolidation and there are control transactions happening. The exit market is challenging, and we do have to focus on this to deliver DPI to our investors, but overall, the excessive pessimism is helping us a lot.”

Investors have to do their homework. “In China, it’s just too simple to say there’s not a lot of money being invested, so valuations are cheap and so we should invest in everything,” says Gunther Hamm, Partner & Co-President at HOPU Investments. “That’s not the solution. The real answer is that companies are less expensive and some of them are good, some of them are not. So, you do the work to find the opportunities where the free cash flows of the business pay back your investment in three or four years and then you can be opportunistic about how you exit from there.”

Australia

One of the region’s more mature markets, Australia is seeing some outsized successes in software, according to John Henderson, General Partner at Airtree Ventures. Counterintuitively, that’s a natural consequence of being far from other markets and having a population that numbers just 26 million people.

“Two obstacles – geographic isolation and a small population – have turned into advantages for Australian software companies,” he says. “Ambitious entrepreneurs, realising that they can’t generate venture returns from a business servicing just the Australian market, know that they have to go for global markets almost from day one. They have come up with highly efficient go-to-market models that they can sell from their Australian base because they have to fly thousands of miles to get to other markets. They are capital-efficient and they become large companies in a short timeframe.” There are also plenty of opportunities for more mature businesses. “There are between 60,000 and 65,000 small and medium-sized enterprises in Australia and if we assume that up to 15,000 of these are actionable opportunities, that’s quite a deep pool,” says Simon Feiglin, Managing Partner at Riverside Asia Partners. “Many of these are owned by the baby boom generation and we can work with them to help find solutions that they can’t do on their own – they can’t access the public markets and Australia is under-serviced for capital, so for firms with capital, there are some great opportunities.”

Korea

Home to trends that have swept the world, such as K-pop and K-beauty, Korea’s dynamism today is unique, with many companies able to grow rapidly in their domestic market even before targeting international expansion.

“Korean consumers are very tech-savvy, fast adopters and open to innovation, all of which sits on top of the latest IT infrastructure,” says a director at a corporate investor. “This means that B2C companies in Korea can scale successfully even in a market with just around 50 million people.”

This growth is supported by government policies and investments that fund innovation. “The Korean government recognises that startups are a vital engine for the economy and so the government fund has invested around $1.5bn this year alone as an LP in VC funds in Korea and globally,” says Yeojung Moon, Senior Managing Director, IMM Investment. “It can be a smart investment strategy to follow the Korean government’s money and policies. There are also open innovation efforts, where companies such as Samsung, LG and HMG are actively investing in Korean startups and providing strategic support for founders to go global. So it can also be smart to follow these corporate investors.”

Yet investing is only part of the story – and here Korea has a secret sauce, says Moon.

“Korea has a specialised public markets track for startups in areas such as healthcare and deep tech – this is for companies that are not yet profitable, but growing fast – and there are high trading volumes in this market,” she says. “It also has a lot of secondary funds for start-ups. As a result, unlike the US, where the venture capital fund cycle is around 10 to 12 years, in Korea, it is shorter at about seven to 10 years. That means venture funds in Korea have a good ecosystem for liquidity.”

Yet all this does come at a price. “Valuations are clearly higher in Korea than many other markets,” says the corporate investor director. “Sometimes that may be justified, sometimes not, but it is linked to the fact that there is a clear path to exit for Korean companies – most of the time it’s IPO. As an investor, we have to assess the returns and whether there is comfort that an exit and return will be there.”