Achieving Private Equity Alpha in Asia’s “New Normal”


Peter Pfister is a Partner and Head of Asia-Pacific on the Global Investment Team at Altius Associates, a global private equity advisory and separate account management firm. Altius has been advising institutional investors on private market investments since 1998 and currently manages and advises approximately US$27 billion (as of 31 December 2014).

This piece is adapted from Key Challenges Facing Private Markets in 2015, Altius Associates’ third-annual analysis of important issues facing the industry.

In 2014, Asia entered a “New Normal”. What does this “New Normal” mean, and can private equity outperformance be generated within the context of this new environment over the next several years?

The “New Normal” refers to changing characteristics in the Asian macroeconomic and political landscapes that are expected to persist for a period of time.

  • Asia is witnessing lower growth in both emerging and developed markets;
  • Many larger countries in the region have gone through leadership transitions, with new leaders keen to enact concrete pro-business policies backed by a strong political mandate; and
  • Asia is experiencing diverging valuation dynamics, with select markets above and others below historical averages.

The impact of these changes on future private equity returns is a key question on investors’ minds. As all of these changes take place within the landscape of Asia, institutional investors are questioning if now is a good time to invest in Asia and if expected returns justify private equity investments in the region.

GDP growth has traditionally been cited as a strong supporting case for Asian private equity, especially for private equity as practiced in Emerging Asia. Positive demographics and a large growing middle-income population in several major emerging Asian markets are often thought to be the fundamental building blocks of generating strong private equity returns. However, several studies on correlation between GDP growth and private equity returns paint a different picture. As depicted in the chart below, these studies reveal there is no real correlation between the level of GDP growth and private equity returns and suggest that private equity is ultimately a “micro” business. With slower growth forecast for the region, there is a clear emerging trend for an increase in control deals in Emerging Asia, which has traditionally been a growth equity market.


In a slower growth environment, entrepreneurs are more inclined to seek a financial sponsor who can add strategic insight and, more importantly, operational value-add in order to navigate a more challenging environment. In addition, growth by acquisition is a resulting strategy shift when overall growth slows down. Within the framework of such changes, LPs have an opportunity to shift their portfolio construction to include select managers who have developed in-house capabilities of taking control and possess the skill-set to add operational value. Increasingly, Altius is seeing successful managers streamlining their investment focus to specific sectors where they have direct and unique industry networks and/or knowledge.

Asia is on the cusp of a new chapter in its political history. In 2013-2014, new governments were installed in several of the key markets of Emerging Asia, including China, India and Indonesia. Additionally, political undercurrents also shifted in countries such as Thailand and Malaysia. Generally, the changes in the political landscape in Emerging Asia are a positive transformation, with new leaders generally having a historical track record of being pro-business. More importantly, in countries where political gridlock was the key factor hampering the effective implementation of policies, new governments now have strong political mandates, as in the case of India where the BJP Party has a majority for the first time in close to three decades.

There is also a greater trend towards economic integration within the region, as seen in the development of the Free Trade Area of the Asia-Pacific (“FTAAP”) agreement roadmap from the recent APEC Summit in Beijing. Further progress has also been made in the implementation of the ASEAN Economic Community (“AEC”) blueprint. These shifts and changes present opportunities for astute investors who are able to identify opportunities and have the skillset to crystallize them.

Private equity investment pace in 2014 increased significantly across Emerging Asia, reflecting the growth of attractive deals in the region related to some of the trends already discussed. Private equity managers deployed US$26 billion in Emerging Asia in 2014, representing a 47% year-on-year increase. A decrease in competition, particularly in the middle market, has further served to fortify the market position of GPs who have demonstrated strong cash-on-cash distributions and are able to successfully fundraise and invest in a favorable environment. Obtaining full allocations to these often oversubscribed funds are proving to be increasingly difficult, and in some instances can only be guaranteed by the establishment of a long-term partnership with these managers.


Deal valuations continue to remain relatively attractive for Asia. Although valuation cycles differ from market to market, as a whole the dynamics benefit the asset class in the region. Fund managers are continuing to close the valuation gap between buyers and sellers by building strong operational teams that have deep industry knowledge and networks to add even greater value to portfolio companies. Pricing no longer acts as the single catalyst to bring a deal to fruition. Vertical knowledge and strategic focus on origination have become integral parts of a proprietary deal-sourcing pipeline that helps GPs avoid overpaying on a deal. In 2014, some of the largest deals in the region were executed at single-digit EV/EBITDA multiples.

Exits have also been an important element for Asia-focused fund managers. GPs are increasingly adopting highly-versatile exit mechanisms, including trade sales and M&A. In 2014, the market witnessed an even stronger and renewed focus on exits by a high number of GPs, some who established dedicated teams focusing on exits from the onset of an investment. This renewed focus has translated into a record level of disbursements for Emerging Asia, far surpassing levels recorded in previous years.


KKR and Affinity Equity Partners sale of Oriental Brewery to Anheuser-Busch InBev for US$5.8 billion was the largest trade sale ever recorded in Asia. Moreover, Alibaba’s listing was the largest IPO in the world. Private equity exits are on a clear upward trend in Asia, and Altius expects this momentum to carry on in 2015.

The “New Normal”, with slower growth and new leadership in a large subset of Asian economies, is expected to positively impact the consolidation and maturation of the Asian private equity industry. These unfolding dynamics are pushing market players to develop clearer differentiation in origination; robust operational value-add capabilities and exit strategies; and to build long-term sustainable platforms. More importantly, the private equity cycle is showing healthy signs of sustainable growth in the future, with record exits in 2014, increased investment activity and less overall competition. This will very likely support an increased interest in the region by global investors, particularly considering the relatively modest valuations as compared to the U.S. and European markets. These developments bode well for the future of private equity in the region and will become the bedrock of stronger and more stable returns.