Private markets in certain parts of Asia-Pacific, such as Southeast Asia, are showing signs of life, but concerns about unlisted asset valuations that came to light during the market downturn in 2022 continue to weigh on asset owners' minds.
Deal flow in Asia-Pacific is recovering slowly. In the first quarter of the year, the aggregate deal size in the region was $47.6 billion, a 36.4% drop from the same period last year, according to data provider Preqin.
By Sept. 30, aggregate deal value year-to-date had climbed to $144.6 billion, narrowing the gap to 26.2% from last year.
Fundraising has been difficult over the past two years after the drop in public market valuations caused liquidity constraints on assets owners as their portfolios began to skew more toward private assets, sources generally agreed. And while the situation has improved this year, asset owners have been asking more questions about how unlisted assets are valued.
One senior executive at an alternatives asset management firm said that private market valuation concerns were constantly raised during sessions at a high-profile investment conference held in Sydney in July.
"It was all anyone could talk about," he said, on condition of anonymity. The Australian regulators have been putting pressure on superannuation funds to keep a closer eye on their unlisted asset valuations, so the super funds are asking questions about how valuations are made and exploring alternative sources of valuating unlisted assets, he said.
The Australian Securities and Investments Commission and the Australian Prudential Regulation Authority in March said that superannuation trustees should be more proactive in updating the valuations of their unlisted assets, particularly when markets are volatile.
In September, APRA released findings of a review looking into the governance practices of superannuation funds with holdings in software firm Canva, which had its valuation cut by 36% to $25.5 billion earlier this year from $40 billion in 2021.
The regulator found that the super funds had queried valuation approaches of appointed investment managers and reflected valuation adjustments as necessary, but required improvements in areas such as interim revaluation triggers, gaps in the skill sets of their board members, and a lack of consideration in the impact of valuation decisions on expected performance and unit pricing.
Industry insiders said that changes in valuations of private assets typically lag those of public markets, and this caused asset owner portfolios to become lopsided when the stock markets plummeted in 2022. The MSCI All Country World index fell 18% in 2022.
However, as time went by, private asset valuations did not fall as dramatically as listed assets, and the disparity in public and private equity valuations meant that asset owners' portfolios began to skew and did not align with their target allocations. This prevented them from investing in new deals or committing capital to fresh fundraising rounds.
At that point, asset owners were looking at how to make sure private assets were marked to market and how to determine fair valuation, said Ken Yap, managing director for Asia at Cerulli Associates, which released a report in July that found that alternative deals were returning in Asia as the recovery in public equity market and public debts improved liquidity conditions for asset owners.
"If they're not deploying a lot of capital and yet the private equity portfolios are still rising in market share, even if the public assets have adjusted, you might say there are still some corrections needed," Yap said.
However, adjusting private valuations can get complicated. One common way of valuating private assets is through finding a comparable listed firm and using its price multiples to gauge a valuation. But no two companies are identical, so it is up to the discretion of private equity firms to choose which companies to compare with, Yap said.
It is one of the challenges that comes with private equity investing, and until an investment goes public, you cannot truly know a company's value, he added.
Globally, institutional investors have also said that they believe their private equity and venture capital holdings are overvalued, according to a Preqin survey.
Asset owners can ask more questions about how their GPs determine fair valuations and challenge some of the assumptions made about companies chosen as benchmarks, Yap added.
That said, even though private valuations did not plummet the way that public asset valuations did in 2022, they also do not rise at the same pace in a bull market, said Serge Allaire, head of private equity at Cbus Super, Melbourne.
"People tend to forget that in an up market, when public stocks rally, in fact, the PE side rallies by about half of the public market. So, it's not as if PE is underrepresenting the impact of the downturn and taking a nice ride on the upturn," he said.
"For instance, if you look at what happened in the first part of 2023, the S&P 500 and the Russell 2000 rallied around 20%. For the same period, the equivalent private equity-backed companies only rallied in the single digit around 5%," he added.
Cbus manages A$85 billion ($54.2 billion) in assets. The default retirement plan offered to participants allocates 2.2% of the portfolio to private equity, largely to buyout deals.
"On the buyout side, the PE managers would do a quarterly valuation, with typically an audited valuation at the end of the year. And this cycle is implemented across the whole industry and put in place with clear valuation guidelines," he said.
The valuation approach is well established, typically on a multiple of EBITDA and based on public and transaction comparisons, he added. He also noted that during the market rally between 2019 and 2022, multiples in the public market reached 20 times, from 15 times, but multiples of PE-backed companies increased only a fraction of that.
In the venture capital space, however, companies are valued based on multiples of revenues, or are at times marked down if there are macro dislocations.
"However, it's more challenging to set different or additional rules since companies are often loss making and with high revenue growth. This may leave the door open to some interpretation," he said.
He believes that progress has been made to get valuations on better footing and that the Australian regulators are approaching it the right way, by focusing on big companies like Canva, which are most likely to get listed in the short term. "So, it makes sense to ensure that they are more attuned to what's happening in the public space, including better alignment with comparable listed companies," he said.
Negative sentiment on China has dampened fundraising figures in Asia-Pacific, which could reach its lowest level in a decade this year, according to Preqin data.
Private equity fundraising in Asia-Pacific was $8.3 billion in the first half of the year, which was only 22% of the total amount raised in the region in all of 2022.
The aggregate capital of China-focused funds declined to $115.9 billion in the second quarter from $141.9 billion in the first quarter of the year.
The impact of China's slump in fundraising has been felt by fund managers across the region.
"China has played a very large role in driving deal volume, fundraising and investment gains in the last five-plus years," said Heath Zarin founder, chair and CEO of Hong Kong investment firm EmergeVest. "Given that a fairly large number of institutional capital allocators from outside of the region are more wary and risk averse on China right now, that continues to have a dampening mood for Asian private equity sentiment."
He noted that anecdotally, there has been interest in Southeast Asian prospects and the New Zealand market, but as a supply chain and logistic-focused fund manager, he remains bullish about investment opportunities in China in the medium term.
These opportunities extend beyond investing purely in onshore China, and can include investing in a Chinese company and helping it grow its operations or supply base outside of China.
"If you're going to set up an operation for producing electronic goods in a new Southeast Asian country, you can find a local entrepreneur or a local smaller business to invest in and to do that (or) you can also help a Chinese business that has that manufacturing capability in China to expand across multiple countries," he said.
EmergeVest has $850 million in assets under management.
In Southeast Asia, the private equity space has been robust, said Janice Leow, partner and head of global investor EQT's Southeast Asia private equity team.
EQT's Asian private equity platform has close to $40 billion total in assets under management.
"The tailwinds are extremely strong. I will say now you'll see a lot more large deals, (whereas) in the past it was a lot more on the midmarket and growth equity type of deals. Now we're starting to see a lot of sizable deals in Asia-Pacific," she said in a video interview from Singapore.
"So definitely we've seen some signs of maturity in the market. And this really ties to the growth of companies as well growing with the middle class, the population growth and also the generally rising GDP and foreign investment in the region," she added.
Markets such as India, Japan and Australia are also benefiting from the diversification that foreign investors are trying to push for, she said. Southeast Asia in particular has good dynamics, such as low costs of labor and a young, highly driven and digitally savvy population, she added.
She remains cautiously optimistic about the next 12 to 18 months as there are uncertainties about certain markets entering a macro slowdown or a political slowdown, but there are interesting segments such as in healthcare that are generally recession-proof.
"We stay diversified, (so) we are able to ensure that over the life cycle of our fund, we can deploy in different geographies (and that's) why we stay invested in multiple sectors," she said.
"One thing about Asia is that most of the countries are still developing countries. So the ability to forecast and predict is maybe less than what you would get in the U.S. … So what you have to do is ensure that you are diversified and always be in touch (with an) on the ground presence," she added.
