Investors will find it worthwhile to study and consider private markets in Asia-Pacific in the long run, particularly in countries such as Australia, Japan, South Korea, and India, said Yup Kim, CIO of the $41 billion Texas Municipal Retirement System, Austin.
Speaking during a fireside chat at SuperReturn Asia in Singapore on Sept. 25, he admitted that the narrative around Asia has changed in recent years, specifically around China, but limited partners globally are making a mistake if they are not visiting and studying the markets.
“The homework assignment to be successful in Asia for the next 10 years is a lot harder for LPs, right? You have to understand Australia, Japan, Korea, Southeast Asia, India… And so I do think the bar is going to be a lot higher to be successful. But I do think it's absolutely critical,” he said.
Two years ago, he believed that the majority of equity value creation in his lifetime would emerge from Asia and that he has a “deep, deep love fundamentally for this region.”
For the first time in a while, his thesis about Asia is being severely challenged, he said. But he believes performance will soon follow, and that Asia is too large to ignore.
“If you want to understand deeply global companies based in the U.S. without understanding Asia's supply chains, understanding Asia's consumer and enterprise preferences, it's really hard to be a successful investor long term,” he added.
However, he noted that investors should not expect short-term 18- to 24-month returns from their Asian private equity investments, and that Asia is a “constellation of incredibly different cultures, demographics, maturity of capital markets, quality advantage… and so you cannot paint a monolithic brush (across the region),” he said.
For instance, while he sees opportunities in select countries, he says China in the short term has fallen out of favor with investors for a reason.
In 2020, China’s venture capital and private equity scene was driving Asia’s private equity returns, which “generated 300 to 400 basis points above the U.S. and Western European PE returns at about the equal amount of volatility. Clearly, that clearly has very much changed,” he said.
“Up until 2020 I was a very strong China bull,” he said. “I do think in the short term, it's very difficult to say, but I do think in the next 10 to 15 years, there's going to be a lot of equity that is created across Chinese companies. I believe in the Chinese entrepreneur, the consumer, the enterprise… (But) I don't know that this return stream is available to us the same way it will be available to maybe many Asia-based investors, certainly Middle Eastern investors and some European investors,” he added.
He is more optimistic about Australia, however, where investors can “make very reasonable mid-market buyout returns by building some of the national champions that cater to the domestic markets,” he said.
Some domestic “champions” have found success internationally, he said, and valuations are cheaper there than in the U.S. and Western Europe. He also noted that there are 23,000 mid-market companies in Australia.
U.S. investors will have to watch out for currency risk, however, because “the Aussie dollar has been somewhat weak against a stronger dollar,” he said.
In Japan, there are opportunities as corporate management teams have not been optimizing the return on investment capital, and founder entrepreneurs from the 70s and 80s are now looking at succession plans, which require a private equity solution to facilitate, he said.
“Across both Japan and Korea, there's a recognition by the government that, given the demographic trends, a lot of the productivity gains has to come from technology,” he added. “And so I think there's just a lot of excitement, as you think about the next generation (of) software companies being built in Japan, and also consumer companies being built in Korea.”
He is also positive on India, which he recognized as a global leader in low-cost technology. “They're digitizing all segments of society. And there's just been a very strong consumer growth story there that will lead to strong community growth in the coming years,” he said.
