China removed from investors must-visit list

Money managers and institutional investors in the Asia-Pacific region are keeping each other at arm's length in an effort to bring the coronavirus outbreak under control, a trend that could weigh on new business opportunities for managers if it drags on.

That turn — at a time when stepping foot in the virus epicenter of mainland China can result in a 14-day quarantine — has transformed an industry of jet-setters into homebodies, with managers in financial centers such as Hong Kong and Singapore working from home to avoid colleagues as well as clients.

Along the way, road shows, visits to the region by key portfolio managers and all manner of on-site due diligence activities have been canceled or postponed.

There's no evidence to date that the industry's standoffish turn has derailed opportunities to win new business. One example: Aberdeen Standard Investments "just won a large mandate from Greater China" in recent days, noted Andrew Hendry, the firm's Singapore-based head of distribution for the Asia-Pacific region. He declined to name the client. Other managers, who likewise declined to be named, said their firms have also won mandates in February.

Still, some analysts predict a continued lockdown for managers and asset owners could trim the number of long-only mandates in play early this year and have an even greater impact on private markets allocations.

Tariq Ahmad, Singapore-based CEO and director, head of Asia with Brandywine Global Investment Management (Asia) Pte. Ltd., said while the spread of the coronavirus going forward remains uncertain, the outbreak could potentially depress new business activity in the region over the coming five or six months.

China — with more than 98% of the 75,748 confirmed coronavirus cases listed on the World Health Organization website as of Feb. 21 and more than 99% of the 2,129 outbreak-related deaths — remains the market most vulnerable to disruption.

In a fast-growing Asia-Pacific market where in-person meetings have traditionally greased the industry's wheels, market veterans say teleconferencing or videoconferencing should prove essential to getting through the current troubles.

"The use of technology and communication tools are key to keeping business going and growing during this time," said Ken Yap, Singapore-based managing director, Asia, with Cerulli Associates Asia Pte. Ltd.

Sequoia Capital China, the Menlo Park, Calif.-based venture capital firm's mainland affiliate, in a posting on China's WeChat platform, cited the "inconvenience" of moving about and meeting due to the epidemic for its decision to sponsor two online videoconference matchmaking sessions Feb. 18 and Feb. 25 connecting "outstanding entrepreneurs" at early stage Sequoia portfolio companies with other venture capital investors.

Neil Shen, managing partner of Sequoia Capital China, said in the posting that nearly 30 Sequoia portfolio companies and 50 "first-tier investors from venture capital institutions" signed up to participate, giving startup companies an opportunity to garner online financing "without leaving the house."

Mr. Hendry said rather than cancel meetings, his team at Aberdeen Standard is proactively switching to videoconferencing to work in an environment that could remain challenging through June or July.

"Clients still need to make decisions. Although it's less intimate doing it remotely, at this stage I imagine folks prefer less physical intimacy," he said.

Some money managers, while agreeing that videoconferencing is the tool of the hour now, say it remains to be seen how far it can carry discussions on new mandates.

Request-for-proposal activity "is still very much alive" but the acid test will be whether a videoconference can substitute for the final due diligence/managers meetings — either on-site or at a prospective client's office — that have traditionally been a key part of the process, said Robert White, Singapore-based president of Eaton Vance Management International (Asia) Pte Ltd.

On that score, Simon Coxeter, Mercer's Singapore-based director of strategic research for growth markets, expressed some confidence. Hurdles to face-to-face meetings now may be slowing some routine activity driving manager appointments, particularly in markets like China and Hong Kong, but with emails, conference calls and video calls filling the gap, "we continue to see RFPs proceeding smoothly in the region," he said.

The situation is seen as more fraught for asset segments such as private equity and venture capital, where in-person meetings and site visits are arguably more crucial to the investment process.

General partners of private equity funds "aren't putting new money to work, as they can't travel and meet companies," while institutional investors aren't making decisions right now on new funds, noted Suvir Varma, Singapore-based senior adviser, Southeast Asia, with consultant Bain & Co.

Dong Hun Jang, chief investment officer of the 12.2 trillion won ($10.2 billion) Seoul-based Public Officials Benefit Association, said at some point over the coming year his fund could issue RFPs for private equity, private debt and hedge funds and would be able to move ahead with first-round quantitative screening processes even if the current environment persists.

But a site visit would be essential to making a decision on a new general partner, as opposed to one POBA already knows, Mr. Jang said. To reach a decision on that type of relationship, alternatives such as a videoconferencing "cannot substitute for an actual face-to-face meeting," he said.

Executives at private equity firms say their activities are facing the greatest headwinds in China, which according to Ee Fai Kam, Preqin's Singapore-based head of research and Asian operations, accounts for roughly 50% of all private equity investments in the Asia-Pacific region. China is likewise the focus of roughly 80% of Preqin's tally of 2,999 country-specific private equity or venture capital funds for the Asia-Pacific region closed between 2016 and the present, Mr. Kam said.

"On the investment side, our China teams … have seen slower deal flow due to the lack of physical meetings," said an executive with one Hong Kong-based private markets investor, who declined to be named. "Outside China, though, everything is operating normally."

The head of another private equity firm based in Hong Kong, who likewise declined to be named, agreed there's little or no disruption in markets like India and South Korea, although general partners with local offices in those markets are better placed to move forward now.

"China, in contrast, is slow for the time being" and the prudent thing to do now is wait things out a bit. "Better to give this some time," he said.

Preqin's Mr. Kam said the impact of air travel bans and fewer face-to-face meetings on the venture capital space will be even greater, as "the ability to connect on an interpersonal level" with founders of a company the venture capital partners are looking to back "matters a lot."

Against that backdrop, private equity and venture capital managers just getting off the ground now will find it even harder to compete with "brand name" general partners that boast strong ties with big institutional investors around the world, noted both Messrs. Varma and Kam.

More established players say they're making do.

For now, the impact of the current environment on the private equity industry is "tiny and unquantifiable," but if the situation results in long-term travel bans, "there will be an impact," Mr. Varma said.