Intertrust N : Six private equity trends in Asia-Pacific in 2022

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As travel restrictions begin to ease, private equity activity across the Asia-Pacific region is set to keep growing. But what will be the key trends this year? We make our predictions

We're expecting 2022 to be a buoyant and dynamic year for private equity in the Asia-Pacific region.

Despite the Covid-19 pandemic bringing strict border controls across Asia, Australia and New Zealand, business has been robust.

Once restrictions start to ease this year, economic activity, expansionary corporate deals and cross-border M&A are expected to take off.

Amid this buoyant business environment, we've spotted several trends that will set the private equity agenda in the Asia-Pacific region in 2022.

1. Rising inflation will create opportunities

The first key trend is the effect of rising inflation on the private equity market in Asia-Pacific. Many businesses have taken on excess debt in the past couple of years on the back of low interest rates.

As rates begin to rise, some of these companies may become distressed or need to be recapitalised. That creates an opportunity for private equity to step in.

Rising interest rates will also impact sector focus for private equity. The past couple of years have been marked by investments into high-growth tech companies with very high valuations.

We expect to see a shift from high-growth companies with weak balance sheets towards sectors and companies with solid earnings and strong pricing power - elements that put businesses in a better place to weather inflation.

2. The comeback of small fund managers

Large global fund managers have dominated the private fund market - particularly in Asia, where border restrictions and geopolitical challenges are harder to navigate for smaller funds.

As a result, capital was directed towards well-known global and regional managers with a strong track record and brand-name recognition. Larger fund managers, who can rely on local investment teams, have been largely unaffected by travel restrictions. But as borders open up, smaller managers will be able to compete again.

We're also seeing a growing number of fund start-ups, which may be linked to the Great Resignation trend that has emerged in the past year. A lot of fund managers and investment professionals are moving out of established brand names and setting up boutique firms.

3. Private capital investments to diversify across Asia-Pacific

While China will remain a key market for investors, limited partners will increasingly want to spread their investments across the Asia-Pacific region for diversification. We're seeing a lot of interest in private capital deals in India, Japan and South Korea, which are set to benefit from this trend.

4. ESG will take off in Asia-Pacific in 2022

In only a few years, environmental, social and governance (ESG) criteria have gone from "nice to have" to "must have" for fund managers in the Asia-Pacific region.

In Baker McKenzie's latest report on ESG in Asia-Pacific, 90% of respondents say ESG is at least a part of the discussion when their companies consider acquisitions or other investment activities.

Increased investor demands and the roll-out of mandatory disclosure requirements in Europe and the US have pushed managers to embed ESG issues in their investment strategies, the report said.

We expect not only to see more investor scrutiny on ESG during upfront due diligence process, but investors will hold fund managers to account on their ESG commitments throughout the lifecycle of the fund.

5. Real estate set to be buoyant in Asia in 2022

Commercial real estate will rebound in 2022, particularly in Asia, where the market is different for cultural and demographic reasons. Workers are likely to return to the office more swiftly because there is far less enthusiasm for working from home than in Europe and the US.

Many employees in Asia have struggled to reconcile homeworking with their limited living space and are eager to feel part of a team at their workplace. But they will expect strict hygiene and reinforced health-and-safety measures as well as improved facilities to minimise the risk of infection. As a result, real estate managers will have to upgrade their properties for the post-Covid world.

Another interesting trend is the shift towards rental space optimisation. Many employers plan to downscale office space to reduce rent.

This will reshape the commercial real estate market in large cities like Beijing, Sydney and Seoul, where employers will adopt a hub-and-spoke approach for office space, increasingly relying on coworking and flexible office solutions.

Companies will downsize the footprint of their main headquarters and open satellite offices in the outskirts, so staff need to visit the central office only once a week or a few times a month. This will boost commercial property valuations in some satellite cities around Asia's sprawling metropolises.

The growth of commercial real estate will not be limited to office space. An ageing population is creating demand for healthcare facilities across many Asian markets.

New technology such as the rollout of 5G and growth of online shopping is creating more demand for data centres and logistics warehouses. All this will continue to reshape real estate valuations in the region.

6. More domestic Asia IPOs in 2022

Last year was a bumper time for IPOs and we're seeing a slowdown as the market takes a breath. However, this is just a short-term trend before activity picks up in the second quarter and the latter part of 2022. The trend will be for fewer offshore IPOs, with more domestic flotations in China, Hong Kong and Singapore.

The listing rules for special purpose acquisition companies (SPACs) in Singapore and Hong Kong have been finalised, and we expect this to drive a lot of exit opportunities for private equity companies in the region, particularly for Chinese companies who can opt for a listing closer to home. We expect a strong trend for more SPACs during the year, led by Singapore and Hong Kong.

All these trends are expected to bolster economic activity and private equity deals in the Asia-Pacific region in 2022.

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