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Private markets and alternatives in APAC

ShanghaiPrivate equity investors plan to ramp up their investments in the Asia-Pacific region by 11% in 2020, according to Preqin Pro data shared during our August webinar on private markets and alternatives in APAC. During the webinar, Funds Europe’s contributing editor, Fiona Rintoul, discussed growth drivers in APAC and practical considerations, such as fund vehicle choice, with a panel of four experts based in the region:

  • Mirana Cheung, managing director, China, at fund services provider Apex Group
  • Danny Tan, head of investment funds, Asia-Pacific, at global law firm Ashurst
  • Mervin Teo, vice president at healthcare private equity firm Quadria Capital
  • Wee Hwee Teo, head of real estate and asset management at KPMG’s tax practice in Hong Kong

Mirana began by outlining growth trends in private market. Globally, there are more deals but of a smaller size. North America and Europe continue to attract the most investment, but the momentum is with APAC.

Danny went on to illuminate the drivers of that interest. APAC’s attractions for investors seeking higher returns include a large population, strong consumer demand and urbanisation. Simply too large to ignore, the region is also emerging from the Covid-19 pandemic with advantages.

“Having entered and exited lockdown earlier than other parts of the world, North Asian countries will likely see their situation and business activities recovering earlier than the others as well,” Danny said. “Investors who are able to are looking for the right opportunities to get in.”

Who are those investors? Quadria completed its core fund raising right before Covid, and Mervin provided some insights on pre-pandemic trends.

“What we have seen is greater participation from US and European investors, who used to shun Asia. This includes pension funds that typically invest indirectly into Asia through larger buyout funds or funds of funds. We’ve seen them coming directly to regional and local managers.”

As healthcare specialists, Mervin’s firm Quadria Capital is in a sector where opportunities are growing, thanks to the Covid-19 pandemic. However, he explained that healthcare was vibrant sector in APAC before this with “the global centre of gravity for healthcare moving from the west to the east”.

Healthcare shortage in emerging Asian economies lie behind this. Asia accounts for 35% of the global population but over 50% of the global disease burden – and just 5-10% of global healthcare spend. This has created an estimated annual funding gap in Asian healthcare spending of US$70 billion that governments cannot fill.

“We as private investors see a role to play in providing high-quality, affordable accessible healthcare,” Mervin said.

There is a need across the board, but Covid has accelerated certain sectors. These include healthcare IT, digital healthcare and tele-healthcare. “It’s thinking about new ways to provide healthcare in a more affordable and much safer way,” Mervin said.

Mirana went on to outline private-markets opportunities in APAC infrastructure. Previously dominated by sovereign funds or state enterprises, infrastructure deals in emerging markets such as Vietnam, India, Myanmar and Indonesia, now attract more participation from private finance, as governments are often constrained by lack of resources.

“They have now opened their markets to foreign investors and are keen to create the right investment climate for private finance,” Mirana said.

There is no shortage of infrastructure opportunities in Greater China either. These are being driven by initiatives such as One Belt, One Road and the Great Bay Area plan.

Wee Hwee added that renewables are becoming a hot sector in APAC infrastructure. He also highlighted real estate demand driven by Covid-19 and e-commerce.

“We’re seeing a lot of interest in data centres and data-centre operating companies,” he said.

Danny next addressed the issue of fund structure and domicile choice for private-markets investment in APAC. To avoid introducing additional complications to the difficult task of persuading limited partners (LPs) to invest, it is important to choose the right vehicle, he said.

Traditionally, Cayman has dominated, with its user-friendly regulation and wide range of fund structures, including the Cayman Limited Partnership, the Cayman Exempt Company (a favourite open-ended vehicle for hedge funds) and the Cayman Segregated Portfolio Company for multi-funds. However, scandals such as the Panama Papers and increasing OECD scrutiny of offshore fund jurisdictions is changing this.

“We see fund managers preferring to domicile funds in more regulated jurisdictions partly because they do not think the trend towards substance and transparency will reverse soon and partly because the cost and compliance burden of setting up in an offshore jurisdiction is increasing so much that the advantage of setting up there is being eroded,” said Danny.

Onshore jurisdictions are beefing up their fund infrastructure to catch this onshoring wave. Singapore introduced the variable capital company (VCC) earlier this year and is encouraging its use with grants. In 2018, Hong Kong introduced the open-ended investment company (OEIC). Meanwhile, Luxembourg and Irish vehicles are seen less in APAC. If they are used, it is typically because funds will be raised from the EU market.

Wee Hwee highlighted another driver of onshoring: tax. Regardless of fund domicile, it is common for fund managers to set up a holding company in Singapore to take advantage of its network of double tax treaties. However, increasing focus on substance means structures not domiciled in Singapore could be susceptible to challenges from the local tax authority.

“The fund should therefore ideally be domiciled in the same location as the holding company,” Wee Hwee said.

He also noted that a company structure is generally better than a limited partnership from a tax perspective because limited partnerships are not eligible for treaty benefits. However, investors need to become more familiar with the corporate structure.

Responding to a question from the audience, Mirana outlined the advantages of Hong Kong as a fund domicile with its ties to mainland China, which will be boosted by the Greater Bay Area plan. She had earlier observed that new Hong Kong fund structures, especially the Limited Partnership Fund, which was introduced on 31 August 2020, are particularly welcomed by managers based in mainland China with funds managing inbound investments financed by international investors. Also responding to the audience, Danny noted that uptake of the Singapore VCC has been high, but it remains to be seen whether it will change the funds landscape.

The panel then turned to the question of investor demands in these testing times. Mervin noted that investors are focused on capital preservation, with returns viewed as a bonus. They are also keener than ever to be kept informed, requiring more regular updates, information on how Covid-19 is impacting their investments and social impact reporting.

Mirana added that she sees a strong focus on data protection and cyber-security, while Wee Hwee pointed to the importance of substance for investors from a tax point of view. He also noted that fund managers must increasingly take account of tax immunity, as investors with tax immunity such as the Asian Development Bank and the United Nations invest in these markets.

The webinar concluded with a look the future – which is harder than ever to predict.

“It’s difficult to be optimistic when hundreds of thousands of people have lost their lives, but I firmly believe the underlying fundamentals in Asia will remain strong,” said Mervin.

Watch the full webinar on our Webinars Channel.

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