Investors should take a nuanced view of Asian private equity, considering the performance and investment opportunities of specific geographies rather than treat the region as a single market, the Hong Kong Venture Capital & Private Equity Association’s (HKVCA) Asia forum heard.

“When you look at returns, there are two parts – North Asia and emerging Asia. They are very different, and people don’t recognise that. The returns from North Asia have been broadly comparable to the US and Europe, said K.Y. Tang, founding chairman and managing partner of pan-regional buyout firm Affinity Equity Partners.

Over the past 15 years, private equity firms have exited 149 investments in Korea where the equity cheque size on entry was more than USD 100m, Tang noted. The average holding period was 4.3 years and the average return was 2.5x. Similar numbers were reported by Korean media last week. They compare favourably to US buyouts over the same period, where the average return is 2.4x.

“We should stop trying to be defensive,” Tang said, adding that Australia has also performed well. As for emerging markets, he admitted inherent volatility and cyclicality, as well as limited scalability, presented challenges to investors.

For Jenny Lee, a managing partner at venture capital firm GGV Capital, Asia is “the kingmaker of all diversification strategy” in an LP’s portfolio. It operates on two levels – by geography and by duration, given the region comprises markets with different local conditions and at different points on the technology adoption and innovation journey.

“I look at venture capital as a 10-year duration movie that is being played out at different speeds and with different stories in every region when it is localised,” Lee said, observing that developments in electric vehicles that she saw 10 years ago in China are now being replicated in India.

“Understanding what has happened in mature markets and being able to translate that – I wouldn’t say copy – to the region you are in, that’s where you get the alpha.”

The notion that some investors fail to identify this diversity, because they “tend to simplify Asia into one market,” was echoed by Stephanie Hui, head of private equity and growth equity in Asia Pacific and global co-head of growth equity at Goldman Sachs Asset Management. “As a responsible asset allocator, you cannot say that for the next five years, I’m not going to do this,” she said. “It is important to look under the hood.”

These observations come at a difficult time for Asian private equity, which is suffering more than most in a global fundraising downturn. Last year, commitments to managers in the region, excluding renminbi-denominated funds, reached USD 56bn, down 50% on 2022 and the lowest total in a decade, according to AVCJ Research. Japan was the only market to see an increase in fundraising.

An aversion to China, uncertainty regarding exits, and performance that fails to match the US and Europe on a risk-return basis are commonly stated reasons for LP reluctance to commit to Asia. However, Hui noted that Asia’s performance wasn’t being questioned before 2010.

“It depends on what picture people see, what vantage point they have. What happened in the last 10 years in the US and Europe was very cheap leverage, multiple expansion in the stock markets, and some growth investing,” she said, drawing comparisons between the focus on valuation multiples based on revenue and average recurring revenue and behaviour during the tech bubble.

“If you are middle aged and you put steroids in your body, you will feel younger and run faster. Now, with interest rates where they are at, the steroids are gone. In Asia, you see a younger population that hasn’t used steroids, and now it’s coming on faster. Natural growth here will be very helpful.”

The onus is on LPs to pick the right managers, as Lee of GGV observed. According to Tang, the longevity of the asset class in Asia means it is easier to identify the likely outperformers.

“It’s like a classical pianist – the more you play, the better you become,” he said. “Many firms have been around 20-25 years; the partners have been there for 15-20 years. They have gone through COVID, they have gone through the GFC [global financial crisis], they have gone through the AFC [Asian financial crisis], and they have become much cleverer in how they play the game.”