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Looking forward: Asia in 2017

Asia-based private equity market participants expect a tougher year for fundraising as well as more competition for big-ticket deals.

1. Fundraising will get tougher 

Fundraising will be tougher in 2017 as the level of competition for investor allocations increases with several pan-Asian funds back in market. KKR is targeting up to $7 billion for its third Asian fund, TPG is eyeing more than $4 billion for its seventh Asia-focused fund, while Carlyle’s fifth Asia-Pacific growth fund has a target of around $1 billion.

“2017 will be an even more challenging year from a fundraising perspective for everyone else, because it will be a year of re-ups,” a Shanghai-based placement agent commented.

2. More money goes to Japan 

According to a Hong Kong-based placement agent, the industry is witnessing more US pensions diverting money from European funds into Asia, and unlike a few years ago where China and India drew the most attention, investors are now eyeing more developed economies like Japan, South Korea and Australia.

Japan is of particular interest, says the placement agent, not only for burgeoning opportunities in corporate carve-outs and conglomerate restructurings but also in the lower to mid-market space. Small to mid-market players have been back on the fundraising trail buoyed by the Abe administration’s monetary and fiscal reforms. Funds including J-STAR, Advantage Partners, CITIC Capital Japan and Nippon Sangyo Suishin Kiko (NSSK) are currently raising close to $4 billion.

3. China’s internet run is over 

Global investors in recent years have plunked down billions of dollars in China’s technology sector from e-commerce and online travel to mobile gaming and virtual reality. However, the country’s economic slowdown, coupled with a turbulent stock market is prompting investors to question China’s sky-high start-up valuations.

Smartphone maker Xiaomi, backed by high profile investors such as Singapore’s GIC and Alibaba-funded Yunfeng Capital, raised billions during China’s internet boom and commanded a $46 billion valuation. But it is now facing growing pressure to live up to expectations after missing its sales target.

“Because of the consolidation in the internet space, valuations are starting to cool down,” says a Hong Kong-based managing partner of a pan-Asian private equity firm. “And most signs are starting to point that China’s internet run is over and growth capital deals are on their way out.”

4. Private equity firms and strategics go head-to-head in deals 

In 2017, there will be more competition for big-ticket transactions.

This year saw an increase in partnerships between private equity firms and strategic investors for multi-billion dollar deals. Notable pairings include Hong Kong-based PAG Asia Capital and Chinese printing company Apex Technology for the $3.6 billion takeover of US printer maker Lexmark.

“Along with the emergence of credible and increasingly successful China-based funds that continue to compete head-to-head with international private equity funds, we are also seeing strategic investors and private equity firms competing against each other for the same, and increasingly limited, number of assets each year,” says Steven Tran, a Hong Kong-based partner at law firm Hogan Lovells.

“Added to this mix are the very deep pockets of the Chinese conglomerates who are equally hungry to expand and develop, the likes of Fosun, Dalian Wanda, Anbang and Ping An – they are really giving the sizeable private equity funds a run for their money.”