Market views: How has the coronavirus affected PE?
The spreading coronavirus outbreak continues to hammer Asia's financial market activity, as confirmed cases continue to proliferate in China and across the region.
The spread of the disease has put paid to deal roadshows, conferences, and initial public offering plans as companies, managers and asset owners attempt to minimise face-to-face meetings.
The South China Morning Post reported that Chinese biotech company InnoCare postponed its $200 million IPO roadshow in February because of the outbreak, said two people familiar with the matter.
Meanwhile, important investor tasks such as due diligence and site visits have not been properly performed as travel restrictions brought down cross-country travels.
Private equity will not be unaffected either. While regional institutional investor demand for private equity as a whole remains strong, fundraising in Asia Pacific for regional funds quieted down over the past two years; Bain and Co estimated that such fundraising dropped by more than 50% in 2018 to $75 billion. The outbreak could further jolt investors’ confidence, especially in the consumer and tourism sectors.
We asked five market experts to offer their views on how much the coronavirus outbreak could impact Asia Pacific private equity fundraising, deal flow and returns this year.
Champ Suthipongchai, chief investment officer
Creative Ventures
Chief investment officer
Ferretto Capital
The impact to private equity fundraising – at both fund and company level – will be a temporary shock, as the epidemic disrupts business-as-usual. On the ground, investors are taking precautions. Since the centre of the epidemic is in China, we expect a disruption in supply chain that will create knock-on effects throughout many industry, impacting both public and private markets.
We expect the market to overreact in the first quarter, but for things to slowly return to business-as-usual in the late second quarter once the impact and risk of coronavirus are better understood. Health measures will be implemented and production level should also be back to normal in the second quarter.
We expect a sharp drop in fundraising and deal activity, with an especially heavy blow to China’s venture capital market which had already seen a sharp decline in its 2019 funding level. One set of companies to watch are consumer internet companies; they burned large sums of money last year only to come to a complete halt in funding due to the virus situation. As a result, we expect to see many fire sales and good companies being picked up through corporate M&A and technology PE funds at a highly discounted price.
We also expect deal and exit volume in Asia Pacific to fall in the first half of the year and then be restored in the second half after the floodgate opens. This will especially be the case in the middle PE, upper PE, and late stage VC market, whereby the companies have more stable cashflow and more cash-rich sponsors.
China lowering its interest rate will relax liquidity, but we expect investor’s overreactions – when coupled with the fact that we are near the end of market cycle – to prevent many to take risk and reap the benefits of return. In fact, now is the best time to buy in China, when no one else is buying.
Sam Yu, vice president
Tinbowah Investment (Beijing)
Adjunct professor
SKEMA Business School (Suzhou)
Whether China can control the further spread of coronavirus will greatly affect venture capital and private equity financing in the Asia Pacific region. Both types also lack funds, and the transmission of negative sentiment of the epidemic has made limited partners’ (LPs) confidence decline and fundraising will be more difficult.
At present, the first thing that both venture capital and private equity managers need to do is to keep cash flow, to maintain the healthy development of leading enterprises. For instance, they help companies do proper post-investment management, including a series of actions such as reducing staff and increasing efficiency.
Under the epidemic, the consumption, catering, and tourism industries were regarded as the hardest hit areas. In addition, the manufacturing industry was also affected significantly. Meanwhile the medical sector and online education, online office and other sectors rose against the trend.
From the overall situation, this outbreak has a significant impact on renminbi funds, but since the launch of the domestic science and technology innovation board has brought opportunities for clearing renminbi funds, it will appropriately alleviate the current situation.
As such, I don't see China, where renminbi fundraising is cooling down, suffer the most among Asia Pacific countries. When the epidemic is over, the Chinese government will surely introduce relevant programmes and policies that will promote the development of the economy.
Xuong Liu, managing director and transaction advisory group Asia practice leader
Alvarez & Marsal
The outbreak of the Coronavirus significantly impacted private equity deal activities in the first quarter of 2020 across Greater China but also Southeast Asia, given the interconnectivity of these markets. Sell side processes are being placed on hold principally due to travel restrictions.
While this should ease over the coming weeks, the concerns among sellers are beginning to switch to which extent the depressed trading activity in the first quarter will impact 2020 full year performance and, ultimately, valuations.
As such, we expect that some sellers may decide to postpone M&A activities until there is a noticeable recovery in financial performance. Consequently, many businesses are pivoting to contingency planning measures, such as rent renegotiation and staff cost rationalisation.
The factors above exacerbate an already challenging macroeconomic environment due to the ongoing trade war with the US, unrest in Hong Kong and general slow-down in GDP growth. To date, these events have hit the consumer, retail, food and beverage, tourism and US export orientated sectors the hardest. While the outbreak of the virus continues to weigh down on these sectors (especially retail), its effects are much more far reaching – impacting manufacturing and disrupting global supply chains.
However, record levels of dry powder in the region continues to act as a counterbalance to the prevailing economic headwinds and ensure that asset prices remain at reasonable levels. Moreover, market participants will be keen to transact as pressure to deploy capital remains high and the benefits of the phase one trade deal with the US kick in.
Robert Woll, partner and member of the corporate and securities practice and the private equity, funds and investment management group
Mayer Brown
The macroeconomic and sectoral impact of the COVID-19 epidemic will certainly be enormous, at least in the short term. How this will affect private equity fundraising and deal flow in 2020 is still highly uncertain, however.
In our practice, we are still seeing active fundraising efforts by private equity managers. Not surprisingly, China healthcare funds may actually benefit; for example, investors might be attracted by a venture capital fund that will invest in medical device companies with applications in China.
Since raising a new Asian private equity fund can take up to 24 months, and limited partners make long-term capital allocations rather than short-term rotations among sectors, the immediate impact on funds that are currently in the market may be to delay closings, but not derail them.
Over the longer term, the coronavirus crisis could accelerate existing market trends, such as increasing allocations by limited partners to Southeast Asia – in parallel to supply chain diversification by multinationals. Among Asian institutional limited partners, we would expect to see a combination of opportunistic investing in special situations in China, as well as health care infrastructure, and allocations to geographic safe havens.
George Maltezos, head of Asia Pacific
Campbell Lutyens
For deep-value investors, there is likely to be significant opportunity to deploy capital into China in 2020. Any blip [for example, as a result of the coronavirus outbreak] is likely to be short-lived, as the government is likely to do everything possible to keep the system flush with liquidity.
However, fundraising will need to be executed in a unique and highly differentiated way, which is precisely where we are investing our resources. We are very bullish on the China market and equally expect many will miss the opportunity. I couldn’t be more excited.