APAC PE investors hit deal record but engage in less ESG activism

Investors engaged in less ESG activism during a record nine months for PE dealmaking, but the market expects this to change.
APAC PE investors hit deal record but engage in less ESG activism

A new report reveals that Asia Pacific private equity (PE) investors have been more bullish about the market this year, with nearly $200 billion-worth of deals recorded for the first three quarters. 

Deals more than doubled in value in the first nine months compared with the same period in 2020. There were $199.6 billion worth of buyouts in that period (the global figure was $1.17 trillion). The second quarter - April to June - was particularly active, with 46% of the total occurring in that time, according to a “2022 Global Private Equity” report co-published by US law firm Dechert and market intelligence Mergermarket yesterday (November 9).

Source: Global Private Equity Outlook 2022

Investors went after deals in the healthcare and consumer sectors, but technology, media & telecoms (TMT) also stood out. Funds are queuing up to acquire companies that have performed well through the pandemic, and technology was a bright spot, claiming 43% of all Asia Pacific deal value in the first three quarters.

Siew Kam Boon, partner at Dechert, sees potential for more renewable energy investment from the region next year. 

Siew Kam Boon, Dechert“One of the traditional attractions for the Asia Pacific region used to be its low-cost manufacturing base and less stringent environmental regulations. With the increased focus on ESG and sustainability (including modern slavery laws), private equity firms might consider targets less weighted by these and other ESG issues," she told AsianInvestor.

"Instead, because of Asia Pacific’s vast potential for globally significant climate and ecological impact, we expect to see much more private equity investment in renewable energy, high-quality natural capital (soil, air, water), and corporations that use technology to reduce carbon emissions in the region," she added. 

As of June 25, Asia-focused PE funds had raised $80.5 billion, according to the latest available Preqin data at time of publishing. That figure is up 59% from a the year before and the highest level in two years. This brought dry powder in the region to a record $384.9 billion.



Although deal numbers and sizes are growing strongly in Asia, the region's ESG engagement is not keeping pace with other parts of the world.

A large majority of the report's respondents from all regions expect limite d partners (LP) to increase their scrutiny of ESG issues over the next three years. This broke down into 96% of those based in North America, 80% of EMEA respondents and 65% of Asia Pacific participants.

Source: Global Private Equity Outlook 2022



Shelley Zhou, Capco

The report suggests four reasons for the lower ESG activism in Asia Pacific: a lack of pressure from LPs, insufficient ESG expertise among firms, scant monitoring of ESG data and related matters, and less management rights over the business for minority investors, a situation that is more commonplace in Asia Pacific.

Shelley Zhou, Asia Pacific ESG lead at financial consultancy Capco, highlighted the importance of benchmarking ESG data in private markets.

Capco uses 14 third-party ESG data providers to help the in-house research team to target ESG risks, she told AsianInvestor.

"[For example] the data currently available on deforestation as an ESG subset is not consistent, reliable, accurate or timely. It is therefore unfortunately propped up by estimation," she added.

ALSO READ: The $4 trillion club: how the world's biggest investors are driving clarity on ESG data


However, another challenge in the region is how to adjust pro-forma financials to account for the impact of the pandemic.

Large earnings swings can complicate the fundamental financials of a business, while heavy competition for deals can make it more difficult to determine  the fair value of assets accurately,  the report said. 

“Because we’re still in something of a growth stage compared with more mature markets, there is lots of competition including from strategics and tech titans. Buyers are not valuing businesses necessarily based solely on historicals and are placing a different premium on growth and other strategic reasons. This makes pricing deals less predictable,” Boon told AsianInvestor.

The number of regulatory crackdowns in various sectors in China could make that market even more challenging for investors, though this environment also offers opportunities.

"The recent sentiment in Beijing has created panic selling from those who do not have the risk appetite, and this has created opportunities – and will continue to create opportunities – for buyers of quality assets at attractive valuations. While these are hot areas, the Beijing sentiments dampen interests but investors will still try to find attractive assets," Boon added. 

While these interventions may create buying opportunities, government and regulators have taken some profound steps, including a ban on private tutoring businesses making profits and raising capital. This could be negative for Chinese PE deal value in the near term as market sentiment cools, the report highlighted.

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