As a younger part of Dutch pension fund APG’s private equity program, Asian investments represent a fast-growing part of its portfolio.
With over $600 billion in assets under management, APG sees the region as large and complex, according to Shirley Ma, senior portfolio manager, private equity for APG Asia Pacific.
“It is not a single market but rather a collection of heterogenous markets which present different opportunities and have different return drivers,” Ma told AsianInvestor.
Recognising the importance of local knowledge in navigating Asian markets, the Dutch firm established a private equity presence in Hong Kong in 2019, she said.
APG seeks to build a globally diversified private equity portfolio by investing in funds and also taking part in co-investments and secondaries around the world.
While geopolitical tensions, regulatory uncertainty, and currency volatility have created deterrents for foreign investors gauging Asia’s private markets, Ma said there are still viable opportunities and key investment themes like a growing middle class and consumption upgrades, which remain a focus for the Dutch fund.
“Asian managers are generally more focused on consumer-facing sectors than their US or European peers. We believe there continue to be significant opportunities in consumer services, healthcare, and financial services,” she said.
While some markets are more mature than others, APG’s private equity team sees growing interest in B2B businesses, as well as consolidation opportunities.
“Not to mention technology, which has become such an important element whether as a standalone investment theme, an enabling agent, or key value creation lever,” said Ma.
ACTIVE OWNERSHIP AMID CHALLENGES
No different from the rest of the world, Asia is seeing challenges resulting from inflation, supply chain disruptions, and Covid-19 impact. This year has marked the end of an extended period of easy money and easy credit, and markets around the world have undergone large corrections.
“Over the past few years, a large amount of institutional capital, especially growth equity in technology-related sectors, was deployed under a high valuation environment,” said Ma. “The current market correction is likely to disappoint investors who are used to having high return expectations for Asia.”
Market corrections have also led to reduced international capital flows to Asia, making it difficult for general partners, or GPs, to raise funds as well as for companies to raise capital.
“Obviously not all GPs and companies are going to survive the current challenges. APG has always emphasised a disciplined investment process and sound risk-management functions in our GP selection. We also believe in active ownership which should allow GPs to have better control of an investment’s destiny in a challenging environment,” said Ma.
“In line with our approach in the US and Europe, APG wants to be a significant and reliable partner to our GPs and in return be able to deploy our capital in a cost-effective manner,” she added.
While APG looks to partner with GPs with the best ability to seek out and manage their private equity investments in Asia, what is equally important are partners who are serious about environmental, social, and governance (ESG) best practices, said Ma. “In particular, in relation to high-priority topics like sustainability, diversity and inclusion, and climate change,” she said.
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The Dutch fund recognises that Asia is generally behind on the ESG trend compared with the US and Europe, and is wary that these considerations are often not seen as a priority by GPs in the region.
“APG only selects partners who are willing to commit to upgrading their ESG practice both at the firm and portfolio-company level. It is worth noting that we do not expect GPs to be perfect at the time we invest, but their willingness to commit and ability to show demonstrable progress during our investment is key,” said Ma.
With the firm belief that Asia is an essential part of a globally diversified portfolio, APG is poised to continue its commitment to the region.
“As said, we want to make meaningful use of our capital and to utilise the power of that capital to make our Earth and society a better and fairer place to live,” she said.
“We are always mindful of our mission to create financial value for our pension participants and will continue to stay cautious under the current challenging macroeconomic environment.”