Searching for Diversification in Private Equity? Look to Asia

Investors with billions of dollars allocated to private equity may be overlooking Asia as a hunting ground for yield, according to CEPRES chief executive officer Daniel Schmidt.

The success of deal making in Asia is driven by different factors than in the U.S. and Europe, according to report from CEPRES, a private-equity analytics firm, at the end of August. “In Asia, I see very high potential,” Schmidt said by phone Wednesday. 

The firm analyzed more than 5,500 private-equity deals in Asia and found they had an alpha outperformance of 6.7 percentage points compared to North American deals over the past 20 years. Asian private equity beat European deals by 10.8 percentage points and global public equities by 15.4 percentage points, the report shows.

Couple this with the fact that, according to Preqin, dry powder in private equity crossed the $1 trillion mark at the end of 2017. Fund managers have record cash on hand, presenting a big opportunity to look for deals in Asia, according to Schmidt.

Many investors believe the impressive returns from the region come with higher risk, according to Schmidt. “That is an incorrect perception,” he said.

In the U.S. and Europe, where the private equity industry is already quite mature, Schmidt said it's harder to find good deals. 

“The companies in the United States are very well managed, especially if they buy it from other private equity owners,” Schmidt said. In Asia, most private equity-backed companies have not been previously owned by buyout firms, he said, which means there may be more opportunity to increase their value.

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There are other regional differences in deal making. In the U.S. and Europe, buyout firms commonly fund their acquisitions with debt to increase returns, while successful private equity deals in Asia are driven more by growth in revenue and earnings margins. The use of leverage may result in bigger gains, but adding a lot of debt to a company's balance sheet can be risky.

Investors allocating to private equity in Asia take on different — but not necessarily more — risk compared to the asset class in Europe or the United States, Schmidt said.