What private equity needs to know about investing in APAC: Part II

NextWave Private Equity

Josh Lewsey, EY-Parthenon Strategy & Transactions Partner, and John Levack, Vice Chairman, Hong Kong Venture Capital and Private Equity Association, join Winna Brown to help private equity investors understand how new regulations will impact the current and future private equity ecosystem in APAC.

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The global trade environment has increased geopolitical uncertainty, making forecasting difficult. The Organisation for Economic Co-operation and Development (OECD) is predicting 2020 will see a 4% global contraction in GDP with only one G20 country having a positive GDP: China.

It is possible that a bifurcation between US/Europe and Asia of both markets and products will occur as a result of politics rather than consumer requirements. This combined with the region's growth potential and faster post-pandemic recovery can potentially result in Asia as a more promising market in which to deploy private capital.

Hong Kong is the biggest cross-border center for private equity (PE) in Asia. While the National Securities Law in Hong Kong has caused significant discussion, the impact on Hong Kong-based PE firms has been nominal: this is because China is already a major investment market for these firms and anyone investing in China is already subject to the Chinese national security law, which is quite similar.

The Hong Kong Government recently passed the following three landmark laws that solidify Hong Kong as an ideal base for private equity operations:

1. Unified Fund Exemption Regime: extends the profits tax exemption to all funds, whether or not the fund's central management and control is exercised in Hong Kong.
2. New Limited Partnership Fund Law: allows a limited partnership to be set up in Hong Kong so a PE fund vehicle can be based there.
3. New concessionary tax rate on carried interest starting in 2020.

Over the next three to five years, PE in Asia-Pacific (APAC) will see:

• Fee pressures and low yields in developed markets will push more capital allocation to APAC.
• Funds that drive sustainable returns through operational value creation and prioritize ESG will emerge as market leaders.
• Bifurcation of funds into financial conglomerates and small specialist funds.
• Minority stakes in local SME companies coming to market as new generations explore exit opportunities.
• An influx of capital from pension (defined contribution) investors will increase dry powder and exacerbate the challenge of deploying it successfully and responsibly.