Capital shifts within Asia

Frewen Lam discusses expected shifts in activity levels and how investors think about capital allocations in Asia in 2023 and beyond as well as the expectation for secondaries to come into focus as businesses look for liquidity.

Anna Ellis: So Frewen just turning to you and perhaps thinking about 2022 and some of the factors that have been a play and how that's going to then expand out into 2023. Interested to get your perspectives on that. 

Frewen Lam: So in 2022, we saw the end of the era in terms of free and easy money. And so this really resulted in a tightening of belt buckles the way that people think about risk. Asia falls has been significantly impacted by that. So if you look at private equity and venture capital activity levels in Asia, we probably saw a greater than 50% decline both in terms of fundraising investment activity and AZ activity. And so this is services a bit of a reminder around the importance evaluation, cash flow, and exit. 

So looking ahead there will be I think a significant shift in activity levels in the way that people think about Asia. The first thing that'll expect me to see is a bit of a switch in the amount of capital that is reallocated across the region. So China for example, historically represented more than 50% of the amount of money coming to the Asian markets. Given the travel restriction, despite the easing of some of the covid lockdown restrictions will likely persist into the first half of ‘23. A lot of the capital activity will likely move into other markets, so Korea, Japan India and Australia. The second thing is really around the way that people think about cash flow so, businesses with pricing power that sort of cash flow focus will remain front of mind for a lot of investors and that'll affect how people think about strategy. We saw the growth markets sell off significantly over the last little while and it's likely that people will remain cautious coming into 2023.

To summarize in terms of you know key focus areas for strategy. It's really, as Mike mentioned earlier, secondaries will come into focus given people kind of looking for liquidity. I think this will really enter into a new phase of growth in what was once a fairly cottage industry for Asia in secondaries. There will be an increasing use of the likes of continuation funds which we've seen historically in the US in Europe come out to Asia and a big way.

The second one as I mentioned earlier is really around cash flow type businesses and businesses with pricing power. Inflation is likely to be persistent in the west and this will have implications for Asia investing as well. And so the way that people think about risk in Asia is is going to remain focused on that particular area.

Anna Ellis: Do you have some perspectives one or two key ones about how those and others will play out beyond 2023? Key trends? 

Frewen Lam: No, I mean I think in 2023 the big thing that everyone's looking out for is a reopening of China. So with 2022 we saw demand being sucked away by lock down, covid related lockdown. The public market sold off dramatically and we've seen some of that bounce back come out as a result of this reopening trade. Private equity typically lags the public markets by let's say six to nine months. So the thing to look out into 2023 is really, we've seen this Playbook before, with lock down and the reopening and that sort of demand coming back. So ‘23 and beyond is probably going to be about China reopening and the implications that it has on the rest of the world. So not just sort of demand domestically, but also once the Chinese tourist and that dollar starts to flow around the world again and the implications that it has on trade and demand in foreign markets.

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