Interview on The Changing Landscape of Private Equity in Asia - BPEA

Today I am interviewing Elanie Gu on the changing landscape of the private equity industry in Asia. Elanie is a partner at BPEA, a top private equity firm in Asia with a business scale of 20 billion U.S. dollars.

Background story.

Elanie Gu joined BPEA in 2011. Previously, she was an Associate with S.A.C. Private Capital Group, based in New York. Before that, she worked as an Investment Banking Analyst at the Mergers & Acquisitions Group of Merrill Lynch in New York and Hong Kong. She holds an MBA from the Wharton School at the University of Pennsylvania and a B.A. from Colgate University. She is fluent in English and Mandarin.

On the Future of China’s Private Equity Market.

Elanie: Nowadays, there are more and more M&A transactions and larger-scale transactions, and the importance of digital transformation and technology is increasing. This reflects the Chinese government's high acceptance of mobile technology, data and artificial intelligence are profoundly changing the way people do business. China is a leader in technology applications, and technology applications appear in almost every business field.

China is the main driving force of current global economic growth, and it remains attractive to investors who want to benefit from the growth in profit, productivity, innovation, capital formation, and return on investment. With the further marketization of the economy, the transformation of the rural economy to the urban economy, and the further development of the consumption and consumption industries, the growth momentum of the Chinese private equity market will continue to strengthen.

In the past, the economy was largely driven by government investment, but now consumption plays a more important role. This long-term theme will continue to have an impact: consumption growth, middle-class expansion, and technology, and transformation-driven growth. In China, there is a lot of capital to pursue these themes. The challenge faced by companies and PE investors is how to make good investments in a rapidly changing environment, and how to find the intersection between growth opportunities, valuation, and return on capital.

On Deploying Large Amount of Funds.

Elanie: Most general partners are very self-disciplined investors. This is an industry in which the fittest survive, and undisciplined behavior will be reflected in the return on investment and be eliminated. The current global environment is unique in that interest rates are extremely low and the return on capital is very low. The size of the US Treasury bond market is about $20 trillion, but the return to investors is only about 1%. In the past, a lot of capital was able to obtain a return of, for example, 4% to 5%, but now the rate of return is only 1%, so capital is also looking for other investment areas. This permeates the entire investor chain and affects the rate of return on investment that people seek.

The way to create returns also needs to adapt to today’s high valuation environment, including acquiring companies in suitable industries that are suitable for objective conditions and growth. At the same time, there must be a practical plan to hold the invested companies and reposition them. Promote it to achieve additional growth, profit margins, and exit multiples. Investors need to consider how to configure better leadership or implement digital transformation for the invested company to create benefits.

If the PE company can continue to add value to the invested company, then investors can continue to benefit from the low liquidity of the PE strategy and the alpha income created, of course, the premise is to proceed in a self-disciplined manner. Today, we have all the tools and experienced GPs that can help and support our investment decisions. We have a very developed financing market to provide funding sources for investment.

On New Opportunities.

Elanie: While seeing the impact of digitalization, we are also seeing more equity transfer transactions instead of IPOs. The new epidemic has accelerated the digital transformation of the United States and other parts of the world, including Asia, and this trend will continue. In the future, there will be more and more data and data analysis applications in the business operations of ourselves and the invested companies.

On Transaction Trends.

Elanie: During the COVID-19 crisis, we saw a huge market dislocation, which brought opportunities such as acquisition and privatization. This situation occurs periodically in emerging markets such as Asia because these markets tend to fluctuate. When liquidity dries up, the market drops and the company is in trouble. Due to the pressure on the entire system, the valuations of many listed companies have been cut in half or even more drastically. Which leads to more acquisitions and privatization transactions. With the increase in the number of acquisitions, it will become more common for a PE company to purchase assets from another PE company. This sounds like a low-return strategy or an incomprehensible market, but it is not. Like the stock market, people buy, sell, and change hands from other people every day.

Of course, there are primary market IPOs, but most transactions are of the nature of the secondary market. The same situation is happening in the private equity market. People buy and sell assets for various reasons, not always because a fund’s returns have been maximized, so it’s time to sell. Decisions are usually related to the life cycle of the investment.

In the current environment, there may be more divestiture and splitting opportunities, because everyone's balance sheet may have liquidity problems or short-term dislocation. From the perspective of PE, this has great potential. In addition, the current geopolitical situation in the world is also a major issue of concern. People's willingness to divest will create some opportunities. Some companies may want to adjust their regional focus and may withdraw from a certain area due to geopolitical issues. In the field of large-scale mergers and acquisitions, there will also be transaction flows brought about by continuous generational changes.

There will be more and more cross-border transactions. For example, to implement globalization, a company needs to expand its business beyond Asia. It can join a global company or acquire some global businesses.