Ability to show return on investment, DPI, leveraging technology, and talent hiring will power Asia’s growth story through 2022

In September 2022, DealStreetAsia in partnership with Ontra launched the private equity (PE) landscape report– a white paper that analyses the fundraising activity in the first nine months of 2022 across Asia. The report served to initiate a panel discussion at the Asia PE and VC Summit hosted by DealStreetAsia in September. Before an audience of investors, Limited Partners (LPs) and General Partners (GPs), and professionals in the wealth management space, a high-profile panel representing the worlds of private equity and venture capital, global investment, and contract management, elaborated on many of the themes raised in the report with regards to the Asia growth story; risk factors and silver linings that investors and wealth managers ought to be cognisant of, and the state of deal-making in a post pandemic environment. 

Ontra is the leading technology and services provider of contract automation and intelligence for many of the world’s biggest and most innovative companies. The Ontra platform combines AI-enabled software with a worldwide network of highly trained lawyers to modernise legal workflows, reducing time, expense and risk associated with contract management and freeing its customers to focus on other strategic priorities. 

The panel included Jon Crandall, Managing Director of Ontra, Kwang Yew See, Principal, Tactical Opportunities at The Blackstone Group, and Anupum Khaitan, Executive Director at Capital Square Partners Management (CSP) in Singapore. The esteemed panelists shared their valuable insights into how the deal making landscape in Southeast Asia has rapidly changed since 2021, why fundraising has become more challenging, and the opportunities that lie beyond these challenges. 

Michelle Teo, Managing Editor, Southeast Asia who was moderating the panel pointed out that 2021 was a boom time for Asia in terms of deal-making. She also highlighted the findings of the report which tracked that growth capital has accounted for 80% of total money raised by Southeast Asia focused PE funds. Teo added, “Coming off that high, however, 2022 has been more subdued according to the findings of the latest edition of DealStreetAsia’s Private Equity in Southeast Asia report.” 

High inflation, global liquidity tightening and rising geopolitical risks have contributed to the slowdown in the overall fundraising performance of private equity firms globally this year. Despite its relative economic resilience, Southeast Asia is not immune to the worldwide uncertainty. Only one Southeast Asia-focused PE fund has managed to reach a final close this year — ASEAN-focused AIGF Advisors announced the final close of its second fund at $126 million in August. This is a significant shift from a record-breaking year in 2021. The number of funds reporting interim closes, although more encouraging than the final close number, also looks fairly weak. With a little more than two months to go before the end of the year, 2022 is likely to go down as the weakest of the last five years. The big question is whether the slowdown will persist well into next year. 

Ontra’s Jon Crandall said, “We’re a legal technology company, so we work with private equity and asset management firms as well as GPs and LPs around the world. We streamline dealmaking to allow them to focus on sourcing the best deals, executing them and getting those parts of their desk. We are a US based company, but starting in January of 2021, we started coming here on the ground to Asia to build the business. At that time, it was really interesting to start a business like this in the region because as seen in 2020 with covid, obviously deal volumes fell off the cliff for a very short period of time and then everyone was completely taken aback with how quickly the markets returned. And not just return to where they were, but with a vengeance and everyone was busier than they’d ever been. We saw a lot of asset managers around the region who all of a sudden were seeing 30-40% more deal volume come through from across their desk if they had raised a new fund or added a new strategy. If they had expanded beyond that, they could’ve easily been looking at twice the amount of work they had been doing previously and that’s a massive operational problem for a lot of funds.

What we’ve certainly seen is a pretty swift move towards trying to streamline some of those processes to allow GPs and LPs to focus on where you can add the most value. Again, it has to do with sourcing companies, finding those diamonds in the rough and not spending your time entering menial data into databases, not spending your time negotiating contracts that can be better done in another way. Last year we really saw a gigantic boom and people really quickly tried to digitise as much of the operations as they could. On a logical compartment of the business, what we work on specifically is the legal front. Legal is often an industry which is very 20th century if not 19th century. So a real shift into the 21st century is what we really saw quite ostensibly.”

With 2021 being an exceptional year for PE investors, how is 2022 playing out so far from what you can see in the market? 

Anupum: The ability to market is not necessarily as important as the ability to show returns from the actual investments and underlying portfolio. We have to consider the concept of DPI (Distribution to Paid-In Capital ). Right now fundraising has become more challenging perhaps because of a lack of exits which has always been somewhat of an issue in Southeast Asia. But I think there are strides being made today that show that there is progress as well. We have seen that a lot of the major globals have also been able to raise funds; for example, Barings raised US$11.2 billion in one of Asia’s largest buyout funds recently; Blackstone has recently raised US$11 billion dollars. TPG and his team have managed to raise US$6 billion dollars. With Carlyle raising US$ 8.5 billion, Warburg Pincus raising US$2 billion dollars, and KKR raising US$15 billion, I think that there is quite a bit of activity happening in the region and happening with respect to fund raises which ultimately goes to show that performance is based on DPI, on exits and the ability of investors as fiduciaries to meet their obligations and be able to fulfil their own values.” 

Kwang: This year everyone knows the macro kind of headwinds in more established markets, in the western markets, stock markets etc, that has kind of trickled down here into the private capital space in Asia. But I would say there continues to be positive trends as well. The countries around us are still on the verge of opening after covid. There are countries in different phases. Singapore is obviously very far off because clearly when we look around we’re having conferences and in person meets. Hong Kong is reopening as well and some other countries are already there. That obviously must give us optimism and differentiation as we invest in this market which is very different from the IPOs in the US and Europe. With more openness, tourism reopening, I think that should give the region some much needed tailwind. We’re also kind of sober minded considering some of the risks that would trickle down to this region in these funding calls.

How much of the deal making debut has been virtual given the restrictions of the last two and a half years and what are the pros and cons of that? Do you think in-person dealmaking is going to come back strong? 

Jon: I still think that in person has a huge role to play. I think the important part is really figuring out what parts can and should be done virtually. And what parts need to benefit from being done in person. I think managing the relationships you have with customers and potential investee companies is important. That’s really where an in person setting really goes a long way. You can meet them, you can look them face to face, speak to them in person and build a relationship and that’s ultimately what this business is about. For PE fund managers and even people like us. We are a portfolio company and we’re kind of seeing this from two perspectives. I think one is as a service provider to the industry, but also as a portfolio company growing its operations. I was in Sydney for two and a half years when they finally dropped the travel restrictions and made it easier to go in. Prior to that I was trying to connect with 30 fund managers for nearly a year from Singapore and they ignored emails and pushed things off. But then when you’re there in person everyone wants to meet. They want to go out for coffee, grab a drink or grab lunch. The level of responsiveness you get in person is totally different than virtually. 

Kwang: The last two years, as a lot of us have experienced, it’s challenging to communicate either through mail or video because ours is a people business. It’s a partnership business. We’re patient capital and therefore the forging of the relationship is critical to our business. Trusting, knowing someone is critical to us. What worked for us is that Blackstone has a couple of different strategies, a couple of different funds. There is a control buyout fund and there’s a real estate fund, which is a more flexible tactical fund which allows us to invest in minority positions and even structured positions where we back good management teams to do what they do sector wise. In that context, what has worked well for us in the last two years is looking at listed companies that have capital requirements that bring forth better disclosures because they are listed, and better governance as well. It’s also easier for them to raise capital and for us to really add value through the breadth of the network. So we’ve been able to effectively do pipe deals over the last two years in Asia as well and we’re now also able to travel there. I think as the region reopens there is more optimism, conferences, more travel, we know the GPs and LPs as well. So, I’m quite optimistic that things will revert back to normal. I would say we have managed to leverage technology to do a lot of the deal work. But the physical element of it, that relationship building, that’s not going away. 

Anupum: It’ll be interesting to see in a few years time what are the returns on investors who have purely done virtual deals (and we’re not talking about stage deals or follow on rounds) with startup companies or ongoing concerns that have already had an established relationship. I think we’ll find out in the near future or perhaps the next couple of years. 

Given the optimism and risks, what is the silver lining? What are the opportunities on the other side of the challenge and how are things being done differently? 

Anupum: There absolutely is a silver lining here. For those funds that are able to raise capital in Asia– as a consequence of a post pandemic world, rising inflation and costs and market turbulence, we are starting to see good companies come to market needing funds whether it is for growth or equity strategies or perhaps for a sale. For a variety of reasons, and particularly in the non core asset area, but even ongoing concerns as well. Ultimately the environment is very supportive. It has historically been but perhaps inflated with some easy money in the last couple of years. 

Kwang: The pros are that over the last few years some of these companies have managed to raise capital, navigating it through very challenging operating environments during covid. They were able to move on ahead and expand. Obviously that’s not speaking about the entire segment. I think the winners are a bit clear. Over the last couple of years they’ve shown the ability to tap into fund raises etc. On the GP side, as we look at companies coming to us for reups, you want to be assessing what they’ve done with the money previously and be a little more stringent as to who you back after this. That more nuanced view about what’s a good company and what’s not is even more critical now versus a year ago. 

Zooming in a little bit more into Southeast Asia versus the more mature private equity markets that we cover, can we go a little deeper into how the processes themselves have evolved over the last five years. What are some of the key changes and why were they significant? 

Jon: I suppose more from an operational perspective it’s really just the volume crush that the digi markets have put on most of the asset management firms in the region, so that really necessitated looking at your process and how you can get the most out of your team. If you’re having work loads double you can’t double your team immediately. That’s a long term thing to ramp up and ramp down hiring to put people on the ground and in new places where you might not have an office and to build those relationships as well. Looking towards what are quick and nimble ways to change our operations is important. For example, if you’ve previously focused a lot on investing funds in China now it’s a bit slower and you’re therefore pivoting towards investing elsewhere. You have to look at ways to ensure you have a team that supports operations, not just relationship builders, but people who can execute behind the scenes well. As a funder you have to reanalyse where in your operations you can look towards outsourcing your solutions, give something over to an expert as you’re confident they’re familiar with it and can do it on short notice. Whereas doing something internally with your own team might take months and more training. 

One trend we’ve seen is the whole move towards Zoom and the whole virtual dealmaking is that it has benefited some markets more than others and some cities more than others within Asia or Asia Pacific if you look at it more broadly. Our fund customers insist that Australia is all of a sudden much more competitive than it used to be. From a GP and execution perspective. It used to be the case that if you wanted to execute a case in Indonesia from Singapore, that’s an hour and a half flight away. It’s easier. From Sydney that’s an 8-hour flight. That’s really hard. But with the move to zoom, all of a sudden we see a lot of large organisations putting teams on the ground there and leveraging those teams to support operations all across Asia Pacific. 

Kwang: With regards to deal assessment processes and transactional processes during covid, most of us on the deal making front have had to adapt for the last couple of years. The focus is on the universe of companies that you’re talking to, making deals with, investing into; companies that you already know, because it’s hard to build new knowledge in countries where there’s a lack of knowledge. We did a few follow-on investments into platforms that we were already invested in because the underlying market is still compelling. There is just less risk in backing someone you already know. But not that’s changed. What’s relevant in front of us, there’s novelty to forging relationships with new companies, but against a very volatile financing background. For us, we’re starting to adapt to looking at deals on a relatively flexible basis (now with interest rates so high) offering a fixed rate product is not the best way to play the risk reward spectrum. Generally we have shown a preference towards structure as well because we don’t want to take as many multiples risks on investments given that it’s really hard to see where that would pan out. Assessing a company through a cycle performance is also very critical. So you need to be able to assess how it’ll all turn out. It’s probably an investment discipline, and on a case by case basis. But it’s what keeps us at our jobs. 

Anupum: One change I have noticed is that there is much more reliance on the virtual world. But I think that that’s something which is probably here to stay with respect to meeting with people and getting information, with respect to Indonesia versus Australia vis-a-vis Singapore, that’s something that you’re definitely seeing. On the flip side, we will still have the coherent physical processes that need to be in place ultimately. So, maybe with Asia and some material agents that becomes a lot easier with agency, but with external parties that one is not familiar with, I think that we will still go back to being a very physical process as well. 

Given all that we have seen, what are some of the factors that large businesses in Southeast Asia need to be thinking about in order to scale in the next three to five years. 

Jon: I think the biggest pain point we have right now is really just manpower hiring. Singapore has a lot of talent in it, but right now everyone’s trying to get that talent. You have a huge shift of Asia’s financials jumping from Hong Kong to Singapore. I think a year or two ago people were quietly saying that and now people are openly saying that. We had the Global Financials Centers Index published a few days ago where Singapore has solidly surpassed Hong Kong in that. So, what we’re seeing is a huge shift which will continue to a large degree from the time it started being around four or five years, but other people are also trying to set up and grow businesses in Singapore specifically. So, while there’s talent here, everyone’s trying to get it. For us it’s just really being conscious of hiring, timelines hiring, and to build a business; make sure that we know as long as we can with our crystal ball looking into the future, where we need to expand, what sort of skills we need to have, what markets they’re going to be experienced in and what they focus on. And trying to get that line up as quickly as possible. That kind of dovetails into really just being very mindful of how we get the most out of the team because of that pressure of everybody trying to hire here in Singapore as well. 

We need to make sure that the team is really working towards their talent and doing value added tasks. You don’t want a team that is doing something that someone else can do, that the team doesn’t have to do. Use people who are experienced and experts in, or use technology to leverage the team as well. First of all hiring and being very conscious about it, but second, making sure that you’re smart with your internal resources. I think from a fund manager’s perspective really focusing your team and on what are the value added tasks. Generating Alpha in a portfolio company, integrated, sourcing, smart deals, and not necessarily worrying about HR and payroll and the risk contracts, just getting that dichotomy right and figuring out what we really need to focus on for our business and what can be done in a smarter way. 

What are the challenges on fronts like regulatory risks? What are some of the lessons for Southeast Asia to be learnt from regulatory changes in other markets that have impacted particularly the private capital business? 

Jon: This is the question that perks up the ears of the lawyers. Before joining Ontra I spent about 11 years in private practice as a partner and before that in associated firms really advising on IPOs and bond fund raising across Asia, India and Australia as well. I think we’ve spent the last few days throughout the conference talking about the great opportunities across the region. Why it’s a fantastic time to invest and a fantastic place to invest. Now I’m going to tell you all the reasons it is difficult to invest unfortunately. I really think what we’re seeing, particularly driven out of the US, is a global element to the trend which focuses more on regulation of private firms. It’s across industries of course, but I think it’s particularly laissez faire because you’re dealing with sophisticated, high net worth investors, institutional investors and things like that, you’re not really dealing with the retail space.

I think there’s been a trend, particularly in the last three years, and the SEC is very focused on it in the States. We’re seeing one of the focus areas for this year specifically is private fund compliance. The chairman of the SEC Gary Gensler has been very active this year speaking about things like side letters and making sure that if you agree to a side letter with an investor, you do what you tell the investor you’re going to do. If you tell them you’re going to invest in only certain underlying geographies, or underlying industries that you actually do that and that you have a compliance and audit protocol in place to prove that you’ve done that. So you have a system built to comply with what you’re saying. There’s a really strong focus on side letters and making sure that there is that compliance process in place. So where it used to be just regulatory compliance that the financial regulators like the SEC and the MES look at, now it’s looking at private contract compliance. That’s kind of a paradigm shift that wasn’t there previously. What we’re really seeing is that a lot of fund managers think proactively. I think there’s a distinction between a proactive management which is probably getting ahead of it and reacting to when it becomes a problem. You never really want to be on the reactive side of compliance. So a lot of fund managers really are thinking proactively about how we can go about documenting all of these side letters, all of the agreements we have with investors; not just documenting it, but making sure we have internal workflows in place to make sure that people are complying with this. People are taking responsibility for the ESG report that we told people we’re going to give, the bespoke financial reporting, notifications and all of this. You have a way of proving to the regulator that you’ve done what you’re supposed to do. 

Anupum: On the regulatory front, what Singapore did earlier on is, in order to make sure that it was kind of a white label place from a structuring perspective and a fund management perspective, it instituted a lot of regulatory requirements primarily for GPs and fund managers to operate in. One thing that I find quite interesting though right now is that Singapore is also trying to reduce the regulatory burden. The structure for many years, at least one of my other organisations, the SPCA had tried to push through with respect to the VCFM, the VCC structures as well, and we’re starting to see now that perhaps, there is understanding that LPs and GPs are sophisticated and can help regulate one another as opposed to a regulatory body needing to do that out right. That’s not to say regulation is going away or anything, but I think we are starting to see a trend in that direction. Hong Kong is also seeing a lot of GPs move to Singapore. A lot of fund managers move here primarily because Singapore is making it much easier to do business. Something it’s historically done, but is also continuing to do very well.

Given the current macro environment, what do you think would be the new focus areas in the coming year on the investment side as well as the asset management side? 

Jon: We speak with a lot of asset managers and I think that one of the biggest trends we are seeing right now in Asia and Asia Pacific more broadly is real focus on private credit. I think the private credit markets across the region have historically been far less sophisticated, less developed than they are in the West, and even less developed than the private equity markets are in Asia. We’ve seen a pull back on bank lending in some markets. We’re seeing interest raises. I think private credit is getting more interesting as a space. Blackstone announced a strategy a couple of weeks ago, a very large sort of ramping up of the private business. So, we’re seeing that a lot of global managers as well are investing in private credit. In Australia and Southeast Asia, I think building those quite extensively, there’s been growth in secondary strategies. There’s been a couple of big fund managers in the last week who have announced adding more teammates, building teams in Singapore for the first time to do second hands in the region. We’re potentially seeing a shift away from the traditional VC, private equity and growth capital, but definitely a lot of thought given to a lot of other asset classes in the region. 

Kwang: We’re seeing a few technologies or innovations in the process of the deal making; for example on the capital raising side, I think private equity firms are tapped into high net worth channels pretty effectively across the last two years. The new frontier is really a mass market. You can see challenges with retail investors, having to appreciate the relative credibility of private equity investments, questions around how do you value a company and therefore how much do you own or what’s the value of that. This trend might move towards democratising investments in private equity via bonds into some of these GP funds. Blackstone as well is trying to push into that. Obviously a lot of regulatory considerations but I think eventually that’s where the fund raising, I’m sure, will eventually lead to. On the deal making front I would say compared to companies in the US or Europe, companies in Asia generally tend to provide less data, maybe from a tracking perspective not as sophisticated. I think there’s a lot of upside to come from that, to companies tracking its own database operational data, financial data more effectively, more nimbly. On our side we’ve been building a deal analytics team that helps us crunch data and also allows us to trawl regions. So those are the big things I am seeing. 

Anupum: What I would say is that we are right now in a macro environment where we have a commodity megacycle number 1, and that’s causing very high inflation. And as a consequence of that, what are the industries that can take advantage of this commodities sector which has been under invested in often times because of fossil fuels and extractive resources. That’s an area that has been actually underinvested in as we’re seeing right now with the prices of commodities rising. I think that’s one area that’s going to be ripe for investment opportunities. And perhaps not for the fainter part if you actually take firms like Blackstone and others who are really invested there. 

But the second area which can intercept this massive amount of inflation we’re seeing, is technology. Technology has always been disinflationary. Steve Jobs used to joke about how the iPhone always costs more or less the same, regardless of the actual internal components getting better, and I think just generically we can use that, but fundamentally as well; but technology will be a disinflationary asset class and continue to do well. Just like the increased costs of financing perhaps that will impact the venture side and startup side, but not necessarily the growth in mature companies.

The event was organised by DealStreetAsia in partnership with Ontra. Please follow this link for a copy of the report ‘Private equity in Southeast Asia: Fundraising landscape 2022.’