KKR: From pivot, it is now time to ‘lean in’ to Asia

Henry Kravis of KKR Photo: Shannon Stapleton// Reuters

As Asian businesses tread beyond the home turf, the need for large amount of capital for expansion is set to translate into major opportunities for global asset managers to hike their exposures to companies in this continent, private Equity giant KKR & Co said in a report last week, and added  that it increased it increased its exposure to Asian equities (non Japan) by 200 basis points to 9%.

The US buyout group said that Asia “will account for a full 62% of total global growth this decade, compared to a more modest 43% during much of the prior two decades,” even as it asked investors to capitalise on this region’s emerging markets and not miss out on the opportunity that it offers.

“Without question, our trip gives us great confidence in the region across several parts of our asset allocation framework. In fact, we are actually using this opportunity to increase our non-Japan Asia exposure to an overweight position of nine percent versus a benchmark of seven percent, an increase of two hundred basis points,” Henry H McVey, a Member & Head of Global Macro & Asset Allocation, CIO of KKR Balance Sheet said in a report, ‘Asia: Leaning In.

The New York-based firm which has a long history of investing in Asia, added that it was increasing its exposure to Asian equities by reducing its US equity position to 17 per cent from 19 per cent and a benchmark of 20 per cent. Among the key markets on which to focus include Indonesia, India, Vietnam, and China.

“From an investment standpoint, we think that such high levels of strong structural growth across a variety of industries, including consumer financial services, payment processing, education, and healthcare delivery, will be constructive for the trajectory of earnings and multiples in the coming years,” McVey’s report said.

McVey said that the key markets on which to focus include Indonesia, India, Vietnam, and China, and key industries to focus were technology, healthcare, travel, and financials.

“…….countries like China, India, Vietnam, and Indonesia sport growth rates that are both large on an absolute and relative basis, dwarfing what many investors see in developed markets like Europe and the United States. Moreover, we think that, given that many Asian countries have not yet fully urbanized, there is likely still more upside as more citizens shift from agriculture towards higher value-add manufacturing and services jobs,” the report added.

The KKR spokesperson told this portal that added that the firm shared a similar opinion on the scope that Asia offers for private equity too, ‘except the opportunity set is slightly different, and what we target within those countries is slightly different’.

Its report adds that the desire for Asian companies to expand abroad represents a significant opportunity for global private equity firms to help facilitate entrance into new markets, including the U.S. and Europe. This provides an opportunity for PE investors to enjoy dramatic wealth creation in key strategic industries where Asian companies may need to buy their way into certain industries and/or markets, McVey added.

According to the report, the the biggest changes in Asia were not only the continued migration up the value-added ‘food chain’ across a variety of domestic industries, but also the impact that technology is having on delivery of these higher value-added goods and services.

“This transition is a big deal, in our view, as it is creating notable winners and losers, particularly among providers that can offer the perception of aspirational value to middle class consumers who increasingly want to upgrade their lifestyles. Importantly, delivery preferences of both goods and services are changing quickly in Asia. Already, the digital payments market in China has surged to $9 trillion in size, up from just $15 billion in 2011 and now 80x greater than that of the United States. Not surprisingly, the impact of this shift in consumer preferences extends far beyond mobile commerce and financial services to include more traditional areas such as logistics, real estate, and transportation. Given the speed and the magnitude of the aforementioned changes, we think that investors need to keep well-informed on the enormity of this transition for both offensive and defensive reasons, Mc Vey said.

KKR is currently making investments from its third region-focused fund — Asian Fund III, a $9.3 billion vehicle — that it closed earlier this year and also the PE firm’s biggest ever investment fund in the region.

In fact, it is not only KKR, but several other buyout firms, have recently raised, or are on the road to raise specific funds for the region. Asia-focused buyout funds had raised $23 billion as of August this year almost breaching the record of $24 billion raised in 2014, according to a report from Preqin.

Among others are the $7.2 billion Guoxin Fund I, which was targeting opportunities in Asia and China and another mega vehicle Asian Institutional Investor Joint Overseas Investment Fund targeting $10 billion.

“While growth remains more muted in more mature economies like South Korea, Australia, and Japan, we see both internal and external forces driving CEOs to create more efficient corporate structures, propelling what we believe will be an important wave of M&A activity during the coming quarters,” KKR pointed out.

Further, the report added that China, an emerging power globally not just in Asia, would move beyond exporting high value-added products to consolidating global industries by expanding its footprint towards Europe, Asia, Africa, and Latin America.

“China is now taking share in industries that were traditionally dominated by American, European, and Japanese manufacturers. We believe this trend is a secular one, and as such, will have significant implications on global pricing and inflation in sectors traditionally thought to be safe from the deflationary threat of China going global,” it said.

Meanwhile, the firm has also gained further confidence that the benefits of the illiquidity premium in Private Credit extend nicely to Asian markets such as India, Indonesia, and Australia. “Finally, our work continues to show that the U.S. dollar is in the process of topping, which suggests a much more favorable backdrop for both local debt and equity in the region versus the prior five years,” it said.

Overall, KKR is of the view that a multi-year run of solid investment opportunities lies ahead. Indeed, with China rebounding off its low, rising GDP-per-capita stories are now working again across the region. The macro backdrop has not been this positive for these types of stories since China’s nominal GDP first began falling in 2011.

Moreover, both long and short investment opportunities linked to Asia’s ‘new economy’ are now exploding, as middle class consumers are dramatically shifting the way they do business across almost every sector we reviewed during our trip, it said. “If we are right about the aforementioned trends, then now is the time for multi-asset class investors to be ‘leaning in’,” the report added.

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