While the short-term investment outlook for the Asia-Pacific region may appear cautious, driven by sluggish fundraising, interest rate uncertainties, sticky inflation and geopolitical challenges, investors should maintain a positive outlook for the region over the long-term, according to a recent report.
Long-term investors will continue to be attracted by the fundamental growth potential of emerging markets (EMs), such as India’s and those of Southeast Asia, where there is an abundance of early-stage venture capital (VC) opportunities, finds investment data company Preqin in its latest report, Alternatives in APAC 2024.
The report also say that the mature real estate markets of Japan and South Korea still offer numerous opportunities and that funds focused on Asia bucked the trend for softer fundraising. Despite a challenging 2023 for Asia-Pacific fundraising – when total capital raised reached a decade low of US$107.8 billion – the proportion of capital raised for Asia regional funds rose from 20.6% in 2022 to 31% in 2023, reflecting a shift in investor’s stronger preference towards diversification and risk aversion.
However, China-focused funds, which had historically dominated fundraising in the region, experienced a significant decline in 2023. Compared with 2022, both total capital raised and funds closed in the country more than halved amid geopolitical challenges.
Meanwhile, Japan stood out on fundraising and deal-making as other single country-specific funds struggled with fundraising, with total capital raised for Japan in 2023 coming in at US$11.8 billion, exceeding 2022’s by 13.4%. This was mainly driven by larger-than-usual private equity fund closures.
“The Asia-Pacific region has not been spared from the global macroeconomic headwinds that plagued the global market in 2023,” says Angela Lai, Preqin’s head of Asia-Pacific and valuations, research insights. “But while the region’s fundraising may have reached a decade low and most country-specific funds struggled to raise capital, demand for Asia regional funds grew amid investors’ stronger preference for diversification and reduced risk appetite.”
VC remains robust in Asia
Japan’s accommodating interest rate and weaker yen also supported the deal market’s growth in 2023, as private capital deal value achieved a five-year high of US$34.8 billion, exceeding the previous peak in 2021 and putting it nearly on par with China as one of the most active private equity markets in Asia-Pacific.
VC opportunities proved to be resilient in the region even though the global VC market has been one of the most affected asset classes since the pandemic; thus, the report’s long-term regional outlook is relatively positive.
The region’s activity has held up relatively well in the global context, the report notes, declining less than its peers and remaining the most active region globally for VC activity by deal volume.
And, as more investors shift their focus to early-stage VC opportunities in the face of weak sentiment, Asia-Pacific is well-positioned with abundant opportunities, the report adds, along with strong growth potential forecast in India, where VC is the key driver of the growth in assets under management.
Even though, the region is not immune to the global macroeconomic headwinds facing the VC industry, it offers, the report finds, diverse opportunities across different sectors and supportive demographics for economic growth.
Korea, Japan office deals pick up
As hybrid working arrangements fade and more people return to the office in Asia-Pacific, the North Asian office market is becoming a focal point for deals.
In 2023, office transactions accounted for 39% of total deal value and 53% of the total number of deals in the region. South Korea, in particular, experienced high demand as the vacancy level fell below 3% for Grade A office space in Seoul.
Office deals also picked up in Japan in the first quarter of 2024, positioning it ahead of South Korea as the most active regional market for office assets.
China will take time
While China, the region’s largest private capital market used to rank first place as the most attractive EM across asset classes, recent surveys show that more investors are now looking towards India and Southeast Asia instead.
Within last year’s decade-low Asia-Pacific fundraising numbers, China-focused funds saw the sharpest decline, indicating that the appetite for investors to add exposure to the world’s second-largest economy fell to a new low.
Prolonged concerns around geopolitical sensitivities that impact international trade as well as domestic issues, such as slowing consumption and the seriously distressed property sector, will still likely take a few years to play out.
However, China, the report points out, is also both directly and indirectly important to many countries in the region as a top trade partner; and hence, its comeback could potentially turn the situation around very quickly.
Despite the change in sentiment towards China, the report emphasizes, the country will maintain its status as a heavyweight in the region’s private capital market, and the strength of its economy will remain key to regional forecasts.
