How should Asian PE/VC act upon the trade war?

Sino-US tensions are posing a multitude of challenges for investors, but one common theme is that markets such as Vietnam, Taiwan and Korea are benefiting from the trade war

Escalating Sino-US trade tensions are undoubtedly impacting the investment market including the private equity/venture capital (PE/VC) sector and investors are taking note. New opportunities are arising even in sectors like technology that are directly affected by the trade war.

Indeed, some analysts suggest the ongoing trade spat is contorting the PE/VC sector significantly. “Twelve months ago, there was such an intense fundraising environment. Yet since last December, the number of PE/VC fund launches that we have been working on has halved,” says James Donnan, managing director at Intertrust Hong Kong, during the HKVCA China Private Equity Summit 2019.

He also notes that of late it takes longer to close the funds. “For those funds that do launch and are successfully closed, we are seeing delays in the investment they are making,” Donnan adds.

Interestingly, some markets such as Vietnam and Taiwan are benefiting from the trade war, according to Jian Guang Shen, vice president and chief economist at JD Digits.

Luo echoes this viewpoint. “We have mostly invested in Taiwan domestically-focused business, so the US-China trade tensions have not really impacted our business,” says Linda Luo, managing director at KHL Capital, noting that her company focuses on telecommunications, media and technology (TMT) and healthcare investments and most of their LPs are onshore Chinese institutions.

In fact, as a result of the trade war, while China is losing market share in terms of share of US imports, other countries such as Taiwan and Korea are benefiting from trade diversion.

“The areas where China is a big loser include printed circuits, data processing machine parts and handbags,” according to Paul Donovan, chief economist at UBS Global Wealth Management.

“China's lost electronics market share is largely being absorbed by two countries – Korea and Taiwan. US customers seem to have bought more from China in advance of the September tax increase, but since then have switched to Korean and Taiwanese suppliers,” Donovan adds, who then reveals that Mexico and Vietnam have also picked up significant market share from China.

Other Southeast Asia markets such as Indonesia and Thailand, which are countries often viewed as alternative locations for low-cost production, have not seen significant signs of any upturn in market share at China’s expense, according to Donovan.

Current market conditions are creating opportunities that investors are willing to grasp. In addition to those markets that are benefiting from China’s loss, there are new investment themes to notice even within China – such as the Chinese domestic technology sector, which analysts suggest could yield investment opportunity.

“Through some of the fund of funds (FOFs) that we invested in, which engage in earlier stage TMT and healthcare investments, we are seeing a renewed interest in onshore China technology. Previously, people were looking for cross-border investment opportunities where they could marry the benefits of US technology and the China market. With the latest tensions, some of the Chinese domestic technology businesses are seeing much pick-up and potential,” says Luo.

Nevertheless, the trade war poses a challenge for investors. Plus, LPs are becoming more cautious and are now doing more due diligence, according to Donnan.

“As an investor, we have to try to separate the controllable factors and uncontrollable factors. Focus on the controllable from the internal perspective while reserving options and flexibility for the uncontrollable factors and potential outcomes,” Luo suggests.

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