Morgan Stanley IM: Why Invest in Asian Private Equity? The Case for Outperformance

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Morgan Stanley Investment Management (“MSIM”) views private equity in Asia as a potential bright spot for investors that offers the opportunity for outperformance, particularly at the current juncture. While Asian private equity can be a difficult segment to diligence and access, MSIM believes that its 20+ year history investing in private equity funds and opportunistic investments in Asia, combined with the broader resources of Morgan Stanley, can help bridge this knowledge gap.1 MSIM’s upcoming series on “Why Invest in Asia Private Equity?” will look to demystify the opportunity, starting out with “The Case for Outperformance,” which explores some of the drivers of outperformance including accelerated growth/leapfrog potential, valuation arbitrage, and the opportunity for company-level professionalization and efficiency improvement. In subsequent papers, the team will go into further depth on the region, covering topics such as the opportunity for venture capital in India and the current state of private equity in China.

Asian Private Equity: Where’s the Risk Premium?

Investors looking to Asia usually ask, “Can I expect a risk premium?” In short, yes—at least based on MSIM’s analysis. On the surface, historical private equity (“PE”) performance in Asia has been shown to be on par with performance numbers generated in other regions. However, top-performing Asian private equity funds show historical performance that often exceeds top-performing North American and European funds.2 This outperformance has generally been delivered with lower levels of underlying leverage, as company-level debt is less readily available and/or less attractively priced in Asia versus Western markets, and private equity subscription lines of credit are less commonly used by funds in Asia.3 General partners (“GPs”) in the region that are able to identify the right market opportunities and execute accordingly have shown that they can indeed deliver that much desired “risk premium”.

This paper covers a few of the drivers of outperformance in Asia—accelerated and leapfrog growth, valuation arbitrage and efficiency improvement—and why these observed characteristics make the Asian market particularly attractive.

^{1 Subject to third party confidentiality obligations and internal policies and procedures established by Morgan Stanley, including information barriers and allocation policies, to manage potential and actual conflicts of interest and/or in respect of regulatory requirements.
2 Preqin, data as of September 2022. Vintage years beyond 2017 have been excluded as performance is less mature and may be too early to tell. Note that the data discussed here is limited to only what is reported to Preqin; as a result, the dataset may suffer from survivorship bias. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown.
3 Preqin, data as of July 2022.}

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