By Jane Leung, Chief Investment Officer, Scenic Advisement
I’ve just returned from my first business trip to Hong Kong since transitioning from the public markets and found the experience to be exhilarating and optimistic. Hong Kong, and Asia more broadly, has always been a region filled with mystery and opportunity. There are no shortages of real or perceived opportunities originating in this marketplace, particularly relative to the U.S. So it begs the question, how do Asian private market investors see the U.S. market these days? Unsurprisingly, geopolitical concerns are top of mind for many Asian investors: whether it be the trade war with China or the general uncertainty around U.S. foreign policy in the region.
Asian private investors and their perception of the U.S. market
Many of the Asian investors we spoke with are currently quite concerned about valuations. How high is too high and what underpins these valuations, especially in the technology sector. Are these companies with strong fundamentals or filled with dreams and AI-powered fairy dust? Some investors are shying away from the U.S. entirely, for now, preferring to invest in more value-oriented European and Israeli opportunities. Others are even heading toward more frontier markets where it is less crowded, such as Vietnam, Pakistan, and Bangladesh. Many of those who are still interested in and have good access into the U.S. markets are structuring deals to ensure minimum returns.
There are at times dichotomies between uncertainty and risk and how that translates into returns. On the one hand, uncertainty can be great for markets, but taking unintended risks is clearly dangerous. Risk can actually be a good thing – dislocations in the markets, wide spreads, that’s actually where the opportunity lies, but you need to fully understand what these risks are to be able to mitigate/hedge your risk and maximize your returns. While this holds true for all markets, it is particularly true when it comes to Asian markets because there is still a fair degree of information asymmetry for US investors, whether it be due to extreme market fragmentation or the presence of many intermediaries (sometimes leading to the “Chinese Whispers” effect), which doesn’t necessarily affect the Asian investor investing domestically as much. As such, large Asian institutional investors with outposts of local staff in the U.S., are on a relatively level playing field with other U.S. investors. However, those mid-sized or smaller Asian players seeking access to the U.S. may encounter more noise and be less willing to take risk.
Cautiously optimistic would be a fair assessment of the mood these days.
Asian founders and their perception of the U.S. markets
Capital comes in many shapes and forms and in the U.S. capital has become quite competitive. There is a lot of money flowing around and available to be put to work. The amounts of dry powder that I have heard that is on hand from many institutional global investors is impressively high. But is all money equal? To some Asian founders, it is not.
There is an increasing preference to raise money from family offices or other laissez-faire-type investors, so those founders can retain more control over the direction of their company. Asian founders of more mature companies are beginning to look to the U.S. to diversify their capital sources as they scale their companies and look to the overseas market for additional growth. One consumer technology firm that we spoke with has been rapidly hiring veterans in the industry from the U.S. and other regions to leverage their expertise in helping to grow their business. Another is actively seeking capital partners who can make introductions to other strategic partners and who have the in-depth experience within their niche industry to help them achieve a true step change in their business.
U.S. founders and their perceptions of Asian investors
U.S. founders are becoming increasingly happy to open up their cap tables to investors outside the U.S., but they recognize they need to do this carefully. Having a China strategy is a high priority for many private companies, if not now, certainly at some point in the future. But separating the wheat from the chaff is no small feat, particularly in Asia, where there are a lot of investors, intermediaries, and other players that often muddy the waters. Finding the right partner is not easy to do as investors come in all manner of shapes and sizes. Some are more hands-on, others are less so. While the immediate thought would be for founders to prefer a less hands-on approach, the reality is that in some Asian jurisdictions, China, in particular, having an entity that already has licenses in place and, most importantly, support from the government, will not only be additive to the equation but also completely impossible to succeed without.
Relationships also take time to build, particularly in Asia, and many U.S. founders, depending on the stage of their company, may not have the bandwidth or patience to cultivate these relationships for the future. Some founders are also rightly concerned about companies that may take their technology and copy it. Interestingly, there are some large conglomerates who have even more sophisticated technology that can add value to the business model. For example, there are a number of large healthcare, insurance and multinational conglomerates that are sophisticated technology users that and can lend their technology and expertise to portfolio companies in the West. This may be surprising to some who view U.S. technology as the most advanced. Though it is in many ways, it’s a big world out there.
My perceptions of these perceptions
The world is indeed getting smaller and smaller by the minute. Unfamiliar cultures and foreign intrigue are now slowly being replaced by the view of one culture and a business and innovation-first mentality. Even as some try to build walls or start wars to curtail this growth and development, the prospects in Asia remain as exciting and vast as ever. While there is still untapped opportunity in the public markets, this lens I now see things through - the private markets - adds a whole new dimension of excitement and sustainable growth to the mix.
Jane Leung who is Chief Investment Officer of Scenic Advisement - an investment bank for the private markets.