Preqin's Funds in Market module currently tracks 161 Northeast Asia-focused private equity funds that closed between 2010 and 2015 YTD. Collectively, these vehicles have raised a total amount of $20bn. Fifty-five percent of these funds cite South Korea as their primary geographic focus, while the remaining 45% primarily target the Japanese market. Capital directed towards Northeast Asia has steadily increased from $3bn in 2010 to $5bn in 2014, testament to the attractiveness of Japan and South Korea as investment destinations. This may be due to a myriad of factors: well-structured legal and fiscal regulations, high business transparency as well as these economies’ long track records of private market transactions.
In terms of fund type, venture capital (comprising 45% of funds closed) and buyout (19%) strategies dominate the Northeast Asia region. The proliferation of venture capital vehicles in this market is largely due to the fact that Japan and South Korea are widely considered to be the top technology and innovation hubs in the world; both nations are ranked as global leaders in terms of R&D spending as well as patent-filing activity, signaling their sustained hunger for innovation.
On the other hand, traditional buyout funds have historically faced resistance in Northeast Asia, and remain a distant runner-up in the fund type breakdown. This may be attributed to a general reluctance to surrender control of large, family-run businesses or chaebols to third parties in both countries. Another notable strategy employed in the region is growth, which makes up 14% of all Northeast Asia-focused funds raised between 2010 and 2015 YTD.
Distressed private equity, which encompasses special situations, turnaround and distressed debt strategies, also seems to be a noteworthy theme in the region, accounting for 9% of vehicles raised in the past five years. Troubled small- and medium-sized enterprises (SMEs) in Japan currently face a sharp credit crunch in the wake of the SME Finance Facilitation Act’s expiry in early 2013. The termination of the debt moratorium law has prompted the gradual offloading of nonperforming loans by Japanese banks, hence cutting off a key source of financing for struggling enterprises in the country. In addition, a spotlight has been cast on South Korea’s corporate debt sector, which holds high levels of leverage as compared with its peer economies. In view of these developments, fund managers utilizing distressed strategies may expect a favourable deals landscape in Northeast Asia.
All in all, the region’s mature and highly diversified business environment provides a multitude of opportunities across a wide spectrum of fund strategies, ranging from venture capital through distressed to growth. Regardless of the approach favoured, overall fundraising figures for the Northeast Asian market have slowly but steadily grown over the past five years, paving the way for greater deal activity going forward.