The new dawn may be a false one

Some of Asia's key markets appear to be shrugging off the global financial and economic slump with surprising ease. But is this the true picture?

“Decoupling”: that apparently discredited word from the immediate aftermath of the financial crisis, when it became apparent that Asia Pacific would not, contrary to popular wisdom, bask in an oasis of prosperity isolated from the turmoil afflicting the Western world.

And yet – around a year on from the collapse of Lehman Brothers – are Asian prospects not, after all, materially different? This is an important question given the implication for LPs' portfolio construction plans. From discussions and emerging news reports, here's a brief summary of the outlook in four of the region's leading economies:

China: on the face of it, China represents a continuing economic miracle. As other economies around the world have seen growth slow dramatically or grind to a halt, China has proved remarkably resilient. According to a report from financial services firm Deloitte, China's GDP grew at 7.9 percent in the second quarter of this year – putting it on track to beat its already challenging target of 8 percent for the year as a whole.

For the growth and venture capital investors that make up the bulk of the private equity market in China, this is good news. Some caution is advised, however. Sceptics point to “overwhelming state intervention” and certain aspects of a fiscal stimulus that may not prove sustainable (such as reportedly undue pressure on banks to make loans – which may therefore be sub-standard and store up problems for the future).

“Next year you could see an unsustainable expansion phase followed by a sharp correction halfway through the year, which would catch people by surprise,” suggests Chris Meads, a partner at funds of funds manager Pantheon Ventures in Hong Kong. “Nonetheless, the opportunity in China remains compelling,” he adds.

India: the macro-economic picture also gives India much cause for optimism, with annual growth of around 7 percent forecast for the fiscal year to March 2010 and possibly as much as 10 percent for the following year. For private equity firms, there is also good news to be found in a recent stock market revival (although the inappropriate pricing of some new issues has been a cause of controversy and seems to have made investors wary).

A simmering problem for Indian GPs is the fundraising environment. The effects of a generally arid fundraising climate globally have been exacerbated in India where a large number of funds have sought to raise money – many of them first-time funds, which are expected to have bleak prospects. Furthermore, many Indian funds have traditionally received a large portion of their capital from US endowments and foundations, which are now facing severe liquidity issues.

Australia: Buoyed by continuing high demand from China for the supply of commodities, Australia looks likely to be the strongest performing Western-style developed economy in 2009. Indeed, JP Morgan recently forecast that the country would see growth this year – albeit at a sluggish 0.3 percent. With a big fiscal stimulus yet to take full effect, there are predictions that interest rates will have to rise soon to see off the threat of inflation.

The Australian private equity market did see a notable acceleration of leveraged buyout deals during the peak of the market, although Australian banks appear to have been somewhat more prudent in their lending than counterparts in the US and UK. Furthermore, international players were responsible for many of the larger LBOs. Domestic players may now be grateful that they were often outbid and forced to sit on the sidelines.

Japan: Thanks to an upturn in exports and a huge fiscal stimulus, Japan saw 0.9 percent growth in the three months to June 2009, following four consecutive quarters of contraction. With unemployment high and wage levels low – and, as a consequence, consumer spending hindered – there is a big question mark over whether Japan's apparent recovery can be sustained once the stimulus measures have run their course.

Private equity in Japan is witnessing a familiar cycle – not for the first time, international GPs have scaled down or pulled out of Tokyo in response to worsening market conditions. Although the rationale still holds that hard-pressed companies will ultimately need to consider selling non-core divisions, many GPs have lost patience with Japan. Furthermore, many deals struck in the country in recent times have been in the consumer and finance sectors – and these have been hard hit.