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US-China trade war will continue to weigh on private equity deal flow in the next year to 18 months, report says

South China Morning Post

發布於 2019年10月16日13:10 • Chad Bray chadwick.bray@scmp.com
  • About 40 per cent of Asian private-equity executives see the US-China trade dispute as having the biggest effect on deals, according to a Dechert/Mergermarket report
  • Exits, fundraising to be more relevant as the top of the economic cycle approaches
A US flag on an embassy car outside a hotel in Shanghai. The trade war will drag on private equity deals in the next 12 to 18 months, the survey found. Photo: Reuters
A US flag on an embassy car outside a hotel in Shanghai. The trade war will drag on private equity deals in the next 12 to 18 months, the survey found. Photo: Reuters

The US-China trade war is expected to have a bigger effect than any other factor on private-equity deal flow in the Asia-Pacific region in the next year and a half, according to a new report.

About 40 per cent of general partners surveyed said they expected the trade war to play the biggest role in the next 12 to 18 months, according to the Global Private Equity Outlook 2020 published by the law firm Dechert and financial data provider Mergermarket.

Of those surveyed, a quarter said the economic slowdown in China would have the largest effect on deal flow, while 20 per cent said growing debt levels in China would play the biggest role, according to the report.

"Chinese activity is likely to remain subdued, at least until the country reaches an accord with the US," the report said. "This may be to the benefit of countries to the south. In particular, China's loss has been Vietnam's gain."

The survey interviewed 100 senior-level private equity executives with US$500 million or more in assets under management in the second quarter. About 20 per cent of those surveyed were from Asia-Pacific.

The US and China have been entrenched in a trade war for more than a year, with Washington putting tariffs of up to 25 per cent on some US$380 billion of Chinese-made goods as US President Donald Trump tries to force Beijing to change decades of industrial and trade policy. China has responded with its own tariffs.

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On Friday, Trump said the US had reached a "substantial phase-one deal" with a Chinese trade delegation led by China's Vice-Premier Liu He following two days of negotiations in Washington. The US would delay implementation of additional tariffs and Beijing agreed to buy more American agricultural products.

The dispute has cut into global trade and weighed on future business investment, which has caused some investors to question whether the ongoing conflict could spark a global recession.

Aviva Investors said on Tuesday that weaker global growth is expected to persist into next year and there is now a one-in-three chance of a global recession.

"World trade and manufacturing are already at recessionary levels, in large part because of the ongoing spat between China and the US," Aviva said. "The danger is growing that the slowdown could spread to the more domestically-focused service sector."

Deal activity in Asia-Pacific has pulled back in the first nine months of this year following a five-year high in the region of 608 transactions worth US$131 billion in 2018, according to the Dechert report. There were just 320 deals worth US$62.7 billion in the first nine months of this year.

Deal flow also has decelerated globally in the first three quarters of the year, but private equity firms still have a lot of dry powder to deploy " some US$1.5 trillion, according to the Dechert/Mergermarket report.

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"Exits and fundraising may be a more relevant area of attention as we approach the top of the economic cycle," the report said.

In the region, Vietnam, in particular, and other countries in southeast Asia have benefited as companies have looked to shift the global supply chain away from China to avoid US tariffs.

"Thailand, the Philippines and Vietnam are all beneficiaries of the current situation," said Siew Kam Boon, a Dechert partner in Singapore. "There is also a new level of interest in other frontier markets. Southeast Asia seems to be gaining a lot of attention."

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.

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