Key Thoughts In Three Key Markets
This article was originally published on Eaton Partners Private Markets Monitor in 2017.
China’s healthcare needs are staggering. Healthcare in Asia and China in particular is a consumption story, not an innovation story. The wealthiest and most educated segment of the population will enter their prime/golden years in the next decade and wallet share will shift to health and wellness. Currently the top selling global medicines are vastly under-penetrated in China and we expect over 70% of the top 200 healthcare companies to turn over in the next 10 years. The BATs of healthcare will emerge to address what is not only a staggering demographic
need but also a social/political and pharma economic trend that will favor new national champions .
Mid-market buyouts coming of age in Japan. Buyouts are on the rise in Japan with 2/3s of SME (Small & Midsize Enterprise) owners over 60 years old. As in the US, SMEs are the deepest, and largest segment of the world’s second largest developed economy. However, PE is still underallocated in Japan. Significant cultural and structural inefficiencies allow for a new generation of smart, local, independent buyout shops to acquire quality cash-flow businesses at inexpensive prices with cheap, covenant light financing reminiscent of the early days of US buyouts. As the first institutional money in, PE has a clear ability to add value, and grow or consolidate strong regional businesses. Moreover, the depth and maturity of market tend to result in relatively uncorrelated returns and strong DPI.
Industry Upgrades. Domestic consumption is an obvious structural trend taking place in Asia due to increasing urbanization, disposable income and mobile technology around emerging regional mega hubs. This is not a new theme. Downstream retail (on and offline) and consumer brands have and continue to be the recipient of significant private equity capital. E-commerce and online payments have leapfrogged the rest of the world. However, the more complicated and fragmented segments of the value chain need to catch up and integrate. An understanding of global inputs, supply chain operations, and enterprise technology will be a barrier to entry at the same time as customer segmentation and demographic preferences are evolving and diverging. Strategies that focus on buying these consumer proxies at better valuations will be best positioned to succeed in this transitionary phase of slowing growth, industry upgrade and consolidation.
