Following a period of pandemic-enforced turbulence, private equity deals have rebounded strongly, with disputes likely to grow as a result

The private equity (PE) scene in Asia-Pacific is thriving again after pandemic-fuelled turbulence. We consider the implications of recent developments for disputes in this sector, including: private equity trends in the region; the nature of PE disputes we have seen; and the key features of arbitration that make it suitable for resolving PE disputes.

Trends in Asia-Pacific

What have we seen?

Before the Covid-19 pandemic, the PE industry enjoyed sustained growth in APAC. Between 2015 and 2019.1

  • the average size of PE funds in APAC grew from $210 million to $630 million;
  • assets under management for APAC-focused funds grew 31% (compared to a 12% increase for funds focused on North America and Europe); and
  • the region’s share of the global PE industry increased from 17% to 28%.

Different trends can be seen in pockets across the APAC region. For example:

  • In Australia and New Zealand, pension and super funds have begun transitioning towards a more active role with direct PE investments. This trend is reflected in Australian Super and BGH Capital's $1.5 billion takeover of education group Navitas in 2019.
  • In comparison, corporate venture capital funds have been more active across Asia (eg China and Japan), with a focus on investment into start-ups and high-growth companies. In mainland China, this has been spurred by a new Foreign Investment Law, which harmonises previous legislation and signals renewed commitment to inbound investment.

Navigating Covid-19

Despite turbulent macroeconomic conditions resulting from pandemic-related disruptions, PE returns in APAC continued to perform strongly, rising to a decade high 14.2% median net internal rate of return in 2021.2 This growth reflects the abundant investment opportunities that have arisen after the Covid-19 pandemic. The acceleration of social trends including e-commerce and demand for remote working, health services and digital platforms has provided new opportunities for PE funds.

The emergence of increasingly sophisticated markets in places like Singapore, Malaysia and Thailand, and early-stage opportunities in markets such as Cambodia and Laos, have spurred this regional progress.

What is to come?

PE transactional activity rebounded strongly from pandemic-fuelled turbulence in 2020-2021. There are some indications this will continue, with high deal volume, increasing industry competition, and strong returns driven by PE firms creating value, delivering top-line growth and reducing cost bases to increase margins.

However, despite the industry in APAC having overcome the worst of pandemic-induced volatility, there are headwinds in the short-to-medium term:

  • The ongoing conflict in Ukraine (including the volley of sanctions against Russia, and Russia cutting gas supply to some European countries), the consequential threat to commodity flows and price pressures;
  • China's response to the spread of new Covid-19 strains; and
  • widespread inflationary pressures.

Where is arbitration in APAC region?

Arbitration is on the rise in APAC across a range of sectors, including private equity. Data published by the major arbitral institutions reveals that parties consistently prefer to resolve disputes by arbitration:

  • According to preliminary statistics, 13.6% of ICC filings in 2021 came from South/East Asia, and another 12.5% from Central/West Asia.
  • Singapore remained Asia's most popular arbitral seat in 2021, followed by Hong Kong (Queen Mary University White & Case Survey 2021)
  • Arbitration is on the rise elsewhere in the region including in Australia, China, South Korea, Japan, Indonesia, Malaysia, and Thailand.

What kind of disputes does PE generate?

While no two PE disputes are alike, there are common categories:

Why arbitration for PE disputes?

PE transactions are often international and fast paced, with investors facing increased competition in bidding for high-quality deals.

Arbitration has a few key features which give it an edge on other forms of dispute resolution for PE cases.

 

Although there are perceived limitations or pitfalls to arbitration, these can be mitigated with various tailored solutions, as outlined below:

Limitation Impediment Mitigation/Solution
Speed

It can take 18-24 months from the commencement of the dispute to the final hearing, and months more for the delivery of an award.

In the context of PE disputes, this timeframe may be too long, with fundraising, deployment, and realisation stages typically taking place in short time frames. If a dispute arises, the parties want to resolve it and move on.

Most arbitral rules also include an "emergency arbitration" procedure for parties who need urgent interim relief before the tribunal has been formed.

Scope for remedies Remedies in arbitration are predominantly monetary. In certain scenarios, PE players may need more urgent relief in the form of freezing orders or injunctions. Arbitrators can make such orders but have limited powers to sanction non-compliance. Most courts in APAC can order interim relief in support of arbitration and have extensive power to punish parties who do not comply.

Outlook

The fundamentals of the PE industry look strong despite the emergence of new risks in 2022. As the volume of deals remains robust, we anticipate a commensurate growth in PE disputes. Statistics indicate most of these disputes will go to arbitration.

In particular, we expect the trend of growth in offshore investment to continue. In recent times, large funds based in the US, Europe and Asia have shown increased interest in assets across APAC, including in Australia. Australia remains a relatively stable and attractive investment market compared to more unsettled markets in Europe and elsewhere. The cross-border component of these offshore investments suggests arbitration of PE disputes will continue to thrive in the region.