Developments in Private Equity in the APAC Region and the Role of Legal Regulation in the Industry
[Rayan Bhattacharya is a first-year law student at the Universtiy of Durham, United Kingdom.]
For the past few years, the evolution of the field of private equity (PE) in the Asia-Pacific (APAC) region has been promising and healthy. Pivotal developments in the financial year of 2017 are expected to pave the way for future ventures and trends in 2018. Hence, the future prospects of PE in the region are stable and bright. The noted increase in the maturation of the APAC PE sector can be taken as a positive indication to the beginning of a new era of growth and opportunity in the PE industry and also related industries such as venture capital.
Current Status of the APAC PE market
2017 was the strongest year recorded yet for the APAC PE market across all matrices. This can be credited to the increasing popularity of the industry in countries and economies which were traditionally insulated to it, and the rapid development of the industry in economies it already had a standing in. While Japan and Southeast Asian economies recorded the largest gains in terms of overall PE investments, Greater China PE deals continued to dominate the APAC market, accounting for the largest share of the overall deals that took place.
Hence, it can be envisaged that the APAC PE market will only continue to rise in the coming months and years, which can be credited to the favorable investment climate, increasing middle class in the region, increasing influence of the technology sector as well as other crucial sectors like construction, real estate, life sciences and healthcare. Moreover, entrepreneurs and company owners in the region are eventually beginning to trust PE as a source of funding and investment more as the opportunities in terms of global exposure and networks seem lucrative. Major transformational shifts in the region such as this are expected to the accelerate the growth of the PE industry henceforth.
The new ecosystem that is emerging for PE in the APAC region is characterized by a multitude of factors. A factor that is immediately noticeable is the geographic diversification of the industry in terms of deals across multiple nations, some of which were more or less isolated from the industry till a few years ago. It is also characterized by an upward shift in the value of deals in the industry and a gradual shift to deals which are highly autonomy and control oriented, hinting an increasing acceptance of the PE industry in the region.
Where do Lawyers and Law fit into this Intricate Commercial Orchestration?
The role of lawyers in APAC PE or more importantly the role lawyers in PE as an industry itself, is derived from the nature of transactions involved in the industry and the variations in general commercial law and policy across borders in the region.
When we talk about the nature of transactions in the industry, it is necessary to recall the very functions of PE itself, or what PE firms and investors do in particular. It is a commonly known fact that a major part of the business functions of PE firms involve bringing in funds from individuals and debt from banks to collectively acquire companies or assets for the purpose of resale or as it is known in the PE world, an “exit”. Hence, it can be logically deduced that lawyers will act as agents of negotiation in the deals that are made by an investor and all the other parties involved.
For example, if a PE firm is carrying out a deal where it is taking over an existing company by pooling in funds from individuals and loans from a bank, there will be lawyers who act for the PE firm buying the company. There will also be lawyers who will act for the company that is being purchased by the PE firm. Furthermore, the banks sanctioning loans for the acquisition will also have lawyers looking into their interests. It is to be kept in mind that the given example is a simplification of what in the real world are exceedingly complex deals, with solicitors and lawyers taking up roles in multiple smaller deals and negotiations that are required to close the final overall deal.
When we speak of cross border variations in law in the APAC region, it refers to the often-multijurisdictional nature of the deals that take place. Hence, it is only natural that those law firms which take up such cross-border deals have offices across multiple jurisdictions across the world to ensure all legal obligations in all jurisdictions that are involved in a deal are accordingly met. Hence, in a hypothetical acquisition transaction involving India, Singapore and Hong Kong, lawyers in each jurisdiction will ensure legal compliance with their domestic law. A lawyer in Hong Kong will ensure all aspects of the transaction pertaining to Hong Kong meet the requirements of the Companies Ordinance of Hong Kong, while the lawyers in Singapore and India will ensure those aspects involving their jurisdictions comply by their countries’ company law.
The Scope of Private Equity in India
While the Indian PE sector is yet to reach the vibrancy of China’s, private equity as a source of funding has injected over $100 billion of capital into India in the last 13 years. It has played a monumental role in the growth of MSMEs, spurred employment opportunities and provided a forum for the expansion of strategic capabilities.
Advising on matters relating to PE in India require a thorough knowledge and experience with foreign investment laws, laws governing publicly listed corporations, general company law, insider trading regulations and, if possible, a basic working knowledge of company law in other jurisdictions the same transaction is being carried out in simultaneously, and impacts it may have in India. Hence, thorough consultations of the Foreign Exchange Management Act (FEMA), the SEBI regulations pertaining to issue of capital, disclosure requirements and takeovers along with the Companies Act, 2013 is recommended.
With 2017 being a highly successful year for PE not only in India but also in the APAC, it is estimated that the performance of the sector will be positive in the 2018 financial year as well. The increasing worldwide acceptance of PE as a source of funding has promoted activity in the APAC in the form of both global and regional investments in what is a rapidly maturing market. With established economies already flourishing in the industry, newer players in the market are also making rapid advancements, which can definitely be seen as a clear indication of the increasing popularity and conventionalization of PE as an industry. With the increasing presence of global investment giants and the rise of local investors, the value of deals is steadily rising, with host economies availing the benefits of increased employment opportunities, boosted young companies and revitalized stagnant ones. Hence, it can be concluded beyond reasonable doubt that PE is here to stay and all the players in the PE industry are all entrants to a new phase of growth and development in deal making across the region.
 Foreign Exchange Management Act of 1999 – Act No. 42 of 1999.
 Companies Act of 2013 – Act No. 18 of 2013.