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'Private Equity expansion in the Far East'
THE private equity market in the Far East has emerged as one of the few winners of the global credit slowdown; while PE investment in the region accounted for just six per cent of all fundraising of PE capital raised in 2003, this year the figure has risen to 16 per cent – with 22 per cent of all PE funds seeking capital now having a focus on Asia-Pacific investment.
Jeremy Hoctor, of private equity analysts Pevara, says: ‘Economic growth in the Far East has attracted PE investment. Private investment firms are attracted by diversification and the fact that these markets have enjoyed more stability in recent years than we have seen in the West.’ Growth has been biggest, perhaps predictably, in India and China,
where disposable income is increasing and so creating obvious opportunities in the domestic consumer goods markets. In China, the boom is down to four key factors: growth of the middle class in spite of inflation, China’s domestic firms’ continued global competitiveness (since 2009, 36 per cent of funds closed in the Far East were in the consumer-discretionary market), Chinese banks’ tightened credit strictures and the decline of the Chinese stockmarket. Aside from domestic trade, healthcare has accounted for 34 per cent
and property taken 27 per cent of the market, with energy and utilities attracting a 14 per cent share. And as PE funds look to China, they have cast their eye to other emerging markets in the region. Consequently, international fund managers have opened satellite
offices in Asia-Pacific countries, in particular, to offer investors the benefit of local expertise, leading to the emergence of new PE hubs in locations such as Mumbai, Hong Kong and Singapore. This influx of LPs allocating capital to the region’s PE funds has helped limit the negative impact to the local industry caused by the economic slowdown. However, Stuart Taylor, of PE data analysts Prequin, says the Far East
has been savvy in retaining a stronghold on its market. ‘It terms of who is managing the PE funds, it is Asia-Pacific that dominates investment. There is a significant international and Western presence in the region, but firms from within are increasing their market share.’ He notes that in 2007 and 2008, 70 per cent of funds in the region were managed by local players, while in 2010 the figure stood at 86 per cent – despite LPs from all around the world being interested in gaining access to private equity markets. Vikram Chakravarty, vice-president and partner at global strategy
consultancy AT Kearny, says the in-depth knowledge of regional firms and international funds’ willingness to put men on the ground in the Far East has helped investors reap big rewards: ‘While the buyout process may be more drawn out in markets that can seem relatively immature and dominated by family businesses, PE investors find that their patience
pays off if they map out the right value-creation opportunities at operational level. ‘Carlyle’s investment in China Pacific Insurance is a classic example
of how PE firms can create value by managing organisational changes that generate high returns.’ When Carlyle sold CPI – China’s third biggest insurer – in 2009, it made
a huge profit on its original investment. Carlyle’s investment in the firm was $800 million for a stake that was eventually worth $4.7 billion, based on the Hong Kong IPO price – giving Carlyle a return of nearly six times its original investment. Mr Chakravarty says China and India’s markets are on track to have record fund raising years with global PE funds, such as TGP and CVC recently expressing renewed interest in this region, as valuation has been adjusted downwards while the financial crisis still rages the Europe and the US. As this sector matures, PE investors are looking to the importance of proximity in smaller markets, focusing on country-specific funds that are considered less likely to be impacted by a global recession, such as VinaCapital in Vietnam or Ancora in Indonesia. Investors are counting on strong growth in these mid-markets and earlier this year KKR invested $159million in the Vietnamese fish sauce producer Masan Consumer while Baring Private Equity co-invested with Nestle $1.7billion in the Chinese confectionary firm HsuFu Chi. Peter Dixon, of Commerzbank, noted last year that the events of
2008-09 may be seen as a ‘pivotal moment when the Asian catch-up with Europe and the US received a major boost’. Stuart Taylor certainly agrees, citing research that recently interviewed
international researchers and found that 60 per cent plan to target allocations to Asia-Pacific, with a 30 per cent looking to maintain their allocations. But in order to keep making profits, PE analysts are going to need to
stay ahead of the curve, warns Mr Hoctor. ‘As more money is invested in the Far East, deal prices inevitable increase as competition grows. ‘Firms will have to be mindful of prices and ensure they are getting good value. Staying one step ahead and identifying the next emerging markets or sector will be crucial in the quest for the best possible returns.’ FM
OCTOBER 2011