After a two-year slump, Asia Pacific’s private equity (PE) sector registered its best-ever performance in 2014, with both deal values and the exit activity not only rebounding, but soaring to a new record of $81 billion and $111 billion, respectively, Bain & Company said in a report.
According to the report from the rom management consulting firm, the deal value soared 61.72 per cent, from $50 billion in 2013. Meanwhile the exit value doubled from $51 billion last year. (See Figure 1.1) The rebound stemmed, largely, from returns that came from the massive transactions of the leading PE firms – sometimes in partnership with large sovereign wealth funds or other Limited Partners.
Going forward, Bain cited that the higher asset prices and tough competition will be the main challenges that could hamper the positive momentum on the deals side. Meanwhile, exit activity in 2015 will largely depend on continued strength in the region’s fickle equity markets.
Returns: Building momentum
Since the slump began in 2011, the PE industry’s recovery and long-term growth in Asia Pacific has depended on two factors – one is General partners (GPs) finding innovative ways to provide more return on capital to the investors, and the other is the steadily improving returns on investment.
In the first half of 2014, Bain found that Limited Partners in Asia Pacific got back almost $1.2 for each dollar called by GPs, as PE firms passed them back to investors.
While the market’s median internal rate of return (IRR) was still lower than the one in the pre-crisis period, the trend is positive. Median returns rose from 9-11 per cent during late 2012- mid 2014 and those for top quartile funds, hit 19 per cent.
Exits: An IPO revival
After three years steep declines; 2014 saw a surge in exit value, which was perhaps the year’s most encouraging development. PE funds in Asia Pacific made a new record of exit investments, worth $111 billion.
Exit value had bottomed out at $51 billion in 2013 when the Chinese government temporarily closed the IPO market to combat fraud. However, the reopening of the Chinese IPO channel led to a 218 per cent surge in the exit values in China, Hong Kong and Taiwan.
The largest exit in 2014 was Alibaba’s $25-billion IPO in September, followed by the $5.8 billion trade sale of South Korea’s Oriental Brewery to Anheuser-Busch InBev and the $3.5 billion trade sale of Arysta LifeScience in Japan.
However, the exit value did not surge for the whole region; it dropped 9 per cent in Southeast Asia and 10 per cent in India.
Investments: A return to peak performance
The report noted that Asia-Pacific deal value hit an all-time record in 2014 at $81 billion, topping the previous high of $77 billion set in 2007; following a lacklustre year in 2013.
The number of individual deals grew 14 per cent, to 742, and average deal size increased to $110 million, from $77 million in 2013.
“Overall, the market experienced a robust 63 per cent increase in total value compared with 2013 totals and beat the previous five-year average by 50 per cent,” Bain & Co noted, pointing out that Greater China led the change once again.
With the exception of Japan, each of the Asia-Pacific markets saw growth in deal value, but Greater China’s 182 per cent increase, to $41 billion, dwarfed activity elsewhere in the region. A major contributor to the overall value surge in the region was the re-emergence of sovereign wealth funds as buyers.
Among these are Southeast Asian sovereign wealth funds making a ripple in the pool. Singapore’s Temasek Holdings claimed the region’s biggest deal with a $5.7 billion investment in Hong Kong-based beauty retailer AS Watson Group.
A Temasek-led investor group also paid $1.2 billion to buy an additional stake of agribusiness company Olam International in Singapore. Malaysia’s Khazanah Nasional helped fuel a $2.4 billion pre-IPO investment in China Huarong Asset Management.
“It is important to note that only a select set of financial investors had the size and clout to address deals of this magnitude, suggesting it will be critical for participation to broaden to less massive players if momentum is to build over the long term,” the report commented.
Still, in China, a surge in pre-IPO deals led to more activity among smaller funds and several local Chinese GPs found ways to tap deals that were previously only open to state-owned enterprises (SOEs), the report added.
One prime example, Bain & Co noted was a $5 billion investment in Sinopec led by RRJ, Hopu and other PE investors.Altogether there were six mega-deals in Greater China that topped $1 billion in value.
The number of deals was about 30 per cent higher than its historical five-year average.
As in recent years, growth and buyout deals drove the most activity throughout the region, with secondary deals— those between PE funds—accounting for about 20 per cent of buyout value in 2014. “GPs also renewed their focus on start-up and early-stage deals and the Internet sector drew the most interest overall. GPs are paying much closer attention to ownership structure and governance, looking for creative ways to manage their risk by building path-to-control provisions into acquisition agreements.”
Fundraising: A clear flight to quality
The Asia-Pacific region has gained share in global fund-raising in 2014, after two consecutive years of decline. This was depicted in the 11 per cent increase in capital raised from LPs (to $43 billion), while the global total fell 7 per cent, to $375 billion (excluding real estate and infrastructure).
“As we’ve noted, that’s a clear testament to how much PE depends on recycling capital to thrive. What’s equally clear, however, is that LPs have become significantly more discerning about which funds get their capital,” the consultancy noted.
Bain & Co believed that having been disappointed during the last boom cycle, LPs are taking a much harder look at performance history and fund strategy this time around.
The number of GPs closing funds in the region has declined steadily each year since 2011, and 2014 was no exception.
“But the total value of funds raised increased, because the average fund size jumped 51 per cent, to $404 million. That reflects a growing preference among LPs to place larger amounts of capital with fewer proven winners,” it said.
Trends in capital flow in the past year showed that the appetite for cross-border investing has grown as well.Large buyout funds attracted the most new capital in 2014, and regional funds that offer LPs the protection of more diversification across the Asia-Pacific economies drew particular favour.
Regional funds raised 33 per cent more capital in 2014 than they did a year earlier and took home more than 50 per cent of the total capital raised region-wide.
Asia-Pacific funds, especially regional funds, increased their share of global fund-raising: Report
Country-specific funds, meanwhile, raised 5 per cent less capital. About 250 funds were on the road looking for funds in 2014, but a decreasing percentage met their goals.
It was noteworthy that almost half of those seeking fresh capital in 2014 failed to reach their targets, and 40 per cent are taking as long as two years to achieve final close, further reflecting LPs’ selectiveness with where to place their capital.
Experienced funds with more than $1 billion in assets under management continued to increase their share of total capital raised in the market, commanding 42 per cent in 2014, about 20 percentage points more than in 2012.
“As we’ve said for several years, this bifurcation in fund-raising will have a beneficial effect on the market over time. The ongoing shakeout of the market’s worst performers should lead to healthier overall market performance. But by nature, PE funds can hold on for a long time, and the transition inevitably will be slow,” the consultancy remarked.
Momentum to continue
Bain & Co noted that despite the slowdowns in China, Japan and Southeast Asia, the region’s overall growth in real GDP softening to 3.8 per cent in 2014 from 4.3 per cent a year earlier, confidence in the region was still upheld.
“The Economist Intelligence Unit is projecting an increase (of the overall GDP) to 4.4 per cent in 2015, and few would dispute that the region’s long-term potential is intact,” it said.
The Asia-Pacific region’s diverse set of economies stretching from China to Myanmar still outperforms the global average, powered by rapid development and modernization, the report highlighted.
To bolster those factors, middle-class populations are growing, and government policy is improving while inflation and government debt are largely under control.
A flight to quality among investors is benefiting funds with size, experience and a proven track record: Report
“What’s been most crucial for the PE industry over the past several years, however, is that the region’s short-term slowdown in growth has reined in inflated expectations that led to a frenzy of sometimes unprofitable activity. LPs and GPs alike have recalibrated during the downturn and are approaching investment with significantly more discipline,” the consultancy said.
Bain & Co is optimistic on the future of the Asia-Pacific PE industry, encouraged that certain structural imbalances in the post-boom industry are easing and that a more mature industry is emerging.