Driving Asia’s growth

China

GDP growth, inflation, asset bubbles and public markets trends have made China both a hotbed of growth and a country with some disconcerting economic indicators. Inflation hit 4.9% in January 2011 and the Chinese government - always on the back foot on this one it seems - raised interest rates for the third time since mid-October, increasing the one-year lending rate to 6.06% from 5.81%. Chinese consumer confidence has declined of late, with 83% of consumers worried that prices will continue to rise over the next 12 months.

Banks extended 7.95 trillion yuan ($1.2 trillion) of new loans last year, exceeding the government's targeted maximum of 7.5 trillion yuan. The unfettered lending that accompanied the post-crisis ‘bailout' in China was largely mis-used, leading to much of the speculation in real estate and the stock market that the country is seeing today.

Analysts believe that a slowdown in output is inevitable, but that does not necessarily mean fewer PE opportunities. With a GDP of $5.75 trillion, private equity investment is just 0.33% of the PRC's economy, China lags the West, where 1.7% of US GDP is a result of private equity and 2.3% of UK GDP is attributed to the asset class.

Official numbers peg GDP growth at 9.8%% in the fourth quarter of 2010 in spite of the government's monetary tightening. But, as Weijan Shan, Group Chairman and CEO of Pacific Alliance Group noted, "GDP growth does not necessarily equate to corporate profitability. Unfortunately I think some people will have to learn this the hard way."

India

Despite the questions around India's private equity model and the blurred lines between public and private investments, India's economy remains an attractive platform for investments. It is one of the fastest growing economies and is the 12th largest in terms of the market exchange rate at $1,242 billion. In terms of purchasing power parity, the Indian economy ranks the fourth largest in the world. GDP growth of 9.2% is expected for full year 2010, with 2011 cooling to a more sustainable 8.2% as a result of monetary tightening and the pullout of fiscal stimulus.

The flood of money into the system after 2008 had pushed up inflation, but as 2010 came to a close, these pressures began to recede, and greater consumption activity re-emerged, with banks lending at a higher pace than before. All of this appears to translate into sustainable growth and economic expansion in India.

India is driven largely by domestic consumption, in stark contrast to more developed countries like Japan, South Korea and China. Still, its IT and outsource service markets are important, with the services sector contributed 58.4% of the national GDP.

Unfortunately, with all of these positives as a backdrop, India has not reached its potential as a result of issues like corruption, the lack of critical infrastructure, sectors closed to foreign investment and regulations which vary from state to state. But for some, they are able to see beyond the trees and appreciate the forest. Hailing "breathtaking" opportunities in India at the 11th Annual AVCJ Private Equity & Venture Forum India 2010 in Mumbai, Michael Queen, Chief Executive of 3i Group Plc, remarked that, "when I look around the world, it's absolutely critical to our ongoing success that our business in India is as strong as it can be."

Vietnam

Vietnam's economic narrative of late has regarded its currency woes. In mid-February, the government cut the value of the dong by 9% in a measure to outpace the 12.3% inflation rate that month - among the highest rates in the region. The spiraling situation prompted Prime Minister Nguyen Tan Dung to announce on February 24 that severe measures would be taken to improve Vietnam's outlook. Among these was his edict that "state-owned groups and corporations must sell all their foreign currencies to the banks to sell to businesses at the regulated price." The state will also enforce a credit cap that limits growth in 2011 to less than 20%.

The movements follow a period of impressive expansion for the country, which experienced an average 7% growth over the past 10 years. The World Bank touted the country as having "one the best performing economies in the world over the last decade."

However, signs of a slowdown were evident. In December, AVCJ reported that Vietnam's market index rocketed from 250 in 2005 to 1250 in 2007, only to drop to 450 in November 2010. At the time, Son Nam Nguyen, founder of VN Capital Partners, and former head of investment banking in Vietnam with Citi, attributed the spike to an influx of foreign capital - clocking in at approximately $4 billion annually - combined with about 40% yearly increase in bank lending. Looking ahead, investors may find a silver lining, Nguyen said, as a decline in bank lending may prompt firms to turn to private equity to stay afloat.

Indonesia

Indonesia as an investment destination has picked up steam the past few years given its title as Southeast Asia's largest economy and as a country that enjoys an abundance of natural resources. Yet, while Indonesia's economic landscape holds high potential for growth - and has already exhibited its gumption through a growth spurt following the devastating Asian Financial Crisis - it is simultaneously hindered by various political and infrastructure hurdles. According to the World Bank, Indonesia's 2009 GDP was $540.28 billion, a 6% rise from 2008. Its 230 million-strong population is more than 27% comprised of under 14-year-olds - statistics that show promise. And, just last month Indonesia's rupiah rose following speculation that the central bank will raise interest rates, bringing it to the strongest level in more than three years. Yet, as of one year ago, nearly half of the population earned approximately $22 a month, at the cusp of the national poverty line, and the World Bank has noted that "employment growth has been slower than population growth." Coupled with substandard health, public service and infrastructure measures that threaten its ability to achieve its Millennium Development Goals set for 2015, Indonesia has a ways to go before realizing its full potential.

Despite this, the government has given way to a rise in overseas investments. Sources have noted to AVCJ that recently Indonesian players have openly accepted foreign capital to jumpstart operations, in light of an absence of government stimulus. Though corruption is still an issue, those inside the country aver that the political risk is minimizing, exhibited through a succession of presidential and legislative elections going off without a hitch.

Japan

Despite current concerns about Japan's economy and the yen, domestic GDP still stands at $5.47 trillion for 2010; the third largest economy in the world after the US and China, which took over the No.2 position from Japan last year. The Japanese government has attempted to implement changes, including reducing the number of industry players through consolidation, and hoping to accelerate private equity investment to help local companies expand overseas.

And, for the past few years, the Japanese government has considered allocating a portion of capital held by The Government Investment Pension Investment Fund (GPIF), Japan's sovereign wealth fund, to private equity. Market onlookers say the plan will be activated within the next two years.

Japan's recent economic revision noted that the commercial industry is shrinking rapidly in the global market. It further noted that the problem is not with specific industries or products, but with the corporate model of Japanese company.

But, its geographic position neighboring China - and Japan's more advanced technological skills and knowledge - have mutual economic benefits that private equity players and local companies are looking to capitalize on to drive corporate growth in both countries.

For the time being, the mega deals of $1 billion plus have largely disappeared. With limited opportunities for large-scale buyouts, local SMEs have proven interesting for the industry (generally translating into investments of less than $120 million per deal). Japan's ageing population has led to more entrepreneurs become interested in PE, looking to capture the value from their years of hard work.

South Korea

South Korea is regaining the economic strength it lost as a result of the global financial crisis. After taking a hit in 2008 and 2009 (with just 0.2% GDP growth in 2009), the country has seen more than 6% economic growth in 2010. Today, the nation's GDP stands at around $1 trillion, which was stimulated by double-digit recovery numbers over the past two years, as well as growing domestic demand.

The Central Intelligence Agency in the US predicts that this trend will continue, sustaining local economic growth at 5%. Moves by the government to stimulate growth include continuing to de-regulate the financial sector to promote growth, something that the private equity industry within and outside of the country is watching closely.

Apart from the financial services space, PE fund managers have predicted an uptick in deal activity in 2011. One local player said, for instance, that it is important for local companies in the manufacturing industry to add value to their business to increase production capacity, which in turn could boost exports. And, like Japan, South Korea is also going to have to deal with its social demographics and an aging population. Private equity players are certainly eyeing targets which are in need of succession plans.

Meanwhile, the South Korean government's sovereign wealth fund, the National Pension Service (NPS), is even more aggressively looking at investment opportunities in offshore markets, saying that it has $4 billion earmarked for such targets. As of the end of 2010, the total asset of NPS became over 300 trillion won ($266 billion) and is expected to increase to 1,000 trillion won ($886 billion) in about 10 years' time.

Malaysia

Malaysia's macro-economic snapshot provides a similar picture. GDP growth forecasts for 2011 (MIER and that of the government) stood at plus 5.2% and 5-6% respectively, vs. about 7% in 2010.

MIER projects that the central bank will raise its OPR (overnight policy rate) to 3% by the end of this year, compared to its present 2.75%, due to the CPI rise, but it is important to note that price gains in Malaysia remain among Asia's lowest. The IMF has recommended making it more expensive to borrow as an expedient in preventing overheating. Meanwhile, however, in 2010 the ringgit proved to be the best performing currency in Asia, up 11% vs the USD.

From a private equity perspective, a major new regulatory concern arose on January 28.2011 when the Securities Commission and Bursa Malaysia raised the threshold for shareholder approval of pending deals to 75% from the previous simply majority 50%. At the same time, a new initiative in September earmarked an estimated $444 billion for infrastructure projects as a way to attract investment.

For PE activity in the buyout space, this all adds up to a very challenging environment: liquidity is coming back to the stock market, well-capitalized banks are starting to lend again, and local corporations and institutions with low debt-to-equity while sitting on substantial cash reserves, as a prominent PE firm pointed out to AVCJ. But in the smaller cap space, the impact will be reduced. And while the new 75% threshold won't kill the ‘take private' business, it will certainly boost the price at which deals get done.

Australia

The economy Down Under is more or less unique among developed countries. The exuberant end is around the phenomenal resource segment, while the struggle is in manufacturing and retail. Overall economic activity expanded for 17 consecutive years until the GFC. And even then, commodity demand, especially from China, limited negative growth to just one quarter. The economy expanded by 1.2% even in the depths of 2009, the best performance in the OECD. That same year, unemployment peaked below predictions, hitting 5.1% in 2010.

GDP growth exceeded 3.3% in 2010, and the Aussie dollar reached the dizzying heights of parity against the US greenback. Results on the S&P/ASX 200 Index were more uneven however. After a very strong start, investors began selling many of their holdings starting in April over concerns that Greece, Portugal, Ireland and the like could default and trigger a double-dip recession. As it turned out, the Aussie benchmark finished the year with a 1.6% gain. Still, concerns remain regarding the economic health of Europe, the US and Japan, plus fresh taxes at home.

Pundits say 2011 could be back to strength with present valuations much more reasonable and forward price/earnings ratios at about 12 (compared to 15 at the start of 2010). Likewise many Australian corporates are confident, with very tidy balance sheets and substantial cash reserves, and an appetite to acquire.

This, however, creates question marks for private equity in Australia; as one senior player put it, when the corporate are flush and have the urge to merge, the best thing private equity can do is get out of the way.

Taiwan

In terms of its macro economic environment, growth is slowing but still strong. GDP rose 6.5% y-o-y in 2010 Q4 vs 9.8% in Q3 and 12.9% in Q2. Industrial production, however, grew 18% in December, compared to 15% in November. Exports were also up some 15% in December, likewise suggesting ongoing strength in 2011. The government estimates GDP growth of 4.8% this year, but pundits add that 6% is easily attainable. In 2010 it was pegged at 10.7%.

From a currency standpoint, the New Taiwan Dollar has proven to be one of the top performing Asian currencies vs. the USD; cross trade is now at its lowest point since 1997. Expectations are that the Taiwanese economy should continue to grow driven by exports to the PRC and US.

In terms of the public equities markets, the Taiex Index is up 1.8%, mirroring the same gain in South Korea's Kospi Index. The two lead all gains seen among Asia Pacific benchmark indexes. At the core of this strength is the performance of Taiwan's electronics sector, which has benefited from government protection.

Though there hasn't been a lot of private equity activity (apart from a couple of high profile media exits of late), a new vein is opening at the point where Taiwanese companies concentrate on cross-strait M&A and other opportunities. Specifically, that's in private equity firms acting as something like a marriage broker between small- and medium-sized mainland manufacturers and their Taiwanese counterparts. In general, these Taiwanese businesses have legacy issues with Western-educated sons no longer wishing to run them; and so are much more amendable to being bought out.

 

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Southeast Asia
• South Asia
• North Asia
• Australasia