1Q analysis: Hard times

1) Bifurcation in pan-regional buyout fundraising

It has become a hallmark of every interview and press release heralding a first, second or final close: this was achieved despite a difficult fundraising environment. The argument is difficult to dispute based on the statistics. In the first three months of 2013, Asia-focused funds raised a total of $6.8 billion, AVCJ Research's provisional data show, the lowest level seen since the fourth quarter of 2009. These figures normally change as additional activity comes to light, but the historical variation isn't particularly large.

Targets are being slashed across the board and the average length of time spent in the market has lengthened, due in no small part to those unfortunate GPs seeking to raise funds - usually first or second timers - on the basis of little or no track record. Clearly, a mid-market manager on Fund IV who has returned capital to LPs from the previous three vehicles is likely to prevail over a similar-sized GP that has generated no exits from its first fund and wants to raise a second.

The global and regional buyout firms occupy a different category, thanks to their extensive investor relations teams and large LPs' tendency to gravitate towards larger funds and brand names.

Yet even at this end of the market, fortunes appear to be splintering. It emerged recently that The Carlyle Group has passed the $1 billion mark on its fourth Asia buyout fund, which launched in May 2012. The fundraising pace is broadly comparable to that of TPG Capital, which began marketing its sixth regional vehicle one month earlier and is said to be on about $1.5 billion.

Both expect to reach final closes - of $3.5 billion and $4 billion, respectively - by the end of the year. TPG took one year to accumulate $4.25 billion for its January 2007 vintage Fund V; Carlyle Asia Partners III came to market 12 months later and achieved a final close of $2.55 billion in April 2010, the global financial crisis having slowed progress.

Comparisons are inevitably drawn to KKR Asian Fund II, which launched last May and is thought to have attracted commitments of around $6 billion, although it has yet to announce a final close. The private equity firm took about 18 months to raise $4 billion for its first regional fund in 2006.
The first quarter of 2013 saw two significant fundraises on the pan-regional and country-focused front. Affinity Equity Partners took just five months to reach a first close of $1.5 billion on its fourth Asia fund, which has a hard cap of $3.5 billion, while China-focused CDH Investments took about the same length of time to win $1 billion in commitments from LPs for its $2 billion fifth vehicle.

How much should we read into prevailing market perceptions of GPs and its impact on the speed of fundraising? Based on California Public Employees' Retirement System (CalPERS) data, Affinity's previous fund - 2007 vintage - had delivered an IRR of 15.7% and a multiple of 1.5x as of September 2012; KKR Asian Fund I (2007) was on 13.1% and 1.4x; Carlyle Asia Partners III (2008) was on -4.9% and 0.9x; and TPG Asia V (2007) was on -3.5% and 0.9x.

So it appears recent performance counts for something. Then there are the factors that don't suit spreadsheets: team stability (TPG has seen turnover, particularly in its China team, while KKR has yet to lose anyone in the region); the makeup of the LP roster (generally speaking, regional firms are likely to have narrower investor bases); alignment of interest (Affinity has a one-fund approach, while Carlyle has four PE vehicles in Asia alone); co-investment opportunities and other participation incentives; and, perhaps more now than ever, an Asia strategy that incorporates China but isn't beholden to it.

LPs' priorities vary considerably but the global trend if for fewer, more significant manager relationships. While a rapid fundraise doesn't necessarily lead to effective deployment, it does demonstrate a level of faith in a GP and the power of momentum should not go unappreciated.

2) Large-cap deals are lagging

At A$900 million, TPG Capital's acquisition of poultry producer Inghams Enterprises in March was the third-largest buyout in Australia since the global financial crisis, excluding real estate and infrastructure. Ignoring those two categories once again, Inghams came in at nearly twice the size of the second-largest deal completed in the first quarter of 2013.

The top 10 transactions together accounted for $4.6 billion, down from $6 billion for October-December 2012, and $11.3 billion, $10.3 billion and $6.9 billion in the first, second and third quarters of the year. The absence of large-cap deals contributed to a 24% quarter-on-quarter decline in Asia private equity investment to $8.5 billion, the lowest level in more than four years.

China saw the sharpest decline in activity with investment dropping 50% to $1.3 billion. Deal flow has declined every quarter since June 2011 apart from July-September of last year, which included the announcement of the Focus Media buyout and Alibaba Group's buyback from Yahoo.

The decline is consistent with the continued deterioration in fundraising as country-focused vehicles attracted just $2.9 billion - of which $1.5 billion went into renminbi-denominated funds, an all-time low. It is no coincidence that growth deals, a focal point for the pre-IPO oriented local currency vehicles, fell 71% quarter-on-quarter. No China transaction made the top 10, which is unprecedented.

While Japan also witnessed a slowdown on previous quarters, South Korea joined Australia as the only major Asian market to post an increase in deal value. With MBK Partners agreeing to buy a majority stake in clothing retailer NEPA for $558 million and a STIC Investments-led consortium paying $384 million for a stake in weapons manufacturer LIG Nex1, Korea was well-represented in the top 10, continuing a strong run that dates back to the second quarter of 2012.

Looking at transaction breakdown on a regional level, the predictable slowdown in buyout and growth activity - the latter more significant than the former - was accompanied a weakening PIPE deals. Given the rebound in regional equities markets, perhaps this is no surprise, but the cumulative value of public market investments, $911 million, was the lowest in more than two years.

On the flip side, there was notable uptick in start-up and early-stage investment, which rose 670% quarter-on-quarter to $1.1 billion, albeit from a low base. China contributed $200 million to the total but the stand-out performer was India, which saw transaction value jump to $738 million from $37 million in the final three months of 2012.

3) Trade sales drive exits rebound

Amidst all the difficulties surrounding fundraising and investment in Asia, exits represented a sole bright spot in the first quarter of 2013. Yes, the IPO market continues to frustrate with a paltry 16 private equity-backed offerings generating $892 million. This is really low - the quarterly average in a disappointing 2012 was $8.6 billion - and a drop-off in mainland China activity is largely responsible.

Yet there was a resurgence in overall exits, which reached $12.7 billion, up from $11.2 billion in the final three months of 2012. More importantly, the strong trade and open market sale figures that underpinned this performance were not driven by sovereign wealth funds trimming their stakes in China's state-owned banks or large-scale infrastructure deals, as is often the case.

KKR saw a 5x return on its investment in Japan's Intelligence Holdings when the recruitment services provider was sold to Temp Holdings for $713 million in March. Also in Japan, Advantage Partners exited Komeda's Coffee to MBK Partners, generating a 7x money multiple. In Australia, Unitas Capital completed the second of its two-stage exit of auto parts supplier Exego to US-based Genuine Parts for $800 million, an investment that has delivered a 3.3x return, while Archer Capital sold Ausfuel to Trafigura-owned Puma Energy for $650 million, having paid about $120 million for the business three years ago.

The latter transaction is particularly interesting: CHAMP Ventures acquired Ausfuel in its early days, grew the business to a scale that would appeal to Archer, which supported further expansion to a point where the company became a viable target for a multinational. As with each of these buyout deals - which together accounted for more than one third of trade sale value for the quarter - it is an example of private equity creating and then realizing value from a business.

The open market sale proceeds were even more concentrated, with three transactions contributing nearly three-quarters of the total. While Cerberus Capital's protracted exit from Japan's Aozora Bank brought a frustrating investment to a close, the first quarter saw The Carlyle Group complete Asia's largest cash exit from China Pacific Insurance. The private equity firm sold the last of its stake for $795 million, bringing the cumulative proceeds to more than $5 billion against an investment of $400 million.

However, Goldman Sachs is poised to take the crown as it inches towards a full exit from Industrial and Commercial Bank of China. A 0.4% stake was sold in January for $998 million, putting the investment bank on course to generate in excess of $9 billion, having committed $2.6 billion in 2006.

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• Topics
• Fundraising
• Exits
• Greater China
• GPs
• LPs
• KKR
• The Carlyle Group
• TPG Capital
• Affinity Equity Partners
• buyout
• China
• Exit
• Fundraising