1Q analysis: Big fish, small fish

1) Fundraising: Of big fish and VCs

In a weak first quarter for private equity fundraising, few lines point upwards. Commitments to Asia-based managers reached $6.6 billion, the lowest quarterly total since the first three months of 2009. Even then, with the industry still reeling from the global financial crisis, 91 managers reached an incremental or final close. In the first quarter of 2014, there were 34 closes.

The numbers, provided by AVCJ Research, are provisional and evidence of further activity will no doubt trickle out, but they do not make for comforting reading. China and Australia are the only markets to see a quarter-on-quarter increase in capital raised. In both cases, there is an element of big fish tipping the scales.

Quadrant Private Equity is one of a handful of Australian GPs capable of raising $750 million or more and it duly closed its seventh fund - and fourth as an independent - at A$850 million ($758 million) in almost no time at all.

Meanwhile, nearly $0.90 in every $1 committed to a China fund in the first quarter went to a US dollar-denominated vehicle; and half of each $0.90 ended up in the second and final close of CDH Fund V. At $2.55 billion it is the largest China fund ever raised by an independent manager.

However, CDH is not the only interesting story behind the China data. As more capital entered US dollar funds than in any quarter since July-September 2011, the big fish was joined by several distinguished smaller fish. Only eight China venture capital funds reached a close in the first three months of 2014, well below the average of 15 for the last two years, but they raised $1.3 billion between them, the largest quarterly total in about two years.

Qiming Venture Partners and DCM led the way. The former took just a few months to accumulate $500 million for its fourth US dollar fund. The latter closed DCM VII at $330 million, above target but smaller than its predecessors in anticipation of reduced activity in the US, although China will play a more significant role.

With GGV Capital expected to close its fifth US and China-focused fund at around $500 million this month - with a further $100 million from renminbi investors - and Legend Capital likely to raise $500 million for its sixth vehicle, the outlook for venture capital fundraising in 2014 seems positive.

This is largely in keeping with the global climate: distributions by North American VCs outpaced contributions for the first time in a decade in 2011 and the trend has continued over the last two years. With capital coming back to them, LPs are more likely to re-up. China-focused managers - particularly those with cross-border funds or affiliations - benefit from this positive sentiment, and that's without even factoring in the return of US IPOs and the spate of trade sales.

Another common characteristic of the US and China markets is that the leaders appear entrenched.

It is difficult to pick outright winners given most China VCs have been around for less than two decades, but the same faces continue to lead the pack. Can they be supplanted by young upstarts? The unknown factor is not US institutional money that remains the industry's lifeblood; it is arguably local high net worth individuals (HNWIs) and family offices.

When IDG Capital Partners' tech, media and telecom team spun out to form Banyan Capital, more than half the $206 million they raised for their debut fund, which closed in January, came from HNWIs. These were predominantly the founders and CEOs of Chinese companies the team had backed while at IDG.

2) Exits: Can strong trade sales, IPOs be sustained?

What a difference Asia's largest-ever trade sale makes. Deduct the $5.8 billion KKR and Affinity Equity Partners received from Anheuser-Busch InBev for South Korea's Oriental Brewery (OB) and the first quarter trade sale data look decidedly ordinary - $1.6 billion, down 75% on the previous three-month period. As it is, buoyed by OB, exits as a whole are flying high at $12.9 billion, the most since July-September 2012 when Enterprise Turnaround Initiative Corporation's exit from Japan Airlines distorted the numbers.

In the absence of a couple more large ticket transactions, the trade sale figure may moderate in the second quarter. The big question is whether IPOs will do the same.

After jumping from $3.5 billion in July-September 2013 to $9.9 billion in the subsequent quarter on the back of renewed activity in China and Australia, private equity-backed offerings have maintained an even keel. There were 53 IPOs in the first quarter of 2014, down from 73 in the previous three months, but they still generated cumulative proceeds of $9.6 billion.

However, nearly half of these proceeds came from two offerings: Innovation Network Corporation of Japan's (INCJ) $3.3 billion listing of Japan Display, which was poorly received and continues to trail its IPO price; and a $1.1 billion float by Harbin Bank that was supported by CITIC Capital, among others, as a cornerstone investor. It also priced at the lower end of the indicative range and is currently trading below the offering level.

In short, neither of these offerings represents a liquidity event for a traditional private equity investor and both are indicative of weakness in what remains a selective market.

While the huge backlog of companies seeking to go public in the mainland should see the Shanghai and Shenzhen bourses remain busy for the foreseeable future, there has been a noticeable slowdown in Australia. Seven PE-backed offerings raised $2.2 billion between them in the last quarter of 2013, with six of these coming in December, and there was talk of a healthy pipeline stretching into 2014.

However, after the weak response to CHAMP Ventures-backed SG Fleet Holdings - following a price cut, the offering was oversubscribed, raising A$188.6 million, but the stock is currently trading at a near 10% deficit to the IPO price - other deals have been shrouded in uncertainty. Mantra Hotels and OzSale were among those to shelve offerings at the end of March and it is thought more could follow.

3) Investment: Korea continues to impress

South Korean buyouts were one of the stories of 2013 and they have continued into the first three months of 2014. The Carlyle Group's acquisition of fire safety and security systems provider Tyco International's local unit for $1.93 billion, which was agreed in March, represents the largest PE buyout in Korea for seven years.

With two announced investments by Korean GP IMM Private Equity also among the 15 largest in Asia for January-March 2014, total PE deal flow jumped to $3.6 billion, the largest quarterly total in nearly five years. Korea accounted for 35% of the $9.9 billion channeled into buyouts region-wide during the period. This compares to a 19% share of the $25.8 billion in buyouts announced in Asia last year.

Korea may not be a particularly deep market - there were eight buyouts in the first quarter, out of 20 transactions in total. But a combination of divestments by conglomerates either in distress or under political pressure, multinational carve-outs and auctions of state-owned assets ensures that when assets do come onto the market they are of reasonable size.

Private equity investment in Asia as a whole reached $23.8 billion in the first quarter, the highest level since late 2010 when the Chinese pre-IPO machine was still purring and growth deals from that market made up the bulk of deal flow. Buyouts were up 100% quarter-on-quarter while growth deals came in at $10.9 billion, an 81% gain on the previous three months.

Obviously it wasn't all Korea. Temasek Holdings moved the needle on both the buyout and growth scales, with its $2.1 billion bid for full ownership of agricultural commodities conglomerate Olam International and $5.7 billion purchase of a 24.95% stake in Hong Kong-headquartered health and beauty retailer A.S. Watson, respectively.

Another significant transaction saw Abu Dhabi National Energy Company, PSP Investments and IDFC Alternatives pay $1.6 billion for two Indian hydropower projects sold by a subsidiary of India's debt-laden Jaypee Group.

These deals are yet another reminder of the amount of private "shadow capital" being put to work by large institutions beyond traditional PE structures, either working alongside GPs or acting independently of third-party managers.

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• Topics
• Fundraising
• Early-stage
• Australasia
• North Asia
• Greater China
• Buyout
• Exits
• South Korea
• China
• KKR
• Affinity Equity Partners
• GGV Capital
• CDH Investments Management
• Temasek Holdings
• Australia
• Exit
• Fundraising
• buyout
• Venture