4Q analysis: On trend

1)  Fundraising: Country funds fill the void

It’s worth noting that 10 years ago, in the aftermath of the global financial crisis, Asia-focused private equity funds raised as little as $33 billion. Five years after that, in 2014, the $100 billion mark was breached for the first time, helped in no small part by a surge in renminbi activity. Chinese local currency funds accounted for $0.40 of every dollar raised. This share reached $0.56 in 2016 – when a record $164 billion was committed to Asian managers – and stayed at that level the following year.

Fundraising reached $147 billion in 2018, slightly higher than 2017, thanks to a handful of global and pan-regional GPs raising ever larger vehicles. Pan-regional funds were responsible for $0.39 out of every dollar raised, up from $0.19 the previous year, as the renminbi contribution plummeted to $0.23. The region was also boosted by a 100% increase in VC fundraising – excluding renminbi funds – to $25 billion.

This short history lesson should give some context to what happened in 2019. Further activity may emerge in the coming weeks, but AVCJ Research’s provisional statistics indicate that just $17.4 billion was raised in the last three months of 2019, the lowest quarterly total in six years. It capped a relatively challenging 12 months in which LPs committed $104.4 billion to Asia-focused funds.

The year breaks down as follows. Pan-regional funds: $18.2 billion, down 68% year on year. Venture capital funds: $16.7 billion, down 51%. Country-focused funds: $86.2 billion, down 3.8%. Country-focused funds, excluding VC: $71.8 billion, up 21%. Several managers in the market with large pan-regional vehicles, so 2020 may look more like 2018 than 2019, but country funds have dominated the past 12 months. Seven of the 10 largest final closes were for country funds; in 2018, seven were pan-regional.

In this respect, the fourth quarter of 2019 was on trend for the entire year. Country-focused funds accounted for most of the capital raised, led by Primavera Capital and Hahn & Company. The former closed its third fund at $3.4 billion, up from $1.93 billion last time around. It is the third-largest US dollar fund raised for China, with four of the top five final closes coming in 2019. The latter broke its own record for the largest Korea fund, scaling up from $1.9 billion to $3.2 billion.

Primavera is one of four China representatives among the top 10 closes for the quarter. Only four pan-regional vehicles made the cut – and one of those is a fund-of-funds. LGT Capital Partners raised $1 billion for its latest Asia offering, most of which will likely be deployed with country managers.

2)  Exits: Still scared to jump

Asia has delivered little in terms of large cash exits from sharing economy businesses. Billions of dollars have been pumped into start-ups that use tech to address demand-supply imbalances in transportation, financial, and information services. However, those that have gone public – such as Meituan-Dianping, Ping An Healthcare & Technology, and Qudian – often don’t yet have the liquidity to facilitate big sell-downs.

This leaves a handful of meaningful trade sales: think Mobike in bike-sharing, Ele.me in food delivery, Oyo Rooms in accommodation (though this was technically a buyback). The addition of Woowa Brothers to this number, following an agreement struck last December to sell the Korean business to Delivery Hero for $4 billion, might make food delivery the most successful sharing economy segment in terms of money returned to investors, at least for the time being.

Goldman Sachs, GIC Private, Hillhouse Capital, and Sequoia Capital are the big names that will walk away with cash or liquid Delivery Hero stock. Delivery Hero will pay EUR1.7 billion ($1.9 billion) in cash and EUR1.48 billion in shares for 88%, which will take out the third-party investors.

Woowa ranks as the largest exit of 2019 but this did little to salvage the fourth quarter. Proceeds reached $15.2 billion, down from $21.2 billion for the preceding three months. A rebound in public market sales after a dismal third quarter wasn’t enough to offset a sizeable decline in trade sales.

Over the past five years, PE exits in Asia have dipped below $16 billion in only three quarters – and two of them were in 2019. It should come as little surprise, therefore, that 2019 returned the lowest annual exit total in four years. The fall to $71.4 billion from the record $122.9 billion posted in 2018 is largely the result of trade sale and secondary buyout activity. Their contribution was $103 billion in 2018. In 2019, it was $65.5 billion.

At the same time, the moderation in trade sales could represent a return to the norm. Last year’s figure is in line with 2016 and 2017, with the spike in 2018 underpinned by bumper deals involving Flipkart and Ele.me. What really stands out in 2019 – albeit more in terms of percentage decline than absolute dollars – is the paucity of sizeable public market exits, whether at IPO or through later sell-downs. The combined total of $4.48 billion is the lowest in over a decade.

The volatility that stymied exits also discouraged financial sponsors from pursuing new share offerings. The number of private equity-backed IPOs declined from 191 in 2018 to 157 last year, with cumulative proceeds falling from $48 billion to $25.2 billion. China witnessed the largest drop-off. Even though activity on the Hong Kong bourse remained relatively stable compared to 2018, IPOs by Chinese tech companies in the US withered from 22 to 15 as proceeds dropped 63% to $2.9 billion.

Much of the damage took place in the first half of the year. The market picked up in late summer, with $8.8 billion raised in the fourth quarter – down on the third but more than the first two combined. It also featured four of the year’s six-largest offerings, of which three seem poised to be significant China success stories.

ESR, a pan-Asian warehousing platform that counts China as its largest market, raised $1.6 billion in November, achieving a market capitalization of $6.5 billion. Warburg Pincus took $1 billion off the table - after the overallotment option was partially exercised - and retains a 18.66% stake. Dairy player China Feihe listed the same month, raising $862 million. Morgan Stanley Private Equity Asia invested less than $50 million but now holds a position worth $2.2 billion.

Finally, footwear retailer Belle International spun out its sports unit through a $1 billion IPO. Hillhouse Capital and CDH Investments, which committed $3.3 billion in equity to privatize the entire business in 2017, are sitting on stakes worth $3.9 billion and $807 million, respectively. And they still own the footwear division, valued at approximately $4 billion.

3)  Investment: Growth capital rebound

While fundraising and exits ended 2019 with a whimper, investment staged a rally in the last three months of the year. The $55.3 billion committed to Asia-based deals – up from $40.1 billion in July-September – represented the biggest quarter of 2019. It was largely predicated on a surge in growth capital activity in China. The buyout and venture portions of deal flow dropped by half to 14.8% and $3.7%, respectively. Growth deals rose from 55.4% to 72.3%.

Investors deployed $39.9 billion in this segment, with nearly one-third of the capital going into three deals. Each one is China-based – investment in the country more than doubled on the previous quarter to reach $26.1 billion – but very different from the others. They also make up three of the four largest transactions of the year.

First, Hillhouse Capital beat out a Hopu Investment-led consortium to acquire a 15% stake in Gree Electric Appliances for $5.5 billion from the company’s state-owned parent. Second, data center operator Tenglong Group secured a $3.7 billion Series A led by Morgan Stanley Private Equity Asia and China Nanshan Development Group. Third, Boyu Capital, Sequoia Capital, and Yunfeng Capital participated in a $3.3 billion late-stage round for short video platform Kuaishou.

What’s peculiar about this set of transactions is that they cut against the grain of 2019. This was the year in which PE investment slipped to $164.5 billion from $196 billion in 2018 – in part because of a decline in China growth deals.

Buyout activity dropped off significantly, from $59.2 billion to $40.1 billion. While the number of billion-dollar-plus transactions was largely unchanged – it fell from 14 to 12 – there were no mega-deals. Meanwhile, growth investment slipped from an all-time high of $103.3 billion in 2018 to $84.2 billion, which was almost entirely due to the seizing up of late-stage funding for technology companies. Nearly $40 billion was pumped into 15 tech transactions of $1 billion or more in 2018. In 2019, the total was $10.3 billion across five deals.

These late-stage deals are for the time being highly concentrated on China. As such, overall private equity investment in the country took a hit, retreating from $95.3 billion to $60.4 billion. Only two major markets posted a year-on-year increase in transaction activity – Japan and India.

For Japan, a mature market that has yet to fully deliver on its corporate carve-out promise, the situation was relatively simple: the number of $500 million-plus deals rose from one in 2018 to six last year, so investment increased from $4.6 billion to $11.7 billion. Conversely, buyouts in India almost went into reverse. The rise in deal flow from $30.2 billion to $40.1 billion was driven by sizeable growth and venture volume. Six of the 25 largest transactions region-wide in 2019 were of Indian origin – and each one was a growth equity deal.  

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• Topics
• Fundraising
• Exits
• Buyouts
• Expansion
• Asia
• Growth capital
• IPO