The year that was

Despite the excitement, the year was also marked by tribulations, both on the macro and micro level. Japan was ravaged by the March 11 tsunami, and remained vulnerable for months after due to the nuclear crisis. Global private equity firms braced themselves for the changes to be announced as part of the Dodd-Frank Act over the summer, and considered what they could mean for their investment eligibility. Concerns about China - Asia's seemingly infallible investment market - cropped up as market observers betted on how long it would take for the bubble to burst. And in August, the crippling economic down spiral that began in Europe reached Asian markets in a big way, and essentially brought private equity-backed IPOs to a halt.

Heading into 2012, ongoing volatility has cast a shadow over investors, though they remain optimistic that Asia's good fortune will prevail. Changes in the landscape are anticipated - such as a rise in Chinese trade buyers and more attention on Southeast Asia - and firms have begun preparing for these eventualities by raking up capital for new funds and broadening their remits to accommodate unforeseen opportunities.

Ahead of the year's end, AVCJ takes a look at the key trends that shaped Asia's private equity landscape in 2011, across the areas of fundraising, buyouts, venture and exits.

2011 fundraising: Fast and furious

Recent years have not been particularly good for private equity fundraisers, but GPs saw a definitive uptake in fundraising in 2010 and 2011, and Asia's top investors are rearing to raise in 2012.

Asia Pacific fundraising remains some way off the highs of 2007 - in which 410 funds raised $62.1 billion - but activity is still positive. According to AVCJ Research, $46.1 billion was raised for Asian PE in 2011 across 243 funds. This level outpaced 2010, which saw $41.4 billion across 354 funds, and certainly 2009, which saw just $25.5 billion raised across 306 vehicles.

The bulk of this funding has been allocated to China. Of the year's top-ten funds, the first nine are domiciled in the mainland or Hong Kong, and six of these will remain China-focused. Rounding the top ten is Northstar Equity Partners' Indonesia-focused fund, offering a glimpse into Indonesia's future and whether the market can absorb capital of this scale.

The scope of China's dominance as the overwhelming leader in Asia's fundraising landscape appears to be growing: China claimed 21% of funds raised in 2007, 29% in 2008, 32% in 2009, 47% in 2010, and 69% in 2011. Australia, India, Japan, Singapore and South Korea - some of the most popular fundraising destinations in 2007 - have all seen capital commitments and their share of the overall total fall in the past three years.

Another notable distinction over the year is the continued shift away from buyout funds. In 2007, 56 buyout vehicles raised $27.6 billion, 45% of the regional total. In 2011, this has fallen to $4.2 billion for 10 vehicles. Growth capital investment vehicles also saw a slip in numbers, seeing $16.9 billion in fundraising, exceeding the 2007 figure and closing in on 2008, which represented 42% of the overall total. For 2011, the growth share was 38%. However, the amount filtered into infrastructure, mezzanine, secondaries and special situations funds rose in 2011, indicating investment trends for 2012.

That said, the most iconic feature of fundraising in 2011 was the speed at which key funds were able to raise. Notable in the crowd was Baring Private Equity, which closed its $2.4 billion fifth vehicle in just six months, and WestBridge Capital Partners, the private equity firm established by Sequoia Capital India's founders, reached the $500 million target for its vehicle also within six months.

Heading into 2012, those who got in early may see the ultimate benefits as the market for fundraising looks increasingly crowded. In terms of pan-Asian megafunds, KKR, Bain Capital and TPG are all on the capital trail, seeking four, five or even six billion dollars to stock their vehicles. Those with deep networks are poised to meet their targets, but others may not fare as well given the direction of the global economy. Still, funds expect to see more attention from LPs as the Western investment climate worsens.

Buyouts on the down in 2011

Despite high hopes that 2011 would be the year of the Asian buyout, activity in this arena has been subdued.

Just $17.8 billion was invested in buyouts across the region this year, marking a five-year low as buyouts even managed to reach $22.8 billion at the height of the global financial crisis in 2009. Deal volumes painted a similarly grim picture, with AVCJ Research recording a mere 119 deals so far this year - comparable to the paltry 125 which were completed in 2009.

Asia's more mature markets of Australia and Japan unsurprisingly led the way on big-ticket transactions, with five of the top 10 largest deals by value consisting of investments into Australian companies. The most sizeable deal, however, was Bain Capital's $2.1 billion acquisition of Japanese restaurant chain Skylark in October, in what was also the largest transaction seen in Japan since the financial crisis. Skylark was bought from Nomura and CVC Capital Partners, who paid around JPY380 billion ($3.19 billion at the time) for the company in 2006. "Bain must have good reasons for buying it," one local LP told AVCJ in October. "The Skylark deal was very expensive for Bain compared to what Nomura and CVC paid."

Capital constraints seem to have been the least of Bain's concerns this year, however, as it preceded Skylark with the completion of Asia's second biggest buyout of 2011: MYOB in Australia. The investor emerged as the unlikely victor in the auction for the accounting software firm in August, paying vendors Archer Capital and HarbourVest Partners around A$1.3 billion for the privilege.

In addition to this, Archer was responsible for another of this year's heftiest deals: Fast food chain manager Quick Service Restaurant Holdings. In another secondary buyout, Archer purchased the firm from Quadrant Private Equity for A$450 million in June.

Neither Bain nor Archer was the year's most active player in the buyout space, though. The holder of that title was Malaysia-based Navis Capital Partners, which signed off four deals in the small-cap deal bracket in Malaysia, Australia and India. The most significant of these was the purchase of the field marketing and retail units of Australia's Photon Group for $146.5 million, which valued the company at 7x EBITDA.

Investors still bet on venture

Investments in the expansion and early stage phases of Asian companies remained prevalent in 2011, with the venture industry in particular making a modest return to form.

Although this year's statistics - at 225 early stage deals - are a far cry from the 538 transactions the market saw in its 2007 heydey, venture firms seem to be slowly but surely regaining trust in Asian start-ups. Firms invested $2.06 billion venture dollars this year to date. On paper, the amount compares poorly with 2007's figure of $6.2 billion, yet, if we bear in mind that values jumped from $2.6 billion in 2006, the signs of optimism in the region seem more justified.

China was far and away the main driver of dealflow in the venture space, claiming three of the year's largest transactions. The stand-out deal was Silver Lake, Russia's Digital Sky Technologies (DST) and Yunfeng Capital's acquisition of a 5% stake in e-commerce behemoth Alibaba Group, worth $1.6 billion. The company made a tender offer to employee shareholders in September, which represented China's largest-ever employee liquidity event and was perhaps the largest seen in Asia as well.

DST was also at the helm of a $1.5 billion third round of funding for another Chinese online retailer, Jingdong Mall, alongside Tiger Fund in April. Another company in the transportation sector, China Air, also received similarly weighty investment of $1.23 billion from Chongqing Longsheng Jiuzhi Investment Management Centre in May.

On the expansion front, a far larger number of deals were finalized, but a proportionally smaller amount took place this year than in 2010, when 874 were recorded. The growth sector mirrors the venture space in that the 820 deals completed in 2011 indicate how the market has plummeted since 2007 (when 1,053 investments were made). An analysis of the values however tells a more promising tale, as the $16 billion invested this year is comparable to the $17.2 billion invested in 2008 and the $16 billion of 2006.

In terms of growth transactions, India and China set the standard, with several of the year's biggest deals. As in venture, Chinese e-commerce companies dominated the larger-ticket deals, with group-buying websites Lashou.com and 55tuan.com attracting $110 million and $50 million, respectively, from the likes of Milestone Capital and CDH Investments Management.

However, the biggest expansion deal of the year centered on Japan's industrial sector at the tail-end of the year: Innovation Network Corporation of Japan pumped $400 million into UniCarriers, a new company formed through the merger of Nissan and Hitachi's forklift businesses, in December.

2011 Exits: A tale of trade sales

Initial public offerings have largely dominated the regional private equity fund's exit narrative, yet the ongoing market volatility has put managers off this avenue in 2011, especially in the latter half of the year. Given the circumstances, many have chosen the path of the trade sale.

In hindsight, the market for private equity-backed IPOs bounced back from the lows of 2008 and 2009 in the 2010 fiscal year - more money was raised from more deals in 2010 than the previous two years combined - but the momentum did not continue in 2011. AVCJ data shows that the $72.3 billion raised through 192 listings in the second half of 2010 turned out to be the peak, with activity sinking down to $20.6 billion from 146 offerings in the subsequent six months. It dropped even further to 82 offerings for $13.7 billion for June to November 2011 period.

Selling in the open market remained a relevant exit option for Chinese companies. AVCJ Research shows that the top exit of the year belonged to Temasek, which earned $2.4 billion after selling a portion of its Bank of China shares on the open market. Of the top-ten exits in Asia, five were open-market sales - all were sales of stakes in Chinese banks.

But even the momentum for these assets flailed as economic uncertainty brought the market to a near halt towards the end of the summer. Citic Securities, China's largest brokerage, was supposed to lead the industry out of the depths with the largest IPO since August. However, Citic performed poorly on its Hong Kong market debut in October, raising a less-than-expected $1.7 billion and saw its shares plummet 10.5% before closing. In December, New China Life Insurance also priced at the bottom of its range to raise $1.9 billion in its dual Hong Kong and Shanghai listing. The series of events led Haitong Securities, China's second-largest brokerage, to delay its planned IPO from December to the first quarter of 2012.

Yet, trade and secondary sales remained a strong alternative to the public market. AVCJ Research shows that Asian's M&A activity in 2011 totaled $41 billion, up from $38 billion in 2010 and $17.2 billion in 2009. Most notable among such deals was Nomura Principal Finance's secondary exit of Japanese restaurant owner Skylark Holdings to Bain Capital for $2.1 billion, Lazard Asset Management's sale of Australian infrastructure firm Connecteast Group to a consortium of overseas firms for $1.4 billion, and Pacific Equity Partners and Unitas Capital's exit of New Zealand's Independent Liquors to Asahi for $1.3 billion.

Australasia was a particularly interesting M&A destination, as companies originally slated for IPOs were instead sold to trade players and, perhaps more interesting, private equity. These included Affinity Equity Partners' acquisition of Primo Smallgoods from its founding family, as well as, Archer and HarbourVest's exit of MYOB to Bain Capital.

Going forward, lingering economic volatility will likely lead to more shelved IPOs, but private equity secondaries are slated to have a real place in the region's M&A landscape. Likewise, a growing number of Chinese corporates are expected to look beyond the Mainland for assets and with their deep pockets and access to large customers bases, these corporate acquirers will be formidable contenders for private equity buyers to reckon with.

 

 

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