First quarter analysis: Slow start

1) Investment: Early year lag

With an enterprise valuation of A$8.2 billion ($6.3 billion), the acquisition of GE Capital's Australia and New Zealand consumer lending unit by KKR, Värde Partners and Deutsche Bank represents one of the largest transactions seen in the region. It is an example of how PE is taking advantage of a global divestment drive by General Electric and, in an Australian context, brings variety to a large-cap deal flow recently dominated by infrastructure assets.

The investment is also roughly equal in size to the combined value of the 19 that sit below it in the private equity investment rankings for the first quarter of 2015. It adds gloss to an otherwise disappointing three months. Include the GE divestment and January-March 2015 is the weakest quarter since the penultimate three months of 2013. Exclude it and one must go back to the immediate post-global financial period for something worse.

To be fair, there were two $5 billion-plus deals in 2014 that had a similar impact on the headline number, but the average quarterly investment total for the year exceeded $22 billion.

So what is responsible for the 21% quarter-on-quarter drop in investment to $18.5 billion? It is should be remembered that the first quarter is a historical weak spot: the Lunar New Year festival reduces the number of work days in certain markets, while a tendency to cram deals in before the end of the calendar year, which can lead to a lag. The first quarters of 2009, 2010, 2011 and 2013 were the smallest of their respective years; the first quarters of 2012 and 2014 were the second-smallest.

As to the specific areas that have seen a drop off in activity, growth and pre-IPO and PIPE deals are worth highlighting. The quarterly average for growth and pre-IPO investments was $10.4 billion in 2014; the total for the first three months of 2015 was just over half that. PIPE deals came to $1.56 billion, 40% down on the 2014 quarterly average.

Strong public markets may have something to do with this. The Shanghai Composite Index began 2015 at a five-year high and gained 16% during the first quarter. The Hang Seng Index increased 3% in the fourth quarter of 2014 and then 5.5% in the first three months of 2015, nearing the five-year high set last September. The market's massive gains since the start of April are well-documented. India's BSE Sensex Index reached a record high at the end of January, up 11.5% from the start of the fourth quarter, although it had fallen back a little by the end of March.

Private equity investment in China fell by nearly 50% quarter-on-quarter to $5.22 billion in January-March 2015, the lowest total since early 2013, according to AVCJ Research (and these are preliminary data, so further activity could yet emerge). India's fall was marginal. This is a reminder that public markets are not the only factor weighing on private equity activity.

Certainly, anecdotal evidence suggests investors are quietly bullish on India, while in China there is more uncertainty as GPs look for the optimal entry point in an environment of slowing growth.

It should come as no surprise that technology remains the exception to the rule. VC investment in China topped $750 million in January-March, less than the final three months of 2014 but still among the third-highest quarterly totals on record. In Kuadi Dache, Lufax and Ele.me - digital platforms for taxi-booking, peer-to-peer lending and food-ordering, respectively - China was responsible for three of the 10 largest investments region-wide. India VC investment reached $340 million, also large by historical standards.

2) Fundraising: Asia still bifurcated

Asia-focused energy and infrastructure investor Equis Funds Group has the distinction of two entries in the 15 largest funds raised between January and March 2015 - further confirmation, if it were needed, of bifurcation in the fundraising market. Some GPs find it relatively easy to attract commitments from LPs; others struggle; Equis had sufficient demand to raise an additional vehicle.

Strictly speaking, the firm actually raised three pools of capital: a $1 billion second fund, which completed a first and final close after less than six months in the market, and is already one third committed; a $300 million follow-on vehicle to Fund I, a 2012 vintage vehicle with a corpus of $647 million; and $400 million for two existing platform investments - covering solar in Japan and wind energy in India and Southeast Asia - that require additional capital because of their rapid growth.

It is a remarkable rise for a GP that is barely five years old and testament to what can be achieved with relevant experience (Equis' partners are seasoned infrastructure investors in Asia) and a differentiated narrative (while there is a trend among certain LPs to get direct exposure to infrastructure assets, more than a few industry participants say there is a shortage of good infrastructure managers in Asia).

As appears to be the tradition among GPs in the region, Equis increased its hard cap from $900 million to accommodate demand. Baring Private Equity Asia, which closed its sixth pan-Asia fund at $3.98 billion, did the same. Banyan Capital dealt with excess demand somewhat differently. The China VC firm closed its first fund in January 2014 at $206 million, but the speed of the fundraise meant some LPs missed out. Banyan responded by fast-tracking Fund II, which closed at $362 million barely 12 months after its predecessor.

These success stories are among the few. Private equity fundraising in the first quarter of 2015 came to $12.8 billion, down from $15.6 billion for the previous three-month period. The number of funds achieving an incremental or final close came to 45, roughly the same as the final quarter of 2014. But these totals represent a sharp decline on the average 90 funds that attracted capital in each of the preceding eight quarters.

3) Exits: End of the party?

In the absence of substantial trade or secondary sales, Asia private equity exits plunged to the lowest quarterly total in three years in the first three months of 2015. Just below 100 exits were agreed or completed - down 30% on the previous quarter - while the amount transacted in dollar terms fell by nearly two thirds to $6.6 billion.

South Korean GP Vogo Investment's sale of its majority stake in Tong Yang Life Insurance to Anbang Insurance Group for KRW1.13 trillion ($998 million) was the largest deal from the quarter. A total of 73 trade sales generated $11.4 billion in the final three months of 2014; 44 were responsible for proceeds of $3.8 billion in January-March 2015. Disclosed secondary sales came in below $300 million, the lowest total since the first quarter of 2010, with just five deals announced.

The biggest drop-off in activity was in Japan and Australia, which saw quarter-on-quarter declines of 95% and 80%, respectively. Given these two markets were responsible for the largest deals in the previous quarter - Permira's $3.5 billion sale of Arysta LifeScience Corporation in Japan and Affinity Equity Partners' $1.26 billion sale of Primo Smallgoods in Australia - this was predictable. However, there is another issue beyond bumper trade sales: both markets have seen a fall in PE-backed IPOs.

The Nikkei 225 Index ended the first quarter at its highest level since 2000 and the ASX 200 Index is at heights not seen since before the global financial crisis. In Japan, a total of 27 offerings by private equity portfolio companies generated proceeds of $3.7 billion in the final quarter of 2014, of which $1.5 billion was returned to LPs. There were 16 PE-backed IPOs between January and March of this year that raised a combined $203 million, although the quarterly figures have been quite volatile in recent years.

Australia's decline is more consistent and protracted. PE-backed IPOs returned with gusto towards the end of 2013 and that momentum began to ease off last year. Proceeds peaked at $2.7 billion in the second quarter of 2014 and slipped to $1.4 billion - with $461 million exited - in the final quarter. AVCJ Research has records of just one PE-backed offering worth less than $40 million in the first three months of 2015.

The forthcoming IPO of Bain Capital-owned accounting software provider MYOB should represent a shot in the arm for Australia's second-quarter numbers, but it remains to be seen whether investor appetite is sufficient for many more PE-backed offerings.

China also saw a substantial fall in private equity exit proceeds - from $3.4 billion in the last three months of 2014 to $943 million in the first three of this year. There was not much change in the number of exits (28 versus 31), although it is well down on the 40-plus posted in each of the first three quarters of 2014.

The pace of PE-backed China IPOs continues to accelerate, though, with 37 in January-March, up from 32 and 23 in the previous two quarters. Still, the proceeds of $4.9 billion were a fraction of the preceding periods - a reminder that offerings such as Alibaba Group don't come along every day. Indeed, no Chinese companies went public on the New York Stock Exchange or NASDAQ in the first quarter, compared to three in October-December 2014.

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

• Topics
• Fundraising
• Investments
• Exits
• Buyouts
• Expansion
• Asia
• Fundraising
• buyout
• Growth capital
• PIPE
• Exit
• Trade sale
• IPO