4Q analysis: End-of-year blues

1) Investment sinks to four-year low

It is telling that four of the six largest private equity transactions announced during the fourth quarter of 2012 were driven by institutional players with strong public sector ties. While traditional LPs are clearly keen to be increasingly open to direct investment - due to the absence of fees and a view that certain kinds of assets are suited to holding periods of more than five years - there was also a sense that economic uncertainty was causing some GPs to hold back.

Top of the deal list is the $2 billion acquisition of a 31.25% stake in New Zealand's Kaingaroa Forest - the largest plantation in the southern hemisphere - by Canada's Public Sector Pension Investment Board and New Zealand Superannuation Fund from Harvard Management Company. This transaction, plus the $1.7 billion bailout of Renesas by Innovation Network Corporation of Japan (INCJ), accounts for more than 40% of the $8.7 billion committed between October and December 2012.

The third-largest deal was Shinhan Private Equity and Stonebridge Capital's $735 million investment in SK Energy to finance the spinout of SK Incheon Refinery. It is the first commitment from the Shinhan-Stonebridge Petro Private Equity Fund, a relatively new vehicle that appears to have sufficient registered capital for this transaction only. The largest investment that comes from an established private equity fund is The Carlyle Group's $375.5 million buyout of Japan's Diversey. It wouldn't have made the top 10 for the third quarter.

AVCJ Research's data may be preliminary but the final three months of 2012 represent a low point, with private equity investment down more than 50% on the previous quarter. One must go all the way back to 2008 for a comparably dismal quarterly total.

The poor showing in terms of large cap deals is inevitably reflected in the headline buyout numbers, with cumulative value falling to $3.3 billion from $7.9 billion the previous quarter. Average transaction size came to $116.1 million, down from $248.7 million. However, there was also significantly less activity on the growth capital front due to continued weakness in the IPO markets. A total of $2.3 billion was transacted in growth deals between, a 62% reduction on the three months prior.

When broken down by geography, the biggest drop in growth capital activity was seen in India and China: transaction value fell 51% quarter-on-quarter in the former and more than 75% in the latter. This is hardly surprising given anecdotal evidence that, although entrepreneurs' valuation expectations are moderating, there is a still a sizeable gap between what they want and investors and willing to pay.

However, there is a more optimistic postscript. In China, the drop in growth deals was more than matched by a fall in buyouts - an indication that, while take-private deals involving US-listed firms are still being announced, value and volume is lower than the third-quarter highs. AVCJ Research counts these transactions from the date of announcement, so the progress made at the end of 2012 isn't reflected in the data.

Three deals announced earlier in the year, Zhongpin, ShangPharma and Focus Media received board approval in the fourth quarter. One more, a $363.8 million management buyout of FushiCopperweld supported by Abax Global Capital, became the fifth private equity-backed take-private since August 2011 to reach a completion.
It adds credibility to China's emerging buyout movement.

2) Fundraising deteriorates, despite activity from state-backed vehicles

The Asia Pacific fundraising picture looks bleak, despite AVCJ Research retrospectively increasing its third quarter fundraising tally more than threefold to $36.8 billion. This would make the July-September 2012 period one of the best-performing quarters historically rather than the weakest in two years, but the reality is different. Innovation Network Corporation of Japan (INCJ) revealed that it had reached a second close of $24.3 billion in the third quarter, and while the group does rely on corporations - essentially LPs - for some capital most of it is a direct injection from the government.

The fourth quarter of 2012 therefore represents more of the same. Around 30 funds attracted commitments of $6.4 billion, the lowest aggregate since the same quarter of 2009. The full-year total is well short of the $73 billion raised in 2011.

Significant activity between October and December included FountainVest Partners adding $350 million to its corpus to reach a final close of $1.35 billion on its second fund, while MBK Partners accumulated more than half its $2.25 billion target with a $1.25 billion first close.

Two renminbi-denominated funds feature in the top 10: China Life Suzhou City Development Investment Enterprise, a $1.6 billion infrastructure vehicle, and the $319 million Huakai (Kunshan) Private Equity Fund. The former is the fourth-largest renminbi fund to reach a final close in 2012 and it boosts an otherwise meager offering from local currency vehicles. Four funds attracted commitments of $2 billion in the fourth quarter, lower than the updated figure for the previous three months, and continuing the decline that became ever more apparent as 2012 wore on.

Renminbi fundraising for 2012 as a whole came to $19.9 billion, well down on the previous year's $30.9 billion. One of the trends we have tracked over the last 12 months is how renminbi vehicles accounted for an ever larger portion of private equity capital raised region-wide, before it dropped off a cliff in the third quarter. Compare 2011 and 2012 on a full-year basis, though, and the percentage shares are not so different.

But is this calculation fair? It is based on a 2012 figure that doesn't include INCJ's $24.3 billion on the grounds that it is a public-private fund controlled by the government. An argument could be made that the five largest renminbi funds in 2012 - accounting for $9.7 billion in capital between them - belong in a similar category. Nanjing JianningZijin Investment Fund, for example, attracted $3.2 billion, most of it from Nanjing-based state-owned enterprises or other government affiliates; it is managed by a government-controlled entity and invests primarily in Nanjing.

The takeaway is not to underestimate the role played by policy in several Asian private equity markets. It's worth noting that five of the six largest distress funds that achieved a close in the fourth quarter are Japanese, and they focus on business revitalization in specific geographies.

3) Hard times for exits, but a couple of positives in the IPO market

The buoyant second-quarter IPO market was never likely to last and the proceeds generated by private equity-backed offerings slipped nearly 50% to $7.5 billion in the final three months of the year. The number of transactions sank to 33, the lowest level in two years.

However, there might be light at the end of the tunnel. Although the numbers were once again slightly distorted by the presence of cornerstone investments, the top 10 IPOs feature some pleasant surprises.

First of all, social networking platform YY completed the first IPO by a Chinese firm in the US in seven months, raising $81.9 million, and then saw its shares climb 7.7% on their NASDAQ debut. The VC-backed company's stock continues to trade comfortably above the offering price, suggesting that there is investor demand for Chinese businesses deemed worthy of attention.

Second, BhartiInfratel, the Indian telecoms infrastructure subsidiary of BhartiAirtel, raised around $756 million in India's biggest IPO in two years. The offering facilitated the exit of Temasek Holdings, Goldman Sachs, Nomura and hedge fund Eton Park Capital. KKR, India Equity Partners, Axa Private Equity, Macquarie, Citigroup, Investment Corporation of Dubai and AIF Capital held on to their stakes.

There was also an uptick in activity through open market sales, with Permira and The Carlyle Group completing their exits from Galaxy Entertainment Group and Housing Development Finance Corp. (HDFC). Permira's sale of a 5.9% stake in the Macau casino for $872.4 million brought its gross multiple on investment first made five years ago to 2.8x. Carlyle generated a 2x return on HDFC after selling the last of its holding for $830 million.

Trade and secondary sales came in at $6.3 billion, down on the $10.3 billion recorded in the third quarter, but for most private equity firms they remain the most likely liquidity channel in difficult conditions. While the headline exit figures make for grim reading - $9.6 billion compared to $21.1 billion in the previous three-month period - Enterprise Turnaround Initiative Corporation, which completed the restructuring of Japan Airlines and exited via an $8.5 billion IPO in September, is an outlier.

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

• Topics
• Fundraising
• Investments
• Exits
• Asia
• Fundraising
• buyout
• Growth capital
• Secondaries
• Exit
• IPO
• Trade sale