China stakes its claim

Above all, it shows China dominating the region’s private equity activity: in fundraising, with a 63.8% rebound versus the same period last year; in investments, with over $8.7 billion invested;  and in an almost 600% rebound in private equity-backed IPO exits, most of them of China assets on Greater China bourses.

Fund pool and fundraising recovery

Given the overall ramp-up in fundraising over the first half of 2010, the region’s overall capital under management showed an unsurprising increase of 13.3%, from $252.6 billion for the full year of 2009 (or $231 billion as at end June 2009) to almost $264.8 billion. Funds raised for the region jumped from $8 billion over 1H09 and $19.4 billion for the whole of 2009, to $13.1 billion up to end June 2010.

The data reflects industry feedback to AVCJ that the much-remarked falloff in global fundraising – down to the lowest levels since 2003 – is not reflected in Asia, where LPs’ interest in the region’s macro qualities is translating into strong commitments to quality funds.

Another factor is at work as well – the evolving PRC fund ecosystem, whether RMB or just targeting China. Fundraising in China is up almost 195%, to over $6 billion, from just $2 billion in 1H09; and the region’s second most active fundraising market, Hong Kong with $2.9 billion raised, is of course the domicile for many China-focused funds.

The second and third largest funds to close in the half-year, the Shanghai Financial Development Investment Fund and CITIC’s Mianyang High Technology Industrial Investment Fund, are both formally RMB funds, at just over $1.6 billion and $1.3 billion dollar equivalent respectively.

With vehicles like this closing, the RMB fund space is self-evidently already significant enough to affect the metrics for the industry across the entire region. “A significant amount of the capital raised in China in 2009, as well as in 1H10, was RMB-denominated,” confirmed Doug Coulter, Head of Private Equity for Asia Pacific at LGT Capital Partners. “Domestic investors in China are becoming a much more important force, and we would expect additional IIs in China to begin allocating to private equity.”

Overall, fundraising appears well on track to exceed the full-year figure for 2009, though less likely to approach anywhere near the bubble-era levels for 2007 and 2008, at $59 billion and $52.5 billion respectively. “It is unlikely that total fund raised in 2010 will be anywhere near to the numbers from 2006-08,” noted Pak-Seng Lai, MD and Head of Asia at Auda International in Hong Kong. “If you exclude the RMB funds in China, the picture is even less promising. The sentiment in 2010 has improved, but LPs in general are still very cautious.”

“Overall, fundraising continues to be challenging,” noted Sebastiaan van den Berg, Principal at HarbourVest Partners (Asia) Ltd. But he added, “Institutions are beginning to have allocations available for private equity, particularly with a focus on China.”

Investments down – or not?

Worryingly for those seeking to allocate the 2007-08 capital overhang, investments so far in 2010 showed a drop even when compared with the difficult period of early 2009, with a 20.2% fall from $22.8 billion to $18.2 billion, and against a full-year 2009 figure of almost $46 billion. However, some of the dropoff can be accounted for by one-off but very large transactions in 1H09, such as Canada Pension Plan Investment Board’s almost $5.23 billion investment in Macquarie Communications Infrastructure Group, and Hopu Investment Management’s $711.4 billion commitment to Bank of China in March, as well as its $4.6 billion commitment to China Construction Bank in May (the latter in conjunction with Temasek Holdings). These deals in themselves account for much of the discrepancy, and illustrate the volatile nature of Asia Pacific investment levels.

Without such transactions, the largest investment of this half-year was a highly state-connected affair – the PRC National Council for Social Security Fund’s $2.27 billion pre-IPO investment in the Agricultural Bank of China. With other major pre-IPO investments from Asian and Middle Eastern SWFs into the same asset still to be accounted for, the overall investment numbers for the half-year will probably look even more favorable when finalized.

“My experience is that deal activities are stronger in 1H10,” noted Lai, reinforcing the underlying trend. “If you compare the number of deals, instead of dollar amount, 1H10 may be a more active period than 1H09.”

Regional re-ratings

The region’s different private equity markets also shows China dominating as formerly favored regions lag. China showed a 17% increase in investments to just over $8.7 billion, respectable but not dramatic growth, but delivering more than twice the dollar value of any other market. And six of the top ten investments of 1H10 were China deals.

Australia, meanwhile, showed an almost 83% drop in private equity investment, from $5.9 billion in 1H09 to just over $1 billion in 2010. This picture would look very different, of course, if Canada Pension Plan Investment Board and Ontario Teachers Pension Plan had succeeded in their $6.4 billion bid for Transurban Group, but more importantly, uncertainty over government plans to tax private equity profits may also have contributed to a cooling in the Australian market.

An almost 65% rise in Indian investment to over $3.7 billion compared to 1H09’s almost $2.3 billion must be reassuring to those who fear that the Indian market is overcapitalized, and that private equity there is failing to match the appeal of the public markets. New Zealand saw a 435% uplift from the $311 million buyout of Airwork Holdings by the Carlyle Group in May. Hong Kong also showed a 354% increase, up to $657 million from $145 million in 1H09, courtesy of CVC Capital Partners’ $274 million PIPE financing of Sun Hung Kai & Co. in April, and Carlyle’s $151 million investment in China Fishery Group in June.

However, the really significant swing in the volatile figures for smaller markets, such as Vietnam and the Philippines, where single deals can make considerable differences from quarter to quarter, was in Indonesia, which saw a 916% increase from just $63 million in 1H08 to ten times that figure, with $638 million. Almost all this, of course, was thanks to CVC Capital Partners’ investment in Matahari Department store. However, other processes now under way, such as Olympus Capital’s partnership with Tata Capital on two Indonesian coal mining assets, suggest that Indonesia will see further capital commitments before the year is out.

“Emerging Asia is becoming the main driver of the Asian private equity industry,” observed Coulter, contrasting the pre-GFC situation, “when developed markets such as Australia and Japan were much more important.”

Listings leap

The huge rebound in private equity-backed IPOs for 2010 so far, up just under 594% on the previous half-year to $15.7 billion, versus just $2.3 billion in 1H09, shows GPs moving promptly to take advantage of the recovery in public markets over the course of 2009 and achieve realizations on their portfolio businesses where possible.

“The buoyancy of the public markets throughout the region, and the success of the new ChiNext board, has allowed many GPs to take advantage of the liquidity window,” affirmed van den Berg. “We have also seen increased strategic interest for Asian-based assets, as corporates consider their options to drive future growth.”

All the same, it is worth noting that the first half’s biggest industry IPO, the almost $2.3 billion Shanghai A-share listing of Huatai Securities, backed by Jiangsu High-Tech Investment Group and Govtor Capital, was only nominally private equity, and certainly a very state-linked China result. Shenzhen Hepalink Pharmaceutical’s $870 million Shenzhen IPO was a much-discussed result, but investor Goldman Sachs, once again, is far from a typical independent GP. Similarly, the first half’s third largest IPO, the $498 million Hong Kong listing of SouthGobi Energy Resources, was backed by two SWFs, China Investment Corporation and Temasek Holdings.

All but one of the top ten listings in 1H10 were in Hong Kong or China, and the only non-Chinese IPO – the IL&FS/Repe/Trikona  DB Realty listing in India – was bottom of the chart. “Private equity-backed IPOs are China-related,” noted Lai. “This is further evidence that the PE landscape in Asia has become increasingly ‘China-centric’.” Additionally, he noted, “the private equity sector in China is recovering much faster than the rest of Asia.”

To take one example, Australia, where Myer delivered 2009’s biggest listing for TPG Capital in November at $1.85 billion, has been a far less attractive IPO venue so far in 2010. Affinity Equity Partners’ Loscam and CHAMP Private Equity’s Study Group were two exits in which sponsors contemplating an IPO opted for the trade sale route instead. Despite 2010’s striking figures, the IPO market across the region is far from uniformly buoyant.

Trade sales improving?

Trade sales showed another, though far less dramatic perspective on the regional exit environment through 1H10 at $7.7 billion, 8.7% up on 1H09’s $7 billion, compared to a full-year total of $16 billion for 2009. The largest exits achieved were in the high hundreds of millions – $696 million for Symphony Asia Holdings’ 55.4% stake in DLF Assets, and $685 million for TPG Capital and its hedge fund affiliate TPG-Axon in the sale of its almost 24% stake in Singapore’s Parkway Holdings. And here at least, China deals were fewer.

Significantly, the buyers in the half-year’s top three trade sale exits were all Asian strategics, reinforcing the feedback from AVCJ sources that Asian corporates are cashed-up, expansionist, and looking to take advantage while valuations remain realistic.

The much-awaited raft of secondary buyouts in the region has yet to significantly affect figures. One major exit, Affinity’s sale of Loscam, went to a trade buyer instead of the two private equity firms in contention. However, other situations developing around the region, especially MBK Partners’ bid to sell its China Network Systems Taiwan cable TV asset for some $2-2.5 billion, look set to deliver a higher total, and more significant secondary buyout traffic, before year end.

Growth growing in investment stages

In 1H10’s breakdown of investment by financing stage, growth capital now appears to be firmly establishing itself as Asia Pacific’s predominant investment discipline. This squares with the overall bias towards China, where buyout funds and control strategies have long struggled. Growth capital contributed just over 40% of the first half’s total investments, at just over $7.3 billion, compared to buyouts, which contributed just 19% at almost $3.5 billion; pre-IPO/mezzanine financing at $3.2 billion; and PIPE investments at just over $2.5 billion. In 2008, by contrast, buyouts accounted for the largest single tranche at 37% of activity, with expansion capital contributing just 26%.

As for the breakdown of investments by industry sector, financial services continued its historic position as the preferred destination, with just over 25% of the half-year total at almost $4.6 billion. GPs consistently emphasize this sector as a sound proxy for Asia Pacific’s overall growth and rising income levels, and are clearly willing to back their comments with commitments.

A new private equity market – but whose?

Across fundraising, IPOs, and investments China is dominating the regional industry in pure dollar terms. Without reference to the West’s still gunshy LPs, it has backstopped an almost 64% rebound in capital raising, while hosting almost all the major private equity listings in the region, and providing the lion’s share of investment opportunities. All this should confirm that the region’s private equity has now matured into a thriving industry, separate from its Western predecessors.

But this can be overstated. For one thing, the biggest fund closed in 1H10 remains Carlyle Asia Partners III at $2.55 billion, a traditional US dollar-denominated buyout fund. Also, trade sale exits, a very important indicator of private equity’s participation in broader M&A, show far less China influence. And closure on the CPPIB/OTPP Transurban bid, as well as a slightly more buoyant ASX, could easily have left investments and IPOs far more dominated by Australia.

And even if the China-centric picture is accurate, it raises some very important questions about how this new private equity kaleidoscope works, who can play, and who gets the money. For the moment, foreign LPs are locked out of RMB fundraising, so the Shanghai Financial and Mianyang closings are worrying extraneous events. And even for those participating, there are some real concerns over the funds and deals. Are they independent? Are they value-driven? Or are they beholden to broader PRC industrial development and political priorities that leave them only nominally autonomous – and nominally returns-focused.

The problem is already here. The Bohai Industrial Investment Fund, for instance, a pioneering PRC RMB vehicle, has long been dubbed “dysfunctional” because of the special interests and broader obligations that undermine its fund structure, profit motive and business improvement focus. The state involvement and state ownership of many of these new investors and investees may just be growing the problem even wider. But the one saving grace for many foreign LPs and GPs is that the increasingly self-funded self-financing nature of the industry could leave it mainly just a Chinese problem for Chinese investors. 

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

• Topics
• Greater China
• Performance
• Fundraising
• Investments
• Exits
• Renminbi fund
• HarbourVest Partners
• LGT Capital Partners
• Doug Coulter
• CVC Capital Partners
• Olympus Capital Holdings Asia
• IL&FS Investment Managers
• Hopu Investment Management
• Temasek Holdings
• Affinity Equity Partners
• The Carlyle Group
• Goldman Sachs
• CIC
• CHAMP Private Equity
• Providence Equity Partners
• TPG Capital
• Symphony Asia Holdings
• MBK Partners