2012: That was the year that was

FUNDRAISING: A FLIGHT TO QUALITY

The renminbi bubble deflates and China fundraising slows, falling in line with broader regional trends

Asia Pacific private equity fundraising is weakening and China is to blame. The reality is that, for more than a year, managers across the region have found it harder to attract capital and China has been papering over the cracks. Now the country is dealing with cracks of its own. It is the inevitable hangover from a renminbi fundraising binge.

In the second half of 2010, Asia-focused funds raised $21 billion. This jumped sharply to $33.1 billion in the subsequent six-month period and held steady at $33.8 billion in the six months after that. In the first half of 2012, it dropped to $28.8 billion. Strip out the China numbers and that spike never really happened. Fundraising went from $11.2 billion between July and December 2010 to $12.5 billion in the first half of 2011 before leveling out at around $10 billion.

The renminbi impact was felt as early as 2010 when $3.50 entered local currency-denominated funds to every $1 US dollar vehicles, but it grew in intensity as the US dollar fundraising began to weaken over the course of the following year. In the first half of 2011, the two classes were close to parity; in the subsequent six months the ratio hit 3.9:1 in favor of the renminbi funds; it rose to 4.4:1 in the six months after that.

Put in percentage terms, China accounted for 62% of Asia fundraising in the first half of 2011, while the renminbi share was 33%. In the second half of the year, the China and renminbi shares increased to 71% and 57%, respectively. For January-June 2012, 79% of private equity capital raised in Asia entered China-focused funds. The renminbi portion was 65%.

The slowdown was apparent in anecdote before it became visible in statistics. Since the start of the year there have been reports of high net worth individuals who made commitments to renminbi funds becoming disillusioned with the asset class and ignoring capital calls. In many cases, they got involved in expectation of quick and lucrative returns, and these faded once public market exit multiples shrank.

Less capital entered renminbi funds in the first half of 2012 than the preceding six months, but it really fell off a cliff in the third quarter of the year. Between July and September, nine local currency vehicles raised a total of $1.4 billion, compared to 27 funds and $6.4 billion in the previous quarter. Of the $10.8 billion raised for the region as a whole, the all China and renminbi shares were 30% and 13%, respectively.

What is really noticeable is the absence of large, state-backed renminbi vehicles that really move the fundraising needle. These accounted for three of the 10 largest funds that achieved a final close in Asia in 2011, including the Innovation Industrial Investment Fund, which at $4.3 billion was comfortably the biggest. In the first half of 2012, state-backed renminbi funds again numbered three of the top 10, including the two largest. Between July and September there were zero.

For China, as for Asia as a whole, average fund sizes have grown even as overall capital raising has declined: $160 million in 2011 to $209 million in the first half of 2012. The trigger factor is a drop in the number of funds attracting commitments: 204 in the second half of 2011 to 186 in the first half of 2012, and then just 33 in the third quarter.

The numbers suggest a flight to quality as investors commit less but focus on a smaller number of funds. Brand names, stable teams, track records, consistent investment theses and differentiated strategies count, and this is apparent in the leading fundraises seen in the past 12 months.

Hony Capital took four months to raise $2.4 billion for its fifth China-focused fund, despite being nearly $1 billion larger than its predecessor. The firm is regarded as one of handful of high-quality local managers, and LPs bought into the idea that large amounts of capital can be deployed in state-owned enterprise restructuring and cross-border deals. Archer Capital, known for consistently making money for investors, took a similarly short period of time to raise $1.5 billion for its fifth buyout vehicle.

PAG and FountainVest Partners also accumulated commitments quickly, largely on the basis of their respective teams' reputations for China deal-making, while Saratoga Capital was able to ride the wave of interest in Indonesia to a $600 million final close.

Other fundraising success stories point to particular niches. Helion Venture Partners and Nexus Venture Partners proved that early-stage specialists in India are still attractive, while the likes of Archer Growth and CHAMP Ventures are seen as among the best performers in Australia's robust lower mid-market.

The brand factor will continue to feature prominently in 2013 as the global and regional buyout firms raise their latest regional vehicles. Bain Capital and PAG, which raised $2.3 billion and $2.5 billion, respectively, were the first movers in a pack that could draw in around $30 billion if targets are reached. KKR, The Carlyle Group, TPG Capital, RRJ Capital, Affinity Equity Partners, MBK Partners and Morgan Stanley Private Equity Asia are all currently in the market.

The target LPs for these firms - pension funds, sovereign wealth funds, financial institutions - may differ from the smaller players, but there is clearly investor appetite for exposure to Asian private equity. It's just that they have become more thoughtful in selecting partners.

 

INVESTMENT: GOING PUBLIC

Falling public market valuations creates take-private and PIPE opportunities across the region

With capital markets struggling across the region, 2012 will likely be remembered as a year in which private equity went public. Investment activity as a whole has slowed markedly, which is itself a product of reduced appetite for growth deals in the poor IPO environment.

Given the lag period in between a capital markets or macroeconomic slowdown and a moderation in entrepreneurs' valuation expectations, a number of more experienced investors have stayed on the sidelines. It is possible that they will use their dry powder more freely in coming months, but it won't alter the big picture significantly.

Having reached $45.6 billion in the second half of 2010, thanks in no small part to a spike in Australian infrastructure buyouts, Asia private equity investment fell to $35 billion in the first half of 2011, steadied to $37.3 billion in the following six months and then fell to $30.1 billion in the half after that. The decrease is largely attributable to China, with investment in the first half of 2012 reaching $11.6 billion its lowest level in two years.

Growth and pre-IPO deals in Asia suffered the most totaled $17 billion in the first half of 2011, falling to $10.9 billion in the following six months, and $9.9 billion in the six months after that. By contrast, buyouts and PIPE deals have remained fairly robust. Buyouts came to $8.3 billion in the first half of 2012, while PIPEs reached $9.3 billion, both up on a year-on-year basis.

As a result, the growth and pre-IPO share of investment activity has gradually decreased over the last 18 months, while other categories have gained. In the first half of 2011, it accounted for nearly half of total deal flow; in the two subsequent six-month periods it was 29% and 33%. Over the same period, the buyout share has risen from 25% to 31% to 34%, while PIPE deals have gone from 21% to 28% to 31%.

The largest buyouts from the last year or so inevitably represent a number of geographies and strategies. Leverage-friendly markets like Japan and Australia feature strongly. Dig deeper and another trend emerges: privatizations of listed companies that are perceived as trading below fair value due to the poor public market investor sentiment.

Australia has traditionally been a difficult location for such transactions due to a combination of recalcitrant chairmen and shareholders who had grown accustomed to stock prices jumping whenever a buyout offer is rejected. Yet Pacific Equity Partners secured a $724 million privatization of Spotless Group, while Crescent Capital Partners and CHAMP Private Equity won approval for buyouts of ClearView Wealth and Gerard Lighting, respectively.

Japanese GPs have also been getting in on the act, with Unison Capital moving for auto parts maker Asahi Tec and Advantage Partners buying home builderYasuragi.

Most activity, however, has come among US-listed Chinese companies, which have seen their stock prices hit by fears of widespread accounting scandals as well as the general market malaise. These deals don't appear at the top of the rankings because in many cases they have yet to close.

China take-private deal flow was negligible in 2006-2007; but close to 50 transactions have been announced since 2010, 18 of them involving private equity. However, an announcement is no guarantee of a closure: only four of these PE-backed deals have been completed: Chemspec International (Primavera Capital, $292 million), China Fire & Security (Bain Capital, $257.8 million), Funtalk China (PAG, $433.9 million), and Harbin Electric (Abax Global Capital, $750 million).

It is an area worth watching, not least because the deal sizes appear to be getting ever larger - a consortium of PE investors is backing a management buyout of Focus Media worth $3.5 billion - but it comes with its own set of challenges. The end-goal for most company chairman is to re-list on an Asian bourse where valuations might be more generous. Such shifts are likely to take a long time to arrange and some will inevitably fall through.

By comparison, PIPE deals represent a much more straightforward method of leveraging low public market valuations, although the desired level of operational control is not guaranteed. The first half of 2012 saw a flurry of private equity investments in US- and Hong Kong-listed Chinese companies, including: TPG Capital and both Li Ning and China Ruifeng Galaxy Renewable Energy, KKR and China Cord Blood, CITIC Capital and China Tianyi Holdings, and CVC Capital Partners and C.Banner International.

This isn't to say the China buyout opportunity is only sustainable as long as public market valuations remain depressed. Rather, the opportunity is long term: founders who face succession planning issues; companies that are going through a transition - perhaps scaling up or going overseas - and find they need more capital and expertise; multinationals that want to re-focus and divest non-core assets; and entrepreneurs who struggle to operate as independents in an increasingly competitive and value-added commercial environment.

For example, TPG completed the largest leveraged buyout of a Chinese company with the $500 million acquisition of packaging firm HCP Holdings. The seller, a family that founded the business in Taiwan more than 50 years ago, felt they had taken the business as far as they could. Bain, meanwhile, completed the corporate carve-out of Hewlett-Packard's China-based surveillance security business.

It is also important to view the China buyout opportunity in context. Take the top 20 private equity deals completed in the first half of 2012, and strip out the trading of minority stakes in large Chinese financial services companies, and the list is dominated by Australia, Japan and South Korea. This is unlikely to change in the near term.

 

EXITS: IPOS IN ABSENTIA

Most Asian markets have endured a difficult 12 months on the IPO front. Trade and secondary sales flourished

For all its promise of growth, Asian private equity is ultimately judged on returns. Several markets still have a lot to prove, and they aren't helped by a lack of public market liquidity. For many, trade and secondary sales, to strategic and financial players, respectively, represent an alternative exit route, but these buyers are only interested in industry leaders.

In terms of private equity-backed IPOs, it has been a year of withdrawals and disappointment. Offerings raised $72.3 billion in the second half of 2010. In the 12 months that followed, the total was roughly half that as the listings dried up. In the first half of 2012, only $11.8 billion was raised. China has seen the most profound decline - $15.4 billion in the second half of 2011 and then $8.1 billion in the six months that followed - but only one market in the region saw any meaningful increase: Malaysia.

The Southeast Asian bourse flourished thanks to two transactions in June and July: Felda Global Ventures Holdings raised $3.1 billion and IHH Healthcare followed up with $2 billion.

IHH represented a stellar exit for Abraaj Capital, which acquired shares in the company as partial payment for a hospital in Turkey, but the two IPOs are classified as private equity-backed partly because they relied on institutional investors to cover a large portion of their offerings. Cornerstone investors including AIA Group, Employees Provident Fund and Qatar Holding bought up one third of Felda's shares; Blackrock, Capital Group and Government of Singapore Investment Corp. (GIC) were among those who did the same for 60% of IHH's offering.

Private equity firms such as RRJ Capital, PAG, SAIF Partners and Baring Private Equity Asia have performed this function in smaller deals in the last 12 months - it is a handy way to deploy relatively large portions of capital - but these opportunities are a reminder of how liquidity is lacking in the region.

Exits as a whole have fallen in the last 18 months, but trade and secondary sales and open market exits have tempered the impact of weak IPOs. After reaching $18.7 billion in the first half of 2011, PE exits jumped to $26.5 billion in the following six months, spurred by strong numbers from Australia, China and Japan. The first half of 2012 saw activity moderate to $21.4 billion.

Trade sales have been reasonably consistent over this period - $15-16 billion in each six-month period - with open market exits the variable factor. This is hardly surprising given how a couple of trades in minority stakes in Chinese financial institutions can move the needle.

In the second half of 2011, Temasek Holdings sold down its holdings in Bank of China and China Construction Bank, Goldman Sachs did the same with Industrial and Commercial Bank of China and The Carlyle Group continued its gradual divestments of China Pacific Insurance. Total raised: $5.7 billion, out of $10 billion in open market sales. This fell to $2.5 billion - out of $4.9 billion - in the first half of 2012 as there were just two mega deals, Temasek trimming its bank stakes again.

It is notable how India came to the fore in 2012 as investors exited financial services holdings. Warburg Pincus completed its second-largest India exit with the last two divestments of its holding in Kotak Mahindra Bank for $170 million and $272 million; Temasek unloaded part of its stake in ICICI Bank for $306 million; and The Carlyle Group made several block trades of its Housing Development Finance Corp. (HDFC) to secure an $830 million exit.

Given that numerous pre-IPO and PIPE deals were completed during India's boom period of 2006-2008, it's understandable that private equity firms are now selling up. But it hardly alleviates the country's capital overhang. The boom years saw $36 billion in private equity investment, more than half of it in growth transactions, and exits over the following four years amount to just $12.8 billion.

A lot of the deals made by domestic GPs are effectively locked in stasis: either underwater because valuations were based on expectations of future growth that haven't been realized; or simply waiting for the IPO window to open.

Trade sales have always been an option, but at $588 million through November 2012, they are down by more than half on the previous year. Secondary sales to financial investors, however, have shown significant growth, rising from $122 million in 2009 to $1.6 billion in 2012. Bain Capital's $1 billion purchase of a minority stake in Genpact from General Atlantic and Oak Hill Capital is seen as a template for greater involvement by global buyout firms.

For Asia as a whole, secondary buyouts accounted for two of the five largest exits in the second half of 2011, as Bain bought Skylark from Mitsui and Nomura and MYOB from Archer Capital and HarbourVest Partners. Leading deals in the subsequent six months included CDH Investments Management, CITIC Private Equity and New Horizon Capital buying LuyePharma from MBK Partners and Advent Private Capital selling its stake in Australia's Genesis Care as part of KKR's investment. This was followed by Unison Capital exiting AkindoSushiro to Permira.

For all the potential of secondary deals, they will continue to trail trade sales, not least because in most situations a keen strategic buyer - with its long-term outlook and eye for synergies - is able to justify paying a higher price for an asset than a financial player. And strategic buyers are very keen to enlarge their footprints in Asia. Navis Capital Partners has been one of the most prolific GPs, exiting six companies in 2012. Each buyer was a strategic investor.

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• Topics
• Investments
• Fundraising
• Exits
• Greater China
• Southeast Asia
• South Asia
• North Asia
• Australasia
• Growth capital
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