Asia Pacific's happy returns

THIS YEAR KICKED OFF WITH RECORDS broken in global private equity exits, and Asia has proven no exception to a strong exit trend that has helped the industry recover from its post-crisis lows. That said, debate continues over firms' real motives for their exit timing, and whether assets are being sold or floated at the optimal time for LPs' returns, or GPs' fundraising needs. AVCJ took soundings of the drivers and significance of the current exit surge.
Behind the bonanza

Asia Pacific has certainly seen a strong recent run of exits, to put it mildly. According to AVCJ Research figures, 2010 saw the highest-ever recorded level of private equity-backed listings in the region, worth almost $84.4 billion - a figure which far surpasses 2007's previous high of almost $65.8 billion. And 2010's trade sale exits, while respectable rather than inspired at just under $29 billion versus 2008's all-time high of $33.8 billion, confirm the recovery from the 2008-09 crisis.

As always, some skepticism is due over the larger items on the list. For instance, the pre-IPO investments by SWFs Kuwait Investment Authority, the National Council for Social Security Fund, Qatar Investment Authority and Temasek Holdings in Agricultural Bank of China's $10.44 billion Hong Kong IPO last year hardly count as convincing instances of the value-creating capabilities of private equity. Ditto the KIA and Kumpulan Wang Persaraan's pre-IPO investment in AIA's $20.4 billion October 2011 Hong Kong IPO. By some yardsticks, the largest true private equity-backed IPO in 2010 was only the $1.67 billion listing of Hony Capital investee Changsha Zoomlion Heavy Industry in Hong Kong in December.

Nonetheless, Asia Pacific certainly saw a genuinely vibrant year for exits, with the pace increasing if anything into 2011. Vincent Huang, Partner at Pantheon Ventures, cites reports, "showing that there were 450+ IPOs last year and over 100 in 1Q11 coming out of China alone, which accounted for the majority of the global markets in terms of capital raised. About half of those IPOs were backed by some form of private equity or venture capital."

Asia Pacific is hardly alone in this respect, as the first quarter of 2011 alone saw some of the largest global IPO exits ever, with the January 2011 listing of Blackstone, Carlyle, Kohlberg Kravis Roberts and Thomas H. Lee Partners investee Nielsen Holdings netting $1.6 billion, and Carlyle, Goldman Sachs, Highstar Capital and Riverstone Holdings-backed listing of Kinder Morgan in February 2011 raising $3.3 billion. Indeed, Bain Capital, KKR, Merrill Lynch, Citi and Ridgemont Equity Partners investee HCA Holdings achieved what some claim to be the world's biggest ever US private equity-backed IPO, at $4.4 billion, in March 2011, beating Kinder Morgan's record after only one month. And the rest of the year is expected to see a continuing run of public-markets exits across US and Asian bourses at least.

However, in both Asia and the US, the IPO exit picture has not been entirely unclouded, despite the headline figures. In the first quarter of 2011, eight large IPO exits were pulled in the aftermath of the Japan tsunami and developments in the Middle East. And in March 2011, KKR withdrew its planned Singapore IPO of local precision engineering investee MMI Holdings (originally privatized for $1.01 billion in 2007), citing market uncertainty. Trade sales saw some comparable uncertainty with Lone Star Funds' protracted exit from Korea Exchange Bank still on hold as of May 2011, as regulators continued to mull over its planned $4.1 billion sale to Hana Financial Group. Overall, appetite remains unpredictable and outcomes anything but guaranteed.

Motives for going to market

Given the speculation over whether the recent spate of exits is driven by GPs' fundraising needs, rather than the larger economic cycle, Huang for one is very clear on the situation. "The drivers for those IPOs are not the GPs. They are just taking the window of opportunity to exit." Andrew Liu, Managing Partner and CEO at Unitas Capital Partners, confirms that the exits are "more macro driven," rather than fundraising-related. For Nicholas Bloy, Co-Managing Partner at Navis Capital Partners, "private equity exits driven by the need to fundraise are a drop in the bucket of overall M&A and IPO activity." And Thomas M. Britt III, Partner with Debevoise & Plimpton in Hong Kong, points out that, "for some PE firms that might have held on certain portfolio companies longer than expected as a consequence of the GFC, there a probably additional incentives for them to exit."

"The exit stars have aligned for private equity investors," affirms Andrew Whan, Partner with Clifford Chance in Hong Kong. He sees four key factors at play, although "of course not all will be relevant to each particular exit." These include: "strong trade buyer interest - particularly evident with trade buyers in mature markets looking to expand into growth or developing markets (e.g. Japanese or Korean trading companies investing in the PRC and Southeast Asia)"; as well as "cashed-up financial sponsors (newly established, local and foreign), and the increasing prevalence of secondaries"; plus "the relatively favorable macro environment in Asia and its impact on the portfolio companies' performance." Finally, he cites "capital markets remaining strong and liquidity levels high in many Asian markets." And for trade sale exits or twin-track processes, where IPO and trade sale options are approached side by side, the strong capital markets and banking liquidity are also usable to source leverage in exit sales.

Even a rosy exit scenario may bring its own problems, though. Doug Coulter, VP and Head of Asia at LGT Capital Partners, warns of "the very large number of companies that are lined up to exit or that have plans to exit over the next 12 to 24 months ... the public markets cannot possibly absorb the number of PE-backed companies that have IPO plans in the short to medium terms, and many GPs are underestimating the risk of exiting."

Market conditions for the new exits

Overall, Asia's current popularity is conferring special advantages on the region's private equity exits, as well as its fundraising drives. Huang explains why Asian exits especially look set to do well. "After the financial crisis, there is tremendous interest in emerging markets in general and China in particular. Global investors are looking to gain exposure to growth, and meanwhile Chinese investors want to invest their capital within China. Hence, we are seeing feverish demand for IPOs." Coulter adds that, "PE-backed Chinese companies continue to dominate in terms of number and volume of exits as well as generating the most interesting cash-on-cash multiples. We tend to see lower cash multiple exits in India."

Liu also sees different exit dynamics depending on the various local markets within Asia. "The type of exit differs from country to country, and it really depends on what the underlying businesses do," he remarks. "IPOs seem to be the preferred route for PE funds invested in China and India. In more mature markets like Australia, there is a good mix of exiting through IPO, trade sale, and sale to other financial sponsors. In South Korea right now, local conglomerates are cash rich and actively looking to acquire businesses."

Huang sees the exit environment in Asia as "essentially through M&A and IPOs, with very little through secondary buyouts. M&A volume in Asia is pretty consistent through recent cycles, even in the downturn. The biggest swing is the IPO market, which has been very robust in the last 18 months." As noted elsewhere, he also feels that the current hot listings market is likely to cool, and is not entirely dependable even in the medium term.

And despite the great successes of some private equity-invested IPOs in the region, and the great strength of Asia's bourses, Whan avers that, "trade sales remain king in Asia. While there are some notable exceptions of capital market exits having been undertaken, and we expect to see increasingly more in future (in particular, in the PRC), the majority of exits remain sales via auction processes. As long as interest among trade and sponsors remains strong and valuations comparable, private equity investors are likely to continue favoring trade sale exits over capital market exits, given their procedural ease and the avoidance of lock-up issues."

More broadly, he sees the current exit environment as positive in reinforcing the proposition of the entire industry, in Asia and beyond. "It is of course encouraging for the private equity industry as a whole (not to mention current and future fundraisings) that the strong recent track record of exits by a range of Asian private equity investors continues."

Prospects for real returns

Despite the rush to the exits, it is worth reflecting what kind of returns are actually likely to come back to LPs at current valuations. Time and again, industry feedback reports cases where GPs exited knowing that they were leaving some money on the table, but opting to take some actual cash today rather than more potential value tomorrow. Currently, Liu believes the spate of exits is "quite likely" to achieve strong results for GPs and their LPs, "if the current market sentiment continues. The weak dollar also helps."

At present, valuations in China and India especially look likely to deliver on the best expectations of investors, but this heady climate already exhibits symptoms of overshoot. Huang reports, "bubble-like valuation on markets like NASDAQ and Chinext. This will not last, but we may see it continue for the time being." Given this environment, it is hardly surprising that, as he adds, "Our Chinese GPs are making a killing in the markets today."

Even if, as Huang believes, the overheated exit environment will not last, "I still believe our best quality GPs in China should deliver 2.5-3x return on the fund in the medium term, given systemic inefficiency."

All in all, then, GPs and LPs can take comfort in a fruitful period for exits, but should also take note of the volatility and missteps still prevalent throughout the last 18 months. Exit windows, whether open or not, seem set to remain murky and opaque.

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• Topics
• Exits
• The Blackstone Group
• The Carlyle Group
• KKR
• Bain Capital Asia
• Bank of America Merrill Lynch
• Goldman Sachs
• Unitas Capital
• Andrew Liu
• Nicholas Bloy
• Navis Management
• Doug Coulter
• LGT Capital Partners