3Q analysis: The bottom falls out of RMB fundraising

1) Renminbi funds stutter amidst flight to quality

Have the wheels fallen off renminbi-denominated fundraising? It would appear so. According to provisional data from AVCJ Research, between July and September, nine local currency vehicles achieved some kind of close, compared to 27 in the previous quarter and 50 during the same period a year ago. Total funds raised have now fallen during three consecutive quarters: from $8.2 billion in January-March to $6.4 billion in April-June and now $1.4 billion in July-September.

To put the scale of demise into perspective, US dollar-denominated fundraising in China exceeded renminbi fundraising in the third quarter. This turns on its head a trend that had been gathering pace over the last two years.

In the first half of 2011, renminbi vehicles accounted for 54% of China fundraising, rising to 80% in the following six-month period and 82% in the six months after that. The renminbi portion of fundraising region-wide increased from 33% to 57% to 65%. In the third quarter of 2012, the share of national and regional totals fell to 44% and 13%, respectively.

It would be tempting to tie this poor performance to wider macroeconomic weakness - Chinese GDP expanded 7.6% in the second quarter, its slowest pace in three years, on the back of weakening exports and lower investment growth - but are investors only now pulling back from private equity or did this in fact start happening several months ago?

The reality is that renminbi fundraising has been underpinned by large, state-backed vehicles for more than a year. With the exception of Hony Capital Fund V, the four largest funds reaching a close in the first half 2012 throughout Asia were government-linked. Such vehicles are conspicuous by their absence from the list of the top 10 funds raised between July and September. The CICC Jia Tai Private Equity Fund is the only renminbi vehicle among them.

There are two other China funds in the list: PAG Asia I (final close) and FountainVest China Growth Fund II (first close). Between them they accounted for most of the $1.8 billion that went into US dollar vehicles in the third quarter, a marked improvement on the previous three months, even though the number of funds fell by one, to four.

It reflects a trend apparent across the region. Private equity fundraising in Asia reached $10.8 billion during the period, the lowest level in two years. But the $2.5 billion quarter-on-quarter fall in capital raised is far less dramatic than the decline in the number of vehicles attracting capital - 33, down from 67 in the second quarter.

What the numbers suggest is that investors are committing less but focusing on a smaller number of funds - entirely in keeping with the "flight to quality" mantra we highlighted three months ago. The four largest funds came from PAG, Bain Capital, Asia Alternatives and FountainVest, all of which can point to senior executives with credibility and experience in the market.

Three more - Kerogen Capital, Clearwater Capital Partners and The Longreach Group - achieved final closes during the quarter. Although each one came in under target, they did better than most. They can also point to particular areas of expertise - energy, distress and Japanese corporate carve-outs, respectively - that might appeal to LPs looking for differentiation and a strong investment narrative.

2) Trade sales, IPOs gain momentum. Can it last?

Trade sale exits and private equity-backed IPOs have rebounded, with July-September quarter numbers building on the momentum of the previous quarter. The question is: can this run be sustained? We are more optimistic about trade sales than IPOs.

First, the public markets. Private equity-backed offerings generated $14.2 billion in the third quarter, comfortably more than the $8.8 billion and $2.9 billion seen in the previous two quarters. However, the number of issues is largely unchanged: 41 in January-March, 47 in April-June, and 42 in July-September. Clearly, a few bumper IPOs are pushing the needle.

For that we can thank the robust Bursa Malaysia, where KhazanahNasional-owned IHH Healthcare weighed in with a $2 billion offering, and Enterprise Turnaround Initiative Corporation, which completed the restructuring of Japan Airlines. The latter culminated in an IPO that accounted for more than half the total raised in Asia as a whole. Clearly, we are unlikely to see one of these per quarter, so expect the IPO data to correct in the final three months of the year.

As for trade sales, $19.9 billion was transacted in the third quarter, compared to $15.6 billion in April-June and a paltry $5.3 billion in January-March. The most notable exits concerned investments made during the boom period of 2006-2007, when Japan and Australia in particular saw a host of highly leveraged transactions.

These assets are now due for sale or refinancing and, given the weak capital markets and tighter lending policies from buyout financiers, strategic buyers are waiting to pounce. Country Road picked up Australian fashion retailer Witchery Group from Gresham Private Equity for $180 million, while Advantage Partners agreed to exit Rex Holdings to rival restaurant chain Colowide for around $175 million.

As for secondary buyouts, Permira acquired Japanese sushi chain AkindoSushiro for $1 billion, generating a stellar return for local GP Unison Capital, and now plans to support the company's expansion into new markets in Asia.

In Australia, Quadrant Private Equity completed an innovative quasi-secondary investment in Super A-Mart and Barbeques Galore. The PE firm put in $136 million and secured a new financing package, taking just under 60% in the combined entity and allowing Ironbridge, which led the original buyouts of the companies, to roll over its equity stake, while Government of Singapore Investment Corporation (GIC) exited.

These represent interesting themes and financial logic suggests they will become more prominent, but we made a similar prediction this time last year and exit activity went into a six-month decline. The nature of these investments and health of the underlying assets means sales tend to come in fits and starts.

3) China's emerging buyout movement

The argument for ever larger China-focused private equity funds is largely predicated on expectations that the nature of investment opportunities will evolve. Through a combination of take-privates of Chinese companies listed overseas, state-owned enterprises in need of restructuring and entrepreneurs looking to exit their businesses or seeking help to expand them overseas, industry participants are optimistic about buyouts.

Several of these driving factors aren't going to bear fruit immediately, but third-quarter deal activity gives an indication what is to come.

The take-private movement reached new heights as the chairman of NASDAQ-listed Focus Media joined forces with The Carlyle Group, CDH Investments, China Everbright, CITIC Capital Partners and FountainVest Partners and put in a buyout offer that values the company at $3.5 billion. Since 2010, 39 take-private deals for Chinese companies trading on US bourses have been announced, completed or terminated and PE investors are involved in four of the 14 completed deals and six of the 20 that are ongoing. Focus Media, however, is by the largest and highest-profile effort.

Not to be outdone, TPG Capital completed the acquisition of packaging firm HCP Holdings for approximately $500 million. It is, for now, the largest ever leveraged buyout of a Chinese company. In this case, the private equity firm secured control from the family that founded the business in Taiwan more than 50 years ago but felt they had taken it as far as they could.

These deals helped the buyout share of total transaction value in Asia reach $6.5 billion and retain its lead over the growth segment. Despite recording a quarter-on-quarter increase, activity in the growth space remains on a longer downward trend as China-focused investors scale back on pre-IPO deals. China deal value came to $8.4 billion for July-September, nearly twice the previous quarter's figure, but the number of transactions fell, suggesting a shift to larger cap investments, including buyouts.

Private equity investment in Asia as a whole came to $16.1 billion, down slightly on the previous quarter, although some transactions have yet to be disclosed. After China, South Korea saw the greatest spike in activity, with deal value hitting $2.7 billion, up 45% quarter-on-quarter and more than 500% year-on-year.

The latest state-linked divestment in Kyobo Life, which saw Affinity Equity Partners, Baring Private Equity Asia, IMM Private Equity and Government of Singapore Investment Corporation (GIC) pay $1 billion for a 24% stake in the company helped. So too did MBK Partners $1 billion investment in Woongjin Coway, although the prospects for this deal are unclear because the parent company filed for bankruptcy post-announcement but pre-closure.

To receive a full set of data and analysis on private equity activity in Asia Pacific during the third quarter of 2012, please contact AVCJResearch@incisivemedia.com

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• Topics
• Fundraising
• Renminbi fund
• Buyouts
• Greater China
• Secondaries
• Exits
• China
• Renminbi
• Fundraising
• buyout
• Asia
• South Korea
• Secondaries
• Exit
• Trade sale
• IPO