3Q analysis: Haves and have nots

1) Yet more evidence of bifurcation in fundraising

It is difficult to think of a quarter in which the division between the "haves" and "have nots" of Asian private equity has been so starkly illustrated. "Bifurcation" is fast-becoming the most overused term in fundraising circles and between July and September we there was further evidence to reinforce the phenomenon.

First, the headline numbers: Asia-focused funds raised $11.1 billion in the third quarter of 2013, according to provisional data from AVCJ Research. The figure, which includes funds reaching a partial or final close, represents a marked improvement on the $5.2 billion posted for the previous three months but it is still the fourth-lowest quarterly total in four years.

China continues to go backwards, with $1.9 billion raised between July and September, down 46% on the previous quarter, but this was offset by Hong Kong, Singapore and South Korea.

Four pan-regional funds underpinned these markets' performance: KKR Asian Fund II added $3 billion to reach a final close of $6 billion; Affinity Equity Partners received another $1 billion towards its $3.5 billion target; L Capital Asia reached the hard cap for its institutional tranche of $950 million, with the GP contribution still to come; and MBK Partners completed fundraising for its third North Asia-focused vehicle, adding $1.45 billion to reach the hard cap of $2.7 billion.

Each of these has been a comparatively rapid fundraise - KKR was in the market longest, taking approximately 14 months to raise the largest private equity pool ever seen in the region, while L Capital Asia began marketing less than nine months before announcing a first close. Collectively they account for 57% of the capital accumulated during the third quarter, and more than 90% of the cumulative total for Hong Kong, Singapore and South Korea.

Now for how the other half lives. Of the 13 largest funds to reach a final close in the third quarter, not including renminbi vehicles, five came in under target.

They include KV Asia Capital Fund I, which launched in December 2010 and set an initial target of around $500 million. This was subsequently cut by half and a final close came in August at $263 million. Ancora Fund II entered the market in April 2011, seeking $300 million but the process was drawn out by unforeseen team turnover and the fund ended up closing in September with commitments of $128 million. It is worth noting that these GPs succeeded in raising funds; many have not.

In other areas there is evidence of compromise. Advantage Partners reached a final close of JPY20 billion ($200 million) on its bridge fund in August. The vehicle, which has a two-year investment period, is intended to allow the GP to rebuild its track record after a difficult fourth fund. Advantage expects to return to market with a full-size fund in the next 12-18 months.

Australia's Ironbridge Capital has opted for a similar strategy. LPs told AVCJ that the PE firm is creating a new vehicle to absorb the remaining assets from its first two funds, giving existing LPs the option of rolling over their equity or exiting. Another fund, with a target of A$250 million ($233 million), will be raised to make fresh investments.

The move is essentially an acknowledgment that it would be difficult for Ironbridge to raise a full-size primary vehicle due to underperformance of its first fund and the generally challenging fundraising environment. Needs must in difficult times.

2) Korea leads the way in Asia buyouts

South Korea was one of the investment success stories of 2012, racking up $7.3 billion in deals, more than twice the previous year's total. Alongside Australia, it was one of only two major Asia markets to post year-on-year growth.

Nine months into 2013 and South Korea has seen $6.9 billion in private equity investment - the country may not top its 2012 performance but it remains a beacon of strength in a region of comparative weakness. South Korea accounted for 16% of region-wide deal value in the first three quarters - and 21% in the third quarter alone - compared to 11% for 2012 as a whole.

The country's share of Asia buyouts is even more pronounced: 42% for the first three quarters, up from 13.5 % in 2012. Of the 15 largest private equity investments between July and September, three were Korean buyouts, and each of these was of a slightly different nature, indicating the breadth of control opportunities.

MBK Partners agreed to pay about $1.5 billion for a 90% stake in ING local life insurance business as the Dutch group continued to divest its Asian assets as part of the conditions tied to its post-global financial crisis bailout. Affinity Equity Partners, meanwhile, completed a carve-out from a local corporate, paying mobile carrier SK Telecom $236 million for a majority stake in Loen Entertainment, which owns MelOn, the Korean equivalent of iTunes. Finally, Baring Private Equity Asia (BPEA) completed a secondary buyout of courier firm Logen for $138 million.

Of the major markets, only Korea and Japan saw an uptick in deal flow quarter-on-quarter - and KKR's $1.7 billion acquisition of a majority position in Panasonic Healthcare made up all but about $150 million of the Japan total.

Interestingly, while India saw private equity investment drop by more than half to $1.4 billion in the third quarter, buyouts remained robust. After posting $367 million for April-June, the country managed $360 million for July-September. This level of activity hasn't been seen since mid 2012 and buyout deal flow has never been anything but patchy since private equity arrived in India.

It is the first time deal flow has surpassed $300 million in successive quarters, a tiny sum when put alongside the size of India's economy or PE investment in other large markets in Asia, but significant as a longer-term private equity trend. The market will deepen but for now it remains shallow, with BPEA's purchase of a stake in Hexaware Technologies - a 41.5% holding for $255 million with a tender offer for a majority position to follow - dominating the rankings.

3) Seeds of optimism for China IPOs

Very little has been heard from the China Securities Regulatory Commission (CSRC) regarding the resumption of domestic IPOs and fund managers are increasingly jittery: even once the hiatus ends, it will take several years to negotiate the queue to list, the listing process itself and then the lock-up period, forcing investors to wait longer for returns. On the bright side, there finally appears to be traction for Chinese IPOs on other bourses.

At $6.1 billion, total proceeds from trade sales accounted for the vast majority of exit activity in the third quarter but the continued, gradual resurgence in private equity-backed IPOs indicates liquidity to come. AVCJ Research has records of 21 offerings generating cumulative proceeds of $3.5 billion, up from 16 offerings and $3.3 billion the previous quarter.

Chinese companies accounted for five of the 10 largest PE-backed offerings, up from three in the second quarter. Four of these were Hong Kong listings - plus EQT Partners-invested and Hong Kong-based Japan Home Centre, which has mainland expansion aspirations (under the Living Plus brand) - and only two were cornerstone investments intended to give momentum to IPOs at a time when retail investor sentiment is uncertain.

There is a sense that the mood is slowly turning and the Hong Kong pipeline is lengthening as a result. In early October, Chinese mobile game developer Forgame, whose backers include TA Associates, Qiming Venture Partners and Ignition Capital Partners, raised $206 million in its IPO and the stock jumped 32% on its first day of trading. Another mobile game developer, IDG Capital Partners and Temasek Holdings-invested I Got Games, is also working its way through the listing process.

Meanwhile, semiconductor manufacturer Montage Technology Group became only the second Chinese company to list in the US this year, raising $71 million in its IPO and opening up an exit channel for AsiaVest Partners and Intel Capital. Like LightInTheBox before it, Montage was unable to price its offering at the top of the range, but the fact it got away is encouraging.

Travel website Qunar - which is controlled by Baidu but counts GSR Ventures and GGV Capital as minority investors - and SAIF Partners, DCM and Warburg Pincus-backed 58.com have already filed for US IPOs, seeking to capitalize on the turning tide. 

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• Topics
• Buyouts
• North Asia
• Greater China
• Fundraising
• Exits
• Southeast Asia
• GPs
• South Korea
• buyout
• Exit
• IPO
• China
• CSRC
• Fundraising
• Asia