Predictions for 2013

REBECCA XU CO-FOUNDER OF ASIA ALTERNATIVES, ON VENTURE CAPITAL AND BUYOUTS:

We hope that public market sentiment and investor confidence in Asia will start to warm up toward second half of 2013. In China over the last several months, we have seen some early but promising news pointing towards economic recovery, but of course this will take time to gather momentum. Asset pricing in many Asian markets will remain relatively soft for the foreseeable future due to a lag effect, thus affording potentially attractive opportunities for investors. 2013 could turn out to be a strong vintage from an investing point of view.

Venture opportunities, especially in the early stage, will continue to show promise. While many venture backed companies were resilient in the face of the recent economic slowdown and public market challenges, most are still waiting to show liquidity. We have focused more on early-stage venture.

Given the nature of these investments, entry pricing has been less affected by the previous late-stage funding hype or the current IPO difficulties. In some ways that has allowed them to remain on path for development, while not being immediately constrained by the shut-down of the public markets. That is not to say that the early stage venture companies do not face challenges, but the fundamental demand for internet-based products and services, mobile internet and e-commerce will continue to be strong.

On the other hand, we expect to see more buyout activity in small to mid-sized buyouts, especially in the more developed Asian countries, such as Japan and Korea. Asset pricing has reduced significantly from pre-crisis levels and leverage remains available primarily from local banks. Once these deals are able to close, the combination of improved margins, lower valuations and a reasonable level of debt, should deliver attractive returns.

GULPREET KOHLI, MANAGING DIRECTOR OF CHRYSCAPITAL INVESTMENT ADVISORS, ON INDIAN EXITS:

Fundraising this year has been tough resulting in some GPs dropping their fundraising plans while others taking more time to reach a close. 2013 will continue to be difficult in terms of fundraising; liquidity and stable track records will be repeatedly cited as key elements in separating the sheep from the goats.

One of the major challenges in India's private equity space is that a lot of managers have raised too much money without a track record of exits. In the next couple of years, there will be a slow process of fund elimination and the remaining players are expected to show better quality. LPs are cautious about the market but this doesn't mean they have shied away from competent and experienced players. Firms with stable teams, liquidity and a record of consistent exits will continue to perform well. One-man shops probably won't work, especially for first-time funds.

The investment climate in 2013 will be volatile. Valuations are likely to remain an issue as India has never been cheap market, though there has been a correction in the last 12 months and it should continue through 2013. In some of our recent deals, we are already seeing a 15-20% discount when compared to two years ago. If you look at the consumer sector alone, prices are still high; but for other domestic consumption industries including financial services, construction and pharmaceuticals, valuations are reasonable and we are able to find better deals.

Looking forward, India will still be dominated by minority and growth capital investments. There is obviously keen competition in the growth capital space, and people like us focus on deals between $20-75 million of equity. Big global buyout shops are here to stay and will compete among themselves for larger ticket sizes.

The public market is still expected to be the most appropriate exit channel, given that strategic sales are sporadic in India. While entrepreneurs are still reluctant to sell control, strategic investors are also unlikely to pick up a 10-20% stake in a company. If the IPO market doesn't pick up, secondary transactions will emerge as another alternative.

JOE BAE, MANAGING PARTNER OF KKR ASIA, ON CHINA GROWTH:

I see the private equity industry in Asia as remaining nascent, so PE firms need to be flexible, with the ability to invest in control and in non-buyout opportunities, as well as in various markets across the region. Global growth will likely be driven by an emerging Asia in the coming years amidst global rebalancing, with China accounting for a third of global growth. But that does not mean that the growth in Asia will be balanced across all markets, or that growth will continue at the same pace.

The overall economic slowdown, and the slowdown in growth, has led to unprecedented valuation levels. So there are more opportunities today to partner with high-quality entrepreneurs in China at reasonable valuation levels then there were in the past. I also see more opportunities to access emerging, frontier markets with strong growth, healthy balance sheets and attractive demographics. On the other hand, curveballs to look out for include slowdowns in regional economies, increasing local competition and problems in retaining talent.

I see Asia as attractive due to regional valuations, making it a good time to enter the cycle. Japan looks attractive as a market to start investing in, and the time is ripe to penetrate new markets in Southeast Asia.

DEREK SULGER, MANAGING PARTNER OF LUNAR CAPITAL PARTNERS, ON SPECIALIZATION:

Currently, there is a shortage in China of GPs willing to prudently exercise control, with the willingness to be involved in operations and take on the responsibility of helping drive value creation; I think the market needs that.

I think there are very different qualities to the China market in 2013 than there were 10 years ago. Shockingly different. The last decade was about minority and pre-IPO investment and venture investment. It was about a lot of low-hanging fruit and lot of multiple arbitrage in an environment where the China was only going up.

I'd say to expect the next decade will be like this is naïve given how dynamic the China market is, and it's evolving. For one thing, as we head into 2013, people no longer believe that up is the only direction.

There is a very valid argument for both types of investment style but investors must start paying attention to risk: risk adjusted returns, risk mitigation, risk management and lower volatility. Control and operational involvement help address these concerns. This is what the market is short of. It seems the opportunity for that is getting bigger and bigger - while it remains a niche, our pipeline demonstrates more choice.

I hope for 2013 this is a small sign that China is maturing, and that specialization will be rewarded. The reality is the vast majority of the market is still clinging to this idea you have to be a minority investor and a generalist, but I think you will see specialization begin to reward investors.

The signs are there that it is starting to happen. There are fledgling signs, for example, of an increase in the number of majority transactions, but on the other hand there is a remarkable amount of complacency if you look at the mix of transactions we still have in China.

HIRO MIZUNO, PARTNER AT COLLER CAPITAL, ON THE SECONDARIES MARKET:

We will see more Asian funds being sold as part of global transactions. When Lehman happened, a lot of global investors tried to reshape their private equity programs, decreasing portfolios in size, but they didn't do it on a pro rata basis. They tried to keep their Asian exposure, while selling European and US assets, because everyone was hopeful that Asia would continue to outperform Western markets.

However, our most recent Barometer shows people are less optimistic about certain areas of Asian private equity, so we expect secondary sales to come from everywhere, including Asian portfolios. There are enough China, India and Australia country funds to be traded, but the pan-Asia vehicles have much bigger commitments from LPs.

On the primary side, people are regaining their confidence in US and European buyouts. LPs are still keen to make investments in Asia but it's no longer the top priority asset class that they want to keep in their portfolios. They will go back to the more normalized allocations between regions.

It's more about GP choice than macro issues. If you have a good track record and a strong team then you can raise money quite easily. We will see a big deviation in terms of the speed of fundraising. Some GPs will raise money quickly while others will spend two years in the market and, in the worst case scenario, not raise anything at all.

As for secondaries direct, It is quite difficult to execute direct deals in Asia because the market is fragmented. You find three portfolio companies in India, two in China and one in Japan. There is little cohesion in the portfolios and there are quite often issues with the quality of the underlying assets. Secondary direct investing usually involves creating new funds around assets; we have looked at a lot, but it's difficult to get transactions done.

The most successful investments we have made have not been where a manager couldn't raise a new fund - because their difficulties in fundraising often result from the poor quality of their recent transactions - but have been situations where we spin a team out of a bank.

MARCUS THOMPSON, CEO OF HEADLAND CAPITAL PARTNERS, ON GROWTH AND SUCCESSION:

I feel positive about the prospects in our core markets of Southeast Asia and South Korea and cautiously optimistic about the prospects for an improving market in China in 2013. In Southeast Asia and South Korea we see the PE markets being driven by steady economic growth and investment opportunities created by family succession factors.

If one considers that age affects us all and the large number of companies founded in these markets in the 1970s and 1980s, one gets a sense of the opportunity as founding shareholders seek to transition out. In China, we are expecting a somewhat better macro-economic environment which may encourage a better climate for entrepreneurs to seek outside capital and a more rational market that should offer more attractive investment terms.

Across the region, we continue to like the retail and consumer product sectors because of the secular growth in disposable income. However, rising labour costs and fierce competition in China are forcing companies to become smarter about the way they conduct their business.

In the same way, competition amongst PE firms is forcing PE firms to think how they can better support portfolio companies and help entrepreneurs formulate and implement new business strategies. As the business environment remains tough and competition amongst PE firms remains intense, entrepreneurs are seeking more from their PE partners.

SCOTT HAHN, CO-FOUNDER OF HAHN & CO, ON SOUTH KOREA:

Overall , I am really excited about the prospects for the new year and beyond in Asia, particularly North Asia and South Korea.

On December 19, South Korea will elect a new president. Whoever it is we have as president for the next five years will bring with them a new sense of optimism. I think private equity and business overall in Korea will be a beneficiary of that. I am hopeful for a pick up in the economy next year and I think those who would benefit most from these opportunities will be those who are familiar with the country, are localized enough and have experience doing successful investments in Korea.

While the global economy will continue to be uncertain, there will be opportunities in those sectors in which Korea has a strong global presence. Sectors with strong and sustainable competitive advantages, such as branded consumer goods, are those you want to focus on in an uncertain macroeconomic environment.

Asia will remain highly volatile in 2013, as it has been for the past several years. I don't see that going away. But I have always been of the opinion that macroeconomic growth and private equity investment returns are not necessarily correlated. I think those who understand the markets they invest in, and have the ability to be flexible in those markets, will perform well. Those staying within their realm of expertise will do better.

I am cautiously optimistic, the world is a volatile place and there is risk, but there is also upside to that risk for the experienced private equity investor.

MOUNIR GUEN, FOUNDER OF MVISION, ON THE GLOBAL OUTLOOK:

Investors are continuing to be positive on Asia and we will see continued interest in regional funds, China funds, there is good regular activity in Australia, South East Asia and South Korea. One of the challenges is what to do with Japan and the developments there. India will continue to be a bit of a contrarian bet during this time.

I think we will see global support for the Asian Pacific market place and that will continue robustly into 2013. The challenges in Europe are still there, a number of elections taking place and investors appear to be proceeding with caution. There is popularity and activity in the US with a large portion of the capital available to us.

General interest among investors in Asia Pacific opportunities is still high. The only thing I would say is the fundraising statistics are contingent on the number of GPs in the market place and at this particular time a large number of pan-regionals so the volume of capital raised in the market should be high.

Looking ahead ,the markets will mature and they will have more experienced GPs. The average portfolio is 3-5% new markets and this will go up to 15%. The growth opportunities in emerging markets are still high. The most dynamic region in the world right now is Latin America. Unemployment is falling, the middle class is growing rapidly. After Latin America, Africa will start taking shape but the main focus for developing a portfolio in emerging markets will still be Asia Pacific.

One the things we have to be careful about is changing regulations. In 2013 there will be new marketing regulations in Europe and I don't how that will effect fundraising, but hopefully it won't have too much of an impact because the bulk of the investors are the Nordic countries, the Dutch, the Swiss and The UK and they have clear rules.

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