2014 in review: A year of record-setting

EXITS: LIQUIDITY AT LAST

Led by Oriental Brewery and Alibaba Group, Asia private equity exits touch new highs in 2014

You can put capital to work in Asia, but can you get it out when you're finished? The LP community has been preoccupied with this question amidst concerns that paper gains on investments in the region's fast-growing emerging markets are not matched by equally sparkling realizations. The total value to paid in (TVPI) multiple now shares the spotlight with the distributions to paid in (DPI) multiple.

A sprinkling of landmarks does not necessarily suggest a sea change in exits - in India and China for example, many deals completed at high valuations remain in fund portfolios, with no liquidity in sight. However, it is worth noting that 2014 has seen Asia's largest-ever private equity trade sale and the world's largest-ever IPO.

As of mid-December, there had been over 500 exits in 2014, generating proceeds of $57 billion, the highest annual total on record. This compares to $43.1 billion for the whole of 2013 and $53.7 billion in 2012. Open market exits are actually down on last year - $8.5 billion versus $10.8 billion - but this has more than made up for by a rich vein of trade sales ($37.9 billion versus $27.3 billion) and IPOs ($8.5 billion versus $3.2 billion).

At $6.2 billion, QIC's sale of Queensland Motorways is the biggest exit of the year, but this happened across two transactions. The largest single deal - and by some distance the region's leading trade sale, if infrastructure transactions are excluded - is the $5.8 billion exit of Oriental Brewery by Affinity Equity Partners and KKR.

The private equity firms bought the business from Anheuser-Busch InBev (ABI) for $1.8 billion, including around $1 billion in debt in January 2010. They turned it into the top-selling beer maker in South Korea and sold it back to ABI for $5.8 billion in early 2014 for an estimated money multiple of more than 5x.

Permira also scored a sizeable exit with the sale of Japanese agricultural chemicals maker Arysta LifeSciences to US-based Platform Specialty Products (PSP) for about $3.51 billion - it bought the company for $2.2 billion in 2007 and previously tried to take it public - while Affinity offloaded its majority stake in Australian deli meats producer Primo Group when Brazil's JBS bought the business outright for $1.25 billion. Affinity acquired Primo for $758 million in 2011.

No other disclosed trade scale crossed the $1 billion threshold. The next-largest is MBK Partners' $696 million exit of Japanese software developer Yayoi to Orix Corp (while the same GP's sale of Taiwan cable TV provider CNS to Ting Hsin International Group for $2.4 billion has been announced, it has yet to close, and this wouldn't be the first time an agreement has fallen through).

The top 10 exits include three IPOs, which saw PE investors sell down part of their stakes. Eight backers of Alibaba Group - in alphabetical order: Asia Alternatives Management, Boyu Capital, China Investment Corp, CITIC Capital, Siguler Guff, Silver Lake, Temasek Holdings-owned Pavilion Capital and Yunfeng Capital - exited a small percentage of the Chinese e-commerce giant at IPO. But even a tiny slice of a $25 billion offering is big in dollar terms, and they took $2.2 billion off the table.

Silver Lake is said to have committed $500 million to the company across two rounds in 2011 and 2012. The PE firm's partial exit was worth $278.8 million and it retains a 2.2% interest with a current valuation of around $5.7 billion. Yunfeng Capital sold $442 million in shares through the IPO and now has a 1.1% stake worth nearly $2.9 billion.

Based on the investment multiple, Capital Today's gain from JD.com, another Chinese e-commerce player that went public this year, is even more spectacular. The PE firm, which was one of JD.com's earliest investors, is said to be sitting on a 100x windfall following the $1.78 billion offering. It has made two partial exits, one at the IPO and another on the open market, raking in about $140 million, and retains shares currently worth around $2 billion. DST Global, Tiger Global Management and Hillhouse Capital also made partial exits.

Two Japan investments, Japan Display and Skylark, join Alibaba in the top 10, with Innovation Network Corporation of Japan and Bain Capital taking out money. Private equity-backed IPOs - not all of which involved exits - have generated total proceeds of $55.2 billion so far this year, the most since 2010.

China is the big turnaround, with the government-imposed embargo on new share listings lifted at the end of 2013 and the US markets receptive once again to VC-backed Chinese offerings. Having seen a paltry $9.4 billion worth of IPOs in 2013 - the least since 2004 - the likes of Alibaba, JD.com and WH Group have sent the 2014 total past $39 billion. Thirteen of 101 offerings were on US bourses.

Australia also carried the momentum that built up over the second half of 2013 into this year, which has seen a record $6.3 billion raised through 19 PE-backed IPOs. Healthscope led the way with a $2.1 billion offering, allowing The Carlyle Group and TPG Capital to realize proceeds of $445 million. Quadrant Private Equity has listed four companies - Estia Health, APN Outdoor, iSentia Group and Burson Group - raising a combined $1.37 billion, of which the PE firm received $500 million, with more still to come.

Pacific Equity Partners was responsible for two IPOs, Spotless Group and Asaleo Care, worth $1.56 billion, and managed to secure a full exit from the latter. The GP received close to $550 million from the two offerings. There were also trade sales of Peters Ice Cream and Griffin's Foods, plus a block trade of Veda Group stock, which takes realizations for 2014 to more than $2 billion.

Private equity exits in Australia as a whole have also reached a never-before-seen high of $14.1 billion, driven by $2 billion from IPO exits and $11.8 billion from trade sales. However, the Queensland Motorways transaction accounts for over half the trade sale total. As with Alibaba and Oriental Brewery, a mega deal really moves the needle.

FUNDRAISING: MISSION COMPLETED

Pan-regional players and China venture capital are the dominant fundraising themes of 2014

When The Carlyle Group reached a final close of $3.9 billion on its fourth pan-regional fund in September it drew a line under a three-year process that has seen nearly all of the largest global and Asia-based PE firms raise their first flagship vehicles since before the global financial crisis. In dollar terms alone, this has dominated the fundraising landscape.

Starting with Bain Capital Asia II, which reached a final close in July 2012, roughly one year after launch, eight firms have raised $27.2 billion between them. This accounts for about 14% of the total capital committed to Asian private equity over the same three-year period. Remove renminbi-denominated funds from the calculations and the share rises to nearly 20%.

In addition to Bain and Carlyle, KKR, MBK Partners, Affinity Equity Partners, CVC Capital Partners, TPG Capital and Morgan Stanley Private Equity Asia have raised funds.

In all but two cases the funds are larger than their predecessors. Four finished above target with two increasing their hard caps. Aggregate capital raised by the eight in this vintage is $5.3 billion larger than the last. Overall private equity fundraising by Asia-focused managers - taking into account incremental and final closes - came to $205 billion between 2005 and 2008; it stands at approximately $240 billion for 2011-2014, although nearly 40% of that went into renminbi funds. Brand names and big buyouts clearly still have appeal.

The big pan-regional funds that impacted the 2014 fundraising data are managed by Carlyle, Affinity, CVC, TPG and Morgan Stanley. However, in some cases there were first and second closes in 2013. Affinity, for example, announced a final close in mid-January but would have finished sooner had there not been negotiations with LPs to raise the hard cap. Like most of its counterparts, Affinity saw a sharp increase in commitments from Asian and Middle East investors. Having contributed 15% of the Fund III corpus, they now account for 39% of Fund IV, more than the North American LP share.

These five GPs together raised $16.2 billion, helping the region-wide total to $51.3 billion as of mid-December. The 2013 total of $50.9 billion has been passed and 2012's $55.4 billion may be within reach. Unsurprisingly, the number of funds attracting capital has fallen significantly. It currently stands at 214, compared to 372 in 2013 and 362 in 2012.

Four funds - Carlyle, Affinity, CVC and TPG - raised in excess of $3 billion, followed by CDH Investments, which closed its fifth China vehicle on $2.55 billion. Apart from Baring Private Equity Asia, which is expected to announce a final close on its sixth fund of $3.85 billion early in the new year, it is difficult to think of GPs likely to raise over $3 billion in 2015. PAG and Hony Capital are among those expected to come back to market in the next 12 months and demand will surely be substantial enough that they could break through the $3 billion ceiling, but it remains to be seen whether they think they should.

Fund size discipline is a concern in Asia, and this is exacerbated by the "flight to quality" still prevalent in the region. Managers with strong track records find it easier to raise capital and private equity is still relatively youthful in the region, so few can illustrate sustained outperformance. When LPs are fighting for allocations, it is all too tempting for a GP to increase the target, which could result in the firm leaving its strategic comfort zone.

Nevertheless, a number of managers raised sizeable funds at short order in 2014 and remained in the mid-market range. Quadrant Private Equity closed its seventh Australia and New Zealand-focused vehicle at A$850 million ($758 million) after just over one month in the market; it was two times oversubscribed.

Asia special situations investor SSG Capital Partners and China growth capital player Orchid Asia raised $915 million and $920 million, respectively, but both had in excess of $1 billion in demand. Crescent Capital Partners, another Australian GP, closed Fund V at A$675 million ($565 million) in 10 weeks and there was only space for small number of new LPs.

The situation was similar among the China venture capital firms. They have raised $6.9 billion in 2014, the highest annual total on record with the exception of 2011, when a lot of renminbi managers were also in the market. But the number of successful closes is just 44, down from 114 in 2011 and 67 in 2008. GGV Capital, IDG Capital Partners, Legend Capital, Qiming Venture Partners, Morningside Technologies, Matrix Partners and DCM have been through several cycles and can rely on the support of loyal LPs.

These seven managers raised $3.3 billion between them as VC funds as a whole accounted for 30% of the $22.3 billion committed to China-focused GPs. It was just 14% in 2013 and has never previously exceeded 25%. Asia-wide venture capital fundraising stands at $9.7 billion, 19% of the regional total, compared to 13% in 2013.

While most of the established China VC firms took advantage of positive sentiment towards tech globally and China in particular - thanks to a surge in US IPOs and increasingly acquisitive domestic internet companies - and raised funds, they are not alone. A new generation of China venture capital investors is emerging, led by successful entrepreneurs who are essentially putting money back into the system that produced them.

This is most visible in seed and early-stage investments by individuals, but a number of institutional funds are also being raised. The team behind Banyan Capital spun out from IDG and closed their first fund at $206 million at the start of the year; a second fund is currently being raised. Vision Knight Capital, founded by ex-Alibaba.com CEO David Wei is already deploying Fund II, which closed at $550 million; Shunwei Capital Partners, set up by super angel Lei Jun, raised $525 million for its second fund.

Vision Knight classifies itself as private equity rather than venture capital, given the firm's operational focus and average check size. Yunfeng Capital, the brainchild of David Yu and Jack Ma, founders of Target Media and Alibaba, respectively, also features in this segment. It raised $1.1 billion for Fund II. With a number of VC firms also raising opportunity funds - which focus on later stage deals involving existing portfolios - the tech investment space is adapting to larger private rounds and later IPOs.

INVESTMENT: BACK WITH A BANG

Growth deals rebound, with China to the fore. South Korea retains its title as Asia Pacific's buyout hotspot

CDH Investments' acquisition of Fujian Nanping Nanfu Battery for around $600 million is exceptional for a number of reasons. Corporate carve-outs are still relatively rare in Chinese PE but a firm returning to invest in a former portfolio company - CDH and Morgan Stanley Private Equity Asia bought Nanfu about 15 years ago and sold it to Gillette - is likely unprecedented.

On a more basic level, this is also one of the largest buyouts ever seen in China, especially if the privatizations of US-listed Chinese companies are ruled out because most do not result in a change of control. For all the talk about more control deals - and they will come as the economy and the private equity industry matures - the country is and will remain primarily a growth capital market.

Asia is on course for its biggest year for PE investments since 2007, with $76.8 billion transacted as of mid-December. This is already more than either of the previous two years - circa $68 billion - and $77.1 billion posted in 2011 will almost certainly be passed. Buyouts are actually down on the 2013 total but there has been a surge in minority growth capital activity, which stands at $33.6 billion, compared to $20.5 billion the previous year. China is a key factor.

Private equity investment in the country came to $20.7 billion in 2013, the lowest total in four years. It has rebounded to $31.8 billion so far in 2014, as GPs take advantage of slowing economic growth, which makes entrepreneurs more sensible on valuations and more open to the support private equity can provide in a challenging commercial environment. Having said that, the number of deals completed is still the lowest since 2009.

China was the target jurisdiction for Asia's four largest investments of 2014, and each one involved a minority equity stake. Temasek Holdings leads the way, having paid $5.7 billion for a 24.95% in A.S. Watson, a health and beauty retailer owned by Hong Kong tycoon Li Ka-Shing - a Hong Kong deal but essentially a China play.

This is followed by the $5 billion China International Capital Corp. (CICC), Bohai Industrial Investment Fund Management, RRJ Capital, Haixia Capital, Goldstone Investment and Hop Investment put into Sinopec Marketing as part of a consortium that took a 29.99% stake. Third and fourth place are also consortium deals: a $2.36 billion commitment to China Huarong Asset Management, and a $2.35 billion investment in Global Logistics Properties' China business.

In a quiet year for Australia - PE investment stands at $7.2 billion, about half the 2013 total and the lowest sum in four years - as would-be buyout targets turned to the buyout capital markets instead, the real control deal hotspot remains South Korea.

Investment is actually down on last year ($8 billion versus $9.4 billion) but the country has seen more buyout activity than any other market in Asia, with $5.3 billion transacted. Australia is second on $4.8 billion. The Korean share of total Asia buyouts is 23%, up from 17.5% in 2013 and 9.9% in 2012. The country accounts for approximately 14% of Asia Pacific GDP.

The Carlyle Group's acquisition of security systems provider ADT Caps is far and away the largest transaction at $1.93 billion. The seller was US-based Tyco International and divestments by multinationals are a proven source of deal flow in Korea. However, nearly half of the buyouts completed were divestments by domestic conglomerates that need to ease their debt burdens or are under political pressure to sell.

Carve-outs include: Standard Chartered Private Equity teaming up with Samyang Corp. to buy Hyosung Corp's packaging business for $396 million; Morgan Stanley Private Equity Asia's acquisition of a construction materials business from a subsidiary of Hanwha Group for $294 million; and a Goldman Sachs-led consortium's buying a controlling stake in the industrial gas business of Daesung Group for $262 million.

An unusual addition to the 10 largest deals in Asia this year is the $1 billion round of funding for Indian e-commerce platform Flipkart. This is ostensibly a venture capital deal, although the check size is so large that traditional VC players no longer participate: South Africa's Naspers, Tiger Global Management, Accel Partners, Morgan Stanley, DST Global, GIC Private, Sofina and Iconiq Capital stumped up the cash at an estimated $7 billion valuation.

A total of $14.2 billion has gone into 1,600 VC deals in Asia this year, $5.7 billion more than in 2013 although there are about 200 fewer transactions. Early-stage deals - which are more narrowly defined - are also at record high: $4.8 billion has been committed, up from $3.8 billion in 2013. Twelve early-stage investments that have surpassed $50 million, more than the previous two years combined, as the average size of funding rounds rises at every stage.

Of the 10 largest VC rounds that have taken place globally this year, six were in Asia: Flipkart; China's Beijingmate, Xunlei, Meituan and Youxinpai; and Australia's Campaign Monitor. Xiaomi, a Chinese mobile phone maker that has been around for less than five years, is said to be negotiating a funding round at a valuation of $50 billion; two years after a Series E round at $10 billion.

Escalating valuations in the tech space are not unique to Asia - led by China and India - but they are arguably justified on the basis of a unique rationale focused on rapid growth, increasing mobile usage and disruptive technologies. It is debatable to what extent the region is ensnared in a valuation bubble, and indeed whether it will burst or simply deflate.

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• Topics
• Investments
• Exits
• Fundraising
• Buyouts
• Expansion
• Asia
• China
• South Korea
• Australia
• Japan
• Southeast Asia
• India
• Exit
• Trade sale
• IPO
• Fundraising
• buyout
• Growth capital