2013 in review: Mixed fortunes

FUNDRAISING: SIZE EQUALS COMFORT

The flight to quality continues in Asia as LPs stick with tried and tested partners, but there are still opportunities for managers that carve out the right niche

Remove China from the equation and Asia private equity fundraising is - according to the headline numbers - little changed. A few weeks from the end of 2013, capital committed to funds in the region stands at $24.4 billion, down slightly on the full-year totals for 2012 and 2011 and up slightly on 2010. The differential between highest and lowest is less than $4 billion. Yes, the peak of 2007 remains a world away, but the past four years have been reasonably consistent.

China was the change agent and one glance at the fundraising chart says it all: streaking from a paltry $10.5 billion in 2009 - still the low point nationally and regionally - to $26.3 billion in 2010, then $53.5 billion the following year; before sinking to $27.1 billion in 2012 and $13.6 billion so far this year. The hemorrhaging has been most brutal among the renminbi-denominated funds. While in 2011 they accounted for more than 40% of regional fundraising, in 2013 it is 30%.

However, the headline numbers only tell part of the story; there are two specific trends that warrant attention. First - and we've said it before but all the evidence suggests it is becoming more entrenched - is a flight to perceived quality.

These perceptions vary depending on the LP but for many comfort equates to size and brand name. A number of the very large institutional investors are encumbered by the amount of capital they must deploy each year to maintain their target allocation. If that amount is $10 billion and the LP is unable to account for more than 10% of a single fund, the commitments of $1 billion or below are challenging for small teams.

And the vast majority of LPs, regardless of size, want to concentrate their allocation - which isn't necessarily shrinking on a dollar basis - on a smaller number of managers. Those that haven't performed are getting culled; those just entering the market without a track record of performance are lucky to get a second look.

The net result is a hollowing out of the middle market as large LPs back managers able to absorb their minimum check size and smaller investors, often the ones with the least experience and exposure to Asia, play it safe with established names.

There is evidence of a division within the mega-fund bracket. KKR closed its second pan-Asian fund at $6 billion this year, MBK Partners raised $2.7 billion in the space of about 12 months and Affinity Equity Partners has reached its $3.5 billion target almost as quickly but has yet to formally announce the fact. In contrast, TPG Capital and The Carlyle Group have been in the market for more than 18 months and are now not expected to close until early next year. Fundraising targets are being revised downwards.

But appetite for the mega-funds remains in comparatively rude health. Three vehicles of $2 billion or more have reached a final close in 2013 and Affinity will make that four. Only once in the preceding four years has this figure been topped - in 2011, when one of the five was a government-backed vehicle.

Move into the lower tiers and the picture changes markedly. There have been two final closes in the $1-1.99 billion range, down from seven in 2012 and eight in 2011. Between $500 million and $999 million, AVCJ Research has records of eight successful fundraises in 2013, compared to 13 and 21 in the two previous years. In the $200-499 million and sub-$199 million ranges, final closes stand at 15 and 16, respectively, less than half the 2011 figures and the lowest totals in nine years.

In 2007, when Asia fundraising reached its pre-global financial crisis peak of $62.9 billion, 24 funds reached a final close of $500 million or more, 46 finished in the $200-499 million range and 48 received up to $199 million.

Of the 20 largest final closes of the year so far, eight have ties to government or strategic investors. Remove these from consideration and only two funds occupy the space in between MBK on $2.7 billion and Kedaara Capital on $540 million. Six of that top 20 also came in under target.

It is, of course, still possible for small and mid-cap managers to raise money. Success hinges on combining a strong track record - first-time funds are favored when operated by people who are not first-time investors or first-time teammates - with a compelling investment thesis and a degree of differentiation from the norm. Specialization is no longer a dirty word in growth capital markets; plain vanilla is.

In this context, the other interesting trend is where these pockets of opportunity, typically funds that have a particular strategy within a particular geography, are perceived to lie.

While the likes of Boyu Capital will raise capital quickly, many China managers are struggling as investor sentiment weakens. This is not a mass withdrawal so much as a strategic reassessment in response to returns in recent years not being quite as strong as initially hoped.

LPs are looking to broaden their exposure across the region as demonstrated by the sharp drop in US dollar-denominated China fundraising - it stands at $2.2 billion, half the previous year's total and less than one eighth of the year before that - while other markets, if not expanding, are certainly not dropping to the same extent.

Japan is the big beneficiary, with $5.1 billion raised so far this year, nearly double the 2012 total. Economic reform is a factor but it is worth noting that a lot of the capital raised went into government-linked funds tasked with reinvigorating small business. South Korea shares some similar characteristics but 2013 has seen final closes in the region of $500 million by Anchor Equity and H&Q. And then MBK will deploy about one third of its corpus in the country.

Southeast Asia also has some emerging stars, even though the market remains relatively shallow and the handful of larger GPs haven't closed funds in the past 12 months. Southern Capital closed its third fund above target at $400 million after reining in its strategy to focus purely on Southeast Asia mid-market buyouts.

First-timers KV Asia and Creador also gained traction, albeit with smaller sums than they had hoped, while Armstrong Asset Management and Quadria are new specialist plays, targeting cleantech and healthcare, respectively.

 

INVESTMENT: EMERGING BUYOUTS

South Korea - and to a certain extent India - establish themselves as interesting buyout destinations as growth deals struggle due to exit uncertainty

Only three of Asia's major private equity markets have seen stronger deal flow in 2013 than the previous year: Australia, India and South Korea. They are among the few bright spots from a period in which a total of $50.9 billion has been committed to Asia by global, regional and national funds. The full-year total should surpass the post-global financial crisis nadir that was 2009, but only just.

It should be noted, however, that the Australia figure is deceptive. Of the $10.3 billion deployed, more than half can be traced back to one infrastructure deal: the acquisition of a 99-year lease of Port Botany and Port Kembla by Abu Dhabi Investment Authority, IFM Investors and four local superannuation funds. TPG Capital secured poultry producer Inghams Enterprises for $901 million, but beyond that it has not been a stellar year for buyouts.

Only five other deals surpassed $200 million, compared to 13 in each of the two previous years, although further down the food chain - into the territory of lower mid-market buyout funds - activity is more consistent.

India, by contrast, is seeing more buyouts than ever before. It remains a predominantly growth capital market, with these transactions accounting for close to half the $7.4 billion deployed so far in 2013. But uncertainty over public market exits and the country's economic trajectory has seen minority deals dwindle.

Buyouts, meanwhile, total more than $1.95 billion. Control investments have previously crossed the $1 billion threshold only twice - in 2006 and 2007, when the market was at its peak.

Notably, five of the 12 India-related control deals announced in 2013 have seen an existing private equity investor sell up, including the two largest: KKR's purchase of a majority stake in Alliance Tire Group for a price said to be around $470 million and Apax Partners' $420 million acquisition of software developer GlobalLogic.

There are several forces at work here. One, it is a function of GPs looking for alternative exit routes in a challenging market, including - as it the case with GlobalLogic - VC investors working in partnership with a founder-entrepreneur who retains the largest individual stake in the business. Two, pan-regional funds are in general increasing in size with each vintage so there are more people out there with the ability to write large checks.

Reasons three through five are: generational change among family owners with younger members often more open to giving up control, divestments of non-core assets by conglomerates that often need to pay down debt, and monetization driven by entrepreneurs' inability to scale up beyond a certain level.

In this respect, there are clear similarities to Korea. In addition to succession planning issues, deal flow is being generated by domestic conglomerates coming under pressure to sell off non-core businesses from banks unwilling to rollover debts and a government concerned about the impact of these companies' expansion on small businesses.

Morgan Stanley Private Equity Asia's $215 million acquisition of tissue paper manufacturers Ssangyong C&B and Monalisa Daejeon, plus related assets, falls into the former category - a family owner with no natural heir who was willing to quietly explore sale options. 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.

However, the largest Korean buyout of the year was another kind of divestment. ING has been selling off assets to satisfy the conditions of a post-global financial crisis bailout and MBK Partners picked up the European group's Korea insurance business in a deal worth $1.65 billion.

Private equity investment in the country stands at $7.5 billion year-to-date, exceeding the 2012 full-year total by a mere $100 million. However, the buyout share has increased by two thirds to $4 billion, the highest level on record. South Korea accounts for 18% of total Asia buyout deal flow in 2013, up from 8.6% in 2012 and 1.5% in 2011. Three of the 10 largest private equity deals announced this year - not including infrastructure or real estate - are Korean. No other country is as well represented.

Buyout activity across Asia has been reasonably strong in 2013. Even though Japan saw cumulative deal value come in lower than the previous year - $4.5 billion versus $5.4 billion - it is still the second-highest annual total since 2007. KKR's $1.7 billion acquisition of Panasonic Healthcare is the largest single transaction in the region outside the infrastructure space.

Still, Asia buyouts look set to decline on a year-on-year basis and China is another contributing factor, with the slowdown in private equity-backed take-privates of US-listed Chinese companies. Nine deals worth $6 billion were announced in 2012; six more have followed this year worth a collective $4.6 billion as the valuation differential that drove many of these transactions begins to fade.

China is also central to the ongoing moderation in growth capital investment. The country has seen PE commitments of $15.7 billion in 2013, well short of the previous year's $25.1 billion.

Nevertheless, the drop-off in growth investments - a result of a shuttered domestic IPO markets invalidating the quick-flip model to which many renminbi-denominated funds adhered - was more than matched by a steep decline in PIPE deals, which fell to $2.7 billion from $7.7 billion the previous year. This is because sovereign wealth funds had a relatively quiet year trading in and out of China's Big Four state-owned banks, a reminder that one big transaction can really move the needle.

 

EXITS: GREEN SHOOTS IN CERTAIN MARKETS

IPOs began to pick up towards the end of the year, with the exception of China where frustrated GPs are looking at alternative exit routes

Making up for lost time, and keen to return capital or at least the liquidity of publicly-traded equities to anxious investors, private equity firms end 2013 flocking back to the IPO markets. But only in selected jurisdictions.

The Chinese bourses have remained firmly closed to new listings for more than a year. Even though the securities regulator has indicated that the embargo will be lifted in early 2014, the backlog of companies that have applied to go public stretches into the hundreds. Private equity-backed offerings in Shanghai and Shenzhen delivered proceeds of $31.8 billion in 2010, $20.2 billion in 2011 and $8.5 billion in 2012, which makes this year's zero look all the more alarming.

Portfolio company IPOs for Asia as a whole are the weakest in a decade - $11.1 billion and 87 offerings so far in 2013, down from $34.7 billion and 189 offerings the previous year - and while China is the single largest contributing factor it not the only one.

Hong Kong has seen PE-backed IPOs slump to $5.2 billion from $8.2 billion, $11.9 billion and $46.6 billion in the three previous years. India and Malaysia are also lagging, although for the latter it is more business as usual after a bumper 2012.

There is, however, reason to be positive, particularly given the uptick in fortunes in the second half of the year. Economic reforms in Japan have spurred the Nikkei and private equity firms are taking advantage with 26 offerings generating proceeds of $1.1 billion; the dollar total is only down on 2012 because of Japan Airlines' $8.5 billion IPO and the supporting fund in that case - Enterprise Turnaround Initiative Corporation - does not represent traditional private equity capital.

Australia is on course for its second-largest year on record, with more than $1.6 billion generated by Dick Smith Holdings (Anchorage Capital Partners), OzForex Group (The Carlyle Group, Accel Partners and Macquarie), Virtus Health (Quadrant Private Equity) and Nine Entertainment (Apollo Global Management and Oaktree Capital). Up to $475 million more will come from Crescent Capital Partners-owned Cover-More Group before year end.

Hong Kong has also seen more traction as 2013 has progressed. Thirteen of the territory's 21 private equity-backed IPOs have happened since September and in only a handful of cases did PE firms participate as cornerstone investors, effectively supporting an IPO that might otherwise struggle to be fully covered rather than building up a company towards a public market exit.

Furthermore, the US capital markets - which have been wary of Chinese private enterprises ever since the spate of accounting scandals in 2011 - are opening up again. There were 33 private equity-backed Asian listings on US bourses in 2010; this fell to 12 in 2011 and then just two the year after that. So far this year there have been six, raising $657 million between them.

Asset owners and IP arrangers are certainly being more careful about what they put in front of US investors. Of the six offerings, only Qunar has yet to turn profitable but it has a strong strategic backer in majority-owner Baidu.

Sports lottery provider 500.com (Vision Knight Capital and Sequoia Capital), classifieds site 58.com (SAIF Partners, Warburg Pincus and DCM), online retailer LightInTheBox (Ceyuan Ventures, GSR Ventures and Trustbridge Partners) and semiconductor manufacturer Montage Technology Group (AsiaVest Partners and Intel Capital) all entered the black in 2012 or early 2013.

China VCs have also found a new exit channel in the form of trade sales to tech giants such as Baidu, Alibaba, Tencent Holdings and Sina. As IPOs dwindled - 98 offerings by Chinese companies on any bourse generated proceeds of $16.8 billion in 2012, but this has fallen to 25 offerings and $5.7 billion in proceeds in 2013 - so trade sales have ballooned to an all-time high of $7.7 billion.

Private equity investors across the spectrum report that they have seen a significant transformation in the nature of strategic interest in recent years, with domestic and Asian buyers far more prolific than they once were.

China's leading technology players - once VC-backed start-ups themselves - have been particularly active as they pursue diversification through M&A. Baidu, Alibaba, Tencent Holdings and Sina have between them committed $2.5 billion across 15 deals so far this year. In the eight years to 2010, acquisitions totaled $628 million.

Baidu has been the biggest spender: it picked up 91 Wireless from NetDragon Websoft and VC investors including IDG Capital Partners, DT Capital Partners, ID TechVentures and Vertex Venture for $1.85 billion; and PPS' online video business for $370 million, creating an exit opportunity for investors including Ceyuan Ventures and Qiming Venture Partners.

Asia exits have, on the whole, disappointed in 2013, coming in at $37.8 billion compared to $53.3 billion in 2012 and $49.2 billion in 2011. IPOs were inevitably down year-on-year, but so too were open market exits and trade sales. And despite all the talk about secondary transactions, they also fell sharply from 2012. Of the $30 billion in trade sales last year, $12.8 billion comprised business between private equity investors; so far this year, secondaries account for just $5.6 billion of $23.9 billion in trade sales.

There are pockets of activity (India secondaries have surpassed last year's record high of $1.5 billion) and the 2012 figure was deceptively high (for example, it included Temasek Holdings buying a minority stake in Industrial and Commercial Bank of China from Goldman Sachs for $2.3 billion), but the transfer of control from one private buyer to another remains a relatively rarity in Asia.

Of the 20th largest exits in 2013, only two fit this model: KKR's purchase of a controlling stake in India's Alliance Tire Group from Warburg Pincus for around $470 million; and MBK Partners' acquisition of Japanese coffee shop chain Komeda Coffee from Advantage Partners for $483 million.

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• Topics
• Fundraising
• Investments
• Exits
• Greater China
• South Asia
• North Asia
• Southeast Asia
• Australasia
• buyout
• Growth capital
• Fundraising
• Exit
• IPO
• Trade sale
• Secondaries
• Asia