Private equity's crisis year, by the numbers

With the numbers now in for the whole of one of private equity's most tumultuous years ever, the general outline of the crisis, and the region's response to it, is coming into focus. And a steady continuing growth in assets cannot disguise the direct impact of the crisis in several key areas of the industry, even while it continues to perform respectably alongside crisis-racked Western peers.

Aggregate capital manages to grow

First off, the total capital under management for private equity in Asia Pacific continued to aggregate steadily, almost as though the crisis had never happened. The total now stands at just above $245 billion across the region, a 10% increase on last year's year-end total of almost $223 billion. (This compares with a global total for funds under management of some $2.5 trillion as at end 2008.) The rate of increase over last year barely slackened from the 2007-08 period, when capital under management rose to almost $223 billion from some $190.6 billion at end 2007.

Some interesting detail on sub-regional and national figures emerges from the overall picture. China and India saw a 21.4% and an 18.6% rate of increase through 2009, close to the top of the figures by region, though bested by South Korea at 24.3%. The developed markets of Australia and Japan, in contrast, saw a 3% and a 4.5% increase respectively.

Ultimately, Asia Pacific private equity is increasing its scope and overall capital pool robustly, in the face of challenging conditions – but it still represents under 10% of the industry worldwide, even in these harsh times. Those who forecast that the region, and especially China, may comprise the largest stock of capital under management anywhere in the long term could have a long wait to see their predictions come true.

Funds fall off … a cliff?

Fundraising over 2009 showed probably the most direct and severe impact of the global downturn – which would have surprised few industry players who witnessed or experience the near-complete paralysis of many leading LPs at the beginning of the year. New funds raised for Asia slumped by just over 70%, to $14.9 billion, against the $50.2 billion raised for the region in 2008.

Philip Bilden, Managing Director with HarbourVest Partners in Asia, remarked that, "2009 will go down as one of the worst years for private equity fundraising around the globe.  Shell-shocked investors (LPs) sat out 2009 for allocations to private equity, due to liquidity concerns, economic uncertainty, and problems elsewhere on their balance sheets."

No national market, however fashionable, was immune from the slide. China saw almost a 70% dropoff to just over $4.4 billion, while Indian-focused fundraising fell 64% to slightly over $3 billion. "Investors continued to seek China plays, notwithstanding structural imbalances and risk in this emerging private equity market," said Bilden. 

Japan, Singapore and Taiwan registered similar declines of over 68%, 63.2% and over 67% respectively. Australia fared worst at almost 81%, while Malaysia saw a hugely disproportionate, but unrepeatable, 753% jump, from a low base of $79 million to $671 million.

"The decrease in fundraising was so extreme in 2009 that fundraising should rebound in 2010 from a low base, even if there is only modest improvement," observed John Fadely, Partner at Clifford Chance. And Bilden predicted, "Across the global asset class, 2010 looks far more promising as investor balance sheets stabilize and allocations to the sector resume."

The raw data is unsettling – out of context. But global fundraising data from Prequin estimates that $245.6 billion was raised internationally during 2009, versus $553.8 billion for FY08 and $624.5 billion for FY07, a 66% y-o-y falloff and the lowest level since 2004. By this global benchmark, the decline in Asia Pacific is sharp, but by no means disproportionate. And as already remarked, market players are anticipating a better year in 2010, because this year has been so bad – and even beyond.

"There could be a backlog in 2010 as the market works its way through the overhang of funds that would have been able to close in 2009 had it been a normal year," Fadely noted. "While fundraising is way down, investments and IPOs are not so much – meaning that there is probably going to be another wave of fundraising in 2011," concurred one leading LP.

Investments hold up well

Investments, in contrast, showed only a negligible dip in 2009, reinforcing ad hoc industry feedback during the year that plenty of Asia Pacific private equity money is finding a home in the distressed situations and revalued opportunities now open in the post-crisis market. New investments shaded down to $53.1 billion from $56.4 billion over 2008, a 6% reduction.

Furthermore, even with this slight reduction in overall value, Asia Pacific's slice of the global investment pie is far larger than in the past. Investment worldwide totaled some $190 billion over 2008, a relatively problematic crisis-racked year, down on $686 billion over 2007. Asia Pacific therefore contributed almost 28% of this total, as against just 13% in 2007. 

Also, the market seems very aware that momentum picked up as the year went on. As one prominent LP remarked, "2H 2009 must have been much stronger by a large margin – investors would really love to see how that momentum [picked up] from the second half onward."

However, looked at more closely, the data is not so uniformly positive or encouraging. For one thing, much of that investment volume came from just a couple of markets, notably Australia. There, the $11.36 billion investment in local toll road player Transurban Group by international direct investment heavyweights Canada Pension Plan Investment Board (CPP IB) and Ontario Teachers' Pension Plan (OTPP), and the former's almost $5.3 billion acquisition of Macquarie Communications Infrastructure Group    produced a huge weighting towards the Antipodes, and accounted for a healthy slice of the entire regional investment volume in 2009. China's figures also benefited from a single huge deal – the almost $4.6 billion PIPE investment by Hopu Investment Management and Temasek Holdings – though the year's total, at almost $12.2 billion, still showed a 15.4% decline. Singapore likewise benefited from the highly government-linked investment by Abu Dhabi's Advanced Technology Investment Company into Chartered Semiconductor Manufacturing Ltd. for almost $3.9 billion, pushing its annual total up to $6.45 billion for a 78.8% increase on 2008.

In fact, only one significant Asian private equity market saw a positive investment uptick over 2009 through purely financial and independent private equity: South Korea, with the $1.8 billion acquisition by Kohlberg Kravis Roberts & Co. and Affinity Equity Partners of Oriental Brewery. Even there, though, the OB deal was trumped by the state-owned – though soon to be privatized – Korea Development Bank, and its almost $2.5 billion acquisition of 50% of Daewoo Engineering & Construction, contributing much of the year's c. $6.1 billion of investments, for a 68.3% increase on 2008.

So, crisis or no crisis, a pattern often seen before in Asian private equity seems to be persisting – government-backed or otherwise highly institutionalized entities make the biggest deals, frequently through PIPEs or other non-canonical mechanisms, leaving the classic, traditional, independently-raised and value-driven private equity funds and their deals with a respectable but not predominating cut of the action. This is not just an argument for purists – the broader investment and policy community that is still watching private equity make its case as a separate discipline across the region might have their attitudes swayed by the pricing and ROI of government-linked deals, or transactions done at levels and through means already available on the public markets.

IPOs still in the lists

With the much-applauded rebound in equities over 2009, private equity at least had a chance to get some properties out the door and into the Asia Pacific public markets to return money to their beleaguered LPs. IPOs did see a slight fall over the year – down 5.4% to $14.5 billion raised versus 2008's $15.3 billion – but activity remained more or less steady over the two years. Closer analysis month by month, however, would have seen a big dip in the first half, especially in the first quarter of 2009, and most of the recovery in the second half. Of the Top Ten Asia Pacific private equity-backed IPOs in 2009, only one listed in the first half of 2009, and that one in May.

Of those Top Ten, it was the Myer IPO, as late as November 2009, that delivered the year's biggest exit win for TPG Capital, with $1.85 billion, marking a whopping 2699.7% uptick in Australia's IPO exit figures for 2009 from the paltry $66 million achieved in 2008. That single IPO accounted for almost all of Australia's $1.86 billion of listing activity in the year. Otherwise, the year belonged almost entirely to Hong Kong, with seven out of the Top Ten IPOs listing on the Hang Seng, including DE Shaw and Goldman Sachs investee Glorious Property Holdings for $1.27 billion in October and Olympus Capital's China Zhongwang Holdings for almost $1.26 billion – in May. One Singapore investee – Avago, invested by GIC Special Investments, KKR, Silver Lake and Temasek Holdings – made the Top Ten list, with $648 million, but there the deal originated out of a US-based transaction, and the venue was also American: NASDAQ. The HKSE essentially dominated the year's IPO stories, just as China dominated the macroeconomic picture for much of the year.

With all the resurgence in 2H09, though, the market still remains well off the almost $65.8 billion of IPO exit value achieved in 2007. GPs and market-watchers waiting for the exit environment to start rising back up towards that peak will evidently have to wait well into 2010. Of course, the picture will look very different once the Carlyle Group's late December $3.1 billion listing of China Pacific Insurance makes its way into the figures, but that remains a story for next year.

"With the buoyant public markets, we expect to see more managers take advantage of the window of opportunity to generate liquidity from their existing portfolios," Bilden said.  "Institutional and strategic investors have shown much interest in participating in the growth of Asian economies, and this is likely to translate into more exit activity for Asian private equity managers."

Trade sales trashed

Market pundits calling a revival in M&A to match the IPO volume of 2009 have not been borne out by the full-year figures, which remained dire for private equity-backed trade sales. Only some $15.9 billion of liquidity was returned to investors through M&A exits during 2009, a 52.9% decrease from the $33.7 billion over 2008. Indeed, the year's largest private equity-backed trade sale was essentially a secondary transaction, with Temasek Holdings selling investee Chartered Semiconductor Manufacturing Ltd. for nearly $3.9 billion to Abu Dhabi's Advanced Technology Investment Co.

At least one of the year's other Top Three trade sale exits was a stellar transaction that concluded a classic test case for Asia Pacific investing – TPG Capital's sale of its 16.8% stake in Shenzhen Development Bank to the mainland's Ping An Insurance for $1.675 billion. Goldman Sachs's almost $1.9 billion sale of just 0.9% of Industrial and Commercial Bank of China also saw a big return, from a miniscule stake, in an exit from a situation fairly far removed from classical private equity. But one of the year's other biggest M&A exits, the $1.1 billion sale by Citi's Japan direct investment arm Citigroup Capital Partners of Bellsystem24 in November, was another secondary deal, with Bain Capital the acquirer. Strategics in the region evidently have nothing like a robust appetite for private equity-backed assets yet, and GPS and LPs will have to wait and hope for their situation and hunger to improve. In the meantime, it seems, a considerable number will be passing assets between each other.

Buyouts, financial services back on top

In terms of the year's investment breakdown by investment stage, 2009, saw buyouts once again well ahead, contributing 56.4% of all deal activity over the year, at slightly under $30 billion. PIPE financings saw a further 20.5% as the second biggest investment category, with $10.85 billion, while growth capital came third at 12% with almost $6.4 billion. The relatively healthy state of Asian banks compared to their Western peers may have helped this predominance of buyouts; so might the relatively immature state of evolution of Asia's leverage financing ecosystem, with exotic – and crisis-damaged – species of financing like the term-loan B market not around to spread their toxins into the Asian investment environment. All told, anyway, probably 2009's best-performing global private equity market – on a relative basis – was heavily weighted towards buyouts.

It seems too early to preach the end of the LBO as an investment discipline, either in Asia or elsewhere. That said, 2009 also might give pause to LPs persuaded by the argument that Asia is a growth capital investment market. Much of the deal volume in 2009 clearly was not growth capital, no matter how precise one wants to be in definitions of stake size and actual control. "The success of deals such as Oriental Brewery illustrate that banks are willing to back the acquisition of quality assets," remarked Bilden.

In 2009's investment breakdown by sector, financial services, traditionally popular and lucrative, also bounced back, accounting for 26.7% of all investment activity at over $14.1 billion. Infrastructure likewise saw a good year, at 22.4% of the total or over $11.9 billion. Another cliché of Asian investment might need re-examination, then: consumer products and services investments delivered just 6.2% of the year's volume, at almost $3.3 billion – though arguably, financial services and infrastructure also count as indirect plays on the habits and expectations of Asia's rising middle classes.

Conclusion: A fickle year

The end result for 2009, then, is encouraging, but uneven, and not an unequivocal win across all aspects of the asset class by any means. Cheerleaders for the fundraising draft hoped to arrive in 2010 have an echoing void to fill from 2009, and inevitably next year's fundraising figures will look better. The key question is how much better, and for who. Industry-watchers worldwide are predicting that funds unable to demonstrate strong return on capital over the 2005-07 vintages are going to struggle in the post-crisis fundraising environment, and many Asia Pacific GPs fall into that category.

Furthermore, the frothy resurgence of the IPO exit markets depends a lot on continuing sentiment, which other market events suggest is still very febrile. The bleak situation in M&A exit activity, meanwhile, suggests levels of corporate distress that are going to take at least another year to work out, and that may drag down the public markets too. Either way, the exit window appears to be banging to and fro in the wind, and cannot give a clear view for nervous GPs. And the reasonably shining state of investment performance in 2009 may not be enough to offset the tarnished luster of the other two legs of private equity's golden triangle.

Asia Pacific's steady growth in capital under management at least shows the industry in the region is robustly managing its way through the crisis, but no one any longer expects the industry to go away as it did after the last major crisis in 1997. Just being able to survive, though, is no longer enough to count as an achievement for Asia Pacific private equity: the real question is how it will thrive in 2010.

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• Topics
• Fundraising
• Investments
• Goldman Sachs
• Temasek Holdings
• TPG Capital
• Philip M. Bilden
• Affinity Equity Partners
• Bain Capital Asia
• HarbourVest Partners
• KKR