Timing, sector selection critical to success in Asia deals - AVCJ Forum

Chang Sun, managing partner for China at TPG Capital, told the AVCJ Forum he had looked at three buyout opportunities in the last six weeks involving companies with valuations of $500 million to $1 billion. In two of these cases, the founders want to spend more time with their families. “There has been a mindset change,” he said. “It used to be that founders would continue working into their 80s but successful younger entrepreneurs want to sell out, and this gives us an opportunity for control.”

While PE firms are still providing growth capital to private companies – the deal type that has characterized the rise of the asset class in China – a wider variety of transactions are now available, including state-owned enterprise privatizations, succession planning situations, and corporate carve-outs. Sun identified the opening up of the capital markets and business owners recognizing previous private equity success stories as key contributing factors.

The changing nature of the deal flow means investors can now write larger checks than before. “Deal sizes are getting larger,” said Edward Huang, senior managing director of The Blackstone Group. “Some of it is structural, companies are on average getting larger, and they are usually still growing in some form or another. But we also see succession planning situations, and a lot of these companies are either already global or competing globally.”

Paddy Sinha, a managing partner at Tata Opportunities Fund, noted that India is seeing similar developments, with five of his portfolio companies now approaching $1 billion in annual revenue. In recent years, the large deal opportunity has been supported by demonetization and goods and services tax (GST) reform, which have shifted the focus of the economy from the informal to the formal sector. “It is creating a greater pool of higher quality, investable companies,” he said.

Succession planning, carve-outs and growth investment are relevant themes across the region, whether private equity firms are targeting corporate divestments in Japan or privatizations in China. Nevertheless, each market presents its own challenges and GPs must tailor their strategies accordingly. For CVC Capital Partners, accessing deals in Southeast Asia meant addressing the fact that many of the best assets are held by a relatively small number of family-owned conglomerates.

“These businesses are owned by wealthy tycoons or family groups and they don’t want to sell, so you have to offer something else – help them with strategic initiatives and contribute in terms of value-add,” said Brian Hong, a partner at CVC. “We decided to do real partnerships, aligned on the upside and on the downside, with a seat at the table, a role in business planning, and an agreed exit strategy.”

The private equity firm continues to pursue this strategy, but it has adjusted its approach over the last 12-18 months for all Asian deals in response to concerns about escalating valuations. There is a stronger focus on defensive sectors like healthcare that are underpinned by robust demand that will hold out in the face of downturns. “You want to avoid the double whammy of multiple contraction and earnings contraction,” Hong added. “It is very hard to recover from that no matter what you do to uplift a business.”

Speaking about India, Tata’s Sinha observed that timing is just as important as choice of sector. “Going into the companies and sectors at the right point in time is very important, you don’t want to chase momentum,” he said. “The challenge is picking the right company at the right valuation.”

The AVCJ Forum is being held in Hong Kong on November 14-16. For more information, go to www.avcjforum.com.    

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• Topics
• Greater China
• Southeast Asia
• South Asia
• Buyouts
• Expansion
• AVCJ Events
• CVC Capital Partners
• TPG Capital
• The Blackstone Group