Asia GPs must spend more time, effort extracting value - survey

“You used to be able to buy something at a cheaper multiple, drive a bit of growth, and sell for a higher multiple. Now you need to focus more on value creation,” said Johanne Dessard, a global practice director in the firm’s PE practice. “I expect the trend of longer holding periods to continue, especially as the multiples are already at high levels. If they were to stay the same or decline, that would raise questions about how investors are going to drive the same level of profit and return.”

Bain’s 2018 Asia-Pacific Private Equity Report notes that dry powder in the region had reached $225 billion as of December 2017, up from $170 billion the previous year. Median valuations for private equity deals were just 3% lower than the record level set in 2016, and while the average EBITDA-to-enterprise value multiple fell to 14.1 – ending four years of consecutive increases – it was still above the US average of 10.3.

This came as investment activity hit unprecedented highs. Asia Pacific accounted for 23% of global private equity assets under management in 2017, up from 9% a decade earlier, while private equity’s share of overall regional M&A hit 17%, compared to a range of 8-12% over the preceding 10 years. Nevertheless, the industry remained cash flow positive despite these large capital calls, with $1.20 returned for every dollar invested in 2014 to September 2017.

Although an improving macro climate and a greater acceptance of private equity among company owners are key contributing factors to the increased deal flow, Asia-focused managers – like their global counterparts – are being increasingly aggressive as they look to deploy ever-larger reserves of committed capital. This is particularly apparent at the upper end of the market 

According to AVCJ Research, total private equity investment in the region came to $209.6 billion last year. There were 32 transactions of $1 billion or more – compared to 17 in 2016 and 24 in 2015 – and they accounted for over half of the capital deployed. Japan and Southeast Asia saw the biggest gains in deal value; they also saw their largest-ever PE buyouts. Of the 32 billion-plus deals, nine were growth-stage technology investments and 17 were buyouts, including eight take-privates.

The top two challenges cited by GPs that participated in Bain’s survey were a lack of attractive deals and valuations of potential targets being too high. More than 70% said competition increased in 2017, especially from regional and local private equity firms, and they see a clear decline in proprietary deals. At the same time, value creation drivers are continuing to shift from multiple expansion and leverage to topline growth, margin expansion through cost controls, and M&A.

“GPs need to flex new muscles to pull these levers. We hear debate around commercial excellence and the ability to drive growth by tapping into pricing, product categories, and segmentation of clients. We have seen some reluctance from PE funds to pull these levers because it requires long-term initiatives, but now that is picking up,” said Dessard.

In addition to commercial excellence, Bain identifies prioritizing talent recruitment and embracing digital strategies as the major areas for improving portfolio company performance. The latter is particularly important in terms of establishing how technology can upgrade existing products and services or revolutionize future offerings. However, the survey found that only 5% of GPs in the region believe they are fully prepared to help investee companies manage digital disruption.

Dessard emphasized the importance of “today forward” initiatives as part of due diligence, where a private equity firm tries to understand what is going to happen not only during its ownership period but in the next few cycles as well. For example, a retailer that faces rising competition from e-commerce is likely to be seen by prospective acquirers as a challenging proposition, which might make it harder for a GP to secure an exit.

Investors are also advised to draw up mini development blueprints or value creation plans based on their due diligence, enabling them to move faster on the longer-duration initiatives that ownership is likely to involve. Knowledge networks are described as crucial to helping devise and execute these plans. While internal teams can help manage the ecosystem around a portfolio company, the knowledge itself may come from the outside.

“If you have a Google expert in-house that individual might quickly become irrelevant, but having an ecosystem that allows you to tap into people like that – and have some of them sit on the board and help the company drive digital initiatives – is going to be helpful,” Dessard said. “A lot of PE firms in Asia now have expert networks. Some people will be almost on the payroll and others can be called on at an agreed rate to drive certain projects.”

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• Topics
• Buyouts
• Expansion
• Greater China
• North Asia
• Southeast Asia
• South Asia
• Performance
• Asia
• GPs
• China
• Japan
• India