LPs warn of impending downturn in Asia

Ontario Teachers' Pension Plan (OTPP) has 70% of approximately C$30 billion ($25 billion) in private equity assets held in direct investments across 50 portfolio companies. Olivia Ouyang, a director for private capital with the pension plan, said this results in greater volatility than is typically found in an LP portfolio, making the operational focus especially important.

"[We are] making sure we have the right management in place and making sure that when we put financing in place it is covenant-lite, so if there is a financial downturn and a cash flow issue, companies will not run into trouble," she told the Hong Kong Venture Capital & Private Equity Association's (HKVCA) China Forum. "We anticipate a downturn and we are actively preparing for that."

OTPP's preparations also include securing downside protection on investments by selling minority stakes in companies it controls and considering commitments to special situations funds that could take advantage of any downturn. Other LPs are of a similar mind, with Doug Coulter, a partner at LGT Capital Partners, identifying secondaries as an attractive opportunity in the event of a slump in asset prices.

"Globally, we are seeing a lot of pro-cycle market behavior. Capital raising is at an all-time high, dry powder is at an all-time high – although if you look at dry powder relative to GDP it is much worse in the US and Europe compared to Asia," Coulter said. "We don't know which the best vintage years will be, so we have to invest across the cycle, but it doesn't feel like these will be the best vintage years."

He noted that private equity is an idiosyncratic business and investors can still find value by being selective – the average entry multiple for LGT's Asia co-investments last year was 8x EBITDA while the market average was in the low teens – but value is thin on the ground. "There is not much value anywhere in Asia Pacific," Coulter said, before identifying emerging China buyouts as an area of interest. OTPP is also keen on this area, with Ouyang particularly keen on carve-outs from multinationals.

Edmond Ng, a managing partner with Axiom Asia, also said that investors must be careful in the current climate, observing that discipline in terms of deployment pace is crucial given there are limited ways to hedge against a downturn. However, should the market take a turn for the worse in Asia, he doesn't expect it to be as bad as the fallout from the global financial crisis.

"Valuations are not at 2008 levels when deals were being done in Australia and New Zealand at 13x EBITDA and 11x was in debt," Ng said. "Now EBITDA is under 10x and leverage is below 50%. Also, the debt is largely being provided by local banks so there is no currency mismatch."

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• Topics
• Greater China
• LPs
• Buyouts
• Fundraising
• Financing
• China
• HKVCA
• OTPP
• Axiom Asia Private Capital
• LGT Capital Partners
• Leveraged finance