Asia buyout managers see no shift in return targets - AVCJ Forum

For much of the past decade, private equity firms have talked of underwriting for a 25% IRR, but targets have modified to around 20% in recent years, noted K.Y. Tang, founding chairman and managing partner of Affinity Equity Partners. Despite the fallout from COVID-19, he doesn't anticipate much of a deviation from this new mark.

"First, people understand that if you do nothing, the returns will fall, but most firms now have operational value-add strategies and experienced operating teams," Tang told the AVCJ Forum. "Second, the cost of debt has a big role to play. We are seeing very competitively priced financing – you can get five-year money at 3.5% with 50% coverage."

This view was echoed by David Gross-Loh, managing partner for Asia at Bain Capital, who observed that the massive capital surpluses in the likes of South Korea, Japan and Taiwan will ensure cheap debt remains readily available for the foreseeable future. China is more challenging because local banks are still getting used to leveraged financing, but Yichen Zhang, chairman and CEO of CITIC Capital Holdings, the parent entity of CITIC Capital, noted that it is becoming easier.

"We have been dealing with Chinese banks for the last 10 years, and especially over the last five years – groups like Bank of China and China Merchants Bank are up to speed," he said. "Regulators have been encouraging banks to move from asset-based lending to cash flow-based lending, so the trend is there."

The ability to finance – and refinance – deals is essential as private equity firms ready themselves for longer-than-anticipated holding periods, especially for businesses that have been challenged by COVID-19. While Zhang was explicit in saying CITIC Capital's exits are being pushed out by an average of 12 months, Gross-Loh and Ganen Sarvananthan, Asia co-managing partner at TPG Capital, were more circumspect, pointing to a range of outcomes across their portfolios.

"We had a quick exit from an alcoholic drinks business we held for a 20-month period [Myanmar Distillery Company, exited in 2017] where we felt the operational impact had come in," Sarvananthan said. "At the same time, we will probably see a number of GPs holding for longer as investments continue to perform operationally or the value-add comes in later."

Exit timing is to a large part contingent on two factors: downside protection, specifically how bad the downside could be, which is, in turn, dependent on exogenous forces, the macro environment, and financial leverage; and how significant the upside could be and whether there are multiple ways to achieve that upside. Gross-Loh believes the dispersion between these factors could be greater given COVID-19 uncertainty, but it doesn't necessarily signal a change in outcomes.

"The weighted average holding period isn't going to change that much because there are more ways to facilitate dividend recaps and partial sales to strategics, as well as IPOs because markets in Asia are maturing," he said.

Sarvananthan picked special purpose acquisition vehicles (SPACs) as another trend to watch. All of the capital is currently being raised in the US and a majority of it is being deployed in the US, but a number of SPACs are targeting deals in Asia.

"How these acquire assets and what they acquire and how that works, and whether there is growth of a new SPAC market on the Asian exchanges – a lot could happen over the next five years," he said. 

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Buyouts
• Buyout
• Performance
• Asia
• AVCJ Events
• covid-19
• coronavirus
• Affinity Equity Partners
• Bain Capital Asia
• TPG Capital
• CITIC Capital