Asia fundraising: Demand and supply

How much is too much? This question was asked numerous times in 2013 when KKR closed its second pan-Asian fund at $6 billion, then the largest pool of private equity capital ever raised for deployment in the region. And yet the entire corpus was invested within four years of commencement, following a very active last 18 months in which $2.5 billion was put to work.

The question is now being asked again, with the firm having raised $9.3 billion for Fund III. However, it doesn’t just apply to KKR. Fundraising is on a hot streak globally as LPs respond to the low-interest rate environment by searching for returns in private markets. The day before KKR’s announcement, CVC Capital Partners reached a final close of EUR16 billion ($18 billion) on its latest European fund, a record total for the region. A day before that, it emerged that Apollo Global Management is seeking $23.5 billion for its next vehicle. Should the GP achieve this target, it would be the largest PE fund ever raised.

The risk is that LPs that will flock into similar kinds of strategies and end up with sub-optimal returns. Concerns about valuation bubbles at the top end of the market are frequently voiced. According to Bain & Company, global buyout activity in 2016 was down on the previous year as GPs ran into more competition from their peers – dry powder reached a record $1.47 trillion – and from corporates. Fueled by cheap debt, acquisition multiples in the US and Europe were at or close to record highs.

Asia is viewed by many through a different lens. Common explanations for jumps in fund size include: economies and companies are growing, so the average deal size is going up; the industry is maturing, which means there are more deal opportunities, whether it is ageing founders who are more open to private equity or greater availability of secondary buyouts; and GPs have developed larger platforms and deeper sourcing networks.

Yet at the same time, the flight to quality is well-established, in part because Asian private equity is still relatively unproven. Ever since the global financial crisis, LPs have gravitated towards the relatively small number of managers with track records and brand names alongside their strong investment theses. KKR is the sixth GP to close a large pan-regional fund since the start of 2015. The increases in fund size over the previous vintage range from 29% (RRJ Capital) to 62% (Baring Private Equity Asia).

KKR explained the 50% jump from Fund I to Fund II in 2013 by pointing to the amount of capital it had invested over the previous seven years ($5.5 billion), its expectations for future deal flow, and the growth in its regional platform. Between 2007 and 2013, the number of executives in the region rose from 27 to 101, of whom 51 were on the PE side, while five more offices were opened, taking the total to seven.

The platform has not expanded substantially for Fund III – there are now 60 PE professionals in Asia, although various complementary functions have scaled up – and KKR might argue that the core infrastructure is now in place. Rather, the narrative focuses on a growing opportunity set for large-cap deals, and how KKR’s global expertise can take market-leading companies to the next level. Much of the firm’s recent activity in Japan has been driven by these factors.

The turnaround in Japan is remarkable, the result of a long-anticipated shift in corporate thinking that is delivering carve-out deals for private equity. But KKR is not the only GP exploring this angle. Moreover, structural change in Japan is just one part of a complex landscape. Pan-regional investors have traditionally relied on Australia, Korea and Japan for large leveraged buyouts – which tend to be highly intermediated – and look for steady deal flow, including the odd big-ticket transaction, in other markets.

Private equity in Asia is evolving and this means there will be more opportunities to put capital to work over time. But the principal challenge of deploying a $9.3 billion fund is the same as a $6 billion fund: every market in the region, to some extent and not necessarily all at the same time, must deliver.

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• Topics
• Fundraising
• GPs
• LPs
• Buyout
• Asia
• KKR
• CVC Capital Partners
• Apollo Global Management