Breaking down the buyout opportunity

These are the three oft-stated drivers of PE buyout deal flow in Asia. But is the hype about increased control deals in a region traditionally dominated by minority growth investments borne out by the reality?

According to AVCJ Research, announced buyout transactions came to $27.5 billion in 2012, surpassing 2010 by a couple of hundred million to become the most prolific year since 2007. Based on current progress, this figure probably won't be matched in 2013, but with $13.3 billion committed in the first seven months, it is unlikely to be a shabby year.

There are, however, a couple of caveats. First, large-cap deals tend to be limited to markets where leveraged financing is readily available: Australia and Japan, followed by South Korea and Singapore.

In 2007, when buyout investment peaked at $45.5 billion, Australia and Japan accounted for 54% of it. Australia has surpassed its 2007 figure only once since then - reaching $16 billion in 2010 - but in every other year the country has generated buyout transactions of at least $5.5 billion, good for one quarter to one third of the regional total.

With Japan not coming close to matching its $11.5 billion figure from 2007, the main reason for the region's strong performance in 2012 was China. The country saw $7.3 billion in buyout transactions, nearly three times its previous high and 28.5% of the Asian total. Focus Media was responsible for $3.7 billion of this and four more take-private deals for US-listed Chinese companies generated another $2 billion.

It is difficult to see how the momentum can be sustained. There deals are all structured through offshore holding companies, allowing leveraged finance to be used whereas for most China transactions it isn't an option. The surge of PE-backed take-privates that occurred in 2012 has now slowed to a trickle, with China buyouts in the first seven months of 2013 coming to $985 million.

Second, buyout deal flow is lumpy. Even in the more established buyout markets, 1-2 large deals really move the needle, and they aren't necessarily traditional corporate private equity.

In 2012, there were seven buyouts of $1 billion or more. Focus Media (The Carlyle Group, FountainVest Partners, CITIC Capital Partners, CDIB Capital and China Everbright), Jupiter Shop Channel (Bain Capital), Woonjin Coway (MBK Partners) and Akindo Sushiro (Permira) fall into the traditional category; Renesas Electronics (Innovation Network Corporation of Japan), Sydney Desalination Plant (Hastings Fund Management, Ontario Teachers' Pension Plan) and Kaingaroa Forest (New Zealand Superannuation Fund and PSP Investments) do not, even though they fit into the broader category of private capital.

In 2012, there were 41 buyouts totaling $12.9 billion in the $100 million to $1 billion range; below $100 million, 62 deals were completed for a total of $2.4 billion. If the aforementioned trends are indeed gathering pace then it is probably happening at the low end of the food chain. Heralding the arrival of a swathe of more diversified buyouts - by opportunity or geography - is premature.

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• Topics
• Buyouts
• The Carlyle Group
• Innovation Network Corp. of Japan (INCJ)
• CITIC Capital
• Japan
• Australia
• China