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AVCJ
  • Performance

Tectonic shift toward Asia Pacific?

  • Paul Mackintosh
  • 03 November 2010
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It's that time again: another year for Asia Pacific private equity brings round another fixture in the region’s industry calendar – the AVCJ Asia Pacific Private Equity & Venture Forum.

This year, the event’s 23rd, the Forum is being presented as Asia’s Private Equity Week, in line with the four days of events and discussions, closed-door roundtables and networking gatherings, happening in the Four Seasons and other venues around Hong Kong.

Still, there is more to this year’s event than a great many investors jaded with slack returns in Western markets and mesmerized by banner headlines about the rise of China. Of course, there is some truth in that caricature – too much for comfort, maybe, for those concerned about investment discipline. But much of the current momentum boils down to one clear fact: Asia Pacific private equity is now no longer just institutionalized and investment grade to a degree that compares well with the traditional core markets of the US and Europe; it is also visibly healthier.

That really is a new development. Asia Pacific private equity had a long way to go to prove itself to international investors over the last decade. Even now, many are questioning – with less and less justification as time goes by – whether it has returned money over time. And when things really did begin to go well, roughly c. 2005, the whole industry worldwide was going through its great boom period, so Asia’s success story was easy to pass over as part of the bigger picture. But come the GFC, Asian private equity did not blow away as it had done in the region’s last major financial crisis; in fact it proved better grounded and more resilient to the stresses of the great draining away of leverage than the industry in the US or Europe.

Asian GPs now who complain of difficult times for fundraising should walk a mile in their Western peers’ shoes. Distributions in 2009 were down to 20% of their normal pre-GFC levels, and are only now recovering from their historic lows. New fundraising, fueled by distributions, has naturally suffered in turn. Macro growth rates meanwhile are creeping up to some 3% p.a. in the US, and 1.8% in the EU, but debt-burdened Western economies are still in no position to match the impetus of Asia.

The debt problem continues to dominate private equity. Asian deal sizes and volumes may have stayed below Western levels, but international LPs seem far more in favor of Asian-style growth capital deals and smaller fund sizes than the debt-driven buyout Leviathans that used to dominate the industry. Asia never developed the addiction to leverage that put such giants on steroids, and now does not have to face the painful withdrawal symptoms. Plus, Asia faces nothing like the huge overhang of capital that threatens to destabilize private equity elsewhere, and whose effects are yet to be fully felt.

So the industry faces a basic shift in its sources of value creation, from leverage to multiples expansion and operational improvement. Naturally that is going to change the constitutional metabolism of the business. But Asian private equity especially seems likely to benefit relatively more, unless Western private equity can prove that it really has the rerating/repositioning and business enhancement skills to match its ability to corner deals and load on bank debt.

Last year, the rebound from the depths of 2008 was still not fully established. This year the shape of the post-crisis Asian private equity industry is becoming clear, and it seems to be in good shape, even before delving into the attractions of the underlying Asian macro story. These, and the opinions of your colleagues on the topics within these pages, are reasons enough to be alert and engaged in the Forum sessions over the days ahead.

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