Capacity limits in AsiaPac?

The leverage instrument of choice – though not in Asia – for the buyout boom that peaked in 2005-08, the CLO repackaged the leverage debt on LBO deals into tradable instruments sold on to institutional investors around the world. The packages commonly featured the so-called term loan B, a facility with a portion for non-bank investors – the institutions. At the height of the boom, they were regarded as more important than bank debt itself as a financing channel, but since the GFC, they have fallen sharply out of fashion, as investors focus on the unquantifiable risks and unpredictable exposures that go along with the structure.

As noted, these never caught on in Asia Pacific, where the institutional investor base was broadly too fragmented and conservative to buy CLOs, and firms and their advisors often lacked the experience and skills to issue them. A few pioneers attempted such structures, but such initiatives mostly dried up as demand withered among Western IIs.
Despite prognostications of a CLO revival, and the clear resurgence of the US buyout market recently, there are few signs of a return to boom-time demand levels for these instruments – yet. For now, Asia Pacific will probably continue on its traditional route of financing private equity deals with senior debt, plus some mezzanine. But this has more implications for regional private equity than meet the eye.

As banking sources have pointed out, banks as LBO capital providers have different timing and returns requirements to institutional investors. Part of the beauty of the so-called term loan-B market in the US was that the institutions usually had considerably longer time horizons as investors than the banks. They also provided a far broader and deeper reserve of capital for buyout players to fuel their deals.

Credit to Maarten Ruijs at CVC Asia Pacific for driving the thesis regionally that, “capital drives the market.” In other words, as private equity’s firepower moved up in the region, so targets and deal opportunities of unprecedented size would be unlocked. Subsidiary to this thesis was the contention that Asia is not short of large assets per se, just available ones. With more leverage to draw on, private equity could therefore even become a serious contender at the true top end of Asian business, alongside or toe to toe with the largest conglomerates and business families. 

Post the GFC, though, the prospects of the existing capacity limits on deal size being breached are still hazy at best. Bank leverage, furnished by lenders still concerned by – if not directly exposed to – lingering toxic debt, and with specific shorter-term returns requirements, will keep the market at the currently-accepted norms of $3 billion maximum deal size and just over 3x EV for the foreseeable future. Without a CLO market in Asia Pacific, or a real market in CLOs from the region among Western investors, there is simply not the capital, for now, to drive the market higher.

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• Topics
• Investments
• Buyouts
• Maarten Ruijs
• CVC Capital Partners