PE’s love-hate relationship with corporates

Theoretically speaking, corporates - able to pay higher prices for assets based on their longer term view and ability to create synergies with existing businesses - are ideal buyers for private equity portfolio companies. However, with secondary buyout transactions on the rise (see page 9), corporations and PE firms have found themselves engaged in fierce competition for the same deals.

Although the relationship between Asian corporates and private equity dates back many years, it probably started blooming in the mid-1990s before the Asian financial crisis, when pioneering private equity firms fed on "corporate crumbs," i.e. minority stakes in corporate ventures. These deals were sourced through GPs' personal relationships with controlling shareholders. Most funds were lucky if got a board seat and control was pretty much out of the question. As the numbers show, the business model did not work well and profitable deals were few and far in between.

When the Asian financial crisis came in 1997, it signaled a shift in power and private equity firms, especially the larger global players, were now in the driver's seat. Armed with substantial war chests raised for the US markets, a number of private equity firms were able to capitalize on the opportunity and buy distressed assets available at fire sale prices. Due to problems at home, many corporations chose to sit it out and as a result private equity had its pick of the best deals, and delivered handsome returns.

Then came the tech boom in 1999-2000, when deals were a bit topsy turvy and the "new economy" looked poised to absorb the old one. Tech companies with their ultra high valuations were able to acquire traditional companies with very little more than a promise of future returns. Needless to say, private equity was not very competitive then, although with hindsight, rightfully so.

The dynamics have since become a bit more balanced: GPs, armed with much larger funds and access to substantial leverage, are going against deep-pocketed corporations with both sides scoring points. Private equity firms, despite their best efforts, could not win South Korea's Jinro, while Affinity and KKR were able to gain ownership of OB.

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• Topics
• Greater China
• Australasia
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• Exits
• Buyouts
• Bain Capital Asia
• Archer Capital
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