AVCJ Asian Private Equity Barometer sees some slowdown in Asia Pacific third quarter 2009
The latest Asian Private Equity Barometer shows the recovery in Asia Pacific private equity investment seen over the last two quarters losing some momentum. Private equity investment regionwide in 3Q09 fell to US$8.8 billion, down from $12.1 billion in 2Q09 and $10.3 billion in 1Q09. However, investment processes more than actual deals seem to be plentiful and ongoing, and the situation is expected to improve by year end.
Singapore appeared unexpectedly at the forefront of 3Q09’s investment destinations, with over US$4.5 billion from six deals, but these were very much special cases, particularly the US$3.9 billion ATIC acquisition of Chartered Semiconductor Manufacturing from Temasek Holdings and other investors by Abu Dhabi government-linked Advanced Technology Investment Company (ATIC). Otherwise, Asia’s leading growth economies, China and India, remained the favourite focuses for investments. China attracted just short of US$2.3 billion from 71 deals, while India saw US$932 million from 36 deals – both down from their 2Q09 totals of US$6.1 billion and US$1.3 billion respectively, but still showing signs of healthy underlying deal flow. Japan, meanwhile, showed a pickup to US$588 million from 15 deals from its very low 2Q09 activity level of US$172 million. Australia, however, despite some very large potential transactions, such as as Canada Pension Plan Investment Board (CPP IB) and Ontario Teachers’ Pension Plan’s US$6.3 billion bid for logistics play Transurban Group, only delivered US$68 million of activity off 11 deals.
Volume down despite healthy signs
The total volume of transactions across Asia Pacific was at least fairly robust, at some 158 deals versus the 154 seen in 2Q09. All the same, the decline in deal value might give investors some cause for concern – though an apparently healthy exit environment and signs of recovery in fundraising indicate that other parts of the private equity ecosystem are reviving post-crisis. Significantly, new players to the region brought in the quarter’s two largest deals – ATIC for the Chartered Semiconductor Engineering deal, US specialist energy investor First Reserve Corp. for the US$500 million buyout of oil and gas firm KrisEnergy Holdings, another major Singapore deal. The largest deal executed by an established Asia Pacific private equity firm was the Morgan Stanley Private Equity-backed US$318 million MBO of PRC pharma player Sihuan Pharmaceutical Holdings Group.
All the same, the falloff seen since 2Q09 has its positive aspects, not least that the quarter’s biggest deals are at least true buyout acquisitions, not the giant PIPEs for small minority stakes seen in 2Q09, typified by Hopu Investment Management and Temasek Holdings’ purchase of 3.6% of China Construction Bank for just under US$4.6 billion. True private equity dealmaking appears somewhat recovered in contrast, with buyouts accounting for 57.4% of 3Q09’s total activity, growth capital 19.8%, and PIPE financing only 12.1%.
Singapore briefly on top, China and India still strong
Singapore’s unusual dominance of the region’s private equity activity in 3Q09 may or may not repeat if Temasek Holdings sheds any more major assets, but in any case, offers little chance for third-party investors to participate. The Lion City’s third largest deal, Pamplona Capital Management’s US$110 million acquisition of the local operations of Global Tender Barges, argues for a continuing strong petrochemicals theme in Southeast Asian private equity, but not for strong domestic deal flow – the deal originated out of a Norwegian parent, with a UK fund investing.
China’s falloff in headline deal value, as already mentioned, owed much to the absence of giant PIPE investments into major bank entities. Without these, the PRC seems still to be delivering solid mid-market momentum, with 55 deals in 2Q09 up to 71 transactions in 3Q09. PIPE financings still accounted for 41.5% of these deals, however, at US$950 million, but at least the quarter’s largest China deal, Morgan Stanley Private Equity’s US$318.2 million acquisition of Sihuan Pharmaceutical Holdings Group, was a 100% buyout. Goldman Sachs also continued its exposure to China PIPEs, already evidenced by its LP position in Hopu, through its US$243.6 million acquisition of a 12.1% stake in Geely Automobile, while Hopu itself took 6% of China private equity success story China Mengiu Dairy for almost US$236 million, and Hony Capital and TPG Capital partnered to take 10.3% of retail play Wumart Stores for US$197 million.
India, now third placed behind China for 3Q09 at US$932 million from 36 deals, exhibited a much smaller shift in value or numbers from 2Q09’s US$1.3 billion from 35 investments, and signs are that the Indian market will remain consistent over the next few quarters. CPP IB, already active in Australia, participated once again in India in 3Q09, in partnership with Kohlberg Kravis Roberts & Co., taking a 15% stake in Aricent Technologies for US$255 million. IDFC PrivateEquity, along with Oman Investment Fund and SREI Infrastructure Finance, delivered another TMT deal – an infrastructure one – with a US$224.4 million investment into Quippo Telecom Infrastructure, and also bought out BP Energy India’s wind power interests for $95 million.
Japan, often disappointing of late in investment numbers, saw a revival led by local players, rather than major international firms, headed by Marunouchi Capital led with its US$215 million investment for 33.4% of local DIY and home improvements leader Joyful Honda. Ant Corporate Advisory, successor to ant capital, took 50% of IT-to-financial-services conglomerate CSK Holdings Corp. for US$157.5 million – as well as investing US$62.3 million in homegrown computer security company VarioSecure Networks. MUL Principal Investment, an investment arm of Mitsubishi UFJ Lease and Financing, bought fruit jelly manufacturer Tarami KK from Sun Capital Partners Inc. for US$89 million, as the latter player exits from the Japan market.
Australia, meanwhile, so often the region’s leading market, with US$5.47 billion of deals in 1Q09, saw no substantial control deals in 3Q09. The largest transaction was Navis Capital Australia’s investment in specialist IT recruitment business Peoplebank Australia at just under US$49 million for a 23% stake in the company. None of the other Top Five deals – including Lend Lease Ventures’ US$8.4 million investment in Windlab Systems, and CM Capital Investments and GBS Venture Partners’ US$3.6 million Sunshine Heart deal – even broke through the US$10
million level.
Buyouts lead despite financing challenges
As already indicated, buyouts across Asia Pacific fared surprisingly well, given their low showing in some of the region’s key markets, such as China. India, in fact, delivered even less in the way of buyouts, with some 82.8% of local activity in growth and expansion capital against only 10.2% of control deals. Japan at least vindicated its reputation as a buyout investment venue, with 56.6% of its quarterly activity delivered by buyouts, as against 39.5% of growth capital.
Continuing challenges in acquisition financing are one explanation for the third-quarter slowdown in deals: sources report that banks have still not recovered the stability and optimism needed to sustain strong momentum. More significant, perhaps, are the resurgent public markets in Australia, China and India that have posed a significant competitive challenge to private equity financing. Australia accounted for 25% of the entire total of global equity raisings through the first two quarters of 2009, as often indebted Antipodean businesses sought relief in a spate of heavily discounted rights issues. Also, the same high capital markets mean that company values are not necessarily persuasive, especially in India, where deals are especially benchmarked against public markets valuations, and expectations are reportedly very high. The positive side of this stock resurgence is that private equity funds are enjoying very attractive exit opportunities, with TPG Capital listing Myer successfully in Australia in a major win for the private equity sponsor.
Sectoral trend led by TMT
Investment patterns by sector showed TMT moving to displace financial services as the key sectoral play for 3Q09, at US$4.5 billion from 41 deals, led by the Chartered Semi deal in Singapore and Aricent in India. Mining and metals also predominated, at US$634 million from 6 deals, and in this sector the First Reserve KrisEnergy deal in Singapore showed the predominance of oil and gas-related deals. Financial services saw US$563 million from 14 deals, with the Ant Corporate Advisory CSK Holdings deal heading up a decidedly mid-market trend in sectoral activity at US$157.5 million.
Consumer products and services, often put forward as the sector most likely to deliver Asia’s growth to investors, saw relatively limited activity in 3Q09, with US$454 million from 13 deals, the largest being the US$235.7 million Hopu investment in China Mengniu Dairy. The healthy level of non-financial services investments, at US$454 million from 13 deals, and retail/wholesale deals, at US$417 million from 4 deals, however, indicate that the broader Asia Pacific consumption thesis remains intact, and active.
Investment recovery only partial
Asia Pacific private equity, then, despite a workmanlike third quarter, seems to have lost a little of the global lead it enjoyed in 2Q09, when Kohlberg Kravis Roberts & Co. and Affinity Equity Partners’s $1.8 billion LBO of South Korea’s Oriental Brewery dominated the global standings. And, although a better exit environment and even an improving picture for fundraising point towards a more fully-rounded recovery and good prospects for 2010, investors would still do well to temper hope with caution.
"On the face of it, global deal activity has been significantly affected by the global liquidity crisis. The number of deals and the size of deals have both shrunk,” explains Honson To, Partner and KPMG’s Asia Pacific regional head of private equity. "But this is not the whole story. Other issues such as valuations, regulatory uncertainty and lack of confidence have also contributed, and many of the heavy-hitting players in the private equity industry concede that debt can still be found when the right opportunity arises. The more buoyant exit environment and signs of a recovery in fundraising both underline the fact that the investment dip is likely temporary, and that private equity firms are still able to profit from the ebullient capital markets and deliver returns to their investors.”
“Asia Pacific, though now established as a solid investment destination post the crisis, seems to have been pulled back by lingering effects of the earlier upheavals,” remarks Paul Mackintosh, Managing Editor at AVCJ. “Although broad fundamentals for the regional private equity recovery appear established across all parts of the ecosystem, from fundraising to investments to exits, the third quarter’s figures show that a resurgence cannot be taken for granted, and executing investments remains challenging.”
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