AVCJ Asian Private Equity Barometer sees sustained Asia Pacific recovery in 2009

China is also coming to the fore as an investment destination after a low first quarter, leading the region with just over $6.1 billion. However, much of this was from a single deal that stretched the definitions of private equity – Hopu Investment Management and Temasek Holdings’ purchase of a 3.6% stake in China Construction Bank, for just under $4.6 billion. Meanwhile, Kohlberg Kravis Roberts & Co. partnered with Affinity Equity Partners in a 50:50 JV to take control of South Korea’s Oriental Brewery from Anheuser-Busch InBev for $1.8 billion, in a deal already received as a bell-wether transaction for the buyout sector regionally and worldwide.

Activity up, strategy concerns persist

Transaction volume across the region showed a less positive trend, declining to just 154 deals. However, with significant amounts of capital being invested, few industry participants or commentators appear concerned. As well as the CCB and OB deals already cited, Singapore’s Temasek Holdings invested $671 million into one of its own assets, Neptune Orient Lines; a consortium including Farallon Capital Management and TPG Capital put $537.8 million into Indiabulls Real Estate; Australia’s Archer Capital announced a $568.7 million buyout of Energy Developments; and Bain Capital Asia committed some $446 million to China’s GOME Electrical Appliances.

However, concerns do persist about the strategies employed by funds to invest their money. Hopu and Temasek’s investment in CCB, for a tiny minority stake, was essentially a private investment in public equity (PIPE), and far closer to a multi-strategy or even hedge fund approach than an accepted value-driven private equity model. Faced with such deals, LPs can legitimately ask what the investment case is for private equity if it simply gives a different way into the public markets. Temasek’s Neptune Orient Lines deal also was far from normal value-driven private equity investing.

China back to forefront

The second quarter of 2009 was reassuring to investors targeting China, as the PRC proved able to absorb significant private equity capital. Furthermore, despite the predominance of the CCB deal, other transactions showed breadth and depth in the PRC market. A BOCI/CDH Investments/Bohai-led consortium invested $425 million for 20% of Chery Automobile, and TPG Capital committed $80.6 million investment for 14.5% of shoe and fashion retailer Daphne International Holdings, dwarfing all but one of the deals in 1H09, with respectable participation by international funds. China – and certainly China-plus-the-HKSE – is clearly recovering as a venue for sizeable transactions. The concerns over PIPE transactions already instanced are mitigated in China by the proviso that traditional buyout firms usually have to opt for these to be able to access opportunities at all.

The first quarter’s leading markets, Australia and Japan, retreated to fourth and sixth place behind South Korea and India in 2Q09. South Korea, second most popular investment destination with over $2.27 billion of deals, benefited from the iconic KKR/Affinity/OB transaction, and from more local dealmaking, which saw a complicated series of transactions by the local partnership of IMM Private Equity and Mirae Asset MAPS Global Investments picking up almost 50% of Doosan Defense System & Technology for almost $172 million, 10.1% of Korea Aerospace Industries for $75.7 million, and 49% of SRS Korea for $42.9 million.

India, meanwhile, recorded just over $1.3 billion of deals, double its 1Q09 total of just $655 million and contributing one deal, the consortium investment into Indiabulls Real Estate, that actually made the Top Ten list for the region in 2Q09. The rest of the Subcontinent’s major transactions continued the financial services/real estate theme, amassing almost $800 million of deals, though the $500 million of transactions in other sectors at least showed some depth and variety in the Indian market. Caldwell Investment Management picked up 5% of the National Stock Exchange of India for $130 million, while Norwest Venture Partners India also took up 2.1% of the same target for $53.6 million – a somewhat surprising move for an ostensible VC investor.

PIPEs predominate across Asia

Although buyout transactions, facing severe challenges in their core Western markets, saw decent performance in Asia Pacific in 2Q09, PIPE deals predominated numerically, with nearly $6.7 billion of transactions, or over 55% of regional investment, while buyouts delivered just under $2.6 billion, or just over 21%. Expansion and growth capital deals, often instanced as the preferred strategy for capturing Asia’s growth, came third with 15.5% of all capital committed, or almost $1.9 billion.

This marks a retreat from the 77% share enjoyed by buyouts in the first quarter, even though the Asia Pacific buyout deals are now arguably more significant on the international stage. The numbers at least reinforce the fact that Asia Pacific deal structures and financial institutions can both support significant transactions. Execution risks, however, loom large in some areas. Lone Star Japan Acquisitions’ $1.2 billion 100% buyout of troubled J-REIT New City Residence Investment Corp. could have transformed the fortunes of Japan’s private equity market if it had gone through. However, a shareholder and creditor challenge blocked the deal, at least for the time being, leaving Japan recording just $172 million of activity from only ten deals in the quarter.

Sectors see financials hold up

Investment patterns by sector showed financial services, including real estate, continuing to dominate as the preferred sector, with over $5.4 billion of deals. Some might challenge the relevance of this statistic, when the Hopu/Temasek/CCB deal accounted for so much of it. However, the predominance of financial services deals in India also shows that the theme is not confined to just a few large China PIPEs.

Consumer products and services deals, matching the number of financial services transactions at ten deals apiece, also delivered over $2.2 billion of investments, indicating that investors are indeed ready to tap Asia’s relatively robust consumer markets through various assets, especially in China and India. Transportation and distribution is clearly an important theme, with $1.47 billion invested in eleven deals, though most of the capital volume at least was in Singapore’s state-connected transactions.

Investment stalled or waiting game?

Asia Pacific private equity as a whole seems to be rebounding off the bottom of 4Q08, and the renewed activity in China and India especially – venues with much capital and many hopes riding on their fortunes – offers encouraging prospects for the rest of the year.

"While the deals may be a sign that the M&A market is beginning to rebound, it remains fragile. It may take a few more large deals before we can really call this evidence of a strong market recovery. Borrowing on favourable terms is still hard to come by, and these large deals will need to demonstrate value in order to restore investor confidence," cautioned Honson To, Partner and Asia Pacific regional head of private equity at KPMG. "It also remains to be seen whether the recent run of Chinese IPOs is a good or a bad development for private equity funds trying to do deals there, especially since valuation expectations are on the rise."

"Asia Pacific appears to be cementing its newly dominant role in global private equity,” remarked Paul Mackintosh, Managing Editor at AVCJ. “If the Bank United FSB deal in the US, and the Candover/Charterhouse Wood Mackenzie deal in the UK, represent the limits of the possible in Western private equity c. 2Q09, then Asia clearly is matching, and in many respects, exceeding, the performance of private equity’s traditional core markets."

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