Asia Pacific continues to be a beacon for private equity

Asia Pacific continues to be a beacon for private equity as investors target the region in search of new opportunities according to a research commissioned by Ernst and Young.

The research examines private equity trends and focus in Asia-Pacific, providing a bright outlook for private investment in the region:

•  While private equity investment is expected to increase across Asia-Pacific, Greater China will drive deal activity, according to 70% of respondents for the report.

• Local funds continue to have an advantage over their global counterparts in both raising capital and making acquisitions due to their deep market penetration and relationships in Asia Pacific.
• By sector, buys in energy and retail are expected to attract the most interest, driven by energy needs across the world and growing middle classes in Asia-Pacific, according to 80% and 72% of respondents, respectively.
• 46% of respondents believe private equity activity in Southeast Asia will expand significantly in 2013.
• 79% of respondents say strategic competitors and cash-rich corporates will present the largest challenge to acquisitive private equity firms in the next year.
• Striving to create value, private equity firms are increasingly using internal operating partners to help implement strategic and operational improvements in portfolio companies.

Mergermarket, the independent Mergers and Acquisitions (M&A) intelligence service, and Remark, the publishing, market research and events division of The Mergermarket Group, in conjunction with Ernst & Young, hosted a panel discussion recently to promote the launch of the report Asia-Pacific private equity outlook 2013.

While Europe and North America continue to face challenges post-financial crisis, economies in Asia-Pacific are seeing record growth, providing added incentive for private equity players to enter the arena.

According to Mergermarket data, 2012 saw 278 deals in the private equity space worth more than US$ 33 b.

A rising familiarity with the private equity model among governments and potential sellers across the region is also providing encouragement as private equity firms begin to establish a greater foothold in Asia-Pacific.

Based on 86% of respondents in the report, private equity in Asia-Pacific will follow an upward trajectory, led by investments into Greater China.

The spotlight will also shine brighter on Southeast Asia – with 85% predicting increased deal activity – as economies across the sub-region continue to post high-growth figures and provide promises of higher yields for investors. Already, global private equity firms have taken note, making a dash to set up operations and start making buys across Southeast Asia.

“We are seeing an increasing shift in interest and investment strategy to Southeast Asia by both limited and general partners. There is Singapore with its strategic location, accessibility to the rest of the region, established financial infrastructure and attractive tax regime, and newer markets like Myanmar and Vietnam that have a great need for investment. With its many markets at different stages, Southeast Asia is very exciting for private equity investors,” says Michael Buxton, Asia-Pacific Private Equity Leader at Ernst & Young.

Similar to last year’s report, making acquisitions remains atop private equity firms’ priority list, followed by raising new capital and improving the performance of portfolio companies.

Buys are expected to be prominent in the energy sector, especially as demand for resources skyrockets globally.

The report also indicates that as private equity activity increases in the region, investors are also becoming more sophisticated. Sector specialisation is becoming more prominent, and value creation strategies are on the rise.

These are becoming increasingly important as a means of differentiation for fund sponsors who are facing more competition for capital from limited partners.

Buxton says: “There is a growing focus on exits and maximising value at exit. To ensure this value creation is executed, we are seeing an increasing use of operating partners to drive strategic and operational improvements in portfolio companies.”

Respondents also expect valuations to continue to rise in 2013, an extension from the previous year. Concurrently, some respondents anticipate that buyers will face an impasse with sellers over valuation, while a majority believe the valuation gap will remain on par with previous years, providing enough space for deals to close.

Another factor affecting deal valuation will be competition from strategic investors, specifically in sub-regions like Southeast Asia. Similarly, sovereign wealth funds are also expected to challenge private equity houses for assets.

“Healthy corporate balance sheets, low levels of debt and ready access to capital are positioning corporate buyers in China and Southeast Asia as significant competition to private equity investors in these sub-regions,” Buxton says.

Exit markets in Asia-Pacific were chilled in the past year. Historical Mergermarket data shows that 2012 saw 96 exits worth US$ 13 b compared to 2011’s 104 exits worth close to US$ 36 b.With IPO markets effectively shut, more and more PE investors will look to trade buyers as a more viable exit route. The report was launched at the Asia Pacific private equity outlook 2013 with panellists in the private equity field including Tim Gardner, partner at Latham & Watkins; Thomas Hugger, CFO and COO at Leopard Capital; David Pierce, CEO at Squadron Capital; and Lucian Wu, Managing Director at Paul Capital while Michael Buxton, Private Equity Leader for Asia-Pacific at Ernst & Young moderated the panel.