Private equity firm KKR launches largest Asia fund as valuations sink
Private equity firm's US$6 billion fund to be used as valuations drop amid downturn, along with returns generated by buyouts
A record US$6 billion Asia fund announced by US private equity firm KKR yesterday would be deployed at a time when an economic slowdown and emerging market sell-off has knocked the overall value of Asia Pacific corporations to historic lows.
While the market volatility should offer KKR opportunities to buy low, the record of the private equity industry in Asia shows that investing in the region is not as easy as it seems.
Regulatory hurdles, cultural obstacles and wild market swings have forced global buyout firms to swallow smaller investment returns than they hoped, with the exception of a few home run deals.
But KKR, a storied firm that pioneered the leveraged buyout back in 1976, has managed to find success in Asia even after arriving later than rivals.
The firm has invested and exited China Modern Dairy, Singapore tech firm Unisteel, Japanese recruitment firm Intelligence, and remains invested in South Korean beer and baijiu maker Oriental Brewery.
That success has encouraged investors to return to KKR's second Asia-focused fund in droves, despite companies across the region facing a shortage of available money amid concerns of credit tightening.
"In private equity, you can make a lot of money in horrible macro environments," said Doug Coulter, head of private equity for Asia Pacific at LGT Capital, which allocates money to private equity funds. He was speaking at a Hong Kong Venture Capital Association event last month.
Most private equity portfolios have a few investments that may prove to be more difficult than expected. For KKR, the stake it purchased in Chinese investment bank CICC looks to be under pressure.
The bank, once China's top investment bank, has steadily lost market share since the KKR deal, hit by tough competition and a steep slowdown in Chinese stock issuance. The MSCI Asia Ex-Japan index is trading at 1.4 times book value, 25.4 per cent below its 10-year median value. The index's price-earnings ratio is also at historic lows.
Investors who allocate money to private equity firms were quick to commit to the last round of Asia private equity funds raised in 2006 and 2007, though the patchy performance of that era has left the investors, known in the industry as limited partners, more selective.
Thus the low prices on offer have not translated to an easy fundraising climate.
TPG Capital, which started raising a US$5 billion fund around the same time as KKR, is still on the road raising money, and is expected to close short of its target, according to people familiar with the matter.
Carlyle was also still in the process of raising a US$3.5 billion fund that would be its fourth for the region, sources previously said. The third fund, closed in 2010, was US$2.55 billion.
KKR's ability to raise a large fund relatively quickly was due in part to the performance of its first Asia fund, according to private equity investors.
The California Public Employees' Retirement System, the largest US pension fund better known as Calpers, has invested US$237.5 million in cash into KKR's first Asia fund, according to the Calpers website, after committing US$275 million to it in 2007. So far, Calpers' net internal rate of return on the fund stands at 13.5 per cent, Calpers says.
By comparison, Calpers has invested US$314.2 million in cash into TPG Asia's fund V, after committing to US$375 million that same year.
So far, the pension fund has earned a net internal rate of return (IRR) of 0.3 per cent, according to the website.
KKR is ahead of peers in Asia, though Affinity Equity Partners - an Asia focused private equity firm - earned Calpers a 16.5 per cent net IRR on a US$125 million investment into the 2007 Affinity Asia Pacific Fund III.
The wind appears to be at the back of KKR's Asia team in the current financial climate, as a drop in initial public offerings and bond volumes across the region means corporations have fewer options when it comes to raising cash.
"There are so many more interesting transactions you can do today in the environment we're in because there are challenges," said Derek Sulger, founding partner of China-focused private equity firm Lunar Capital Management, also speaking at the HKVCA event.
The perception of Asia's growing investment opportunities has kept money flowing to the buyout industry, with 22 per cent of the global total of private equity funds being raised as Asia-focused, compared to 21 per cent as Europe-focused, according to data provider Preqin.