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A 15 per cent stake sale in Gree Electric Appliances to a fund backed by Hillhouse Capital for US$5.9 billion was the biggest private-equity transaction in emerging Asia last year. Photo: Shutterstock

Asia-Pacific private equity funds still ‘one step behind’ US, European counterparts, new report says

  • One factor holding back funds in Asia-Pacific may be the region’s more demanding exit environment, according to eFront report
  • Private-equity deals in Asia-Pacific in 2020 at slowest pace since 2012, according to Refinitiv

Private equity funds in China and other emerging economies in the Asia-Pacific region need to consistently deliver substantial net cash distributions to investors to catch up with rivals in North America and Europe, according to a new report by financial services software provider eFront.

In its research, eFront, which is owned by BlackRock, the world’s biggest asset manager, found that private equity funds in China, India, Indonesia and Singapore have matured much more slowly than funds in developed markets. In part, calls for more cash from investors by emerging Asia funds have largely outweighed distributions, leaving them “one step behind” Western counterparts.

But, investors are increasingly looking for places to effectively deploy capital as they seek to avoid negative interest rates in Europe and opportunities to avoid a prolonged exposure to cash, creating an opportunity for the region’s US$1.1 trillion industry, eFront said.

China and other emerging economies in the region are less penetrated by buyout funds than more developed markets, so there is "much more room for growth, according to Tarek Chouman, the eFront chief executive.

“Wealthy families own the most substantial portion of mid-market business in southeast Asia, and we are expecting to see their growth supported by [private equity] funds,” Chouman said, meaning there may be more targets available as the business landscape matures in the region and greater opportunity for the region’s funds to catch their rivals.

One reason for the longer maturity cycle in China and other emerging Asia markets may be a more demanding exit environment for private equity funds in the region, such as higher requirements for companies to be sold or publicly listed, according to eFront.

‘No way.’ Chinese firms won’t be buying in US, Europe, says former Sinopec boss

Private-equity fundraising has been healthy in Asia and globally in recent years, reaching US$595 billion in 2019, the third highest total on record, but below capital raising totals in 2017 and in 2018, according to data provider Preqin. Fundraising declined by 10 per cent from a record US$628 billion in 2018.

Funds looking to deploy that capital, however, have been squeezed by high prices for targets and a crowded investing environment. The industry had an estimated US$1.43 trillion in so-called dry powder, or cash to invest, at the end of last year, according to Preqin. There was about US$350 billion of dry powder in Asia-focused funds as of the end of June last year.

As a result of the more challenging environment for deals, private equity firms have been looking for opportunities outside developed markets for potential growth, with industry leaders increasingly touting the potential of Southeast Asia and China, as its markets further open, for investment.

But, investors have faced some headwinds recently as an 18-month trade war between the United States and China muted activity, with emerging Asia experiencing the sharpest decline in private-equity deal activity globally.

The value of private-equity-backed mergers and acquisitions in the Asia-Pacific region, excluding Japan, slipped by 13 per cent to US$79.1 billion in 2019, according to data provider Refinitiv. That compared with US$90.9 billion in 2018, the highest level in the past decade.

By comparison, private-equity transactions in the US, the largest market for deals globally, dropped 8 per cent to US$172.1 billion and activity in Europe declined 7.5 per cent to US$102.8 billion.

The biggest private-equity transactions in emerging Asia last year included a 15 per cent stake sale in state-owned air conditioning manufacturer Gree Electric Appliances to a private equity fund backed by Hillhouse Capital for US$5.9 billion; a US$1.5 billion investment by Softbank’s Vision Fund in Chinese second-hand car seller Chehaoduo and a US$1.4 billion investment by Softbank in Singapore technology company Grab.

This year has got off to slow start in the region as an early Lunar New Year holiday, combined with concerns about the coronavirus outbreak, have slowed activity. The outbreak has infected more than 43,000 people worldwide and caused at least 1,018 deaths, surpassing the severe acute respiratory syndrome (Sars) epidemic in 2003.

China’s easing of M&A rules to boost fundraising, say analysts

Through February 10, there have been US$1.5 billion of private-equity-backed deals in Asia-Pacific, excluding Japan, the slowest period since 2012, according to Refinitiv.

“Since 2009, Western markets are going through a period of rising valuation multiples. This trend is exceptionally sharp since 2015, which is reflected in the prolonged period of distributions exceeding capital calls in the US and western Europe,” Chouman, the eFront CEO, said. “Emerging Asia is not lacking capital inflows and has experienced a rise in successful exits of large and experienced PE-backed companies. However, this market is challenging for relatively small and new PE firms.”

This article appeared in the South China Morning Post print edition as: ‘room to grow’ for asia private equity funds