Asian Private Equity Funds Face New Challenges of Capital Deployment and Exit

18 February 2016

Hong Kong – Grant Thornton’s latest Asia Private Equity Review 2015/16 (The “Review”) finds that Asian private equity(“PE”) firms are cautiously optimistic about investment across the region for 2016. It also reveals that PE firms have become conservative in view of the uncertain economic outlook which has resulted from the Eurozone crisis, China’s economic slowdown and the unstable international political situation. Some of them might even seek investment opportunities in secondary markets. Meanwhile the turbulent capital markets have also affected the PE firms’ exit strategies.

Asian PE market is maturing

The PE environment in Asia continues to mature and grow despite the apparent slow down of their investments in 2015. As of December 2015, there were over 600 active PE firms based in Asia, accounting for around 10% of the world’s PE firms. This also represented an increase of around 20% in the number of active Asia-based PE firms as compared with the figure in 2014. The majority of such firms are located in Hong Kong and mainland China (25%) or Japan (24%).

According to the statistics (Mergermarket – Monthly M&A Insider), energy, mining and utilities dominated the mergers and acquisitions in Asia with 337 deals that are worth around US$143 billion in 2015. The financial services sector came second. In 2016, it is predicted that TMT (technology, media and telecommunications), pharmaceuticals, medical and biotechnology and environmental protection sectors will become preponderant in mergers and acquisitions across Asia.

Enhancing asset value through participation in business management

While PE firms used to put their investment focus on minority ownership and growth equity, some of them are transforming into venture capitals to invest mainly in start-ups. They also seek to enhance the asset value by participating in the target companies’ businesses through operational and efficient management.

Barry Tong, advisory partner at Grant Thornton Hong Kong said, “PE funds usually hold minority interests in target companies, but nowadays some of them hold equity interests above 50% in the target companies with the aim of taking control of them. This allows the PE funds to increase the enterprise value of the target companies by participating in their operations, enhancing their business management and putting their accounts in order.”

However, PE firms have become more cautious about their investments, given the capital markets around the world have become even more volatile by a number of factors such as China’s volatile stock market and unpredictable monetary policy, the devaluation of Renminbi, the economic slow downs in the emerging markets and the uncertain international political situation compounded by the upcoming United States presidential election.

Secondary buyout has become an increasingly preferred exit strategy

PE firms’ exits from their investments have slowed to the doldrums. Traditionally, the PE funds tend to exit their investments through initial public offerings (IPO), but this method, along with trade sale, have been severely affected by the economic uncertainties.  As a result, secondary buy out has gradually become an alternative exit strategy, which accounted for 20% of the total number of exits from 2011 to 2015.

Mr. Tong said, “Some underperforming PE firms have become even more cautious about investment, and prefer to acquire equity interests in companies from the secondary markets because other sizeable PE funds have already conducted due diligence of such companies, which enables them to minimise risks.”

As to the outlook for Asia’s PE market in 2016, the Review states that China is expected to be the growth engine of the region. In the country’s 13th Five-year Plan, the PRC government has already laid plans in innovation, mass entrepreneurship and green development areas, which will give tremendous investment opportunities to the PE firms.

Mr. Tong concludes with his view on the prospect of the PE sector, “Although the global economic environment in 2016 will continue to be quite uncertain, we are still cautiously optimistic about the prospect of the PE sector this year because the Asian PE market has become more mature. We are happy to see that PE funds are willing to concentrate on enhancement and creation of enterprise value during the entire investment life cycle and to work with professionals to enhance the growth of business of the target companies in their investment portfolios. The PE funds have no longer merely pursued deals with the highest bidders. With the support of the PRC government, we believe that investment in start-ups will become a driving force for the development of Hong Kong and mainland based PE firms.”

PE Exit Trends

Global Number of PE Backed Exits by Type for 2011 to 2015

  Source: Preqin – 2015 Private Equity-Backed Buyout Deals and Exits

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