Asian private equity deal activity is expected to see modest growth this year – with Southeast Asia looking particularly attractive – after a 22% drop in regional deal value to $47 billion in 2012, indicates a new report by Bain & Company.
A driving force behind deals will be the large amount of dry power, or money raised from limited partners (LP), that needs to be invested, totalling $130 billion among general partners (GPs) in Asia-Pacific, according to the consultancy.
Yet a slowdown in the economies and IPO launches in the former PE hotspots of China and India made them less appealing to investors last year.
“In a market like China, IPO deals have been a significant driver of deal flow,” says Vinit Bhatia, a partner in Bain & Co’s private equity practice and a co-author of the report.
“Given that the IPO market is soft, this will likely have an adverse impact on deal flow in the short term,” Bhatia tells AsianInvestor.
India’s sluggish deal flow was compounded by the fact that entrepreneurs in the country maintained a high bar in deal negotiations by holding out for higher valuations and being resistant to handing over management control.
“As China slows and India looks for a path forward, the emerging economies of Southeast Asia continue to enjoy strong GDP growth that is attracting the increased attention of PE investors looking for greenfield opportunities,” says Bhatia, who is based in Hong Kong.
A pressing need to invest LP capital is not unique to Asia, with an estimated $900 billion in dry powder held by GPs globally. “Too much dry powder is still chasing too few attractive investment opportunities, keeping deal multiples high,” notes the Global Private Equity Report 2013.
In Asia, Bain foresees a divergence in the execution and valuation of deals by PE managers. “We see more experienced GPs increasing their focus on diligence to ensure they minimise risk of over-valuation and maximise potential for ensuring higher returns,” says Bhatia.
On the other hand, less experienced GPs who do limited due diligence have been seen bidding up the price of assets, says Bhatia. He notes that a contributing factor is the rising competitive pressure to execute deals.
Asia’s 22% year-on-year drop in PE deal value in 2012 was nearly equal to the 23% rise in deal activity seen in North America over the same period.
The availability and popularity of debt instruments, including collateralised loan obligations and loan mutual funds, helped to feed US deal flow in the form of public-to-private deals – effectively the privatisation of listed companies.
Public-to-private deals likewise helped to power the 2006-07 PE boom, notes Bhatia. He adds that such deals do not figure prominently in Asia due to the nature of PE investments in the region, which typically are in the form of growth capital, and with GPs holding only minority stakes in portfolio companies.