US bank Morgan Stanley says it is seeing the best value for China private equity deals in a decade as it looks to deploy capital after raising $1.7 billion from asset owners for its fourth Asia fund.
Morgan Stanley Private Equity Asia IV has been more strongly backed by institutional investors than the bank’s previous fund, with their participation estimated at around double the size – a reflection of the search for yield.
Investors in Fund IV include US state pension plans, sovereign wealth funds, financial institutions, fund of funds, endowments and high-net-worth individuals, as well as Morgan Stanley and its investment team.
Size-wise Fund IV is $200 million larger than Fund III, although it still trails far larger capital pools amassed by some of its competitors. KKR raised $6 billion last year for Asia's largest-ever fund, CVC Capital Partners’ closed a $3.5 billion fund, Affinity Equity Partners’ collected $3.8 billion and TPG raised $3.3 billion for its sixth Asia fund.
Morgan Stanley will likely invest its fourth fund within three to four years across 15 to 20 mid-sized deals. It has a team of between 55 and 60 professionals on the ground.
The firm is sticking with its tried-and-tested strategy of deploying about 80% of its fund in China, with Korea also a focus.
“China entry prices over the last two years have been the most attractive we’ve seen since 2002 to 2004,” Chin Chou, chief executive officer for Morgan Stanley Private Equity Asia, told FinanceAsia, sister publication to AsianInvestor.
The deadly outbreak of Severe Acute Respiratory Syndrome in southern China in 2002 and 2003 weighed heavily on stock prices at that time.
More recently global investors have pulled back from emerging markets, including China, after former US Federal Reserve chairman Ben Bernanke first raised the prospect of tapering its large-scale asset purchasing programme in May last year. Investors have chiefly redeployed capital into the recovering US economy.
This pullback has left many Chinese companies undervalued in the eyes of private equity firms.
Morgan Stanley is hoping to repeat the success it had in China when it made eight times its money after investing in Sihuan Pharmaceutical and 14 times its money after investing in Ping An Insurance. It hopes to maintain its edge by focusing on investments of $50 million to $100 million, while its competitors gravitate towards billion-dollar buyouts.
Morgan Stanley took Sihuan Pharmaceutical, China’s third-biggest drugs firm in terms of hospital purchases, back into the private sector in 2009 and relisted it in Hong Kong a year later, raising about four times what it paid. The stock currently trades at about 10 times its investment.
The bank has sold roughly two thirds of its position in Sihuan Pharmaceutical and pocketed about eight times its money invested to date.
Only a few years ago private equity firms struggled to finance take-privates but nowadays more banks are backing deals, suggested Chou. “Local banks have successfully developed expertise in acquisition finance for take-privates,” he said. “The banks have this product on their radar screen.”
Previously in China Morgan Stanley has focused on making minority investments in the consumer sector, when the country’s income per capita was expanding from $2,000 to $5,000 between the late 1990s and 2010.
In the past five years, however, the US firm has signed fewer deals in the basic consumer staples sector. “Today most of the big consumer markets have already consolidated. There is not a lot of market share to take,” reflected Chou.
Instead it has sought out services-oriented companies and high-end manufacturing firms, including one health-care services investment and two pharmaceutical deals.
“We think pharmaceuticals is a growth sector in China, particularly now that income per capita has grown to about $5,000 to $6,000,” said Chou.
Korea is also a focus for Fund IV. Morgan Stanley recently agreed to buy a subsidiary of Korean conglomerate Hanwha, called Hanwha L&C, tapping into a wider trend of restructuring chaebols. “Domestic conglomerates are focusing more on core businesses and selling peripheral units,” noted Chou.
Further, Morgan Stanley is buying businesses from individuals, such as its acquisition of a stake in restaurant chain Nolboo from its founder. It is also looking at opportunistic deals where foreigners are selling businesses.
“Local currency financing is reasonably liquid in a few key countries: [South] Korea, Taiwan, Singapore and Japan,” said Chou.
Fund IV has already completed two small investments into South Korea’s Ssangyong C&B Monalisa and India’s Janalakshmi Financial Services.
Other deals signed but not yet closed include the purchase of South Korea’s Hanwha L&C and two take-privates in China, Sino Gas International and Noah Education. There are two more deals in the offing, one in Korea and one in China.