Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
CLSA likes Asian property and it likes the Asian consumption theme. It is less avid for technology, concepts, start-ups and infrastructure.
Coull remains tough on valuation and sensible exit strategies, noting that any private-equity firm that is not mindful of these will find itself in the bottom quartile of performers. He says, given the increase in market volatility this year, private-equity firms can not just rely on making profits by virtue of high beta in rising markets across the board.
Veteran funds, those established in 2000 and 2001, have hit the sweet spot in terms of finding windfall gains in the positions they acquired at that time. However, entry prices have risen since.
CLSA thinks it is time to be extra prudent with China and India, the most notorious hot spots at present for private-equity investment. While acknowledging the health of the Indian economy, Coull observes that if CLSA were to rent its Indian offices today, it would be asked to pay Manhattan prices. In India the collision of local money with international liquidity has driven land prices sky high, as developers hope they can translate this into highly priced residential and commercial developments.
In China, banks have been heavy lenders this year and companies are facing margin pressures. CLSA says it is hard to see anywhere in Asia that could provide a major exogenous shock to the rest of the region, with the possible exception of China.
In Korea, Coull is cautious on how local culture embraces foreign businesses, but is positive on opportunities: "Foreign investors could have been more sensitive about how they walked away with such big profits, and you can see what effect this has on the nationalistic Korean people. Property pricing there is not bad though and yields are attractive."
In Taiwan, international private-equity investors are saying a prayer for a KMT victory in the 2008 elections, with the biggest potential negative to investor perception being an unexpected victory by the incumbent DPP party.
CLSA sees a theme of reverse capital flows to Taiwan from the PRC as mainland money comes in. Also it can envision Taiwanese banks and chemicals companies acting as big consolidators of the PRC economy. CLSA says it is closing on a $250 million property deal in Taipei in the next few weeks where it is buying a city block, but at this stage cannot give more specific details.
CLSA also has a positive outlook on Southeast Asia, having just bought SIA's headquarters in Singapore for $430 million. Thailand is on the back-burner for now due to unresolved political issues, but with low price-earnings multiples and high dividend yields the country is slated for re-emergence in 2007. "Who would have foreseen Thailand becoming unstuck under Thaksin?" Coull wonders. "On price and yield, however, you can't be overly pessimistic for 2007 and beyond."
One driver in particular for the Southeast Asian story is the re-engagement of Japanese companies. Japanese companies have been active investors in North Asian assets, but aren't comfortable operating in China, due to political issues and concerns over intellectual property rights. CLSA expects Japanese companies to start investing in Southeast Asia next year, particularly in the property sector.
Based on its focus on risk analysis, CLSA remains vigilant about the Asian private-equity arena and is price sensitive on extravagantly priced deals. "You have some macro predictability in the United States," says Coull. "In Asia you have to have 14 different macro views. There may be a reminder waiting out there about just what a risky place the world is, perhaps bird flu or terrorism, and that will have an impact on the risk premium."
Nevertheless, CLSA is on course to make further acquisitions across a private-equity landscape which it sets far wider than those firms doggedly following fashionable Chindia trends.
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