EM uncertainty yields PE deal discounts

The combination of emerging market volatility and uncertainty surrounding China is creating buying opportunities for private equity, say industry executives.

While the recent EM rout and market turbulence has generated short-selling opportunities for hedge funds, it is also providing deal prospects in certain sectors for PE, according to Swiss investment firm Unigestion.

Outside of Chinese e-commerce or consumer staple brands, “GPs [general partners] will be able to buy companies at very attractive valuations”, says Robert Collan, investment manager with Unigeston’s private assets team in Singapore.   

The firm has exposure to Asia across equity long-only strategies and funds of funds investing in private equity and hedge funds, with more than half of its AUM in separately managed accounts.

The continuning bottleneck in China IPOs has led entrepreneurs to seek alternative ways of raising capital, one being private equity, Collan tells AsianInvestor.  

China has been home to seven of the first eight deals by PAG Asia I, a $2.5 billion regional buyout fund that has deployed about half its capital.

“The China market looks quite attractive to us for the kind of deals we are looking for – control or buyout transactions or structured minority investments with downside protection,” David Kim, chief operating officer at PAG Capital, said during a panel at the Borrowers and Investors Forum hosted by AsianInvestor and FinanceAsia this month.

The Shanghai Stock Exchange is trading at a price-to-earnings ratio of between 9-10 times, which has had the effect of lowering expected deal valuations, Collan says. “Those are attractive levels” for PE investors in China.

An anticipated China credit crunch, which has contributed to a damped market sentiment, is also a source of investment opportunities.

“There is a credit issue in China, but that you can also play that credit,” says Collan. “While there is risk in the system, there are also managers on the private equity side who can make use of those markets which are in a bit of distress, and invest in those opportunities.”

For example, US distressed specialists Oaktree Capital, Farallon and Och-Ziff were among the 10 cornerstone investors in the IPO of distressed mainland debt manager China Cinda Asset Management, which listed in Hong Kong in December at the top of its price range.

Other countries in emerging Asia also offer opportunities, but in specific sectors. Collan cites as an example the healthcare sector in India.

However, the Sensex has had been buoyed by a bull run that reached a five-year high this week, thereby impacting deal valuations. “Generally, [PE] funds are having issues today because valuations have not come down very much,” he says.

PE hotspot Indonesia, while attractive due to the size of the market, is also one with select opportunities. “We are being fairly careful because we believe that when an economy is very much emerging, the amount of deal flow that you might get as a manager is not extremely high," says Collan, “but it’s improving.”

While concerns about future EM volatility are expected to reduce institutional inflows into EM-focused PE funds, a recent joint study by Harvard Business School and US-based Bella Research Group maintains that PE “is likely to be one of the few avenues to gain exposure” to investment opportunities in fast-growing emerging markets.

Both emerging and developing markets are cyclical, says Collan. With any PE fund with a 10-year lifecycle, “you will have a downturn, come what may”. He adds: “You need to find the best managers in the region irrespective of the countries they are investing in.”