The buyout arena in China hasn’t been tainted by the private equity frenzy surrounding growth capital and pre-IPO deals, according to Lunar Capital’s Derek Sulger.
He says that two years ago Western investors were concerned about whether they could make capital commitments and were perplexed by the high level of valuations in Chinese private equity.
Now they are asking why conditions are so bad back at home in the West, but not so bad in Asia, (shaky banking system and sovereign debt are two easy answers). However, he points out that public equity markets have indeed been weak in Asia and, in the cases of some countries, have declined further than Western markets.
Lunar Capital is putting the finishing touches to three Chinese buyout deals where it intends to secure majority control of two food and beverage firms and one consumer product company. One is for $20 million, one for $50 million, and the consumer products company is a biggie at $100 million.
“We’re not investing at a crazy valuation, which means we’d have to go to the public markets [in order to make an acceptable return on equity]."
Lunar Capital is envisaging that it may ultimately exit via a trade sale. So therefore the prevailing conditions for IPO appetite in the equity markets won’t even be a factor.
Lunar Capital’s biggest fund has assets of $200 million, (the 10-year tenor Lunar Capital Partners 3 fund that launched in 2010), and so to accommodate these new deals Lunar is getting in additional wherewithal from co-investors, some of whom are already limited partners in their funds. The existing funds are Lunar Capital Partners 1 at $10 million and Lunar Capital Partners 2 at $50 million.
“With buyout deals there is less volatility,” says Sulger. “Some of those growth capital deals that listed at five times price-to-book multiples are now back at trading at levels less than one times their book value.”
The new raft of local RMB private equity funds are investing in growth deals in favourite segments such as alternative energy, technology and media, and pre-IPO transactions. They like businesses that look like they can go public quite quickly, not in several years' time.
So he finds that doing a buyout instead means less competition from other funds, and also a more sanguine attitude from investee companies, given that without the big bonanza of an IPO on the horizon they don’t feel tempted to be over-bullish about asset valuations to get growth private equity firms’ danders up.
One of the companies in Lunar’s trio of buyout deals was contemplating doing a pre-IPO deal. Lunar Capital said that they shouldn’t and should sell it to them instead. And they did just that.