ALB discusses what a world without the global financial crisis means for private equity in North Asia with Paul, Weiss partner Jack Lange
All the empirical data supports the assertion that the worst may well be over for private equity (PE) in North Asia. PE houses, investors and financial sponsors appear to have shaken off the after affects of Lehman’s collapse and be back to business as usual. But as Jack Lange tells ALB, ‘business as usual’ has a very different meaning than it had in PE’s heady days of 2007 and early 2008. “The difficulties we saw in Asia as a result of Lehman, predominantly surrounding the ability to price assets, seem to have subsided,” he says. “Now that the market has bottomed out, people have swung back into action very quickly to avoid missing out.”
While confidence may have returned to the markets, the deluge of deals hasn’t arrived just yet but it may not be as far off as one would imagine because of PE’s unique value add. “Deal flow is nowhere near the peak levels we saw in years past essentially because valuations are still slightly unrealistic… but PE players are certainly starting to transition from managing problems with portfolio companies to looking at deals, which is a positive sign,” he says.
“PE offers a value add like no other,” said Lange. “It is a different proposition from bank financing because a PE investment can increase returns, it is an investment in people and management and this appeal should see deal flow return.”
But when things do return to ‘normal’, Lange said they are likely to be different from PE investments in previous years. Investors will be looking to target new and emerging sectors with greater frequency—something which is most evident in the case of China.
“Part of it is getting into sectors that nobody has noticed yet. Seven or eight years ago a good example of that was dairy products,” he said, citing Morgan Stanley’s investment in Mengniu Dairy and, more recently KKR’s US$150m investment in Ma Anshan Modern Farming—on which a Paul, Weiss team led by Lange acted for KKR— as examples of activity in that sector.
And while sectors that ‘nobody has noticed yet’ may be few and far between in North Asia, Lange said that any investment targeted at China’s growth sectors is becoming increasingly popular.
“Anything consumer oriented in the PRC is viewed as good medium to long-term play. Sectors like healthcare, pharma, infrastructure or building related,” he said adding that investments focused on financial institutions will continue to be appealing.
Two recent transactions illustrate this pattern according to Lange. China Pharma’s (a subsidiary of Morgan Stanley Private Equity Asia III Holdings) US$318m takeover of Sihuan Pharmaceutical and the US$160m investment in Sinochem subsidiary Far Eastern Leasing Company by a consortium of investors including KKR, GIC Special Investments and CICC. Lange led Paul, Weiss teams on both deals, acting for China Pharma/Morgan Stanley and the aforementioned consortium, respectively.
If the deals above are evidences of the new approaches being employed by PE players in China, then they are also clear evidence of how PE funds are now being deployed. Hence while PE may have been used as a solution to the dearth of debt financing at the height of the financial crisis—to tide companies over during the longer than expected IPO timetable—now some PE financing is being used to help aid the growth of China’s state-owned enterprises (SOEs).
“I think now we are starting to see a new coming of cooperation between foreign PE and SOEs,” Lange explains. “In a way, it’s coming full circle. In the first phase of foreign PE in China there was a lot of effort to do JVs with SOEs. Then the focus shifted almost entirely to working with emerging entrepreneurs. Now entrepreneurs are starting to find capital from local funds, and foreign PE has begun to work in new areas of business with SOEs and helping them expand into these.”
Identifying such opportunities is vitally important, said Lange, in a market such as China where domestic PE funds are rising to the fore. “The role foreign PE will play is changing a little because in the PRC you have huge pools of domestic capital that are coalescing, and this will naturally affect strategy,” he said. “It may be that foreign private equity will play a role where this pool of domestic capital is not… or perhaps some more of it will migrate toward emerging markets which have not yet come as far as China in developing a domestic private equity industry.”