The outlook for private equity in Asia couldn’t be more positive. The latest statistics indicate an impressive second quarter of 2009, during which some US$12.1bn worth of PE deals were agreed on across the region. This figure is up from 1Q09’s US$10.3bn and is comparing well with 2Q08’s 15.1bn, along with recent activity levels in core western private equity markets.
While it should be noted that the number of deals reached a new low in this period, with only 155 recorded, it’s clear that the market has well and truly bottomed out from where it was in 4Q08, when only US$7.4bn of deals were seen. But a look at the top 10 deals over the period in the table on page 54 indicates that while PE is Asia may have, to some extent, returned to levels more reminiscent of the heady days of 2007 and 1Q2008, the imperatives underlying investments have changed. China Construction Bank’s investment and Temasek deals indicate as much, stretching the conventional notions of private equity as a value-driven investment. There are plenty of new challenges that the region’s PE corporate counsel and business leaders are facing as Asian PE rebounds and according to our survey, they will be relying increasingly on their external legal advisors to join the dots.
Southeast Asia
Discussion of private equity in Asia normally focus on the more mature markets of North Asia; Korea, Japan and to a lesser extent China, and with good reason. Together, these countries accounted for over 70% of total dealflow in Asia throughout 2Q09.
On the other hand, PE in South-East Asia is much less talked about, if at all, and then only usually only in connection with markets in India and Australia. While Lee Taylor, a partner with Clifford Chance in Singapore, believes this is probably an accurate reflection of the state of the region’s PE markets at the moment, he says that one should not draw the conclusion that PE is non-existent in South-East Asia.
“We have seen a significant upturn over the last couple of months in the number of private equity deals in South-East Asia, especially Indonesia, Malaysia and Singapore. Many of our private equity clients have been focusing on portfolio company management over the last year or so, but their focus does now seem to be reverting to doing deals,” Taylor says.“We have been working recently on a wide variety of private equity deals spanning all of the jurisdictions we cover out of the Singapore office: health-care buyouts in Malaysia, the acquisition of a semi-conductor business with operations in Singapore and China, and the sale of a luxury goods retailer in Singapore. We are currently working on a number of other private equity deals, which remain confidential,” he adds.
Taylor concedes that when compared to markets in the north, South-East Asia still has a long way to go. By the same token, PE’s relative obscurity in the region also makes it an exciting prospect for investors. “There are many relatively cheap assets in this part of the world and there is great growth potential in the emerging markets of SE-Asia, compared to the more developed markets in Europe and the US,” he says. “With the emergence of the middle class in many of these countries, certain sectors will do well, such as health-care, education and consumer goods. Private clients recognise this. Many of our global private equity clients are adopting strategies that worked well for them in other parts of the world a decade or so ago, and are leveraging off that learning in specific sectors.”
Potential investors are still treading warily, mainly because unlike other areas of practice like M&A, the recent revival on the region’s capital markets may actually be detrimental to PE activity. “Deals that were in the works before the crisis fell through, simply because buyers and sellers couldn’t come to a consensus on pricing; the gap in expectations was simply too high. I have lost count of the number of deals I have worked on in the last 12 months which have aborted soon after they started,” Taylor says.
“The IPOs that we have seen over the last few months have only worked to increase expectations even further. We now have clients that are actively looking at exits through IPOs (some clients having started down the IPO path 18 months ago, switched to an auction sale and recently back to an IPO as the market has rebounded), and standard trade sales, for example.”
Honson To, a partner with KPMG and its Asia-Pacific regional head of private equity, shares Taylor’s wariness. “While the [recent PE] deals may be a sign that the M&A market is beginning to rebound, the market remains fragile,” he says. “It remains to be seen whether the recent run of IPOs is a good or bad development for private equity funds trying to do deals, especially since valuation expectations are on the rise.”
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