In Asia, Private Equity Is Still Bullish

September 4, 2007 In Asia, Private Equity Is Still Bullish By DONALD GREENLEES HONG KONG, Sept. 3 — Private equity firms are setting records in the size of Asian buyout funds, adding to an existing pool of more than $35 billion that is waiting to be invested in deals in the region, industry participants and analysts said. The aggressive fund-raising drive in Asianwide and country-specific buyout funds is taking place at a time of tightening credit markets, volatility in equity markets and some resistance from shareholders and regulators to private equity buyouts. Analysts said this mix of conditions posed new challenges for private equity firms in replicating the deals on which they built their reputations of strong returns to investors. But led by several global buyout funds, investors are expected to commit $25 billion more in the second half of this year to private equity funds in Asia, according to the Center for Asia Private Equity Research. That would be on top of $15.4 billion in fresh capital committed to regional funds in the first half of 2007, a rise of 57 percent over the period a year earlier. In recent months, big private equity firms have been leapfrogging one another to set records for fund size. Kohlberg Kravis Roberts this year built a $4 billion Asia fund; TPG, formerly the Texas Pacific Group, is expected to close in the coming weeks on an Asia fund of about $4.2 billion; and CVC Capital Partners has built one that could reach $5 billion. Even at such sizes, the Asian funds are still well below levels set by buyout funds in more mature markets like Europe, where Kohlberg Kravis, for example, is seeking to raise a fund of at least 7.7 billion euros, or $10.4 billion. “There is so much international capital looking to find a home in private equity generally, and Asia is regarded as particularly attractive at the moment,” said Andy Thomson, editor of Private Equity International, a magazine in London. Asian markets, on the back of strong economic growth, have performed better in recent years, and big investors are increasingly interested in diversifying from traditional regions like Europe and North America. But other analysts said the growth of this Asian private equity war chest coincided with increasing difficulties for the industry in completing big-ticket deals, even before the subprime mortgage crisis in the United States put a squeeze on credit markets and brought volatility to stock markets. The Center for Asia Private Equity Research has tracked a marked increase in the number and dollar size of deal failures since the start of the year. From January to the end of July, it said 22 deals, valued at $38.9 billion, had failed because of regulatory hurdles or because shareholders of target companies had rejected the price. Australia, which has been one of the leading markets in the region for private equity deals during the last two years, has also led the way in prominent failures, including the collapse of the proposed buyout of Qantas Airways. In several deals in Australia, private equity buyers were either outbid by strategic investors or shareholders were unwilling to accept the valuations. Elsewhere in the region, regulatory hurdles are often the bigger problem for the industry. Kathleen Ng, managing director of the center, said private equity firms in Asia would have to seek more deals in the hundreds of millions, rather than billions, of dollars and be satisfied with minority positions in companies instead of buyouts. In the meantime, there is a lot more money chasing deals in the region. Ms. Ng estimated that the current value of unallocated funds in Asia was $35.7 billion at the end of July, with the amount set to grow sharply. “It’s a testing time,” she said. “But private equity investors are very innovative. They find a way to devise a deal.” Although the recent market problems have added to the complications, Ms. Ng said there was intense demand from investors in private equity funds, like pension funds and insurance companies, that have long-term investment horizons. Market volatility may also foster more deals. If the recent market problems start to affect the broad economy, analysts and industry participants said, there could be a return to some of the bargain-hunting that benefited private equity firms in the early part of the decade. “Periods of volatility are normal in Asia,” said Dan Carroll, a senior partner with TPG in Hong Kong. “And it is in times of volatility that we have done our better deals.” He said TPG’s deal pipeline remained “very active,” and he expressed confidence that the firm would be to able fully allocate its latest fund-raising. A lot of the new deals are likely to be in China, while Australia could slip, which would be a significant change. According to figures released by Thomson Financial last month, Australia topped the region, excluding Japan, for private equity deals in the first half of the year, with $12.3 billion in deal value. China ranked sixth, with deals worth $678.7 million completed. “Australia had an outsized year in 2006, going into 2007 well above the historical mean, and that is correcting a bit,” Mr. Carroll said. “China and Japan will be increasingly active markets in the next couple of years.”