Private Equity deal-making continues, China continues to expand

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  • Domestic firms drive PE deal activity in China
  • Smaller deals drive PE activity in India
  • Entrepreneurial spirit is key to PE’s staying power

Hong Kong, 26 March 2012 — Momentum for deal making in China continued in 2011 despite the global decline. Aggregate PE deal activity rose significantly in the fourth quarter of 2011, in sharp contrast to global trends. Moreover, despite valuation concerns founded in increasingly robust competition for deals among local and global PE firms, deal-making continued unabated, and the aggregate value of PE deals in 2011 rose to US$20 billion — an increase of 48% as compared with 2010 figures. In 2011, there was a marginal decrease of 7% in PE deal volume with 640 deals, compared with 687 deals in 2010.

According to Global private equity watch – a return to entrepreneurship 2012, an annual study by EY, an entrepreneurial mindset has been the key driver to the industry’s ability to adapt to the ongoing volatility.

Michael Buxton, Asia-Pacific Private Equity Leader at EY says: “Though relatively young in tenure, Asia Pacific private equity investors are gaining experience as well as accumulating investment capital. They could well break into global markets seeking their own diversification strategies.”

PE activity in the Americas remained broadly stable through 2011 in terms of deal value, while Asia Pacific region saw a modest increase in value. By contrast, Europe saw a drop-off in activity, largely driven by the European debt crisis.

Buxton continues, “Over the last few years, PE has extended well beyond its traditional markets into fast-growth economies such as India, China and Brazil in an attempt to capitalize on the emerging middle class dynamic in these geographies. In the future though, it is those PE firms with the vision to tap into the world’s so-called “frontier markets” such as Colombia, Chile, Indonesia, Vietnam, Czech Republic and Turkey, that will reap above average returns. These markets share similar trends to the BRIC countries, but valuations tend to be more reasonable and competition more limited.”

PE has also been quick to identify a shift in capital flows. As their investor bases grow, some of the larger firms are taking the opportunity to expand their business to offer LPs a wide variety of investment strategies and asset classes. They have extended into new areas, such as hedge funds, real estate and distressed debt evolving into multi-asset managers. This is true not only of firms in the more established markets, but also in Asia Pacific.

“Local firms are realizing the vast potential of a number of growing alternative asset classes in Asia Pacific and are casting a wider net in order to capture institutional investor demand.” Buxton explains, “In December 2011, buyout firms had US$49.1 billion for Asia and other emerging markets.”

Deal-making in China continues amid global decline

PE activity in China continues to expand, with growth in PE deal activity supported by an increasing supply of local PE capital and the availability of exit alternatives. Unlike India, where PE deal activity is driven by global firms, China has an increasing number of domestic firms that are competing for PE deals, including 8 of the top 10 PE deals in China Q4 2011.

PE fund-raising in China did decline by 11% from US$32.1b in 2010 to US$28.5b in 2011. The second half of 2011 witnessed new commitments totaling US$8.6b, just half that of the first part of the year. However, LPs and GPs remain focused on Asia Pacific and China in particular as local currency PE funds continue to expand. Renminbi (RMB) funds experienced a 28% year-on-year increase in their aggregate value to US$11.4b in 2011, demonstrating that local investor participation in Chinese PE is on the rise.

Continued long-term interest in Indian PE

Indian PE activity started 2011 on a high note, with deal buoyancy carried forward from late 2010. However, in line with global trends, the second half witnessed a steep decline in investment value, while volume remained consistent throughout 2011. Year-on-year comparison indicates 15% and 20% increase in aggregate deal value and volume, respectively, compared to 2010.

PE-backed IPOs declined in 2011, with just 8 IPOs by PE, significantly down on the 27 seen in 2010. The amount raised also dropped from US$4.3b to US$1.2b – a 71% decline. This is the reflection of the uncertainty last year in Indian stock markets and as a result, PE has delayed listing portfolio companies, but is ready to push the button when market conditions improve.

However, the long-term attraction of the Indian market was demonstrated by the improvement in fund-raising toward the end of the year. In Q4 2011, PE and VC firms launched fund-raising processes targeting an aggregate US$7.5b. Buxton says: “Recently, some firms have abandoned fund-raising specifically targeted toward investments in India, yet the signs are that firms with a proven track record of returning money to investors will be successful.”

Entrepreneurial spirit is key to PE’s staying power

Other findings from the report include examples of how PE firms have demonstrated their entrepreneurial ability to respond to severe economic volatility, a consequence of the global recession. Comments Buxton: “These behaviors were critical to overcoming the economic challenges and enabled value creation on behalf their investors. This entrepreneurial approach is a key element to the industry’s future success.”

Looking forward to the rest of 2012

Asia Pacific private equity investors are eager to make new acquisitions, but the challenge remains how to locate the best deals.

“The outlook for PE-backed IPOs is heavily dependent on external factors such as the stabilization of Europe, improved growth prospects for the US and increased investor confidence in Asia.”

Buxton concludes, “With improved operating results at many PE portfolio companies and an aging portfolio, many sponsors are watching closely for signs of the IPO window reopening and have been working diligently to prepare their portfolio companies for a public equity exit. However, the challenges remain around how to locate the best deals and finding good opportunities to exit existing portfolio companies.”

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