The Asia-Pacific private equity market has emerged over the past five years as a market of increasing interest to international investors. Asia Pacific has become an increasingly important destination for international capital as a result of structural changes brought about by the 1997/98 Asian financial crisis and ongoing liberalisation efforts, as well as continuing rapid economic growth and increasing globalisation. The Asia-Pacific private equity market has matured with the emergence of well-established fund managers, with experienced teams and proven track records.
Total private equity funds under management in Asia Pacific reached US$122 billion by 31 December 2005, with US$19.8 billion raised and US$23.8 billion invested in 2005. Private equity investment in Asia Pacific has increased at a CAGR of 20.7% pa over the past four years, according to the Asia Venture Capital Journal.
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Source: Asia Venture Capital Journal
There are over 2,000 private equity/venture capital firms currently active in the region. Over the past 18 months, an increasing number of ‘mega’ funds (with over US$1 billion in capital commitments) have emerged, reflecting a significant increase in investor appetite and interest in the asset class. There are also a large number of small, single-country funds managed by established and emerging fund managers and an increasing number of ‘special situations’ funds such as distressed investments, infrastructure and mezzanine funds.
Private equity has become increasingly attractive as an asset class in Asia Pacific as a result of the following trends:
- Improved investment/regulatory environment. Since the Asian financial crisis in 1997/98, the region has benefited from improvements in transparency and corporate governance and an increase in the quality and availability of entrepreneurs and management teams. The enhanced sophistication of capital markets and integration with the global economy has led to the increasing adoption by governments of international regulatory standards and by companies of global best practices. Foreign exchange rate policies have generally become more market oriented.
- Availability of buyout opportunities. Business restructuring, government deregulation, privatisations, the break-up of conglomerates, the unwinding of cross-holdings, the restructuring of the financial sector and China’s entry into the World Trade Organisation have all created increased buying opportunities for private equity investors. In contrast to the period prior to the Asian financial crisis, when business owners saw private equity as a source of venture or growth capital financing with flotation as the likely exit route for the investor’s minority shareholding, buyout transactions have become widely accepted, and capital markets and local banks have become increasingly willing to provide debt financing for such transactions. Over the past two years, buyouts accounted for about 65% of private equity investments in the region.
- Maturity of fund managers. A new generation of fund managers focused on buyouts entered the Asia-Pacific market in the aftermath of the financial crisis. These fund managers were typically staffed by a combination of senior buyout professionals from abroad with little Asian experience and local professionals with little buyout experience. Several of these teams have now matured, possessing greater breadth and depth of experience. At the same time, the growth capital firms that survived the shake-out following the financial crisis have become much more rigorous and disciplined in their approach.
- Improved exit environment and track record. The exit environment in Asia Pacific has significantly improved as a result of greater interest in the region from strategic buyers, financial investors and capital markets. While international capital flows are potentially volatile, globalisation is a long-term structural phenomenon. With the structural shift in the Asia-Pacific private equity market towards buyouts, fund managers now have increased control over exit decisions and multiple exit options, including trade sales and recapitalisation, rather than simply being dependent on sentiment in the listed equity markets. The number of exits and the returns achieved have increased considerably over the past five years:
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Source: Asia Private Equity Review
Japan’s Private Equity Market
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Source: Asia Venture Capital Journal
Japan is the second-largest economy in the world and the largest Asia-Pacific private equity market. It accounted for 35% of private equity investments made and 28% of private equity funds raised in Asia Pacific over the past three years. The penetration of private equity in the Japanese economy nevertheless remains very low. Acceptance of private equity was slow in coming as it is essentially a new concept introduced into a conservative business culture, characterised by a ‘failure’ stigma associated with selling business interests, a tradition of corporate loyalty and ‘jobs for life’, and a lack of focus on the creation of shareholder value.
However, following more than a decade of recession and stagnation in the Japanese economy, fundamental changes have occurred as acknowledgement of the benefits of certain Western business practices has become more prevalent. Examples of these changes include the deregulation of industry, restructuring of the banking sector to clean up non-performing loans, divestiture of non-core businesses by conglomerates and unwinding of the keiretsu cross-holding system, which provides artificial support to underperforming companies. Examples of successful precedents where troubled companies have been successfully turned around by adopting new business philosophies and practices (such as Nissan and Shinsei Bank) have been widely reported. Private equity deals and success stories have become increasingly common and vendors of businesses and managers are more open than ever before to private equity solutions.
Australia’s Private Equity Market
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Source: Asia Venture Capital Journal
The Australian private equity market is the most mature private equity market in Asia Pacific. It accounted for 12% of private equity investments made and 12% of private equity funds raised in the region over the past three years. There is a well-established group of experienced private equity fund managers with strong investment track records, investing their third or fourth funds. Most of the regional buyout firms have been successful in deploying capital into the Australian market, sometimes in partnership with local firms. The regional buyout funds typically target large deals, where competition from local players is less intense. Compared with the other markets in the region, the penetration of private equity in the Australian economy is high, but it still lags the levels in the United Kingdom and the United States. The economic environment has been favourable with strong commodity prices and stable government policies. The Australian economy has exhibited strong growth, low unemployment and low inflation over recent years.
South Korea’s Private Equity Market
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Source: Asia Venture Capital Journal
The South Korean private equity market is the third major buyout market in Asia Pacific, after Japan and Australia. It accounted for 11% of private equity investments made and 6% of private equity funds raised in the region over the past three years. The Korean buyout market developed rapidly in the aftermath of the 1997/98 Asian financial crisis. Many Korean conglomerates were highly leveraged and were forced to sell their assets. In addition, a number of businesses were acquired by private equity firms out of receivership. Regional firms dominated this round of activity as there were few local players with very limited resources. Indeed, Korea was the most-active market in the region for most of the regional players at this time. The deals done in the aftermath of the financial crisis have generally been realised and at impressive multiples of the original investment cost. This generated some nationalist sentiment and the Korean government has taken action to stimulate the development of a local private equity industry.
China’s Private Equity Market
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Source: Asia Venture Capital Journal
China’s size coupled with its rapid growth and modernisation make it a key force in the global economy. China has already become a manufacturing powerhouse, supplying a disproportionately high proportion of the world’s manufactured goods. Its competitive advantage lies in its hardworking, low-cost labour force. Its large population and rising incomes make its domestic market a strategic priority for numerous multinationals. Chinese companies are increasingly trading, raising capital and acquiring companies abroad. The penetration of private equity into China’s economy is low – reflecting a range of legal and cultural impediments – but growing very rapidly. At US$8.1 billion of private equity investment into China, 2005 was a bumper year. Two large minority investments into Chinese banks however account for as much as half this total. Over the past three years, China accounted for 20% of investment activity in the region and 8% of funds raised. Hong Kong retains its role as a fund-raising centre for China and the region. Greater China accounted for 22% of investment activity and 33% of funds raised in Asia Pacific over the past three years. Compared with other markets in the region, China offers an intriguing blend of opportunity and risk. There are spectacular success stories, such as Baidu, Ctrip, Shanda and Mengniu Dairy, and a less-reported range of failures. Private equity investment risks in China have decreased over time due to the increasing availability of trustworthy and competent management teams and entrepreneurs (typically trained abroad or with multinationals in China), improvements in the regulatory environment and more experienced and disciplined fund managers.
India’s Private Equity Market
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Source: Asia Venture Capital Journal
Similar to China, India has a large population, a low-cost labour force and a rapidly growing economy with an emerging middle class. Long-term economic growth has been high and driven by economic reforms. Unlike China, which has focused on manufacturing exports, India has focused on service exports based on its large pool of highly educated and English-speaking workers. India is by far the leading supplier of information technology (IT) and business process outsourcing (BPO) services to the developed world. Compared with China, India also has a well-developed legal infrastructure and capital markets. The penetration of private equity into the Indian economy has been low. The historical focus of the industry has been on seed and growth capital, largely into the IT and BPO sectors. This has substantially broadened out over time, into later stage growth capital, private investment in public equities (PIPEs) and buyouts and into manufacturing and consumer plays. Over the past three years, India accounted for 7% of investment activity in the region and 11% of funds raised. 2005 was a record year for fund raising by Indian fund managers, reflecting increased international recognition of India’s achievements and prospects. Several regional and global buyout firms have recently established or expanded their presence in India.
Macquarie Funds Management
Macquarie Funds Management (MFM) is the Funds Management division of the Macquarie Group. Headquartered in Australia, the Macquarie Group is a leading provider of a full range of investment banking, financial markets and retail financial services with over 8,000 people in 23 countries. As at 30 April 2006, total Macquarie Group funds under management was US$73 billion, of which MFM accounted for US$40 billion. MFM has been investing in private equity since 1996 and has a history of delivering strong returns to investors. MFM manages approximately US$1.8 billion through private equity fund of funds and separate accounts for large institutional investors.
MFM is currently raising a fund of funds to provide investors with access to the Asia-Pacific private equity opportunity. MFM believes that the best way of building an attractive, well-diversified private equity portfolio in Asia Pacific is by selecting and partnering the leading fund managers in the region. MFM’s Asia-Pacific fund aims to provide exposure to selected leading fund managers in the region and diversification across the investment stage, investment strategies, geographies and vintages. It is intended that the core of the portfolio will be in private equity funds that invest in buyout transactions primarily in developed markets such as Japan, Australia and South Korea, supplemented with exposures to growth capital transactions and special situations primarily in developing markets such as China and India.
Hugh Dyus has over 15 years of experience in Asia Pacific. He gained his private equity experience primarily through his position as a Director of PPM Ventures (Asia) Ltd, the Asian private equity arm of Prudential plc of the United Kingdom. Hugh served as Chairman of the board of Global Brands Company Inc. and as a Director of Pacific Beverage Inc., both portfolio companies of PPM Ventures. He holds an MBA and a B. Econ Science from the University of the Witwatersrand, South Africa. Hugh is now based in MFM’s Hong Kong office.
