Introduction

To say that the Asian markets have been a hotbed of opportunities for investors of all stripes in the recent past would be to acknowledge the obvious. And yet, it is as good a starting point as any in reviewing the growth and performance of Asian private equity (PE) funds in 2005.

After a sluggish first quarter and a turbulent second quarter in 2005, the markets took off in June and remained buoyant for the rest of the year - except for a brief pause in October to secure profits - and closed the year on a very positive note. The year's performance in most emerging markets was driven as much by strong corporate profitability and M&A activity, as by massive inflows of liquidity. If market movements in the first quarter of 2006 are anything to go by, investor enthusiasm for and optimism in these markets continue unabated.

In 2005, global M&A volume reached its highest level since 2000, with the total value of deals standing at US$2.98 trillion - a US$900 billion jump from the previous year's figure. The fourth quarter alone accounted for close to 30% of this value, becoming the third largest quarter on record . Although Asia accounted for only 18% of the global aggregate deal value in 2005, it cornered the largest share of the year-on-year jump in M&A activity, with a record growth of 39% by deal value.

Against this backdrop, and given the fact that Asia has been experiencing a high degree of corporate restructuring, it should come as no surprise that the region is a prime target for PE investment. The following sections take a closer look at the various aspects of this heightened interest in the Asian PE markets.

Capital Pool

Inflows of fresh capital into Asian PE in 2005 (US$17.6 billion) almost trebled in comparison to the figure for 2004 (US$6.5 billion), with India leading the way by attracting over 13% of the year's regional volume. Strong corporate and entrepreneurial activities in China and India, the emergence of Japan as well as strong returns in Australia, have all contributed to the health of the Asian PE space in 2005 .

Assets raised by PE firms and committed to Asia grew by a staggering 525% during the same period (from US$2.8 billion in 2004 to US$14.7 billion in 2005), in a further affirmation of investor confidence in the future of Asian private equity. In contrast, the next best growth in the funds raised in any of the other emerging markets was in Central and Eastern Europe (US$2.27 billion, after a 261% growth from the previous year's figure).

Investment Stages

In terms of the stages of PE investment, interest in the Asian markets is no longer merely limited to large-scale buyouts but is seeing increasing activity in the middle-market and venture capital (VC) segments. For the first time this year, growth/expansion situations overtook buyout situations, capturing a larger share of the year's transaction aggregate. For instance, over 80% of the capital deployed in both China and India (adding up to US$4.3 billion for the year), was in companies in the expansion/growth stage.

This widening in the scope of PE investment situations was accompanied by efforts to educate the markets about PE and deepen its reach among Asian corporations, a process made difficult by their reluctance to take on too much debt.

Investments

In terms of PE investments as well, there were a number of landmark events that signalled heightened interest in the Asian markets. For one, the Carlyle group's US$375 million investment in Xugong, had the twin distinctions of being China's largest PE investment as well as its first LBO. For another, the year saw big

PE names turning their gaze towards the region - Kohlberg Kravis Roberts set up offices in Hong Kong and Tokyo, while Bain, Newbridge, Carlyle and Apax all raised substantial funds specifically for Asia. The year also saw many "firsts" - for the first time, three large funds, each with assets of US$1.5 billion or above, closed within the year, adding US$5 billion to the Asian PE capital pool; also for the first time, single-country-focused funds with sizes over US$500 million were established, suggesting maturing markets.

Capital deployment wise, the year saw a 29% jump over the 2004 figure of US$11.8 billion, while deal volume over the same period stayed constant at 271 deals. Consequently, average deal size climbed 31% year-on-year reaching US$63 million. The favoured sectors for the year among Asian PE firms were the services sector, and IT and telecom companies.

Another good indicator of the deepening Asian PE environment in 2005 was the exceptionally strong activity in the exits market. While the majority of exits from PE situations have traditionally been through private sale, VC and buyout-backed IPOs were the dominant exit strategy in 2005, particularly in Hong Kong, India and Taiwan, accounting for half of the 188 exits during the year (up 25% from 2004's figure). The broadening scope of exit strategies is in turn shortening holding periods and making PE investments more liquid.

In Closing

To recapitulate, the Asian PE firms witnessed unprecedented growth in 2005, expanding the scope of investments into the heretofore less explored growth/expansion stages, as also adding depth and liquidity to the markets. If global M&A activity in the first quarter of 2006 is any indication (deals worth US$400 billion announced in March alone), this uptrend is expected to continue well into the near term as investors retain their positive outlook for the region.

Eurekahedge has recently launched the most comprehensive database of Asian private equity funds, with information on 575 unique funds and a total fund size of close to US$106 billion. For more information, please visit http://www.eurekahedge.com/pedatabase/index.asp