Asia-Pacific private equity firms riding boom despite credit crisis

Despite the subprime mortgage crisis in the United States, private equity groups in the Asia-Pacific region excluding Japan are still riding a boom.

19 November 2007
Published by South China Morning Post

“Private equity firms in the region have no problem attracting capital. Pension funds still are willing to invest,” said David Nott, regional leader for KPMG’s Private Equity Group in the Asia-Pacific.
 
The global credit crunch that started in August has curtailed private equity activity in the United States and Europe. Failed buyout attempts made headlines as the market ran out of cheap loans. Blackstone Group, a leading US private equity firm, announced disappointing third-quarter results.

But Mr Nott has seen no impact so far on peers in the region. Firms with good track records can still raise new funds easily. Affinity, for example, was able to raise US$2.8 billion in four months this year, Mr Nott said. Three years ago, it raised just US$700 million over nine months.

Last year, private equity firms in the region raised US$32.9 billion in new capital, up 39 per cent from 2005 and five times the total four years ago.

“There was a fundamental shift in investor interest to China and Asia as investment destinations,” Mr Nott said. A survey by Asian Venture Capital Journal found 94 per cent of investors named strong economic growth as a key reason for investing in the region.

Less reliance on debt financing also makes Asian private equities less prone to the recent credit crunch. The debt-equity ratio is usually conservative and covenants or conditions for loans were stricter in Asia, Mr Nott said.

While high-profile billion-dollar takeovers dominated headlines, most of the region’s funds were actually growth capital, interested in much smaller deals, he said.

Only 10 per cent of investors polled by the survey described their funds as buyout, that is borrowing money to acquire other businesses. Those describing themselves as generalists interested in all stages of a business’s development totalled 44 per cent.

Another trend is the growing importance of sovereign funds in the region. An estimated US$864 billion is earmarked by governments for investment in the region including Singapore, the mainland and Australia. “Their sheer size means they will be significant players in the global market,” Mr Nott said.

China Investment Company set up recently by Beijing has capital of US$200 billion. “With US$200 billion, you can buy any company in the world,” Mr Nott said.

Noting that sovereign funds could be investing for political and strategic reasons and not just financial gains, he said: “Their brief or mandate for investment would be the most interesting to see.”

In the first nine months of this year, private equity houses invested new capital of US$53.3 billion in the region, compared with US$61.8 billion for the full year last year. This led Mr Nott to say that a new record high would be set for the full year.

However, he admitted that “no one knows yet” if the subprime problem would dampen US demand for mainland goods and check the latter’s growth.

So far, it is still boom time for Asia-Pacific private equity houses.

Last year, total private equity funds under management in the region rose almost 30 per cent to US$158.5 billion from a year earlier. By June this year, it rose further to US$171 billion. The mainland dominated the investment profile with 61 per cent, followed by India with 37 per cent and 29 per cent in Australia.

In the next five years, while 74 per cent of investments will still favour the mainland as a prime destination, India will become more popular, drawing 63 per cent of investments and Taiwan capturing 38 per cent.

In the next five years, investors will favour the consumer, retail and services sectors, with 25 per cent expressing interest, followed by 19 per cent in industries touting environmental protection.