McKinsey & Company’s recent report, “Private equity Asia-Pacific: Is the boom back?” answers the title question with a qualified: “yes.” The important qualification is that though deal-making is on the rebound, and it is becoming easier at last to raise funds from investors (around the world) to be put to work in Asia, PE funds operating in some of the Asian markets may have difficulty exiting positions once taken.
One traditional exit strategy, the initial public offering, seems to have disappeared entirely in certain places.
But let us look at the good news: after the prolonged downturn of 2008-2010, PE deal volume in the Asia-Pacific region did turn up again in 2011. The raw deal volume figures for Asia in 2011 were nearly twice what they had been in 2010. By contrast, North America saw only a 1.3 percent deal flow increase from 2010 to 2011.
Europe and Its Echoes
The rebound in 2011 might have been even stronger, except that in the later months of that year what the report refers to gingerly as “ongoing uncertainty in Europe” acted as a drag.
Let us reminisce briefly about some of that uncertainty. In September 2011, ratings giant S&P lowered Italy’s sovereign rating and downgraded seven Italian banks. In October, the government of Belgium nationalized Dexia Bank Belgium, a bank with a debilitating level of exposure to Greek debt. S&P would downgrade Belgium itself before the year was out. In November, then Prime Minister Papandreou announced a referendum on acceptance of a bailout package and then, under intense pressure, almost immediately backed off the idea.
In the face of such headline events, banks around the world were encouraged to “hoard capital,” as McKinsey puts it, leaving businesses struggling to find sources of credit. Potential Asian PE investors were among those who, as one link in this chain reaction, found money scarce.
Though that dampened growth, it obviously didn’t prevent it. Indeed, a glass-half-full optimist can see the dampening as a good thing, because it means there are still plenty of opportunities to be exploited, “ample room for growth” as McKinsey puts it.
An indication of that ample room: the GDP share. PE investments in Asia are only 0.8 percent of the nominal GDP of the countries involved. The corresponding figure in the US is 3.9 percent: in the UK it is 3.0.
Let’s drill down a bit, amidst Asia’s component markets as reflected in this report. China accounted for 45 percent of the 2011 PE activity in Asia. The value of its PE investments for 2011 exceeded its previous (2007) peal.
That level of dominance may not be sustainable, especially given concerns about slowing growth in the country in general. Although McKinsey expects that, in coming years, China will continue to play a leading role, it also thinks that Southeast Asia and India will attract more attention.
Within Southeast Asia, deal values grew faster in 2011 than did deal volumes (also true in Japan, but not true anywhere else in Asia). The average size of a PE deal in 2011 in Southeast Asia increased 33 percent.
As noted above, one potential worrying sign is that businesses aren’t exiting the PE market for the public world. Indeed, Southeast Asia recorded no initial public offerings at all in 2011. Such exits as did take place took the form of trade sales. Mitsui bought a PE-owned Malaysian company, Integrated Healthcare, in a deal valued at $1.09 billion, in April 2011.
India’s PE results in 2011 were positive. Deal volumes there fell 64 percent during the period 2007 – 2010, and then rose 181 percent from 2010 to 2011, though the recovery of deal values was not as impressive. From that discrepancy alone you might conclude (accurately) that the PE sector is recovery in India by making a lot of small deals.
“Regardless of sector, large investments are now increasingly rare in India. One of the reasons, investors have told us, is rising value expectations,” the report says. In other words, those who control the larger private companies have been holding out for prices that strike potential deal makers as unrealistic.
But for India, as for Southeast Asia, the exit data for India are not encouraging. The total number of exits fell in 2011, as did exit values. Those exits that do occur are generally trade sales; there is in India “little indication of any longer-term recovery in the IPO market.”