Private Equity: A New Approach to Asia

by Honson To, KPMG, 14 November 2009

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buyout Honson To KPMG China minority stake PE private equity

Asia Pacific has traditionally not been the happiest hunting grounds for many private equity (PE) houses. In the pre-credit crisis days, their predominant focus seemed to be on Europe and North America, where deal opportunities were plentiful and access to debt finance was not a problem. And with so many of the leading PE players being based in the West, many of them preferred to keep their focus closer to home.

I believe that's all going to change now. My private equity contacts are already saying that the Asia Pacific region is becoming the most important region to them as the world emerges from the global recession. The reason is simple: many PE houses are showing an ability to ‘roll with the times’ and adapt their business model to the new circumstances in which the world now operates.

U-Turn on Total Control

Traditionally, many PE houses were intent on assuming total control of a target company. This idea of ceding complete control was something which never sat comfortably with business owners across the Asia Pacific region. In fact, for some businesses, the idea of being taken over was intolerable. This quickly became a frustrating barrier to many PE houses' aspirations during the bull market.

Now, I'm seeing a far greater willingness - on both sides - to consider ‘growth investments’. It’s a transaction which typically sees a PE house taking just a 20-25% stake in a company. Private equity investors previously considered these deals inferior to fully leveraged, 100% buy-outs. They are now becoming much more common. In fact, even large global funds are partnering with local PE players to achieve this.

Private equity investors are not entirely giving up control. Innovative conditions are being worked into such minority stakes deals that allow PE investors to gain a little more influence than such a stake would traditionally confer. For example, an investment may come with the insistence of a seat at the board, new faces on the management team, or a greater say over performance issues.

This is just one of the ways that the rules of the game are being redefined, but it still sits far more comfortably with Asia Pacific owners than did the idea of a complete take-over.

I don’t think, however, that there will be wholesale change across the entire Asia Pacific PE industry. I believe that plenty of players may still cling to the buy-out model, especially in the more mature markets like Australia and Japan, where buy-outs have traditionally fared well. But these players may sit out of the game a little longer, waiting for the debt finance market in the West to return.

In the meantime, the growth investment approach is likely to continue to gain acceptance across the Asia Pacific region, most notably in China. Deal values will steadily climb as more and more investors buy into the ‘economic growth miracle’ which the region can still lay claim to.

There is a mis-conception

Submitted by K O Chia on 18 November 2009 - 4:17pm

There is a mis-conception about PE. In fact, the whole PE market has grown to have different asset class as: venture capital for younger companies, private equity for growth companies & buy-out for complete spin-outs. In the venture & private equity world, it has always been minority shareholdings. However, only in buy-outs where there is reliance on equity-debt element to give the required return tend to take majority ownership.

Hope this helps to clear up the mis-conception. If anyone wants to know more, let me know and we could drill down.

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