Cash-Rich Corporates Becoming Less the Foe of Private Equity in Asia

The private equity market in Asia-Pacific is coming of age and is realising substantial growth not only in volume and value terms but also in terms of market maturity, according to a new report “A Maturing Market: Asia-Pacific Private Equity Outlook 2014”, released by Ernst & Young.


The report, developed in collaboration with Mergermarket, highlights that rising investor sophistication as general partners utilise new means of investing, as well as greater understanding of the complex PE model by business leaders are underpinning this growth – and hence leading to expected increased deal activity in the region going forward.


One of the standout trends in this year’s survey was that cash-rich corporates would no longer pose the greatest challenge to private equity in Asia-Pacific in the year ahead. Only 40% of respondents chose this option as opposed to 79% in 2012.


“Corporate buyers are becoming less the foe and more the “peng you” – Chinese for “friend” – of private equity in Asia,” says EY’s Private Equity Leader for Asia-Pacific Robert Partridge. “This shift in attitude has developed as corporates are seen as less of a threat in competitive situations and more as potential buyers.”


This in turn saw respondents lean toward trade sales as the exit strategy of choice in 2014. A number of private equity firms across the region, particularly in Southeast Asia, have already benefited from the demand for assets by exiting portfolios to corporates for a sizable profit. Even with the listing hiatus in China lifted, a pipeline of deals has built up that will result in considerable waiting periods among PEs looking to exit through IPOs.


“While reforms to the public listing process in China will introduce new rules and expedite approvals, we are going to have to wait another quarter before we can tell if this new system is effective. Once we get through the first round of listings in 2014, private equity will have a better idea of what to expect, or how much longer they must wait to exit investments,” says Eva Ip, Private Equity Partner, EY Greater China.


In terms of challenges, 62% of respondents expect overvalued targets to be a major hurdle. This follows an upswing in sentiment from last year, when only 48% felt valuation issues would prove most challenging.


“To bridge the value expectation gap, private equity needs to be able to develop a relationship between the parties, rapport that can be created with open communication and by a demonstration of value. Having specialist knowledge of a particular sector, a track record of excellence and access to markets will all serve to establish improved ties with the seller group,” adds Eva.


According to 60% of respondents, regulatory issues will also remain a concern for the market, especially among foreign private equity firms new or unfamiliar with local investment landscapes.


Similarly, Asia-based funds are expected to chip away market share previously held by their global counterparts. These funds will be in the spotlight for global PE agendas in the year ahead, with 99% of respondents anticipating that competition in terms of raising capital will be significant. Likewise, 94% said executing transactions in Asia versus non-Asia fund situations will prove challenging for foreign firms.


On a country level, private equity practitioners are still at the base of a significant learning curve, adapting their Western model of investing to the diverse economies of Asia.


“Foreign and domestic firms are becoming more disciplined and sophisticated in terms of investing. Many oversights, such as a lack of adequate due diligence, are becoming a thing of the past,” said Partridge.


Commenting on opportunities in Australia, he added that “despite its small population, there are still acquisitions that can yield considerable returns. Similarly, a quality workforce and high level of innovation provide a positive framework for investment.”


In Japan, the mindset toward PE is progressively changing, “[Japanese corporates] are developing a better understanding of the value private equity can bring to their businesses,” concludes Partridge.


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