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.
Learning from the Past
Those funds that are enhancing their Asia Pacific footprint are also showing a willingness to learn from previous mistakes by making better use of local staff.
I believe it was in Japan where we first really learned that wholly imported teams just don’t work. Now I'm seeing some PE houses sending their expat staff home while ramping up their local recruitment. They appear to have accepted the reality that Asia Pacific assets cannot be managed at arm’s length. Having talented, local people on the ground is one of the keys to a successful regional strategy.
An equally important trend is the focus on driving performance improvements. In the absence of rising valuations, a lot of hard work will have to go into performance management in order to secure a return on investment. This is where we may see PE houses becoming quite innovative in the ways they use their minority stake to exert influence over the way a company is run.
An exciting time lies ahead for PE in Asia Pacific. In return for showing a willingness to change a fundamental aspect of their previously successful business model, many are being rewarded with growth opportunities at a time when other investors remain sidelined. That willingness is also being backed up by some bold investment strategies.
Some investors have always harboured concerns about perceived regulatory obstacles across the region. But these obstacles were driven as much by the aforementioned cultural fear of ceding control as they were by more basic protectionism, particularly in the Asian economies. Now that many PE houses appear willing to compromise in this area, they may find doing business in the region far easier.
The Asia Pacific region may not have been many people's first choice for where the PE revival might come, but I believe it's where the smart money is now going.
About the Author
Honson To is Head of Transactions & Restructuring and Head for Private Equity at KPMG China.