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Analysis: Asia private equity exits outstrip new deals
SYDNEY/HONG KONG |
SYDNEY/HONG KONG (Reuters) - Asia's private equity industry has quickly turned into a sellers' market, as firms cash out of investments made on the back of the region's robust economic growth.
And the trend is expected to continue as long as Asia's stock markets remain steady and institutional demand holds up.
In the near term, that means more initial public offerings (IPOs) backed by private equity firms and more cash on hand for them to spend on new Asia deals, bankers say.
"With the markets as euphoric and as liquid as they are, viewing a Hong Kong listing as an exit route, compared to M&A, can be relatively attractive," said Dan Dees, Asia Financing Group head at Goldman Sachs in Hong Kong.
For many years, private equity executives noted that while a lot of buyout industry money was going into Asia, not much of it was coming out, especially in a market like China, where foreign investment is tightly controlled.
Yet that sentiment changed in 2010, as the volume of private equity exits in Asia overtook new investments made by buyout firms. While China's stock markets ended 2010 with a whimper, their growth has far outpaced other global markets since the crisis, spawning an IPO boom that began in the spring of 2009.
As of late last year, private equity-backed IPOs hit a record $28.9 billion, compared with $27.9 billion in new investments, according to Thomson Reuters data -- marking the first time in five years that buyout firm exits in the region exceeded acquisitions.
Even in China, long a coveted and yet difficult foreign private equity market, buyout firms finally struck gold: TPG Capital TPG.UL cashed out of Shenzen Development Bank for $2.4 billion and Carlyle Group CYL.UL launched an exit that could reap around $4 billion in profit from its stake in China Pacific Insurance (2601.HK).
"These exits are going to keep growing and outstripping the buy-side assignments," said veteran Citigroup private equity banker Chris Laskowski, who returned to Hong Kong from the United States last year for a bigger slice of the action.
Private equity firms typically raise money from institutional investors such as pension funds, and purchase controlling stakes in companies by borrowing around two-thirds of the cash needed. After cutting costs and streamlining, they sell the stakes a few years later, keeping 20 percent of the profit, and handing the rest back to investors.
In Asia, the model is different, involving much less, if any, leverage, and often limited to non-controlling stakes.
The wall of private equity money that traveled to Asia in 2006 was hit hard by the credit crisis, making it tough for investors to cash out.
Asia's quick recovery from the financial crisis and the IPO boom that followed offered private equity firms an opportunity.
Prominent exit deals in Asia late last year included Lone Star's LS.UL agreement to sell a $4.1 billion controlling stake in Korea Exchange Bank 004940.KS and MBK Partners's agreement to sell a $2 billion stake of China Network Systems in Taiwan.
Sales to corporate or private equity buyers remain the preferred option, but many buyout directors agree that IPOs offer the best and easiest exit, particularly in Asia where Hong Kong's booming IPO market has outperformed sluggish markets elsewhere.
About 30 percent of all IPOs in Asia, excluding Japan, last year had a private equity firm behind them, according to Citigroup.
With exits in Asia at record levels, the question now is whether buyout firms will raise more money for bigger deals or scale back and tone down the size of funds since the frothy pre-crisis days.
New fund-raising is becoming more difficult, with investors wary after a stretched period without returns, and mixed results on some investments made at the peak of the cycle.
However, executives say they can still raise more funds.
"How much money can be raised versus how much money ought to be raised is extremely cyclical. There have been a number of large private equity deals, ourselves included, and I don't think the number of large deals are going to decline," TPG co-founder David Bonderman said at a recent conference in Hong Kong.
Bonderman noted that when deals are down after a big fund raising period, it always looks as if too much money was raised. But his stance reflected a view that large exits and buyout pools will only lead to more investing, not less.
"It always looks that way and then when the cycle rebounds and people do deals, that money gets used up pretty rapidly. I think things are moderately in balance." (Editing by Dhara Ranasinghe)
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