Buyout firms bet big on Asia

HONG KONG (Reuters) - The heavyweights of the private equity industry, whose ability to do U.S. and European deals was hobbled by the credit squeeze, are looking longingly to Asia's high growth economies as a safe haven in troubled times.

Global buyout firms including TPG TPG.UL and CVC Asia Pacific CVC.UL are putting together new multibillion dollar Asia funds, shrugging off warnings of too much competition and the challenge of putting the money to work in the region.

These jumbo fundraisings put Asia on track to beat the record $32 billion raised for the region in 2006, according to the Asian Venture Capital Journal (AVJC).

Industry players meeting in Hong Kong this month said rather than deter new investment, signs of a U.S. economic slowdown and troubles at U.S. and European financial firms have only boosted Asia's appeal.

"The motivation for the fund raising is that Asia is a huge market seeing tremendous growth and long-term opportunity, at the same time as the U.S. and European markets are perhaps contracting," said James Seymour, managing director at EMP Global, a private equity fund adviser.

"Returns by the mega funds in the U.S. and Western Europe have also been heavily influenced by the availability of credit and that credit is now being withdrawn. Credit is not such a big component in their returns in Asia," he added.

Industry sources said the players raising new cash include Citigroup Venture Capital International (C.N), which is seeking about $3.5 billion to concentrate on growth capital investments.

Buyout fund CVC Asia Pacific is said to be raising about $5 billion, U.S. giant TPG is collecting around $4.2 billion from financial institutions, and regional fund CCMP Capital Asia is looking to raise $3 billion.

Buyout giant KKR KKR.UL raised about $4 billion earmarked for deals in Asia earlier this year, they added.

CREDIT MARKET SEIZURE

The seizure of global credit markets has taken a heavy toll on both private equity and investment banks, which were stuck with hundreds of billions of dollars of leveraged buyout debt on their balance sheets as debt investors deserted the markets.

But non-Japan Asia buyouts have been largely spared because private equity investments in the region are often done on an unleveraged basis, with investors relying on high organic growth rather than financial engineering to earn double-digit returns.

"The fundamentals in Asia are much stronger and resilient and we've seen very little damage from the recent credit crisis in the U.S. Most of the companies in our portfolio are not leveraged and we depend on growth for return," said Patricia Dinneen, managing director of Siguler Guff & Company.

Dinneen said one of its funds has committed close to $500 million in 150 companies in China and India, generally paying 6-7 times cash flow, and in rare cases more than 12-13 times.

"When you look at their growth of 50-60 percent a year, the equation still works," she said.

Not everyone is so optimistic. Industry critics have warned the surplus of new cash will lead to a shortage of sense, with returns falling as competition among private equity firms drives up valuations.

And private equity deals in Asia tend to be smaller than in the West, with opportunities for takeovers comparatively scarce.

But despite the temptation, and the resources to do so, private equity executives pledged they would not overpay and would keep gunning for gross returns of 30 percent.

"We should be trying to deliver, obviously, a significant gross premium above relevant public markets' indices to make it worth anybody's while," Nicholas Bloy, founding partner and director of Navis Capital Partners, told the SuperReturn Asia conference.

Overhanging this optimism is the danger that the U.S. economic slowdown and global financial market woes will spill over into Asia, cutting growth to a degree that could crimp returns and cause private equity investors to reverse those big bets.

"The impact will be dulled, but we will not be immune ... the big question is: What will be the economic impact if the situation does deteriorate in the U.S.?" said Chris Rowlands with private equity firm 3i Group Plc (III.L).