By Stephen Aldred and Michael Flaherty
HONG KONG, July 10 A record $6 billion Asia fund
announced by U.S. private equity firm KKR & Co on Wednesday will
be deployed at a time when an economic slowdown and emerging
market sell-off has knocked the overall value of Asia Pacific
corporations to historic lows.
While the market volatility should offer KKR opportunities
to buy low, the record of the private equity industry in Asia
shows that investing in the region is not as easy as it seems.
Regulatory hurdles, cultural obstacles and wild market
swings have forced global buyout firms to swallow smaller
investment returns than they hoped, with the exception of a few
home run deals.
But KKR, a storied firm that pioneered the leveraged buyout
back in 1976, has managed to find success in Asia even after
arriving later than rivals.
The firm has invested and exited China Modern Dairy Holdings
Ltd, Singapore tech firm Unisteel, Japanese
recruitment firm Intelligence, and remains invested in South
Korea beer and baiju spirit maker Oriental Brewery.
That success has encouraged investors to return to KKR's
second Asia-focused fund in droves, despite companies across the
region facing a shortage of available money amid concerns of
"In private equity, you can make a lot of money in horrible
macro environments," said Doug Coulter, head of private equity
for Asia Pacific at LGT Capital, which allocates money to
private equity funds. He was speaking at a Hong Kong Venture
Capital Association event last month.
Most private equity portfolios have a few investments that
may prove to be more difficult than expected. For KKR, the stake
it purchased in Chinese investment bank CICC looks to be under
pressure. The bank, once China's top investment bank, has
steadily lost market share since the KKR deal, hit by tough
competition and a steep slowdown in Chinese stock issuance.
The MSCI Asia Ex-Japan index is trading at 1.4 times book
value, 25.4 percent below its 10-year median value, according to
data from Thomson Reuters Datastream. The index's price to
earnings ratio is also at historic lows.
Investors who allocate money to private equity firms were
quick to commit to the last round of Asia private equity funds
raised in 2006 and 2007, though the patchy performance of that
era has left the investors, known in the industry as limited
partners, more selective.
Thus the low prices on offer have not translated to an easy
TPG Capital, which started raising a $5 billion fund around
the same time as KKR, is still on the road raising money, and is
expected to close short of its target, according to people
familiar with the matter.
Carlyle is also still in the process of raising a $3.5
billion fund that will be its fourth for the region, sources
have previously told Reuters. The third fund, closed in 2010,
was $2.55 billion.
KKR's ability to raise a large fund relatively quickly was
due in part to the performance of its first Asia fund, according
to private equity investors who spoke to Reuters.
The California Public Employees' Retirement System, the
largest U.S. pension fund better known as CalPERS, has invested
$237.5 million in cash into KKR's first Asia fund, according to
the CalPERS website, after committing $275 million to it in
2007. So far, CalPERS' net internal rate of return on the fund
stands at 13.5 percent, CalPERS says.
By comparison, CalPERS has invested $314.2 million in cash
into TPG Asia's fund V, after committing to $375 million that
same year. So far, the pension fund has earned a net internal
rate of return (IRR) of 0.3 percent, according to the website.
KKR is ahead of peers in Asia, though Affinity Equity
Partners - an Asia focused private equity firm -- earned CalPERS
a 16.5 percent net IRR on a $125 million investment into the
2007 Affinity Asia Pacific Fund III.
The wind appears to be at the back of KKR's Asia team in the
current financial climate, as a drop in initial public offerings
and bond volumes across the region means corporations have fewer
options when it comes to raising cash.
"There are so many more interesting transactions you can do
today in the environment we're in because there are challenges,"
said Derek Sulger, founding partner of China focused private
equity firm Lunar Capital Management, also speaking at the HKVCA
The perception of Asia's growing investment opportunities
has kept money flowing to the buyout industry, with 22 percent
of the global total of private equity funds being raised as
Asia-focused, compared to 21 percent as Europe-focused,
according to data provider Preqin.
KKR has been actively scouting real estate investments in
China, according to banking sources. Those investments could be
made from the firm's global real estate fund, or its second Asia
KKR has also developed a credit lending strategy in India,
which it hopes to extend to other countries across Asia,
although the firm cannot lend from the new Asia buyouts fund.
Lending directly allows KKR to develop relationships with
companies which can lead to buyout opportunities further down
the road, according to a source familiar with the strategy.
KKR was founded in 1976 by two cousins, Henry Kravis and
George Roberts, and Jerry Kohlberg, after they worked together
at Bear Stearns. Kohlberg left the partnership early on, but the
firm went on to pioneer the business of buying a company on
borrowed money, restructuring it in certain cases, and selling
it later for more than the cash invested.
KKR, which went public in 2011, was immortalized in the book
and movie "Barbarians at the Gates", which chronicled the
takeover battle for U.S. conglomerate RJR Nabisco.
The Asian II Fund follows the $4 billion Asia fund
it raised in 2007 and a $1 billion China Growth Fund in 2010,
KKR said in a statement. The New York firm says it has invested
more than $5 billion in Asia since 2005, with its regional
portfolio of 30 companies employing around 100,000 people.
KKR has invested in tech, consumer and financial businesses
across China, Singapore and South Korea since it started its
first Asia office in Hong Kong in 2007, led by Korean-American
Joseph Bae, who remains in charge.