March 24, 2009 / 12:19 PM / 8 years ago

Asia funds say valuations need further fall

<p>Laure Wang, co-founder and Managing Director of Asia Alternatives LLC, speaks during the Reuters Hedge Fund and Private Equity Summit in Hong Kong March 24, 2009.Tyrone Siu</p>

HONG KONG (Reuters) - Asian private equity investors said they expect deal flow to start to pick up late this year or in early 2010, as the gap between what sellers demand and what buyers are willing to pay narrows.

Meanwhile, competition for deals has decreased as hedge funds and banks that were active in providing capital to companies preparing to go public have left the scene, dealmakers told the Reuters Hedge Funds and Private Equity Summit.

Laure Wang, managing director of Asia Alternatives, a private equity fund of funds, told the Reuters Summit that many investors have a strong pipeline of Asian deals but very few feel comfortable about the valuations to make an actual deal now.

"Everyone's looking at things but nobody is closing things because there is still a pricing gap," said Wang, who is also a co-founder of Asia Alternatives.

"Our hunch is there is going to be more deal activity in the fall," she added.

In Asia, private equity investments continued to slide to the end of 2008, with the fourth quarter seeing $8.4 billion of deals, down from $27.6 billion in the same period of 2007, according to Asian Venture Capital Journal.

"People are trying to find out when and where is the bottom because if you are catching a falling knife, that's not the position to be in," said Edan Lee, a managing director of Asia-focused private equity firm Olympus Capital.

"If things continue to remain depressed, and options are becoming more limited, the gap will be closing very fast," Lee said, referring to capital-hungry sellers.

Lee, whose firm raised a new $750 million fund in 2008, said he expected dealmaking to pick up late this year or early next year when valuations fall further.

"The gap is narrowing and it will become narrower," said Frank Tang, Chief Executive of FountainVest Partners, which manages a $1 billion China fund backed by Singapore state investor Temasek TEM.UL.

"In the first half of 2008, the gap was the biggest. The key argument today is what the reasonable level is, given how volatile the external environment has been. So it is difficult to pin down," he added.

In China, some entrepreneurs take the Shanghai benchmark index .SSEC for reference when they negotiate with private equity investors for a deal.

Some analysts have said that the Shanghai stock market could be the first to recover, thanks to Beijing's policy support, after it became the world's worst performer in 2008.

"We've made proposals actively to companies over the past six months and our idea of an acceptable valuation is probably still disconnected relative to what a company is expecting. So deals have not been done yet," said Lee.

But Lee also warned that most private equity investors would not invest in companies whose prices look too cheap to be true, due to concerns about management problems or corporate frauds.

"There are some unsophisticated entrepreneurs who do not really understand markets so that needs quite a bit of discussions and most of our investments really take some time to do," said Tang.

"Although values have come down on the public side, the private side is still lagging. It's come down, but even not as much as it should," said Wang of Asia Alternatives.

Additional reporting by David Dolan

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