Breakingviews - Crisis patience will reward buyout barons in Asia

Trading information for KKR & Co is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., August 23, 2018. REUTERS/Brendan McDermid

HONG KONG (Reuters Breakingviews) - Asia’s buyout barons face a high-wire act. Private equity dealmaking in the region is on the rise this year, defying a global pandemic-induced slump. But some of the worst acquisitions were done during the last financial crisis. Sitting it out and delaying exits may help firms avoid repeating past mistakes.

It’s been a busy year. KKR, TPG and others are pumping over $5 billion into Reliance Industries’ Indian tech upstart Jio, and Bain Capital is spending over $1 billion on a Japanese medical-staffing company. Meanwhile, Warburg Pincus is leading an $8.7 billion bid to take Chinese classifieds outfit private.

Even excluding, financial sponsors in Asia-Pacific have inked $22 billion of acquisitions this year, according to Dealogic, 22% more than in the same period in 2019. That compares to $155 billion globally, a 38% year-on-year drop.

Funds have record levels of dry powder, debt is still available and companies are in turmoil, making it a tempting time to spend. Indeed, Warren Buffett made savvy, outsized bets on Goldman Sachs and General Electric at the peak of the financial crisis in 2008.

There are good reasons to hold off, though. “Successful” funds did few deals in 2008 but began investing again in 2009 as the crisis ebbed, according to consultancy Bain & Company. It defines success by those that raised at least 20% more capital between 2008 and 2014 compared with the previous seven years. Capital raising is usually predicated on good returns. These better firms made 38% fewer acquisitions in 2008 than in the previous year.

Firms whose post-crisis fundraisings dropped by 20% or more, however, did the opposite. They accelerated purchases in 2008, doing 34% more deals than in 2007. High-profile headaches include CVC’s disastrous doubling down on Australia’s Nine Entertainment. The firm eventually wrote off $1.8 billion of its equity, a record private equity loss in Asia Pacific at the time. Successful funds also did more control buyouts, giving them a bigger say when things went wrong, and held onto existing assets through the worst of the turmoil, according to Bain & Co. If the last crisis is anything to go by, Asia’s dealmakers might be getting ahead of themselves.


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