Current Trends- Private
Equity
2012: Stuck in the dreary storm
It
is well known that 2012 was not the best year for the private equity and
venture capital markets.
Buoyant by the
year-over year (2010-2011) increases in the overall level of US deal flow
volume and capital invested; many private equity professionals chose to express
optimism at the start of 2012 despite the fact that global buyout market still
remained flat since 2010. Pension funds and insurance companies found it
difficult to commit capital given that there were hardly any pickup in
investments and exits. Their optimisms were quickly muted as political and
regulatory uncertainty rose in the U.S., the reemergence of Eurozone’s economic
troubles and the pessimism over how India and China would ‘land’ their heated
economies contributed to an unexpected decline in global buyout deal flow amounting to a disheartening $186billion
($246-$696 billion pre crisis) by the end of 2012.
A Global Update 2013: Amidst the
dark clouds
At
the start of 2013, GPs across the global are still saddled with huge amounts of
dry powder accumulated since the downturn. The notion of “too much money
chasing too few deals” holds true even in the Global Private Equity market and
made serious by the following economic predicaments
i. Europe still held back by economic
uncertainty; will continue to drive a wedge between buyers and sellers. The IPO
channel is expected to remain dormant in Europe.
ii.
China and India; the two
countries most sort after for private
equity investments have experienced disappointing economic growth, increasing competition
from other PE firms and unstable politics. Searching for good deals in both countries
will continue to be a challenge.
iii. Australia, is entering a period of
heightened risk and vulnerability as global commodity demand wanes
iv. In Japan, the devaluation of the yen
may add some short term relief to the nation’s deflationary conditions, but, it
is by no means a long term solution. Investors will be battling the powerful
headwinds of an aging population and high government debt.
GPs
holding aging dry powder still face many challenges brought over from 2012 and
are eager to put their capital to work, so as to prevent a maximization or
extension of holding periods which pushes down returns for LPs; affecting the
relationship between both parties. But where else can GPs put their capital to
work?
Pockets of opportunities: Growth
drivers
Despite
a sea of negativity in the global economy, Asia-Pacific (excluding Japan &
Australia) seemed to have invoked bullish expectations and interest from many
professional PE firms and LP investors. These are some of the reasons;
Asia-Pacific’s
economic growth is fueled by rapidly improving standards of living, a healthy
household savings figure and a growing middle class. This in turn also gives
rise to many potentially local businesses for cash rich PE firms to fund and
mentor. The overall low PE penetration in the region further supports PE
financing for local businesses.
Exit opportunities
are also abound in the region. PE firms who invested early into Asia-Pacific
for the last 15 to 20 years, are expecting more global companies to step up
their acquisition.
activities
in Asia Pacific and buyout holding companies as they seek to expand into high
growth markets and solidify their comparative advantage. As such, exits to
strategic buyers are expected to be more likely than exit via IPO for
Asia-Pacific.
The PE
investment trend in Asia Pacific to note
The
private equity industry in Asia-Pacific continues to evolve; instead of just
providing financial support, the current investment trend now in Asia Pacific
is that PE firms are more focused on ‘value creation’ -the use of internal
operating partners to drive value creation in portfolios. Many PE firms in Asia
Pacific insist on partnering with the management, providing needed technical expertise,
resources, networks and structuring proper governance to grow the business
together instead of than leaving it to run on its own.
4. Pockets of
opportunities: The specifics
Country specific: Vietnam
Vietnam
has not been investors’ first choice to deploy capital due to its past weak
economy performances and high inflation— but what the country lacks in economic
glitter; it more than makes up for in stability. The largely homogenous
population and established political regime have created a degree of improved
confidence and calm. Vietnam as a whole is hungry for capital; their financial
sector is not well established and their private sector is not well run. Many
businesses need capital and expertise to reach the next level of business
success. Sectors currently experiencing only lukewarm activity could soon start
to see heated deal flow as GPs become embroiled with competitors for assets,
particularly in the consumer goods, financial services and other non-exportable
sectors.
Country
specific: Myanmar
Myanmar
is experiencing a new paradigm shift; turning away from its politically
repressive past and embracing democracy and economic reform. The country is
opening up to the rest of the world. Problems such as the lack of basic
infrastructures –proper roads, power. The lack of financial intermediaries; an
outdated banking system, presents a huge opportunity for businesses to look
into. The growing manufacturing base and low cost labor factors are also likely
to draw businesses looking for viable alternative markets to China. The
resource-rich nation will likely see an expansion of investment, particularly
in its banking, infrastructure, oil and gas sector for 2013 and the coming
years.
Sector specific
Consensus
among PE professionals expects energy, mining and utilities and consumer
sectors to attract the most interest across Asia-Pacific. Other sectors like
Industrials and chemicals and technology, media and telecommunications are
expected to draw in significant interest as well.
