Private Equity Outlook for 2013-2015 (My View)

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.

Though it remains to be seen how the rest of 2013 will pan out for the private equity market as a whole. We at partners group continue to believe that there are pockets of opportunities, if one were to look closer. Perhaps we all can start by looking to Asia- Pacific as the engine to drive growth for the foreseeable future.