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Asia may reward private equity's patient capital
[HONG KONG] Private equity may prove its long-term bona fides in Asia. After years of wrestling with protective family founders and entrenched corporate attitudes, new research suggests the buyout model is paying off.
Entrepreneurs in the region have been largely resistant to meddling buyout barons, preferring to borrow more themselves or hand control to the next generation. And when they do invite in private equity, it is often only with a small stake. Companies, too, have been slow to sell off pieces of their sprawling operations.
This is changing, though. Half of recent deals struck in Asia included path-to-control provisions, up from about a third, according to a study released on Thursday by consultancy Bain & Co. And though the number of full takeovers in the area dipped last year from a record in 2016, they grew noticeably bigger. The average LBO (leveraged buyout) clocked in at over US$500 million, more than double the previous annual figure. It happened even as valuation multiples fell a bit, to a still-lofty 14 times Ebitda (earnings before interest, taxes, depreciation, and amortisation).
Returns are on the rise, too. The median net internal rate of return for funds dedicated to the region reached 11.5 per cent in January, up 0.7 percentage point from the end of 2016, Bain found. Some, if not much of that, probably can be attributed to Asia's fast economic growth. There have been similar cyclical bounces before. Buying high and selling higher is not a strategy that stands the test of time.
There is also no guarantee that deals like the Bain Capital-led US$18 billion acquisition of Toshiba's memory-chip business or the US$11.5 billion leveraged buyout of Singapore's Global Logistics Properties by Hillhouse and Hopu can be replicated. One risk of such successes is that it attracts crowds. Many firms also are zeroing in on similar sectors, such as healthcare in China and consumer goods in South-east Asia.
What's more, returns in Asia, which account for only about 10 per cent of private equity investment globally, lag those in the West. Macroeconomic shocks are known to ripple across the Asia-Pacific region, and can hurt both profitability and exit opportunities. And yet, buyout firms keep chipping away at local norms. The region itself could yet turn out to be a good case study in patient capital.
The value of Asia-Pacific private equity deals increased to a record high of US$159 billion in 2017, up 41 per cent from a year earlier, consultancy Bain said in a report published on March 15.