More scope for Asia's PE firms to expand: report

Singapore

THREE-quarters of senior private equity executives in Asia-Pacific (APAC) said that geographic expansion had significantly become more important to their firm over the last three years, according to the 2019 Private Equity Outlook Report by global law firm Dechert, together with Mergermarket.

This beats the view of 58 per cent from respondents in Europe, the Middle East and Africa (EMEA), and 69 per cent from North America.

Some 70 per cent of APAC respondents also have a more favourable view of vertical integration deals, compared to 53 per cent in EMEA and 56 per cent in North America.

However, APAC private equity firms' focus on specialisation in domain expertise is slightly less compared to the rest of the world; 80 per cent of APAC respondents said that firms emphasised less on specialisation in domain expertise, compared to 90 per cent in EMEA and 88 per cent in North America.

Globally, the majority of the 100 senior private equity executives surveyed said they believe competition for deals will lead to an increase in consolidation between firms over the next three years. Such moves are expected to help private firms expand their capital base and increase scale for other advantages, said the report.

To combat competition and higher multiples, respondents said that they were very likely to make acquisitions based on industry or market differentials, create vertically integrated portfolio companies, and build a portfolio company from scratch with a hand-picked management team.

Respondents said that the top challenges to executing club deals included determining the sources of financing (40 per cent), finding the right consortium partners (36 per cent), and building rapport with consortium members (36 per cent).

The report found that club deals, including transactions with significant co-investment commitments from limited partners, are becoming increasingly widespread. But challenges remain, which include determining the sources of financing and finding the right consortium partners.

Respondents also said that private equity stands at an "inflexion point". Uncertainty related to disruptions in global trade, repercussions from the US tax code and regulatory overhaul, and an uncertain exit environment mean that firms face unprecedented pressure to find long-term value, said the report.

"Capital used by private equity funds is becoming a lot more flexible. Not just in terms of how much is invested and the sectors at play, but also where in the capital structure the capital will be used and the expected return profiles," said Ross Allardice, a partner in Dechert's London office.

"For PE (private equity) funds, this is an exciting time as they now have a much wider variety of strategic options. From assuming minority interest to starting their own platforms, today's PE firms are no longer just asset management vehicles."

The report surveyed 100 senior executives within private equity firms across APAC, EMEA and North America on the outlook for private equity. Firms surveyed needed to have US$500 million or more in assets under management and these could not be first-time funds.