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ContentsForeword                                        1Executive summary                               2Deal expectation...
ForewordAmid a sea of change in the global economy, the tide in Asia-Pacific has continued torise. Despite languid economi...
=p][mlan] kmeeYjqPrivate equity activity continues to rise in Asia-Pacific             The focus for exit opportunities is...
]Yd ]ph][lYlagfkRespondents are bullish on private equity activity across9kaY%HY[aÔ[ af *()+Gn]j l`] f]pl )* egfl`k$ o`Yl ...
]Yd ]ph][lYlagfk                    Expanding on opportunities in the region, another private equity fund sponsor says,   ...
?Hk Y[jgkk 9kaY%HY[aÔ[ j]eYaf hjaeYjadq ^g[mk] gf eYcaf_acquisitions, but increased attention is being given to raisingcap...
]Yd ]ph][lYlagfk                                            However, making acquisitions is not at the top of the agenda  ...
Greater China will witness the most activity, accordingto 70% of respondentsHd]Yk] jYfc l`] ^gddgoaf_ eYjc]lk Zq ]ph][l] h...
Khglda_`l gf Kgml`]Ykl 9kaYOpportunities stemming from Southeast Asia’s growing prominenceare drawing private equity playe...
opening offices,” Pais says. “It’s not easy to sit in Hong Kong        Discovering the deals and dealing with competitiona...
Khglda_`l gf Kgml`]Ykl 9kaY                                                                     “Right now, Vietnam is loo...
interest in the country, opening and closing representative          is reviewing potential coal mine acquisitions in Myan...
]Yd ]ph][lYlagfk                                             Compared with 2012, respondents show a stronger consensus    ...
Another institutional investor in Southeast Asia adds to this, saying, “Looking at thepopulation of Asian countries and th...
]Yd ]ph][lYlagfk                                             However, sector focus varies by geographic location          ...
Sector specialization is becoming more importantlg 9kaY%HY[aÔ[ hjanYl] ]imalq afn]klgjk@go aehgjlYfl ak k][lgj kh][aYdarYl...
]Yd ]ph][lYlagfk                                             Deal sizes are expected to be larger across the board in 2013...
Respondents expect fewer exits and more managementbuyouts than in 2012Gn]j l`] f]pl )* egfl`k$ o`Yl lqh] g^ hjanYl] ]imalq...
]Yd nYdmYlagf Yf ÕfYf[af_                                             A majority of respondents expect transaction values ...
Macroeconomic conditions continue to weigh heavilyon valuationsO`a[` g^ l`] ^gddgoaf_ g qgm l`afc akYj] `Ynaf_ ka_faÕ[Yfl ...
]Yd nYdmYlagf Yf ÕfYf[af_                                             The valuation gap between buyers and sellers is larg...
There is slightly greater appetite for leverage across9kaY%HY[aÔ[ [gehYj] oal` *()*@go em[` d]n]jY_] g qgm ]ph][l oadd Z] ...
]Yd nYdmYlagf Yf ÕfYf[af_                                             9[jgkk 9kaY%HY[aÔ[$ ]Zl eYjc]lk `Yn] klYZadar]$ Y[[g...
]Yd Ögo Yf ]pal ghlagfkMacroeconomic conditions and regulatory changes are]ph][l] lg `Yn] l`] egkl ka_faÔ[Yfl ]^^][l gf ]Y...
]Yd Ögo Yf ]pal ghlagfk                                             L`] j]_mdYlgjq ]fnajgfe]flËk ]^^][l gf ]Yd Õgo ak egkl...
Deals sourced from personal relationships and advisoryintermediaries are still seen as important in many marketsin 2013Af ...
]Yd Ögo Yf ]pal ghlagfk                                             In 2013, IPO markets are expected to be subdued compar...
;YhalYd Ögok Yf afn]klgj ]eYfAfn]klgj Yddg[Ylagf lg 9kaY%HY[aÔ[ hjanYl] ]imalq ak ]ph][l]to rise at a faster pace compared...
;YhalYd Ögok Yf afn]klgj ]eYf                                             A big jump in institutional capital coming from ...
Secondary market trading is on the rise, according to 60%of respondentsO`Yl g qgm ]ph][l ^gj l`] hjanYl] ]imalq k][gfYja]k...
;YhalYd Ögok Yf afn]klgj ]eYf                                             Fund sponsor due diligence processes at the asse...
;gmfljq%kh][aÔ[ ^mfk Yj] Ôfaf_ egj] ^Yngj af *()+for Asian and non-Asian LPs alike@go oadd 9kaYf DHk Yf fgf%9kaYf DHk hjae...
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
Asia Pacific Private Equity Outlook Report 2013
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Asia Pacific Private Equity Outlook Report 2013

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Accenture - Asia Pacific Private Equity Outlook Report - Feb 2013

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Transcript of "Asia Pacific Private Equity Outlook Report 2013"

  1. 1. 9kaY%HY[aÕ[hjanYl] ]imalqgmldggc *()+
  2. 2. ContentsForeword 1Executive summary 2Deal expectations 3Feature article: Spotlight on Southeast Asia 8<]Yd nYdmYlagf Yf ÕfYf[af_ )0<]Yd Ögo Yf ]pal ghlagfk *+;YhalYd Ögok Yf afn]klgj ]eYf */Challenges to private equity 34The changing face of private equity 40Feature article: Pan-regional view of privateequity endeavors 44Feature article: Making an exit 48Historical data 51Top deals table 56Methodology 58Respondent information 58About mergermarket and Remark 60Contacts 61
  3. 3. ForewordAmid a sea of change in the global economy, the tide in Asia-Pacific has continued torise. Despite languid economic activity in North America and Europe, economies acrossAsia-Pacific continue to grow, still with significant potential, based largely on a growingmiddle class and rapidly improving standards of living.Private equity investors, most of whom are adept at spotting trends early and investingahead of the curve, have been active in Asia-Pacific in the last 15 to 20 years. This,matched with a growing sophistication of private equity investment in the region, hasled to a surge in new fund opportunities focused in Asia-Pacific, sponsored both byglobal private equity houses and by local firms leveraging relationships and expertisein local markets.Furthermore, both Asia-Pacific governments and potential sellers have become morefamiliar with the private equity investment model and understand the benefits that thissource of capital can bring for development. Needless to say, many are now increasinglyreceptive to private equity investment.However, challenges remain, and foremost among them as we look ahead to 2013 iscompetition from strategic corporate acquirers, many of whom are looking to Asia-Pacific as the engine to drive growth for the foreseeable future. At the same time,changing regulations in some markets around the region are changing the rules forprivate equity investors, leaving fund sponsors wary of what is to come in certainmarkets, particularly given uncertainty in the global economy.In light of these views, we have again teamed up with mergermarket to assess marketsentiment in the year ahead. Respondents to this year’s survey maintain a strongercollective viewpoint in many areas compared with last year. Most agree that Asia-Pacificshould remain a relative bright spot in the global economy. We hope that you find thisyear’s report compelling, and as always, we welcome your feedback.Ea[`Y]d :mplgfHjanYl] =imalq D]Y]j$ 9kaY%HY[a^a[=jfkl Qgmf_ 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 1
  4. 4. =p][mlan] kmeeYjqPrivate equity activity continues to rise in Asia-Pacific The focus for exit opportunities is shifting gearsand Greater China will remain the most active market As compared with 2012, respondents expect fewer exitMore than 85% of respondents say private equity activity will opportunities via an IPO in 2013, particularly in Greaterincrease over the next 12 months, and by a significant margin China and India. At the same time, exits to strategic buyersrespondents believe that Greater China will host the majority of are expected to be more prevalent in every subregion acrossactivity in 2013, a result similar to last year’s survey. Southeast Asia-Pacific as cash-rich corporates look to expand into high-Asia is on the rise with nearly half of respondents expecting growth markets. Respondents also expect an increase indeal activity to expand significantly in the region. Furthermore, institutional investors looking to sell their positions with Asia-respondents believe making acquisitions, raising new capital and Pacific private equity funds on the secondary market as LPsimproving the performance of portfolio companies will represent try to liquidate some of their holdings as activity slows onthe majority of activity in 2013. exit markets.Energy, mining and utilities and consumer sectors are Institutional capital is expected to flow into Asia-Pacificexpected to see the most activity again in 2013 as sector private equity funds at a faster rate in 2013specialization becomes more important A majority of respondents believe that LP investor allocations toRespondents again expect energy, mining and utilities and Asia-Pacific private equity funds will increase over the comingconsumer sectors to attract the most interest across Asia-Pacific, 12 months. As a result, funds raising capital are expected towith a much stronger view for 2013 compared with 2012. Other meet or slightly exceed fund-raising targets, according to mostsectors across the region with high expectations for activity respondents, and country-specific funds are expected to garnerinclude industrials and chemicals and technology, media and the most investor interest, from foreign and domestic LPs alike.telecommunications (TMT). Sector specialization is becoming When making new allocations, respondents indicate a greatermore important, according to the majority of respondents. focus over the coming 12 months on asset-level due diligence processes of fund sponsors.Deal sizes on the riseDeal sizes are expected to be larger in 2013 than they were in Competition for assets is expected to heat up2012, according to respondents. What is more, respondents As investors raise new capital for private equity investment,expect valuations to continue to rise in 2013, an extension respondents expect competition for assets to be the foremostof a trend from the previous year. At the same time, some challenge for private equity investment across Asia-Pacific.respondents expect that buyers will face an impasse with sellers Aside from going head to head with other private equityover valuation, while a majority believe the valuation gap will investors, respondents expect corporate acquirers to presentremain on par with previous years, allowing enough room for the greatest competition. Sovereign wealth funds in certaindeals to close. At the same time, most respondents believe deal subregions are also expected to challenge private equityvalues will be most affected by prevailing economic uncertainties investors, but the consensus among respondents is that LPand competition for deal flow. investors lack direct investment experience to adequately contend with fund sponsors.Macroeconomic conditions and the regulatory environmentswill significantly affect deal flow in 2013 Value creation becomes an imperativeAcross Asia-Pacific and in each of Asia-Pacific’s subregions, As the private equity industry in Asia-Pacific continues tomacroeconomic conditions will have a large effect on deal flow evolve, the use of internal operating partners to drive valuein 2013, according to most respondents. Furthermore, another creation in portfolios has increased. Half of respondentslarge portion of respondents say the regulatory environment in observed growing use of these resources, many noting thatAsia-Pacific will affect deal flow, with the strongest concerns in these professionals are playing an increasingly important roleGreater China and India, though more than 50% of respondents in improving portfolio companies. The industry will change inpoint to regulatory concerns in Southeast Asia and Australasia other ways too. A majority of respondents believe private equityas well. firms will diversify their offerings, with most focusing on venture capital and infrastructure.2 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  5. 5. ]Yd ]ph][lYlagfkRespondents are bullish on private equity activity across9kaY%HY[aÔ[ af *()+Gn]j l`] f]pl )* egfl`k$ o`Yl g qgm ]ph][l oadd `Yhh]f lg hjanYl]]imalq Y[lanalq7 2% 9kaY%HY[aÕ[ 46% 40% 12% Greater China 47% 44% 9%Southeast Asia 46% 39% 15% South Korea 37% 25% 38% India 24% 47% 29% Australasia 16% 68% 16% Japan 9% 55% 18% 18% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents =phYf ka_faÕ[Yfldq Expand slightly Remain the same Contract slightly ÉL`] [gflafmaf_ [jakak afAcross Asia-Pacific, and particularly in Greater China and Southeast Asia, nearly half =mjgh] Yf l`] dY[c g^ _jgol`of respondents expect significant expansion in private equity activity over the next 12 af Fgjl` 9e]ja[Y ak lmjfaf_months. Furthermore, 40% expect slight expansion in the region, showing that the vastmajority of respondents expect increases in private equity deal flow over the coming afn]klgj ^Yngj lgoYj 9kaY$year. India and Japan stand out as the only jurisdictions where a significant number of Yf egj] Yf egj] ^gj]a_frespondents expect a slight contraction in activity. Quite interestingly, views for 2013 hjanYl] ]imalq Õjek Yj] fgoshow a substantial increase compared with 2012, when only 16% expected a significant ]q]af_ 9kaYf eYjc]lkÊexpansion across Asia-Pacific and 30% expected activity to remain the same or contract,with the majority expecting only a slight expansion.Much of this year’s fervor for private equity activity stems from Asia-Pacific’s risingeconomic status relative to the more developed private equity investment markets inthe United States and Europe. One private equity investor sharing the view of manybelieves, “Private equity penetration in Asia is very low, which leaves significant roomfor an increase in activity.”Another private equity fund sponsor says, “Asia-Pacific continues to be the preferredlocation for private equity investors because of its growing economies and abundantopportunities. Private equity firms are expanding their reach in terms of location andsector in order to deploy more funds in anticipation of higher returns not available intraditional markets.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 3
  6. 6. ]Yd ]ph][lYlagfk Expanding on opportunities in the region, another private equity fund sponsor says, “Asia-Pacific has unique opportunities that cannot be matched by any other region. Private equity firms in Asia-Pacific are not worried about adverse global market conditions and are innovating and using new strategies.” Perhaps an example is one Cayman Islands-based private equity firm, which, according to proprietary mergermarket intelligence, is targeting investors for its three latest frontier market funds, two of which are focused on Bangladesh and Myanmar. Exemplifying innovative new strategies, the firm’s Myanmar fund will invest in real estate initially, while the Bangladesh fund targets development finance institutions. From a fund investor’s perspective, one institutional investor who expects LP capital allocations for Asia-Pacific private equity to increase significantly says, “Conditions in Asia-Pacific are perfect for private equity investments, and private equity activity in the next 12 months will outperform the activity of previous years.”
  7. 7. ?Hk Y[jgkk 9kaY%HY[aÔ[ j]eYaf hjaeYjadq ^g[mk] gf eYcaf_acquisitions, but increased attention is being given to raisingcapital and improving portfolio companiesO`Yl oadd Z] l`] egkl aehgjlYfl _gYd g^ hjanYl] ]imalq Õjek gn]j l`] f]pl)* egfl`k Y[jgkk 9kaY%HY[aÕ[7 EYcaf_ Y[imakalagfk 87% JYakaf_ f]o [YhalYd 75%Aehjgnaf_ gh]jYlagfYd h]j^gjeYf[] g^ 75% hgjl^gdag [gehYfa]k Restructuring/ 43% j]ÕfYf[af_ ]Zl Exiting current 42% investments Other 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondentsSimilar to 2012, making acquisitions tops the list of private equity goals for 2013,Y[[gjaf_ lg 0/ g^ j]khgf]flk$ [gehYj] oal` .+ dYkl q]Yj 9l l`] kYe] lae]$ ÉHjanYl] ]imalq Õjek Yj]raising capital seems a more palpable reality this year with three-quarters pointing to fgo ljqaf_ lg kh][aYdar]the fund-raising trail as a primary goal for private equity, compared with just 40% last gh]jYlagfYddq af l`]year. The largest jump according to respondents is in improving operations of portfoliocompanies, which also garnered three-quarters of respondent views, compared with Zmkaf]kk]k af o`a[`just 30% a year ago. l`]q afn]klÊSumming up these views, one institutional investor states, “As the fundamentalsare getting better, private equity firms are more confident in making new acquisitions,and with the economy improving, many private equity firms are committingthemselves to their existing portfolio companies and are developing them internally.”Another institutional investor says, “Private equity firms are now trying to specializeoperationally in the businesses in which they invest. They are focusing heavilyon improving the operational performance by improving systems, processes,entrepreneurialism and risk management.”One specific value-added strategy detailed in last year’s Asia-Pacific private equityoutlook report is again highlighted by a GP investor: “Private equity firms in Asia-Pacificare not leaving portfolio companies to run on their own. They are instead partneringwith portfolio company management teams, providing them with knowledge andtechnical expertise along with a global platform to help portfolio companies succeed inthe international market.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 5
  8. 8. ]Yd ]ph][lYlagfk However, making acquisitions is not at the top of the agenda in every market O`Yl oadd Z] l`] egkl aehgjlYfl _gYd g^ hjanYl] ]imalq Õjek gn]j l`] f]pl )* egfl`k af qgmj hjaeYjq j]_agf g^ ^g[mk7 Greater China Southeast Asia India Australasia Japan South Korea 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Making acquisitions Improving operational performance of portfolio companies Raising new capital J]kljm[lmjaf_j]ÕfYf[af_ ]Zl Exiting current investments Other While the majority of respondents focused on Greater China, India and Australasia say making acquisitions will be the primary focus for firms in their respective subregions, gl`]j _gYdk lggc l`] lgh khgl af gl`]j eYjc]lk gj ]pYehd]$ /) g^ AfaY%^g[mk] respondents say improving operations will be a primary goal. One reason, according to an India-based GP, could be the regulatory environment. “Private equity firms are trying hard to exit investments in India, and they certainly have no intention of increasing acquisitions in India until the regulatory climate eases. Comparatively, the local private equity firms are still committed to their existing portfolios and are raising capital in order to increase operational performance by making strategic changes,” he says. Currently, Indian regulators are considering easing some of the new regulations regarding private equity, though the final outcome remains to be seen. The private equity environment in Southeast Asia is a bit different. According to one private equity investment banker, “The private equity market in Southeast Asia is not overcrowded and the valuations are lower compared to its neighbors, thus private equity firms will make many new acquisitions to expand their business when valuations are lower.” He went on to say, “Furthermore, firms in China, India and Australia will not only acquire new targets but will also allocate capital to improve the operational performance of the portfolios.”6 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  9. 9. Greater China will witness the most activity, accordingto 70% of respondentsHd]Yk] jYfc l`] ^gddgoaf_ eYjc]lk Zq ]ph][l] hjanYl] ]imalq ]YdY[lanalq gn]j l`] f]pl )* egfl`k2 ) 5 egkl Y[lan]3 . 5 d]Ykl Y[lan]! 2% Greater China 70% 22% 6% 16% 32% 19% 17% 10% 6%Southeast Asia 4% 21% 30% 23% 15% 7% India 4% 20% 23% 18% 26% 9% Australasia 4% 3% 10% 23% 19% 41% Japan 2% 2% South Korea 12% 16% 30% 38% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents 1 (most active) 2 3 4 5 6 (least active) É;`afY ak fgo l`] hjagjalqDespite uncertainty concerning the Chinese economic growth engine and respondents’ ^gj eYfq _dgZYd Õjek$ Yfconcerns around changing regulations in China (see pages 20 and 31), the majority ;`afY oadd d]Y l`] hjanYl]of respondents, as they did last year, overwhelmingly expect the greatest amount ofprivate equity activity to take place in Greater China – perhaps due to the sheer volume ]imalq Y[lanalq fgl gfdq afg^ ghhgjlmfala]k Af ^Y[l$ l`ak q]YjÌk kmjn]q ^gmf l`Yl /( g^ j]khgf]flk ]ph][l 9kaY$ Zml ]n]f _dgZYddqÊGreater China to experience the most activity, as opposed to 60% last year. India, on theother hand, which was projected to be the second most active in 2012, fell to the thirdspot, behind Southeast Asia.One investment banker says, “China is now the priority for many global firms, andChina will lead the private equity activity not only in Asia, but even globally. The positivemacroeconomic environment of China and its high growth rate are difficult to ignore.Chinese companies are capturing global markets by storm and are emerging as majorplayers. Thus, private investors are automatically attracted.”On the other hand, a globally focused private equity investor based in Australasiasays, “Robust growth in Southeast Asia is the most attractive choice and is drawingthe interest of private equity funds. Singapore is well placed to capitalize on this trendwith its strategic location, accessibility to the rest of the region, established financialinfrastructure and attractive tax regime.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ /
  10. 10. Khglda_`l gf Kgml`]Ykl 9kaYOpportunities stemming from Southeast Asia’s growing prominenceare drawing private equity players’ attention — and dollarsTo create an overview of private equity activity in Southeast Asia, buyout firm Kohlberg Kravis Roberts (KKR) arrived in Singapore,Brandon Taylor, Editor for Remark Asia at mergermarket, spoke preceded by rivals Blackstone and General Atlantic, according towith Ernst Young’s Luke Pais, MA Leader for the ASEAN; a Financial Times report.Kelvin Lee, Transactions Leader for Vietnam; Preman Menon,Director of Transaction Advisory Services in Malaysia; and Renato Private equity capital is being raised rapidly, showing no sign ofGalve, Head of Transactions Advisory Services for the Philippines. slowing, with fund managers looking to add to current funds or start new ones.While a minor blip on the radar screens of general partners (GPs)only a few years ago, Southeast Asia is fast becoming a primary “Historically, China and India have been high on limited partners’destination for private equity. Indeed, slowed economic growth in (LPs) radars, but increasingly we are seeing a shift in investmentChina and political and regulatory factors in India — two favorite strategy and a recognition of Southeast Asia as a destination forcountries for GPs — in addition to refocused attention from that shift,” says Luke Pais, MA Leader for the ASEAN. “Curiosityfunds previously chasing deals across a troubled Eurozone, have from LPs is piquing, and Southeast Asia is becoming a veryallowed the spotlight to shift to Southeast Asia, with Singapore, exciting market.”Indonesia, Malaysia, Thailand, Vietnam and the Philippinesaccounting for virtually all investment in the region. But while a viable alternative to its market-saturated neighbors, certain precautions need to be observed, first and foremost ofEconomies across the subregion are growing in the mid-to-high which is looking at Southeast Asian countries for their individualsingle digits, a trend likely to continue. The World Bank says worth and not at the region as a single entity. As Pais points out,that Malaysia, the Philippines, Thailand and Vietnam currently “These are different markets at different stages of development.showcase gross domestic product (GDP) growth rates between But to some extent, that is the attractiveness of the market.”4% and 6%. Indonesia is expected to hit 6.5% by year’s end.Growing consumer demand across Southeast Asia, spurred by A regional magnet for private equitythe region’s emerging affluent populace of some 600 million, As the gateway to the region, Singapore has seen an uptickhas created space for expansion in the consumer and in private equity activity as global firms rush to establish theirmanufacturing sectors. presence in the city-state.Now, eager to benefit from Southeast Asia’s growing Last October, KKR opened a branch office in Singapore, itsprominence, global firms are stepping up acquisition activity, seventh in the Asia-Pacific region. Since 2005, KKR has investedas well as their overall presence in the region. Last year, global US$1b in Southeast Asia through notable transactions involving Singapore-headquartered companies Avago, Unisteel and MMI. Other global buyout funds, such as TPG Capital and CVC Capital also have opened local offices in Singapore. CVC opened itsÉ;mjagkalq ^jge DHk ak haimaf_$ Yf Kgml`]Ykl Kaf_Yhgj] g^^a[] af *((/ Yf `Yk ]klYZdak`] k][lgj l]Yek focused on investment across Southeast Asia. 9kaY ak Z][geaf_ Y n]jq ]p[alaf_ eYjc]lÊ Dmc] HYak “Hong Kong used to be a former base for private equity investors targeting the region, but now they’re moving to Singapore and8 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  11. 11. opening offices,” Pais says. “It’s not easy to sit in Hong Kong Discovering the deals and dealing with competitionand service the market from there. If you’re not in the market, Singapore may be the undisputed regional hub for private equity,actively talking to people all the time, you’re not necessarily but myriad other deals and opportunities await discovery in thegetting the first bite when deals come up.” individual jurisdictions, led by Indonesia, Thailand and Malaysia.Singapore-based hubs are quickly becoming the norm as Since 2011, Indonesia has seen 13 deals worth close tocompetition from other private equity firms and cash-rich US$900m, according to mergermarket data. The sprawlingcorporates for assets and acquisitions heats up, forcing archipelago nation’s stability and economic potential has longgeneral partners and their firms to act with haste and allocate enamored investors and is likely to draw increased focus fromgreater resources to Southeast Asia. Singapore’s regulatory major funds in the region, Pais notes.environment, specifically, is a driver for deal activity. Safeguardsfor investors and the overall ease of doing business act as Deal value in Thailand over the same time period totaled onlyadditional incentives to operating in the city-state. US$114m in two transactions. Pais says that as private equity activity increases in other Southeast Asian markets, Thailand“There’s quite a sizable amount of funds available to invest,” has become less active.Pais says. “And Singapore structures are looking attractive tointernational investors.” But with many opportunities come many challenges. Aside from 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 9
  12. 12. Khglda_`l gf Kgml`]Ykl 9kaY “Right now, Vietnam is looking for capital, as the financial sector is doing quite poorly,” says Kelvin Lee, Transactions Leader forÉOal` Y `a_` d]n]d g^ kgh`akla[Ylagf$ Y Vietnam. “In the Southeast Asia region, this is one place that ljYfkhYj]fl j]_mdYlgjq ]fnajgfe]fl$ Yf dgo needs private equity more than anywhere else.” ZYjja]jk lg ]fljq$ EYdYqkaY ak gf] g^ l`] ]Yka]j ]klafYlagfk ^gj hjanYl] ]imalq afn]klgjk Economic considerations aside, one of the largest challenges for private equity investors in Vietnam is target quality. gmlka] g^ Kaf_Yhgj]Ê Hj]eYf E]fgf “There are a few gems, but unlike Indonesia, Vietnam lacks a well-run private sector, and capital is going to be needed to take some of these businesses to the next level,” Lee notes.rival private equity firms, investors must also vie with cash-richcorporates, particularly those emanating from Japan, armed Deal size and scale also limit private equity growth, as mid-sizedwith deep pockets and synergies that private equity firms cannot funds with upwards of US$500m to deploy struggle to findcontend with. companies north of the US$100m mark. Most deals fall in the US$35m–US$50m range. According to mergermarket data,However, when on the sell side, firms and fund managers are aside from KKR’s purchase of a 10% stake in Masan Consumeroftentimes able to capitalize on demand for their Southeast Corporation, a food product distributor, for US$159m in 2011,Asian assets, selling investments to strategic buyers at a hefty the only other notable deals were US-based TPG Capital’spremium. In 2011, Navis Capital Partners sold Singapore-based hmj[`Yk] g^ Y )( klYc] af HL ;gjhgjYlagf ^gj MK+/e af *((.King’s Safetywear Limited, a manufacturer of industrial safety and Temasek Holdings’ purchase of a 10% stake in Minh Phufootwear and personal protective equipment, to US-based K]Y^gg ;gjh ^gj MK*)e af *((/Honeywell International for US$345.8m. Navis purchased thecompany in 2008 for US$83.5m. That deal was preceded by A general dearth of private equity players in the VietnameseNavis’ sale of Linatext, a Malaysia-based maker of specialty market has positioned the country to become a target forrubber-based products purchased for US$31.1m, to the Weir investment in the coming years as investors look to branchGroup for US$200m.Malaysia, too, stands out as a prime destination for private ÉL`] [mjj]fl lj]f ak k]]af_ Y jYha k`a^lcapital. With a high level of sophistication, a transparentregulatory environment and low barriers to entry, Malaysia is one YoYq ^jge [gjjmhlagf lg ljYfkhYj]f[q$of the easier destinations for private equity investors outside of ^gkl]jaf_ Y egj] o]d[geaf_ ]fnajgfe]flSingapore, says Preman Menon, Director of Transaction Advisory ^gj afl]jfYlagfYd Zmkaf]kk]k Yf [j]Ylaf_Services for Malaysia. Yet, despite these conveniences, Malaysia [gfÕ]f[] Yegf_ ^gj]a_f afn]klgjkÊhas historically seen lower levels of private equity investment, J]fYlg ?Ydn]with a fairly local ecosystem of deals, a trend that is likely tochange as local businesses look outside Malaysia’s borders.Growing pains out from Singapore, Indonesia and Thailand. Sectors currentlyVietnam may not be an investor’s first choice to deploy resources experiencing only lukewarm activity could soon start to see– the nation’s weak economy and high inflation have created heated deal flow as GPs become embroiled with competitors forconsiderable disincentives — but what it lacks in economic glitter assets, particularly in the consumer goods, financial services andit more than makes up for in stability. The largely homogenous other non-exportable sectors, Lee says.population and established political regime have created a degreeof confidence and calm, giving it a needed edge over neighboring Aside from Vietnam, the Philippines awaits its share ofjurisdictions. investment. Historically, private equity firms have had a fleeting10 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  13. 13. interest in the country, opening and closing representative is reviewing potential coal mine acquisitions in Myanmar, andoffices as needed. This was largely due to political instability, Timah, the state-owned Indonesian mining company, is preparingbut that is changing. The current trend is seeing a rapid shift to invest up to US$18m in a tin mine.away from corruption to transparency, fostering a morewelcoming environment for international businesses and creating Once economic reforms take hold and political promises areconfidence among foreign investors, says Renato Galve, Head of realized, investors will be able to fully utilize Myanmar’s uniqueTransactions Advisory Services in the Philippines. geographic position as a link between Southeast Asia and China and India. A low-cost labor force and growing manufacturingOne particular sector that could see improved activity is base are also likely to draw businesses looking for viableinfrastructure — from roads and rails to ports and power lines alternative markets to China.— which the archipelago nation finds itself incredibly lacking.According to the World Bank, the Philippines ranks as one of the While prospects abound across Southeast Asia, private equitytop destinations in Asia for private investment, ahead of regional investors’ abilities to tap these new frontiers for growth will relycompetitors Indonesia and Malaysia. As of late, however, thatinvestment has been unsteady at best, as noted by a recentFinancial Times report, decreasing from US$5.5b in 2009 ÉL`]j] Yj] Y ^]o _]ek$ Zml mfdac] Afgf]kaY$to US$1.1b in 2011. These opportunities, matched with thecountry’s stable inflation rates and political stability, stand to Na]lfYe dY[ck Y o]dd%jmf hjanYl] k][lgj$ Yfraise the Philippines’ profile for private investors. [YhalYd ak _gaf_ lg Z] f]]] lg lYc] kge] g^ l`]k] Zmkaf]kk]k lg l`] f]pl d]n]dÊOpen for business C]dnaf D]]Long the pariah of the region, Myanmar is turning away from itspolitically repressive past and embracing reform. A rapid shiftto democracy, marked by the military-led government’s politicaland economic reforms in early 2012, is seeing the country open largely on their ability to adapt and maintain a level of flexibility.to the rest of the world. As sanctions from the West are lifted, This is particularly true as no two jurisdictions exhibit the samepotential investors worldwide are taking note, but barriers remain regulatory environments. Risks are abundant — but so too are theto be breached before Myanmar joins the ranks of its Southeast treasures of a region ripe for private equity and foreign investors.Asian neighbors.Roads and power infrastructure are in short supply, Lee notes,and adequate laws protecting investors are needed. Mosttransactions are also still conducted in cash; credit card useis rare.“Right now it’s an early-stage story,” Pais notes. “This isparticularly true of the banking system — it needs to gear up tointernational standards and also needs international institutionsto establish a presence.”That hasn’t stopped multinationals, as interest and anticipationto enter the largely untapped market grows. A resource-richcountry, Myanmar will likely see an expansion of investment,particularly in its oil and gas sector, Pais says. Already,Indonesian companies have started their market entry: accordingto mergermarket intelligence, an Indonesia-listed coal miner 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 11
  14. 14. ]Yd ]ph][lYlagfk Compared with 2012, respondents show a stronger consensus for energy, mining and utilities and consumer sector deals af *()+ Y[jgkk 9kaY%HY[aÔ[ O`a[` k][lgj k! oadd ]ph]ja]f[] l`] _j]Yl]kl Yegmfl g^ hjanYl] ]imalq Y[lanalq Y[jgkk 9kaY%HY[aÕ[7 Energy, mining 80% and utilities Consumer 72% Industrials and chemicals 51% Technology, media and 48% telecommunications Pharma, medical 45% and biotech Financial services 39% Real estate 21% Transportation 11% Other 11% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage of respondents Af *()*$ -* Yf ,/ g^ j]khgf]flk ]ph][l] ]Yd ^dgo af l`] ]f]j_q$ eafaf_ Yf utilities and consumer sectors, respectively. For 2013, those two sectors maintain their lgh hgkalagfk oal` 0( Yf /* g^ j]khgf]fl na]ok$ j]kh][lan]dq =f]j_q ak kladd Yl l`] top of the agenda for many Asian nations, and private equity investors will be looking to capitalize on innovation and growth in the sector across the region. Furthermore, the Asian consumer has continued rising in terms of discretionary income and purchasing power, and financial investors see plenty of opportunity to play leading roles in this growth story. At the same time, a rising tide is lifting all vessels, and a number of sectors are also expected to attract private equity activity. One globally focused institutional investor in South Korea says, “The energy sector is enjoying unprecedented growth in Asia-Pacific, and rising demand and stable oil prices are driving the increase in private equity activity. I think in the next 12 months, private equity investment in the energy and mining sector will remain strong in response to high commodity prices. Furthermore, the pharmaceutical, medical and biotechnology sector is also receiving high levels of private equity funding as Asia-Pacific is emerging as the new location for drug development and innovation.”12 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  15. 15. Another institutional investor in Southeast Asia adds to this, saying, “Looking at thepopulation of Asian countries and the demand for reforms in health care, I think privateequity will have great opportunities to invest in the health care sector. In many Asia-Pacific countries, spending on health care occupies a huge chunk of annual governmentspending, and thus government is planning for major reforms and innovations in thehealth care system.”Given the current economic environment, deal flow in other sectors could benefitfrom the valuation climate. As one investment banker puts it, “I think there are a lotof opportunities in retail and manufacturing, which are struggling in these marketsand have historically low valuations.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 13
  16. 16. ]Yd ]ph][lYlagfk However, sector focus varies by geographic location O`a[` k][lgj k! oadd ]ph]ja]f[] l`] _j]Yl]kl Yegmfl g^ hjanYl] ]imalq Y[lanalq af qgmj hjaeYjq j]_agf g^ ^g[mk7 Greater China Southeast Asia India Australasia Japan South Korea 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Energy, mining and utilities Consumer Financial services Technology, media and telecommunications Industrials and chemicals Pharma, medical and biotech Real estate Other Transportation While the energy, mining and utilities and consumer sectors will be hot across the region, only in Greater China do these sectors occupy top spots. South Korea- and Southeast Asia-focused respondents expect industrials and chemicals to see the bulk of deal flow; expectations in Japan center on the energy, mining and utilities and TMT sectors. As Japan abandons nuclear power, the search has begun for new energy sources to meet the country’s energy needs. As one institutional investor explains, “Energy companies are looking to invest in renewable energy and other conventional forms of energy, and private equity firms are trying to explore this new opportunity in Japan.” In India, more than three-quarters of respondents believe the consumer sector will be most popular, but the TMT sector also garnered almost 60% of respondent views. One investment banker in India states, “Demand for IT services and new technologies in the telecommunications and mobile sectors have surged, and opportunities to invest in innovative companies are significant.” He continues, “Technology companies in India, China and South Korea are emerging as leading providers of new generation technologies. These technologies are in great demand, but lack access to debt finance, thus private equity investors are well placed to capture the opportunity.”14 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  17. 17. Sector specialization is becoming more importantlg 9kaY%HY[aÔ[ hjanYl] ]imalq afn]klgjk@go aehgjlYfl ak k][lgj kh][aYdarYlagf ^gj hjanYl] ]imalq afn]klaf_af 9kaY%HY[aÕ[7 13% 49%38% Very important Somewhat important Not important ÉK][lgj kh][aYdarYlagf ak YMirroring results from our previous survey, sector specialization is important to ËemklÌ af l`] [mjj]fl ngdYlad]the majority of respondents. Slightly more respondents this year consider sector Zmkaf]kk ]fnajgfe]fl$ Yfspecialization both very important and somewhat important, perhaps a result ofgrowing sophistication in Asia-Pacific private equity. l`] Z]f]Õlk Yj] `a_`ÊOne institutional investor says private equity firms that specialize in a certain sectorhave the edge in sourcing deals and seeing them through to completion. Sectorspecialization allows these firms to identify high-potential sector players. Sectorspecialization also helps private equity firms “define a clear strategy, while keepingtheir reach broad enough to ensure they target only high-yielding and healthycompanies,” he says.Not all respondents saw a need for sector specialization. One said it was unnecessaryconsidering the general abundance of opportunities and the plethora of industry expertsand advisors. Others say specialization can act as a compass in uncertain economicwaters and against rising competition. One respondent says, “Sector specializationis a ‘must’ in the current volatile business environment, and the benefits are high. Itimproves the quality of the deal by being able to identify the right targets and by beingable to perform streamlined due diligence.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 15
  18. 18. ]Yd ]ph][lYlagfk Deal sizes are expected to be larger across the board in 2013 compared with 2012, but remain in the mid-market range Af o`a[` ]Yd kar] jYf_] g qgm ]ph][l lg k]] l`] _j]Yl]kl d]n]d g^ hjanYl] ]imalq afn]kle]fl gn]j l`] f]pl )* egfl`k af qgmj hjaeYjq j]_agf g^ ^g[mk7 Greater China 28% 50% 13% 9% Southeast Asia 38% 24% 38% 6% 70% 18% 6% India Australasia 16% 32% 36% 16% Japan 27% 45% 18% 10% South Korea 24% 38% 38% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents US$15m US$15m–US$50m US$51m–US$100m US$101m–US$250m US$250m Last year, respondents expected high levels of activity below US$15m in Greater China, India and South Korea. This year, only India is expected to see strong deal flow at this level, and only according to 6% of India-focused respondents. On the flipside, very few respondents in last year’s survey expected deals above US$250m and only in Southeast Asia and Australasia. For 2013, expectations have shifted, with no respondents expecting large-scale deals in Southeast Asia in the next 12 months. Respondents thought the largest deals would continue to occur in Australasia, as well as Greater China and Japan. More interestingly, significant numbers of respondents in every subregion expect more deal flow in the US$101m–US$250m range. One Australia-focused respondent says that private equity firms are being drawn to the mid-market due to the ease of integrating and managing smaller companies and that these buys are ultimately more profitable than those for larger companies. As such, the respondent elaborates, private equity firms are changing their investment strategies, focusing on the mid- and lower-mid-market.16 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  19. 19. Respondents expect fewer exits and more managementbuyouts than in 2012Gn]j l`] f]pl )* egfl`k$ o`Yl lqh] g^ hjanYl] ]imalq ]Yd k! g qgm ]ph][llg eYc] mh l`] Zmdc g^ ljYfkY[lagfk af qgmj hjaeYjq j]_agf g^ ^g[mk7 Greater ChinaSoutheast Asia India Australasia Japan South Korea 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Management buyout Secondary buyout IBI (21%–49%) Private investment in public equity (PIPE) Pre-IPO investments Institutional buyout (100% stake) Take private Exit IBI (50%–99%) Institutional buy-in (20%)Management buyouts are gaining the most consistent attention from respondentsacross all subregions as private equity investors look to provide capital for managementteams ready to take over ownership of the companies they run. For example, accordinglg 0* Yf /* g^ j]khgf]flk af BYhYf Yf ?j]Yl]j ;`afY$ j]kh][lan]dq$ l`] Zmdc g^deals are expected to happen via this channel.While values are down, and therefore so are expectations for exits, many respondentsstill see opportunities for secondary buyouts, which are expected in South Korea,Australasia and Southeast Asia by close to three-quarters of respondents.One such recent example was US-based Kohlberg Kravis Roberts Co.’s June 2012acquisition of a 63% stake in Genesis Care Pty Ltd., the Australia-based health carefirm operating a network of cardiology and cancer care hospitals, from Advent PrivateCapital Pty Ltd., the Australia-based private equity firm, for an approximate cashconsideration of US$352m. According to respondents, other such deals are expectedto follow. 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ )/
  20. 20. ]Yd nYdmYlagf Yf ÕfYf[af_ A majority of respondents expect transaction values to rise in 2013 Gn]j l`] f]pl )* egfl`k$ o`Yl Yj] qgmj ]ph][lYlagfk ^gj hjanYl] ]imalq ljYfkY[lagf nYdm]k7 9kaY%HY[aÕ[ 13% 64% 18% 5% Southeast Asia 23% 46% 31% Greater China 16% 41% 28% 15% Australasia 11% 79% 5% 5% Japan 9% 73% 18% India 6% 29% 53% 12% South Korea 75% 25% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Af[j]Yk] ka_faÕ[Yfldq Increase slightly Remain the same Decrease slightly For 2013, more respondents expect an increase in transaction values than they did in *()* Af ^Y[l$ // g^ j]khgf]flk ]ph][l ljYfkY[lagf nYdm]k lg af[j]Yk] af l`] 9kaY% Pacific region over the next 12 months, compared with just 62% of respondents a year earlier. Over the next 12 months, the greatest overall increase in values is expected in Australasia, according to 90% of respondents, and the most significant rise in prices is expected in Southeast Asia, according to 23% of respondents, with another 46% expecting a slight increase in Southeast Asia. Fewer respondents expect major changes in Greater China and India, with over half expecting Indian valuations to remain the same. One private equity investor focused solely on India explains, “Valuations in India are not expected to rise compared to other Asia-Pacific countries because private equity investors are worried about the current regulatory environment in India.” And in fact, 12% expect valuations in India to fall over the coming 12 months. Another South Korea-focused respondent sheds some light on the landscape there, saying, “During the last two years private equity activity in Korea was rather low, and both local and international private equity firms refrained from investing in Korea. However, now institutional investors have again become active, and they are allocating more funds for private equity investments in Korea, and I think private equity valuations will increase in Korea as a result.”18 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  21. 21. Macroeconomic conditions continue to weigh heavilyon valuationsO`a[` g^ l`] ^gddgoaf_ g qgm l`afc akYj] `Ynaf_ ka_faÕ[Yfl afÖm]f[] k! gfl`] [mjj]fl hjanYl] ]imalq nYdmYlagf [daeYl] af qgmj hjaeYjq j]_agf g^ ^g[mk7 Greater ChinaSoutheast Asia India Australasia Japan South Korea 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Macroeconomic conditions Bidder competition for target J][]fl ÕfYf[aYd h]j^gjeYf[] g^ lYj_]l L`] ÕfYf[af_ ]fnajgfe]fl Market position of target Potential IPO alternatives Public market valuationsAs was the case in 2012, respondents place a heavy emphasis on the macro-economy’sability to influence company valuations for private equity deals. Indeed, the globaleconomic uncertainty is expected to affect the valuation climate strongly in all Asia-Pacific subregions, particularly Greater China, Southeast Asia and India. In Australasiaand South Korea, the same or more respondents expect competition to influencevaluations in their respective markets, a key reason cited by more than halfof respondents in every subregion except India.In Australia, a primary reason for increased competition could be a flight to quality.As one respondent explains, “Competition for Australian assets is very high becauseAustralian assets are very safe and the financing and regulatory climate is excellentand highly developed, which significantly impacts valuations.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 19
  22. 22. ]Yd nYdmYlagf Yf ÕfYf[af_ The valuation gap between buyers and sellers is largely ]ph][l] lg j]eYaf kl]Yq Y[jgkk 9kaY%HY[aÔ[ Gn]j l`] f]pl )* egfl`k$ o`Yl g qgm ]ph][l lg k]] oal` j]_Yj lg l`] nYdmYlagf _Yh Z]lo]]f hjanYl] ]imalq Zmq]jk Yf k]dd]jk7 9kaY%HY[aÕ[ 18% 54% 28% India 53% 23% 24% South Korea 25% 75% Southeast Asia 23% 23% 54% Greater China 22% 47% 31% Japan 18% 73% 9% Australasia 11% 68% 21% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Increase Remain the same Decrease According to 54% of respondents, the valuation gap between buyers and sellers across Asia-Pacific is expected to remain largely unchanged, which is almost identical to respondent views in 2012. More respondents (28%) see the buyer-seller valuation gap decreasing across the region, compared with last year when 21% expected the same. In fact, one private equity investor gives a positive view: “As the market is recovering and uncertainty is fading, valuation gaps in Asia-Pacific are narrowing, and we can expect more deals to close.” He continues, “Seller demand is right where it was, and now buyers are willing to pay more for a valuable target as the market is recovering.” Interestingly, the tables have turned in both India and Southeast Asia as the valuation gap in India is getting wider and in Southeast Asia smaller, according to more than `Yd^ g^ j]khgf]flk L`ak ak af aj][l [gfljYkl lg j]kmdlk ^jge dYkl q]Yj Af AfaY$ ,/ g^ respondents said the valuation gap in 2012 would decrease, and the outlook for 2013 is likely the result of investor caution given uncertainties in the Indian economy. At the same time, sellers have seen high valuations in the past and perhaps feel some degree of entitlement to command a premium for their businesses. One India-focused private equity investor opines, “Though the valuation gap in India is increasing, I expect a global condemnation of recent policies will lead the government to withdraw these policies, and eventually the valuation gaps will stabilize.”20 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  23. 23. There is slightly greater appetite for leverage across9kaY%HY[aÔ[ [gehYj] oal` *()*@go em[` d]n]jY_] g qgm ]ph][l oadd Z] mk] af hjanYl] ]imalq ljYfkY[lagfkgn]j l`] f]pl )* egfl`k af qgmj hjaeYjq j]_agf g^ ^g[mk7 Greater China 19% 62% 19%Southeast Asia 31% 61% 8% India 29% 53% 18% Australasia 26% 53% 21% Japan 45% 45% 10% South Korea 75% 12% 13% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents 0%-25% 26%-50% -)%/- ÉD]n]jY_] `Yk af[j]Yk] afIn particular, respondents focused on Greater China and India expect greater use of hjanYl] ]imalq ljYfkY[lagfkdebt to finance transactions in 2013. Last year’s survey found that 55% and 60% Zml ak kladd dgo]j l`Yf l`]of respondents expected 0%-25% leverage in each market, respectively. This year, amajority of respondents believe leverage will be in the 26%-50% range, still relatively hj]%[jakak d]n]dkÊlow by global standards. One Japan-based private equity investor with an Asia-Pacificreach says, “Leverage has increased in private equity transactions but is still lower thanthe pre-crisis levels.” Another global private equity investor based in and focused onAustralasia explains, “Deals with less leverage tend to be more successful than highlyleveraged deals as they have less burden of carrying forward debt, and investors canfocus on improving the value of the acquired company.”This aversion to debt seems to be particularly true of South Korea-focused respondents,of which three-quarters anticipate debt levels placed on acquired companies to be at thelowest end of the range. 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 21
  24. 24. ]Yd nYdmYlagf Yf ÕfYf[af_ 9[jgkk 9kaY%HY[aÔ[$ ]Zl eYjc]lk `Yn] klYZadar]$ Y[[gjaf_ to 63% of respondents expected to remain steady across 9kaY%HY[aÔ[ @go ogmd qgm Z]kl ]k[jaZ] l`] hjanYl] ]imalq ]Zl ÕfYf[af_ ]fnajgfe]fl gn]j l`] [geaf_ )* egfl`k7 9kaY%HY[aÕ[ 63% 12% 12% 13% Greater China 24% 24% 11% 6% 35% Southeast Asia 31% 8% 53% 8% India 55% 36% 9% Australasia 53% 5% 26% 11% 5% Japan 50% 6% 38% 6% South Korea 64% 3% 23% 5% 5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents L`] ]Zl ÕfYf[af_ ]fnajgfe]fl `Yk klYZdar] Yf oadd j]eYaf klYZd] ]Zl ÕfYf[af_ oadd Z] egj] a^Õ[mdl m] lg j]klja[lan] [gn]fYflk ]Zl ÕfYf[af_ oadd Z] ]Yka]j lg gZlYaf l`Yf dYkl q]Yj ]Zl ÕfYf[af_ oadd Z] egj] a^Õ[mdl m] lg j]lj]f[`af_ =mjgh]Yf d]f]jk ]Zl ÕfYf[af_ oadd Z] egj] a^Õ[mdl m] lg jakaf_ [gkl g^ Zgjjgoaf_ The consensus according to respondents in all subregions is that the debt-financing environment for private equity transactions has stabilized and will remain stable. In addition to views for the entire region, a majority of respondents in India, Australasia, Japan and South Korea expect this to be the case. One institutional investor states, “The debt market has improved compared to last year. Governments understand the importance of private investments, and they are supporting private equity investors by providing access to debt. Though China is still behind some other Asia-Pacific countries, the situation has certainly improved there as well.” However, others believe that the market has stabilized but has yet to improve. A private equity investor with a pan-Asia-Pacific focus says, “Debt financing still has to improve for me to say that it is easier to obtain than last year, but I can say that in Asia-Pacific, the debt environment has stabilized and will slowly improve.”22 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  25. 25. ]Yd Ögo Yf ]pal ghlagfkMacroeconomic conditions and regulatory changes are]ph][l] lg `Yn] l`] egkl ka_faÔ[Yfl ]^^][l gf ]YdÕgo af *()+O`Yl ^Y[lgj k! oadd `Yn] l`] _j]Yl]kl ]^^][l gf ]Yd Ögo gn]j l`] [geaf_)* egfl`k Y[jgkk 9kaY%HY[aÕ[7Macroeconomic conditions/ 84% uncertainty Changes in government 74% regulations Availability of leverage 56% Funds nearing the end of 44% their investment period Seller distress 43% Other 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage of respondentsJust as lingering uncertainty in the global economy is affecting the valuation climate,an uncertain outlook is expected to affect private equity deal flow activity, accordingto 84% of respondents, as market participants gauge the right conditions forinvestment. This was a common theme in 2012 as well, when 65% of respondentssaid that macroeconomic conditions would have an impact on deal flow. However, in2013, respondents have placed a far greater emphasis on regulatory changes and theiraf^dm]f[] gn]j ]Yd ^dgo2 /, af *()+ [gehYj] oal` gfdq *- g^ j]khgf]fl na]okfor 2012. Despite these expected challenges, the outlook still remains positive.A global private equity investor based in South Korea says, “Private equity has becomean important aspect of liquidity and therefore governments are encouraging privateequity investment by relaxing restrictions on investors. This will have a greater impacton private equity deal flow. Consider India. Private equity firms are concerned aboutcontinuing their investments in India because of the Indian Government’s new taxpolicies, but if the government does not implement the new tax policies, then privateequity deal flow could double in the next year.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 23
  26. 26. ]Yd Ögo Yf ]pal ghlagfk L`] j]_mdYlgjq ]fnajgfe]flËk ]^^][l gf ]Yd Õgo ak egkl acute in Greater China and India O`Yl ^Y[lgj k! oadd `Yn] l`] _j]Yl]kl ]^^][l gf ]Yd Ögo gn]j l`] [geaf_ )* egfl`k af qgmj hjaeYjq j]_agf g^ ^g[mk7 Greater China Southeast Asia India Australasia Japan South Korea 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Macroeconomic conditions/uncertainty Changes in government regulations Funds nearing the end of their investment period Availability of leverage Seller distress Other While there are a host of factors affecting private equity deal flow across Asia- Pacific’s subregions, macroeconomic uncertainty stands out above the rest in every major geographic location. Other notable factors affecting deal flow are changes in government regulations in Greater China and India and seller distress in Japan, according to roughly three-quarters of respondents. An institutional investor in Southeast Asia says, “Changing regulations in India are having a major impact on the appetite of private equity funds investing there. The Indian Government introduced some quick policies with short notice that complicated the deal process, and private equity investors were apprehensive given the new policies. However, as the Government plans for amendments of these policies, investor interest should return.”24 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  27. 27. Deals sourced from personal relationships and advisoryintermediaries are still seen as important in many marketsin 2013Af qgmj ghafagf$ o`Yl oadd Z] l`] hjaeYjq e]l`g ^gj kgmj[af_ 9kaYf hjanYl]]imalq ]Ydk gn]j l`] f]pl )* egfl`k af qgmj hjaeYjq j]_agf g^ ^g[mk7 Greater ChinaSoutheast Asia India Australasia Japan South Korea 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Direct from corporate/strategic Personal relationships Advisory intermediaries Direct from PE Pre-IPO Investments Marketing events Online informational exchanges Direct marketingA key theme of last year’s report was the competitive value-added proposition thatprivate equity funds offer to investors in finding the next deal in an unsophisticatedmarketplace. While personal relationships were a key marker for sourcing deals,according to respondents last year, respondents expect new opportunities to comedirectly from corporate sellers in 2013, though still with an emphasis on personalrelationships, particularly in Greater China and Southeast Asia.On the other hand, in India and South Korea, 82% and 63% of respondents, respectively,say advisory intermediaries are the primary means for sourcing new opportunities. Aninstitutional investor in India says, “Sourcing deals in India and China is not an issue.In India the process of matching private equity buyers and sellers increasingly involvesintermediaries.”Another institutional investor in Australasia says, “Now private equity firms are relyingon personal relationships and sourcing targets through local networks. The experienceof the local investment team is always the most reliable as they know where what ishappening in the market. But when private equity firms venture into a new market theyoften use advisory intermediaries or directly approach corporate targets.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 25
  28. 28. ]Yd Ögo Yf ]pal ghlagfk In 2013, IPO markets are expected to be subdued compared with last year O`a[` hjanYl] ]imalq ]pal kljYl]_q ]al`]j AHGk$ k][gfYjq Zmqgmlk gj ljY] kYd]k! g qgm ]ph][l oadd Z] l`] egkl naYZd] af ]Y[` g^ l`] ^gddgoaf_ eYjc]lk gn]j l`] f]pl )* egfl`k7 Greater China 51% 7% 42% Southeast Asia 31% 13% 56% India 39% 8% 53% Australasia 10% 29% 61% 1% Japan 56% 43% South Korea 5% 51% 44% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents IPO Secondary buyout Trade sale With IPO markets relatively slow compared with previous years, respondents expect fewer exit opportunities in public markets over 2013 compared with 2012. However, a majority (51%) still expect IPO markets to provide the best exit opportunities in ?j]Yl]j ;`afY$ l`gm_` dYkl q]YjÌk fmeZ]j oYk `a_`]j Yl ./ 9 eYbgjalq g^ j]khgf]flk in Southeast Asia, India and Australasia expect the most viable exits to be to strategic buyers, contrasts with last year’s views, when respondents were split between exit options.26 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  29. 29. ;YhalYd Ögok Yf afn]klgj ]eYfAfn]klgj Yddg[Ylagf lg 9kaY%HY[aÔ[ hjanYl] ]imalq ak ]ph][l]to rise at a faster pace compared with 2012Gn]j l`] f]pl )* egfl`k$ o`Yl g qgm ]ph][l oadd `Yhh]f lg DH afn]klgjYddg[Ylagfk eY] lg l`] 9kaY%HY[aÕ[ hjanYl] ]imalq [dYkk Yk Y o`gd]7 2%24% 30% 44% Af[j]Yk] ka_faÕ[Yfldq Increase slightly Stay the same Decrease slightly ][j]Yk] ka_faÕ[Yfldq É:a_ afn]klgjk af hjanYl] ]imalq ^mfk Yj] af[j]Ykaf_In total, nearly three-quarters of respondents expect more LP capital to enter the l`]aj [YhalYd Yddg[Ylagfk ^gjmarket in 2013, compared with 68% in 2012. At the same time, the pace is projectedto pick up as allocations made to Asia-Pacific private equity are expected to increase afn]kle]flk af hjanYl] ]imalqsignificantly, according to 30% of respondents, compared with just 19% in 2012. One af 9kaY%HY[aÕ[ Z][Ymk] g^Asia-Pacific-focused private equity investor based in Southeast Asia says, “Big investors `a_`]j _jgol`$ aehjgnaf_in private equity funds, such as global pension funds, university endowments and family [gjhgjYl] _gn]jfYf[] Yfoffices, are increasing their capital allocations for investments in private equity in Asia- `a_`]j j]lmjfkÊPacific because of higher growth, improving corporate governance and higher returns.I anticipate a staggering jump in capital allocation by the LPs if the macroeconomicconditions turn more favorable.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ */
  30. 30. ;YhalYd Ögok Yf afn]klgj ]eYf A big jump in institutional capital coming from Greater China is expected in 2013 O`]j] g qgm ]ph][l egkl afÖgok g^ afklalmlagfYd ]imalq [YhalYd aflg 9kaY%HY[aÕ[ hjanYl] ]imalq oadd [ge] ^jge gn]j l`] f]pl )* egfl`k7 Greater China 74% North America 47% Australasia 42% South Korea 30% Europe 28% Japan 7% 0% 10% 20% 30% 40% 50% 60% 70% 80% Percentage of respondents Almost three-quarters of respondents expect institutional capital to come from Greater ;`afY gn]j l`] [gmjk] g^ *()+$ Y kmZklYflaYd af[j]Yk] ^jge l`] ,/ g^ j]khgf]flk l`Yl said the same of 2012. Respondent views regarding capital flows from North America and Europe are roughly the same as they were in 2012. However, Australasian and South Korean LP capital is expected to flow into the market according to 42% and 30% g^ j]khgf]flk$ [gehYj] oal` / Yf 0 g^ j]khgf]fl na]ok af *()*$ j]kh][lan]dq A global institutional investor in Greater China says, “European and North American institutional investors are looking to increase their investments in private equity funds in Asia-Pacific. The opportunities for them in their domestic markets have shrunk as returns have withered, thus they are increasing their investments where they can make better returns. Also they are motivated by the regulatory changes Asian governments have undertaken particularly to attract these foreign institutional investors.”28 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  31. 31. Secondary market trading is on the rise, according to 60%of respondentsO`Yl g qgm ]ph][l ^gj l`] hjanYl] ]imalq k][gfYja]k eYjc]l a] DHkZmqaf_ Yf k]ddaf_ ]paklaf_ [geeale]flk Yf afl]j]klk af hjanYl] ]imalq^mfk! af 9kaY%HY[aÕ[ gn]j l`] f]pl )* egfl`k7 8% 7%32% 53% Af[j]Yk] ka_faÕ[Yfldq Increase slightly Remain the same Decrease slightlyThe financial crisis in 2008 and the ensuing turmoil in the years following promptedLP investors the world over to search for liquidity. The result has been an increaseof activity in the secondary market. In Asia-Pacific, the trend has been slower tomaterialize than in more developed markets in the West, but activity in the secondarymarket will pick up in the region, according to 60% of respondents, though most (53%)expect this change to be slight.One private equity investor in India says the general absence of other exit opportunitiesfor portfolio companies has led LPs to turn to the secondary market more so thanpreviously. Another institutional investor focused on South Korea says that since manyportfolio companies are still unable or unwilling to exit, LPs are using secondary activityto make gains. 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 29
  32. 32. ;YhalYd Ögok Yf afn]klgj ]eYf Fund sponsor due diligence processes at the asset level are becoming more important for LPs making new investments af 9kaY%HY[aÔ[ ^mfk Gn]j l`] f]pl )* egfl`k$ o`Yl oadd Z] l`] egkl aehgjlYfl akkm] ^gj ^mf afn]klgjk o`]f eYcaf_ f]o Yddg[Ylagfk lg 9kaY7 Due diligence processes 71% Management team experience 57% mf an]jkaÕ[Ylagf 42% Geographic location of the investment team 32% Historical results 32% Internal controls 29% 0% 10% 20% 30% 40% 50% 60% 70% 80% Percentage of respondents Compared with 2012, due diligence has become far more important for institutional investors evaluating new fund opportunities in Asia-Pacific. While management team experience remains a top issue, identical to last year, due diligence processes top the list ^gj /) g^ j]khgf]flk af *()+$ [gehYj] oal` bmkl *- af *()* Oal` Y `]a_`l]f] awareness of fraud and corruption, thorough due diligence has become paramount, and due diligence processes must be prepared to adapt to Asia-Pacific’s markets, many of which differ substantially from their Western equivalents. Due diligence in Asia, one respondent in Greater China points out, takes an unusually long time. The market has yet to embrace international standards, and due diligence processes can be outdated. Relying on historical results alone does not create an accurate picture of the company. An institutional investor in India says, “In Asian markets, due diligence that relies only on the annual books is not enough. Instead, due diligence has to be done by gathering unbiased information from the field by interviewing customers, suppliers, competitors and creditors to get accurate information about the target and most importantly its liabilities.” Pertaining to the experience of the management team, a private equity investor in Japan says a lack of qualified investment professionals in the local market presents problems, and relocating investment teams creates feasibility issues. According to the respondent, “As the industry is maturing, private equity is becoming increasingly competitive, and success completely depends on access to good deals, which is only possible with a highly experienced management team.”30 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+
  33. 33. ;gmfljq%kh][aÔ[ ^mfk Yj] Ôfaf_ egj] ^Yngj af *()+for Asian and non-Asian LPs alike@go oadd 9kaYf DHk Yf fgf%9kaYf DHk hjaeYjadq eYc] Yddg[Ylagfklg 9kaY%HY[aÕ[ hjanYl] ]imalq gn]j l`] f]pl )* egfl`k7 76% With regional/country kh][aÕ[ ^mfk 83% 59%Oal` 9kaY%HY[aÕ[ ^mfk 45% 45% Through direct or co-investment opportunities 41% With mega/global 57% investment funds 27% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage of respondents Non-Asian LPs Asian LPsAccording to more than three-quarters of respondents, Asian and non-Asian LPsalike will prefer country-specific funds over 2013, a continuation of a trend fromlast year, when 62% and 45% said Asian and non-Asian LPs would elect country funds,respectively. At the same time, global and Asia-Pacific funds should draw more non-Asian capital, according to respondent views, and while some LPs engage in directinvesting, many respondents believe this will remain difficult.According to one institutional investor, “Asia-Pacific is dominated by regional- andcountry-specific funds, which have the upper hand in the market and always exploit thisfor their benefit. Thus, both local and international LPs are choosing to invest in local orregional funds. I have not seen many LPs engaging in direct investments because theylack experience.”Another private equity investor provides a slightly different view, saying, “Local LPsare concentrating on country-specific funds because of cultural similarities and are notvery interested in partnering with global private equity firms. Local LPs are also tryingtheir hand at direct investment opportunities, but foreign LPs will not be able to obtainpermission for direct investing in many Asian countries.” 9kaY%HY[aÕ[ hjanYl] ]imalq gmldggc *()+ 31

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