Key Takeaways on The Leveraged Buyout Private Equity Market in Asia

Seven reasons why we are laser focused on the Buyouts market in Asia


1) Globally, Asia is the most attractive region with significant growth potential in the foreseeable future


point hope private equity singapore

The world’s economic centre of gravity has shifted back to Asia since its last peak in the 19th century. According to groundbreaking research by Professor Danny Quah at the London School of Economics, the global economic centre of gravity has shifted nearly 2,000 km, one-third of the planet’s radius, eastwards away from the US and towards China and India between 1976 and 2006 over a 30-year span.

Extrapolating growth in almost 700 locations across Earth, that centre of gravity is expected to be located between India and China in 2050. Global profit pools are also shifting east, pointing to Asia’s growing importance compared to the rest of the world.

Compared to the US or Europe where Buyout transactions have typically been highly leveraged (up to 80%) and focused on cost cutting and/or restructuring initiatives, control transactions in Asia have generally required less leverage (not more than 50%) to achieve returns above 25% IRR, driven by Asia’s strong growth.


2) Asia offers highly attractive Buyout opportunities due to under-penetration of Buyouts compared to Western benchmarks, coupled with a highly populated mid-market space


The buyouts market in Asia is under-penetrated compared to the Western benchmarks, representing significant headroom for growth in this private equity space. In Asia, control Buyout value as a percentage of GDP was 0.1% over the last decade, while that of US and Europe were 1.0% and 0.8% respectively, reflecting the high potential for Buyouts to grow in the region.

The mid-market is an attractive segment for Buyouts in Asia due to the supply and quality of companies. According to a report published by Mergermarket, Asia-Pacific (excluding Japan) was the only region to see an increase in mid-market activity in 2013 with US$141b worth of deal, up 43% compared to 2012 at US$99b, while other parts of the world experienced a decrease in mid-market activity.

There are over 100,000 mid-market companies in Asia, but less than 5% of these are listed and most are still “off the radar” of mainstream research analysts. More than 70% of businesses in Asia are family owned and have a strong presence in Southeast Asia and Northeast Asia. These Asian businesses are in transition, with many of them facing succession issues and being “passed down” from the first generation entrepreneurs who started these companies after World War II.

Attractive Buyout targets among this group are those that are domestic champions in large domestic markets, and export leaders who have strong market share of a particular market niche.


3) Asian private equity is diversifying away from Growth Equity towards Growth Buyout strategies


As the Asian private equity market matures, it is increasingly mirroring the diversity of fund strategies seen in North America and Europe. Despite the prominence of Growth Equity investments in Asia, other strategies, particularly Buyouts, have an increasing presence in the region, according to analysis performed by Preqin.

This has driven a significant rise in the average fund size of Asia-focused Private Equity funds from US$256m in 2012 to US$422m for funds closed in 2013. Growth Buyouts in particular enable Private Equity firms to ride the upside in the intrinsic growth prospects of Asian companies, while offering the necessary control to achieve further growth. Against this backdrop, Unitas Capital for example has recently devised a five-year process during which it refocused its strategy towards operational value-add, which means greater emphasis on control.

While Buyouts to date have been largely confined to the region’s mature markets (Japan, Australia and Singapore), control acquisitions are gaining momentum in high-growth emerging Asia, according to a survey conducted by Ernst and Young, pointing to a positive shift towards Growth Buyouts that is poised to benefit from the Asian growth story.

Malaysia private equity buyouts
Point Hope focuses on Buyout investments in Southeast Asia and Korea


4) A pan-Asian strategy generates superior return compared to country-specific funds


A pan-Asian strategy allows Buyout firms to country-rotate within the target countries to take advantage of disparities in valuations across economic, market and industry cycles. Historically, pan-Asian funds have generated superior returns compared to single country funds based on empirical research. The country rotation approach taken by private equity funds in Asia allows flexibility to avoid investments in countries or industries where there is intense competition for deals, which will significantly impact entry multiples.

By exploiting transaction-pricing differentials, pan-Asian Buyout firms are able to maintain a flexible approach in selecting the most attractive Buyout opportunities and ultimately build a balanced portfolio that is diversified by geography and sector. On the contrary, Private Equity funds that are mainly country specific typically struggle to deploy capital when country valuations are high due to increased competition or unfavourable external conditions such as frothy stock markets.

5) However, there is a shortage of skilled Buyout professionals in Asia


There are only 26 Buyout funds across Asia, with only 10 pan-Asian funds. LBO is a relatively young asset class in the region and started only after the 1997 Asian Financial Crisis with UBS Capital, CVC Asia and J.P. Morgan Partners, who were later joined by Carlyle Group and TPG (Newbridge). At the end of the 1990s, while most of the investment efforts were directed towards early stage venture investments mainly in Southeast Asia, the lack of industry maturity resulted in poor quality deals being executed in the region leading to a number of early institutional investors withdrawing from the market. However, Asian private equity took a positive turn from 2000 onwards with the arrival of large institutional investors including Buyout funds that educated the business community on the value of private equity investments, lobbied various government for regulatory reforms and worked hard to demonstrate returns on their investments. Since then, LPs only backed experienced teams who have spunoff from international funds. As a result, there is currently only a handful of qualified Buyout professionals in Asia, and an even smaller pool of skilled pan-Asian ones.


6) In addition, a pan-Asia strategy usually requires critical mass of over $1bn because of high operating costs


hong kong size investments

Maintaining a pan-Asia presence requires significant resources including multiple local offices, large teams and operating expenses. Pan-Asian funds that manage US$1b and above tend to have a 40-50 strong investment team spread across the region compared with large country specific funds that typically have 10-20 professionals in their home bases. Furthermore, pan-Asian funds need to build up substantial capabilities in regional execution, and significant resources need to be expended in formalisation of processes and creation of robust internal controls to facilitate a regional strategy. As a result, these firms typically spend US$3m-US$5m10 to set up the required infrastructure for operation.


7) There are currently extremely few players in the pan-Asia mid-market buyout space due to high barriers to entry


This presents an opportunity for a new player to cement a sustainable and unique position in the Asian Private Equity competitive landscape. Point Hope Group is one fund manager that is embarking on this journey, so if you would like to learn more, then connect with us.





An Original Thinking piece by Gerald Leong, Charles Kok, Daryl Tan

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