PRINT THIS PAGE Big is beautiful14/02/2007. Source: Asia Private Equity Review (APER).
Big is beautiful? This seems no longer true for private equity, at least for the time being, says the Asia Private Equity Review. With each day bringing a new record for either the size of a fund or a deal, private equity has been capturing headlines in global financial publications. Yet, along with the publicity, is the relentless scrutiny by the press of all aspects of private equity management. Another development that warrants attention is the US Department of Justice’s probe into fund management firms’ investment practices. In early November, the Wall Street Journal revealed that the private equity arm of Merrill Lynch had received a request for information from the Department, which was reportedly taking initial steps to determine whether Merrill Lynch Global Private Equity was engaged in anti-competitive behaviour in its deal-making process. The private equity unit of Merrill Lynch was part of the consortium that participated in the US$21 billion takeover of HCA Inc., a hospital chain, and the largest buyout on record.
Since July, when the HCA deal was announced, private equity has become a focus of the watchful eyes of the financial community. Hardly a day has passed without a topic relating to private equity being mentioned. A September article by the Financial Times commented on some of the resisting forces that the industry is now encountering when courting target companies for takeover purposes. The Economist described the "hard-nosed buyout groups are showing unusual friendliness" in a new club deal trend. While the label "Barbarians at the Gate" has been used to describe buyout groups’ approach to deals, an October cover story of BusinessWeek, titled "Gluttons at the Gate", unveiled the high and multiple levels of fees being extracted by private equity houses from their invested companies. Ironically, all these public comments have come when the private equity industry has "largely shaken off its swashbuckling image" and become "more sophisticated…(and) more respectable", as the Financial Times has aptly described the development of the industry.
Cherished Values
In Asia, where private equity has now come of age, after years of investors questioning the sustainability of its model, the merits of private equity deserves to be acknowledged. Since 2004, the Asian private equity industry (‘industry’) has successfully maintained a profitable track record. In the 33 months ending September this year, an estimated US$44.5 billion has been returned to investors’ coffers, compared to an invested capital of US$16.1 billion. This is an impressive 2.7 return multiple on investment principally made since the beginning of this decade. Private equity management firms in Asia have not only provided required capital to growing companies, but also a solid pathway to a prosperous future. This is illustrated by the share price trading performance of those companies that have previously received private equity capital before they become a public company.
In the period under survey, at least 60 private equity investee companies are known to have gone public, with over 55%, or 33, of them being able to sustain trading performance above their first day closing prices. Of these 33 companies, over 72.7% of them have also been trading above their applicable sector indices. This trend is an affirmation of these companies’ strong financial fundamentals, a central factor to motivate public investors’ to loosen their purse strings.
The companies that have benefited most from private equity investors’ financial support are those based in China and India. Companies coming from these two markets account for 75.8% of those that fall into the category that are trading well above their first day closing price. Overall, China leads in taking up 45.5%, followed by India which claimed 30% of the pie, with Singapore trailing behind as a distant third at 12% (fig. 1).
Significantly, all China-based companies have not only been able to sustain share price well above first day closing prices, but have also out-performed the indices applicable to the bourses on which they are currently listed. Only 40% of India-based companies can rival China’s unblemished record.
With both China and India enjoying envious economic growth, private equity can proudly claim to be playing a significant part in this process that, in turn, propels Asia to a new high on the global economic stage.
Observation
Given the mesmerising return record that Asian private equity has been able to demonstrate, it is a feat to identify companies that have failed to benefit from the backing of private equity capital. The recent demise of China Paradise Electronics Retail Ltd., (‘China Paradise’), is an exception rather than the norm.
Between January and October 2005, Morgan Stanley Private Equity Asia and CDH Investment invested a total of US$67.5 million into China Paradise, which went public on the Hong Kong Stock Exchange (‘HKCE’) in mid October last year. But a year later, in early November this year, China Paradise became the shortest-listed company on the Hong Kong bourse as it came under the full control of Gome Electrical Appliance Holding, a rival to China Paradise.
Yet China Paradise’s fall was largely fuelled by its aggressive expansion plan. Between July 2005 and June 2006, the number of its stores grew from 105 to 225. In the meantime, its net income after tax sunk to 15.52 million yuan (US$1.89 million) in the second quarter of 2006, compared to 165.4 million yuan six months earlier.
China Paradise’s fall did not prevent its private equity investors from clocking a three times return before it was removed from the HKSE.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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