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PRINT THIS PAGE State of the Asian Private Equity Markets31/10/2007. Source: SCM Strategic Capital Management AG .
This seems to be the time to be invested in Asia and Asian private equity proves no exception. To distinguish myth from reality and to identify the opportunities available, SCM has undertaken an extensive study of the private equity markets in the Asian region. Using a wide range of contacts including a host of relationships to GPs active in the region SCM has tried to assess whether love will turn to losses again or whether Asia will meet investors’ expectations this time.
Asia – too big to be ignored
With roughly a quarter of global GDP the Asian economies rank third behind the USA and Europe. China is already the world’s 4th largest economy after the USA, Japan and Germany and is expected to overtake Japan for the no. 2 spot as soon as 2015. Asia is also a very diverse region including economies that are characterized by fast population and economic growth like China and India as well as more mature but slower growing economies like Japan and even downright emerging markets. The Asian growth rate has been 2.3x the growth rate of Europe and Asian GDP (ex Japan) has doubled during the last decade.
Asian M&A – mirroring the global M&A boom
Compared to 2004 M&A volumes almost doubled but with 7% of GDP, the Asian M&A volume is still below Europe and the USA where transaction volumes exceeded 10% of GDP in 2006. The pressure to adapt to changing industry dynamics combined with the growth effects of an increasing urbanization, an improving skill base and rising incomes and consumer power supports an optimistic outlook for the continuation of the M&A boom in Asia.
Private Equity – The year 2006 marks a watershed
Until 2004 private equity accounted for roughly 4% of M&A activity but in 2006 this share surged to 11.4% or more than USD 50 billion. Transaction volumes increased 10-fold in Australia, 3—fold in India and Korea and more than doubled in China and India in 2006.
Investment activity is dominated by large buyouts
In 2006 the volume of large buyouts of USD 500mn transaction volume or more increased 6.6x compared to 2004.
Asian Private Equity firms – overwhelmed by the opportunity
Asian private equity firms were and still are somewhat unprepared for this increase in large deal activity. Among the 50 largest private equity firms in the world there is only one Asian firm and it will be some time before we see the first USD 10bn Asian buyout fund. It is thus no surprise that the large end of the Asian private equity market is dominated by global buyout firms that accounted for 75% of transaction volume in 2006.
Where demand misses opportunity
But as buyout opportunities continue to be abundant and returns are strong due to good exit multiples investors are eager to invest and in 2006 new commitment amounts had more than doubled compared to 2004 amounting to more than USD 25 bn in new commitments. If the SCM analysis of recent commitment flows is any guide to the future one might expect a continuation of first time funds being formed and raised (about 30% of new commitments) and venture capital funds receiving a disproportionate share of total commitments, i.e. 14% of new commitments vs. 3% of new investments in 2006. The fact that new money raised by venture capital funds in 2006 was equal to 6x the investment amount of that year points to a bubble, reminiscent of the situation in Europe in the late nineties.
Will the tide lift all boats?
No, both exits and new investments are driven by buyouts and – to a lesser extend by growth financing. There is issue is access to good funds that are limited due to the immaturity of the Asian private equity markets. While the opportunity in this segment is genuine and driven by sound economic fundamentals, many fund offerings in the region are not. Investors thus need to exercise discipline and not to compromise on quality when deploying capital in Asia. As SCM’s study has demonstrated, the opportunity is not so much in China with its flurry of venture capital activity than in the rather “older economies of Australia and Japan (accounting for almost 50% of buyout volume) followed by Korea and India. The bottleneck in Asia is the narrow skill base of the private equity industry and there is no shortcut to circumvent that.
SCM Strategic Capital Management AG was founded in 1996 and provides management and advisory services for institutions building private equity and/or international real estate portfolios. With more than $4.5 bn of assets currently advised, SCM ranks among Europe's leading providers of capital for real estate and private equity funds and enjoys unsurpassed access to the world's foremost managers in these areas. For further information please visit http://www.scmag.com
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