Asia Pacific private equity industry continues to post strong results

03 April 2017 Consultancy.uk

Private equity industry activity in the Asia-Pacific region remained strong in 2016, with deal activity hitting almost 900 and deal value rising to $92 billion. Investors have remained relatively upbeat, even in light of regional and global uncertainties in 2016, with investments particularly focused on Internet and Technology companies. Exit activity however continued its downward trend across the region, falling to $74 billion.

The private equity (PE) industry across the globe has enjoyed a relatively strong 2016, with buyout-backed exits coming in at $328 billion, while buyouts recorded $257 billion. In a new report from Bain & Company the consultancy firm considers exit and buyout activity for PE firms across the Asia-Pacific region.

Private equity vitals for Asia-Pacific region

The Asia-Pacific region, like much of the rest of the world, has found itself in a period of relative turbulence. Chinese stock markets were a roller-coaster at the start of 2016, while the slowdown in commodity prices, the Chinese economy more widely, created a host of uncertainties for companies across the region. While the situation has stabilised somewhat, additional challenges have arisen with US administration rhetoric in favour of slapping import tariffs on goods from the region, including on vehicles.

While uncertainty has reigned, the PE industry booked another relatively strong year with investment deal activity in line with that of 2014, while buyout-backed exists too remained relatively robust. Suvir Varma, Bain’s Private Equity Practice in Asia-Pacific lead remarks on the result for the year, “After a record-setting 2015, we anticipated last year would be a much tougher deal-making environment – one that would make it more difficult for PE funds to generate market-beating returns. Despite persistent challenges, PE firms rose to the occasion and delivered impressive results – the second best on record. They now face the task of sustaining this positive momentum amid another year of uncertainty ahead.”

Investment momentum eased

The long-term trend for activity in the PE space in the Asia-Pacific region shows that momentum eased during 2016, with deal value falling to $92 billion from $124 billion the year previous. Deal volume too has seen a decrease, falling from more than 1,000 deals to around 890 deals.

The market remains strong however, even when compared to previous peaks, such as just prior to the financial crisis and just prior to the most recent downturn in the market (2011-2012). According to the firm, deal activity was boosted by a number of factors, including the continued low cost of capital and large institutional investor interest in the area.

Asia-Pacific funds are sitting on an ample supply of dry powder

Funds in the sector remained strong during 2016, with around $136 billion available (retained) for activity going forward. Funds were down slightly on 2015 when funds stood at $137 billion, and down around $13 billion on the recent peak in 2013, when total funds hit almost $150 billion.

In terms of funding type by purpose, buyout funds represent the largest proportion of the total unspent dry powder from 2016, up slightly from 2015, while funding for growth dropped slightly on the year previous to around a quarter of total funds. Venture funding as a proportion of total unspent funds also increased slightly on the year previous.

Appetite for internet-related assets drove more than a third of 2016 deal activity

Activity in the Asia-Pacific region continued to be buoyed by deals in the Internet sector, which represented 34% of all deal activity. Interest in the sector has grown in recent years, from around 12% in 2012 to 39% in 2015. Innovation is a key reason cited for investment in the Internet sector, as well as increased interest in technology.

In terms of recent averages of activity, 2011-2015, deal activity has shifted heavily in favour of Internet and Technology, which other areas, such as Utilities, Logistics and Industrial have seen activity flag. Health, Financial services and services more generation remain of continued interest to players in the sector.

Existing old stock and difficulty exiting

The research also found that exists in 2016 were down on the year previous, falling to $74 billion across 418 exit transactions. One of the reasons for decreased activity comes down to a steady decreased in available stock, which had built up in the years following the financial crisis during which PE firms were reluctant to sell. The share of vintage stock dropped from 36% noted in 2015 to 29% in 2016.

The authors add that, exiting stock that is getting close to portfolio lifespan is no real challenge in 40% of cases, a moderate challenge in a further around 40% of cases and some challenge in around 17% of cases. Most companies report that the challenge of exiting portfolio that is close to lifespan got better during 2016 than it was the year previous.

Kiki Yang, leader of Bain’s Private Equity Practice in Greater China, comments about the wider conditions in the Asia-Pacific PE market, “Wringing greater value from PE investments is much more of a priority than it has been in the past. It’s also not as straightforward as it once was. Funds that will thrive are those that understand they must exercise an entirely different set of muscles to win the best deals and unlock new sources of value.”

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Consumer goods start-ups grow interest from venture capital

23 April 2019 Consultancy.uk

Funding the latest consumer goods start-up has been a real money-spinner for venture capitalist firms, with a number of $1 billion companies – or unicorns – having emerged in the space in recent years. New analysis has explored the resulting corporate consumer products activity in the acquisitions space.

Consumer products have enjoyed years of strong growth as new markets opened in developing Asia. China in particular has enjoyed strong growth across a range of consumer good types as the country’s middle class expanded. Private equity firms have been keen to pick up targets in the space as they expand their portfolios to include additional local capacity as well as customers in new markets.

As a result, a study from Bain & Company has found that interest from PE firms in the consumer product space grew sharply in 2018, hitting 6.1% of all invested capital for the year, and making it the third most sought-after category. It is now only behind financial services (23.9%) and advanced manufacturing and services (13.9%).

Corporate venture capital investment

The ‘M&A in Disruption: 2018 in Review’ research found that growth in the segment reflects key changes in the segment as a whole. This is particularly true of insurgent brands, which often leverage local expertise in order to take on international giants in domestic markets.

Short change

The market changes have led to shifts in motivations for consumer goods company investments from PE firms. The number of strategic investments stood at 50% in 2015 compared to deals that increased scope. This has shifted significantly, with 34% of deals focused on strategic outcomes in 2018 compared to 66% for scope. The move towards scope reflects companies seeking out fast-growing products that enable stronger revenue growth streams.

Acceleration in scope-oriented M&A in consumer products

However, there were other motivations for deal activity in the space. Activist investors have put pressure on companies to expand their portfolios in recent years, with the trend expanding from just US targets to Europe.

Further trends

The other key shift in the space regards outbound deal activity. The study found that outbound deal activity has increased significantly in the Americas (up 363%) with total deal volume up only slightly (15%). Key deals included Coca-Cola and Costa, Procter & Gamble and Merck’s consumer health unit, and PepsiCo and SodaStream. In the Asia-Pacific region, outbound deal activity rose 195% while total deal activity fell sharply, by -36%. The EMEA region saw both a sharp decline in outbound deal activity, at -68%, as well as lower overall deal activity, which fell by 32%.

Cross-regional deal making

Deal-making in the current environment is increasingly fraught with uncertainties, as business models change on the back of new technologies, new consumer sentiments and wider market changes from new entrants. As such, acquisitions are increasingly useful as possible hedges on changes in market direction. As such, companies are increasingly pressed to take a future-back position, making sure to incorporate a vision of how the company needs to look in five years into acquisition strategy.

The firm notes that certain acquisitions which enhance a remembrance of a nobler mission, revive a sense of entrepreneurialism and engage directly with consumers may be necessary qualities in acquisitions that transform a company to fit market expectations in the coming decade. While going forward, focus on innovation, partnering with retail winners, reducing cost base and constantly reallocating scare resources will be necessary to protect market share in areas where insurgent local and strategic competitors are active.

Related: Private equity asset growth top priority for 2018.