Asia-Pacific private equity deal market value jumps to 125 billion

11 April 2016 Consultancy.uk

The Asia-Pacific private equity market has boomed in the past two years, hitting $125 billion in deal value, following a lacklustre period. Particularly Greater China, India and Australia and New Zealand have seen significant rises, with China hosting a large number of $1 billion+ investments. Private equity players in the region have been actively exiting their pre-2008 stock, which has fallen to an average of 17% of portfolios, while investment rates of return have climbed to a median of around 12%.

Globally, private equity activity enjoyed a boom of activity in recent years. The Asia-Pacific region too has enjoyed rich activity of late, buoyed by high growth rates in the region’s developing economies, particularly China. However, since last year, considerable global and regional volatility has kicked in. China’s economy is in a state of flux, with flummoxed regional investors seeing $5.1 trillion in wealth evaporated on the Shanghai Stock Exchange between mid-June and the end of August 2015. Low oil prices, lower growth prospects, historically low interest rates (that are likely to rise) and fluctuating currencies, provide little room for short term stability.

In a new report from Bain & Company, titled ‘Asia-Pacific Private Equity Report 2016’, the global consultancy explores the state of the private equity market in the Asia-Pacific region, both in terms of the past years as well as the direction the market may take in the coming years.

Another bumper year
Uncertainties affecting the region did little to dampen private equity investment activity in 2015. Deal volume was up considerably in 2014 and 2015 on the years previous. 2014 had around 600 deals while 2015 had around 900, while 2012 and 2013 had around 400 deals apiece. Deal value too saw significant increases, mainly on the back of mega-deals, hitting a total of $125 billion in 2015, up from $87 billion in 2014. 2013 and 2012 managed less than half of the transaction value of 2015, at $51 billion and $59 billion respectively.

The number of exits were also up considerably: in total 600 companies were sold for a total value of $81 billion in 2015. The volume and value were down somewhat on 2014, when 800 exits netted $112 billion, although 2015 was significantly better than 2013, when less than 400 deals netted $52 billion. 

China boomed
The research further highlights the role Greater China (GC) played in last year’s bumper year. The GC region saw the largest number of public-to-private buyouts last year, the total of which jumped $17 billion – up more than five times on the five-year average, and made up 14% of total private equity deal value in 2015. The GC region saw 154% value growth in 2015 on the 2010-14 average, while it enjoyed a CAGR of 56% on 2014. India too saw activity increase significantly, up 98% on the 2010-14 average and 60% on a year earlier, while Australia and New Zealand saw deal activity up 101% on 2010-14 and 122% on the year previous. Japan and South East Asia both saw substantial decreases in activity on the year previous, with -64% and -34% on the 2010-14 average respectively, and -54% and -44% on 2014 respectively.

Mega deals, those valued at above $1 billion, saw large increases on the year previous. 22 deals at a value of $54 billion were booked, up from 12 deals with $27 billion in value the year previous.

Internet deals
The researchers also looked at the areas generating the most activity in 2015, in relation to average deal counts between 2010 and 2014. One area of major change, in recent years, is the growing importance of digital technology, which increasingly defines the daily routine in middle-class China and India. Companies offering internet-based solutions are exploding, find the authors, generating a tsunami of interest among private equity funds looking for growth. The investment type last year represented 39% of total volume and 29% of total value. Investors across the region piled a record $36 billion into 371 Internet-related deals in 2015 and another $15 billion into 141 technology companies. Media, healthcare and financial services also drew fresh interest in 2015.

Pre-2008 selloff
On the back of growing capital gains, the number of exits of private equity stock from the pre-2008 era saw a large increase. In 2014 23% of portfolio stock were pre-2008 acquired companies, which dropped to 17% as of mid-year 2015. This is significantly lower than the global pre-2008 stock still creating overhang on portfolios, at around 30%. The unrealised capital of pre-2008 vintage for the Asia-Pacific region saw a significant drop between 2013 and 2015, dropping from $137 billion to $108 billion last year. That, and the industry’s efforts to clean out older deals, actually trimmed the average holding period for Asia-Pacific private equity assets to 4.4 years from 4.8 years a year earlier.

Return on investment
The management consultants at Bain highlight that funds have enjoyed increased returns on their investments over the past five years. The median return in 2011 was 8.5%, which, over the intervening years, grew steadily to 12% mid-way through last year. The top percentile group managed to generate a considerable margin on their venture(s), finding returns of more than 20% in H1 2015. Even the third-quartile funds performed relatively well in relation to the stock-market, seeing returns of around 5%.

While strong returns have been realised in recent years, the road ahead may be bumpy – the consultancy states that “it is very likely” that returns will come under pressure in 2016 and beyond. Since the projected IRRs for those younger vintages are essentially paper returns, they can change direction very rapidly. Private equity fund returns typically take about seven years to stabilise, and a lot could happen between now and when investors actually see their money. “Slowing GDP growth, chronically high price multiples and interest rates that have nowhere to go but up will only make it harder to produce the IRRs that investors demand of their emerging market exposure. And if the market’s record pile of unrealised capital continues to grow, it will become more and more difficult to make timely distributions”, conclude the authors.

Suvir Varma, who leads Bain's Private Equity Practice in Asia-Pacific, adds: “Last year was an exceptional year for deal-making. By comparison, 2016 will likely be much softer. As the macro story across the region deteriorates, private equity is wading into unfamiliar territory – a slower growth environment that will make it much more difficult to find good companies, improve their performance and exit them at market-beating returns.”

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Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.