By Harun Rauf
Despite a contraction in private equity deals in Asia-Pacific over the past two years, many experts still see long-term growth prospects in the industry, with the potential for high returns if investors take note of past experiences and make strategic decisions in the region.
The last two years have seen deal values in Asia-Pacific’s private equity landscape fall to US$45 billion in 2013 from US$55 billion in 2012 and US$63 billion in 2011. A slowdown in economic growth in the region over this period has been cited as the primary reason for the downturn in private equity investments, leaving many funds struggling to deliver promises made during the investment boom in 2011, when investors earnestly entered the market hoping to expose themselves to double-digit economic growth in the region.
Private equity firms have also experienced difficulty exiting their positions in the region, causing many investors to cut back on new commitments while they wait for old ones to be completed.
A closer look at the statistics, however, provides reason to be optimistic for the future of private equity in the Asia-Pacific region, with a Bain & Company report suggesting 2014 could be a turning point for the industry as it matures and streamlines operations.
Although total deal value fell in 2013, the number of deals was up 20 percent from 2012. One of the largest transactions of 2013 was a US$1.2 billion investment from the Qatar Foundation Endowment for a five percent stake in Bharti Airtel, a telecommunications company based in India.
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Buyouts are also becoming more prevalent throughout emerging markets, allowing more control over assets. This shift is particularly true in China, where there has been a shift from minority stake holdings to controlling shares and buyouts. This change in behaviour is set to continue in future.
Additionally, private equity firms are not lacking capital. In fact, they are currently holding a record number of unspent funds: US$138 billion.
In 2014, some of this capital has already been put to good use, with the value of deals in the first quarter equalling around half of the total value of deals concluded in all of 2013.
With that promising start, the outlook for private equity in the Asia-Pacific region is seemingly favorable, with long term growth potential remaining high. The Economist Intelligence Unit estimates that the region will control around 45 percent of world output by 2030, compared to the region’s 26 percent share of world GDP output in 2000. This growth is expected to be fuelled by rising consumption throughout Asia-Pacific.
RELATED: China Allows Private Equity Investment in Insurance Companies
On the other hand, there are still some shortcomings for private equity in the region. Exiting investments is still an arduous process in many cases and some private equity funds continue to struggle to remove poor performing assets from their books. This has led investors to create detailed exit strategies for their future investments.
The report highlights several pillars of success that private equity firms will need to succeed. Firstly, firms will need to establish and maintain a deep network of contacts that can provide market insights and alert firms to potential opportunities. Secondly, they must base due diligence on a clear investment thesis, ensuring that any deal made follows a predetermined set of principles. Next, each investment must have a clear exit strategy, with contingency plans in place in the case of market adjustments.
While the future of private equity remains unclear, the report published by Bain & Company paints an optimistic picture. The authors believe that, following the downturn of the past two years, a turning point may have been reached and that the industry is in a healthy position to harness future economic growth in Asia-Pacific.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.
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