Asian GPs brace for tougher times

Forward-looking fund managers are preparing their portfolio companies for life in a deteriorating economic and financial climate, delegates at PEI’s Asia Forum in Hong Kong learned.

Asian private equity groups will not escape unscathed from worsening conditions in regional and global markets, was the consensus view of industry leaders speaking at “The Private Equity International Forum: Asia 2008” in Hong Kong today.  

I am shocked and dismayed that central bankers are putting their economies at risk because of a philosophic stance that has absolutely no basis in logic

Tim Sims

Delegates were reminded that Asian private equity was less vulnerable to the fallout from the global liquidity crisis because of its more modest use of financial leverage relative to Western markets. However, sponsors were also emphatic on the need to take action to strengthen portfolio companies facing tougher economic and financial conditions in the coming months.    
KY Tang, chairman and managing partner of pan-Asian buyout group Affinity Equity Partners, told the conference that his firm last year adopted a “heightened focus” on interest rate- and currency-related risk. “Currency risk is often underestimated by Asian companies, but if you are a Hong Kong-based company for instance and your dollar-pegged local currency softens, your profit margin can disappear very quickly,” he said.
Amid rising commodity and raw material costs, Affinity was also reviewing the sourcing strategies of its portfolio companies, Tang noted.

Customer concentration and creditor risk in the portfolio were also areas of concern: “You need to understand what happens if a large customer or a key supplier go out of business,” Tang said.
Tim Sims, managing director of Australasian buyout specialist Pacific Equity Partners, said his firm too was “adopting strong defensive positions” where necessary, although he also stressed that PEP’s investment portfolio was in good health.
Sims said companies experiencing poor trading in today’s environment should expect little if any “mercy” from their lenders. “The banks are now in a ‘mad acceptance’ sort of mindset, ‘it’s alright to have got it wrong’ is their attitude. So if a company has a problem, the banks won’t step in to manage the situation; the private equity firms will have to do it themselves, which will impact their returns.”
A shakeout of underperforming Asian managers as a result of the current challenges was now likely, he added.
Sims was also critical of the world’s reserve banks and their efforts to keep inflation between 2 and 3 percent. “There is no evidence at all that this is right. I am shocked and dismayed that central bankers are putting their economies at risk because of a philosophic stance that has absolutely no basis in logic,” he said. Keeping inflation at 5 percent instead would allow economies to continue to grow sufficiently.
Despite the difficulties in world markets, speakers including Tang and Sims agreed that fundamentally, the outlook for skilful and experienced private equity managers in Asia was still good. Pockets of liquidity to finance transactions still existed, especially among local consumer banks willing to step into the gap left by the retreating international investment banks.
Commenting on the trend of international limited partners increasing their allocations to Asian private equity, PV Wang, partner and head of Asian operations at global fund of funds group Adams Street Partners, said: “There will be cases of capital being misallocated to the wrong managers, but ultimately it is all about how the industry responds to more capital flowing in. There will be bumps in the road, but the long-term trend for Asian private equity is very positive.”