Bain & Co: ‘Asia PE becoming more activist’

The Asian private equity industry, now more than two decades old, is seeing less passive, growth investors and more of the 'big boys' playing an active role in portfolio company growth.

With Asia’s private equity industry maturing, the regional fund managers are taking a much more activist role in their portfolio companies to deliver the kinds of returns expected by their investors.

Lalit Reddy

“When you feel like you have become one of the big boys, you have to play like the big boys too – become more activist, drive portfolio performance and not just sit back and watch it,” Lalit Reddy, a Bangalore-based partner at Bain & Company told Private Equity International.

Reddy added that “Asia-Pacific private equity firms are doing a lot more work on driving performance improvement at their portfolio companies – whether it is commercial excellence to improve the top-line and margins or being more active in managing talent in these companies, or whether it is pushing the digital agenda to reach at par with the industry.” As examples, he said consumer companies who want to test the digital readiness of their companies are looking at heat maps of their sales force and monitoring the social media reach of its competitors.

Asia-Pacific’s private equity industry achieved its best performance to date in 2017, in terms of deal values, fundraising as well as exits, according to data from Bain’s Asia-Pacific Private Equity Report 2018.

Total capital raised exclusively for the region reached $66 billion in 2017, slightly higher than the $62 billion raised last year. Investments also hit a new record of $159 billion in 2017, up 41 percent over 2016. Meanwhile exit values increased 25 percent to $115 billion last year, compared with the previous five-year average.

“In terms of Asia-Pacific private equity versus the global market – the types of deals that have happened, the size of deals, the exits momentum that we saw over the last year and the fundraising activities that we are seeing – it is very clear that the ups and downs of the 2000s and 2011-12 timeframe are behind us. Investors feel more comfortable about Asia,” Reddy pointed out.

“The previous concerns about finding the right targets –the right people, especially in smaller markets who understand private equity; and the ability to return capital to stakeholders and exit investments – a lot of these have subsided,” he said.

A key challenge, however, for Asia-Pacific GPs remains deployment, despite higher investments made last year in comparison to 2016. Fifty-two percent of GPs surveyed by Bain said the lack of attractive deal opportunities is one of the top two challenges keeping them awake at night.

Explaining the plausible reasons for the scarcity of deployment opportunities, Reddy said that the healthy IPO markets are making private companies wonder why they should go through the entire private equity diligence experience, when they can easily take the company public instead.

The other reason that is driving the perception of limited deal availability is the valuation of assets.

“Valuation expectations are as high as they have been in the last 10-15 years. This is why those who can pay the high valuations are having a more activist stance, once they are open to deploying capital,” he noted.