With a record amount of dry powder, $132 billion, held by general partners focused on the Asia Pacific region and competition between regional and local general partners, as well as cash-rich corporate buyers, Bain & Company’s Asia-Pacific Private Equity Report 2015 highlights the challenges of a huge amount of money chasing a limited number of deals.
“Record dry powder means GPs will be motivated to do deals even if faced with higher multiples and stiff competition. The challenge will be to avoid past mistakes by seeking out proprietary opportunities, securing path-to-control mechanisms and devising an exit strategy from day one,” the report said.
With intense competition and higher asset prices, it will be more difficult to find and justify suitable investments, the report said.
The average enterprise value to EBITDA entry multiple for Asia Pacific private equity backed transactions last year was 15.3x, up 21 percent from 2013.
The Asia Pacific entry multiple was also 59 percent higher than the 9.6x average multiple in the first half of 2014 for US buyouts, the report states.
The report also stated that limited partners hoping to enhance their returns may also inject more “shadow capital” into an already saturated market, “although only a small group of LPs currently have the capabilities to source and execute standalone deals”.
GPs also expect to see more co-investment.
More GPs in the Bain survey considered current valuations in the Asia Pacific market to be high to very high, and 72 percent of them expected prices to continue climbing in 2015.
Although the ongoing shakeout among GPs may help to ease pricing over time, given the competitive pressures and superabundant capital, valuations will remain under pressure, the report said.
The public markets are exacerbating the trend for higher asset prices, with implications for deal-making. “It doesn’t help that robust equity markets in various Asia Pacific markets also have tended to support higher multiples. If that fuelled the surge in exit activity last year by lifting the IPO markets, it also emboldened sellers to demand higher prices – a trend that, if it were to continue unabated, could dampen deal-making,” according to the report.
In light of increased competition, there is a renewed push for performance.
Before the global financial crisis, GPs in the Asia Pacific region could count on buying companies at reasonable prices and watching their multiples expand alongside rapid GDP growth, the report stated.
“’Quick flips’ of three years or shorter were common, helping produce world-beating returns that attracted floods of new capital. But those easy-money days are over.”
Overall, the report concluded that “GPs have the opportunity to create their own future in the Asia Pacific region by focusing hard on creating more value from their portfolios. Those firms that can’t state precisely what they stand for and how they will outperform the averages are likely to struggle against firms with a sharply differentiated strategy for consistently delivering value.”