Baring Asia to ramp up Japan dealmaking with seventh flagship

The firm has closed Baring Asia Private Equity Fund VII on its $6.5bn hard-cap.

Baring Private Equity Asia is expecting Japan to account for a larger proportion of its latest pan-Asian flagship.

The Hong Kong-headquartered firm closed Baring Asia Private Equity Fund VII on its $6.5 billion hard-cap last month, according to a statement on 21 January. The vehicle is 60 percent larger than its 2014-vintage predecessor, the statement said.

Japan is likely account for a “large percentage” of Fund VII, though no country is expected to account for more than 30 percent of the vehicle, chief executive Jean Salata told Private Equity International. The firm’s existing AUM is split across Japan, India, South-East Asia, Greater China and Australia.

“Our strategy focuses on large-cap buyouts, and there’s more of those to be done in Japan than China, where the control buyout market is not as developed,” Salata said. Its portfolio comprises 32 assets, of which nine are in Greater China, five are in India and three are in Japan, according to its website.

BPEA will pursue companies with an enterprise value between $500 million and $1 billion, Salata added. He noted that, historically, the average for the firm had been around $300 million to $500 million and that this had grown in line with Asia’s expansion.

“You’re starting to see more secondary transactions as the industry matures, so there’ll be more transactions related to those kinds of disposals,” he said.

Fund VI is understood to have acquired 14 companies, according to a source familiar with the vehicle. That fund had generated a 1.31x TVPI and 15.89 percent net internal rate of return as of 31 March 2019, according to Employees’ Retirement System of Rhode Island documents.

Fund VII is expected to target a slightly higher number of assets through larger equity cheques, the source said.

Salata declined to comment on the exact composition and performance of BPEA’s funds. However, he said it was underwriting to a mid-20s gross IRR on all deals and had been achieving that in its most recent fund.

Private equity funds in Asia are collecting big bucks. In the past 24 months, Hong Kong’s Hillhouse Capital closed Fund IV on $10.6 billion, The Carlyle Group raised $6.55 billion for its Asia Partners V and PAG closed Asia Capital III on $6.1 billion.

The wealth of dry powder is at odds with a slowdown in private equity dealmaking. Spending in Asia fell 26 percent to $148 billion last year, according to S&P Global Market Intelligence, as recession fears prompted greater scrutiny on asset quality and pricing.

The impact in China was especially pronounced. Mergers and acquisitions dropped 11 percent last year amid tighter lending controls, trade tensions and investor concerns over tech exposure, according to Baker McKenzie figures. This in turn made it harder to raise China-focused vehicles.

“As valuations rise, there’s more of a gap between seller and buyer expectations, which has likely contributed to a slowdown in Asia, rather than a lack of dealflow,” Salata said. “There’s no reason why Asia, which represents around half of global GDP, should account for less than its pro rata share of private equity investment.”

An increasing number of firms are looking to Japan. Apollo Global Management planted its flag in Tokyo with an office in 2018, following a similar move by Pantheon several months prior. Scandinavian giant EQT is planning to establish a Tokyo presence and Bahrain-listed Investcorp is in the early stages of developing a Japan strategy.

Bain Capital is reported to be in market with its first dedicated fund and Carlyle held a first close on its fourth Japan fund in the third quarter of last year.

“There are more firms establishing themselves in Japan but the markets are growing and the universe of opportunities continues to expand, so it’s still relatively underpenetrated,” Salata said.

“It’s still possible to find deals that aren’t intermediated there. It’s one of the largest economies in the world, yet it has only a small amount of private capital relative to other markets so overall I’m not too concerned about the competitive dynamics in that market.”