Exit stage east

Asia provided something of an exit haven during 2009, according to a recent study, however the western markets are returning with renewed vigour.

It should come as little surprise that 2009 was a lacklustre period for divesting portfolio companies. A recent study by Zurich-based SCM, a provider of management and consulting services for alternative investments, provides insight into just how bad things got and what this means for trends developing during a more benign 2010.  

SCM’s annual exit survey reveals the value of all exits in Europe declined by 21 percent compared to 2008, largely due to a heavy fall in secondary sales. In the US the market for exits fared even worse in 2009, dropping 45 percent on the 2008 figures, also due in part to fewer secondary and trade sale opportunities, which together accounted for 80 percent of the decline in exit volumes in the US.

With the two most developed private equity markets both reporting steep drops in exit activity during 2009, it was the increasing buoyancy of the Asian private equity market which meant the total global decline was a less shocking 20 percent.

While the US and Europe were gripped by the financial crisis, Asia underwent an unprecedented year in private equity. As well as witnessing a 10 percent increase in exits measured by value for the year, for the first time ever Asia experienced four exits in the $1 billion-plus bracket: two in Japan, one in China, and one in Australia. US-based Bain Capital, for example, completed a $1.1 billion buyout of Bellsystem24, a Japanese call centre operator, marking a significant exit for Citigroup in November of last year.

A booming Asian stock market and IPOs fetching high multiples provided funds with stakes in Asian listed companies plenty of attractive opportunities for exit, says SCM’s chief executive officer, Stefan Hepp, in an interview with PEI.

In examining whether the trend is set to continue, SCM’s report notes that exit activity in Asia “was much more vibrant” for the first half of 2010 than it was in the same period last year, with the second half of 2010 expected “to remain brisk”. 

However, it is unlikely Asia will dominate once 2010 figures are calculated, says Hepp, adding that Europe and the US are experiencing a rebound in exit activity.

Little has come of the widely anticipated IPO surge, comments Kiran Sharma, a private equity lawyer at DLA Piper, adding “the flurry of activity in potential IPOs we saw earlier this year has all but disappeared. Firms still see too much uncertainty and risk in getting the right valuation for an offering”.

Activity in terms of private equity-backed IPOs was particularly muted in the third quarter of 2010. On a global basis, a mere 28 companies were divested in the third quarter, fetching a total of $5.7 billion, according to recent research by financial services firm Ernst & Young. This represented a 34 percent decrease compared with Q2, and is the slowest period for private equity-backed IPOs since the third quarter of 2009, which saw $4.3 billion raised from 11 portfolio company exits.

However, the largest deal of the year occurred in the third quarter when MEG Energy, a Canadian oil sands company backed by Warburg Pincus, was floated for $678 million in July, the research noted.

The research also provided evidence of the Americas’ resurging dominance over Asia and Europe. 75 percent of third quarter private equity-backed IPOs took place in the Americas, where 21 portfolio companies garnered approximately $4.4 billion. In Asia, six exits raised $1.3 billion for firms, and EMEA saw just one exit raising $29 million in October.

As the year concludes, private auction processes will continue to be the favoured option for European and US firms, adds Sharma. “2011 looks promising for exits, but private equity firms will still want a swift transaction and optimal price valuation in the circumstances for a portfolio company, which in today’s market is better provided through a competitive auction,” she explains.

As market conditions improve, however, the backlog of portfolio companies waiting to be divested will not be cleared entirely, the survey noted, so “there will be no big party held to celebrate the end of the year, but people will come to the conclusion that 2010 was a continuation of improving market conditions,” adds Hepp.

Now in its 7th edition, SCM’s survey analysed data from 56 different private equity firms who collectively manage 203 funds.