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Friday Letter At a crossroads

Asian private equity will not escape unscathed from the global credit crunch.  

Now that the debt market bubble has been pricked, where next for Asian private equity? At this point, any answers to this question can at best be preliminary. The crisis paralysing the global debt markets is far from over, with many observers agreeing that things are likely to get worse before anything resembling normality can return. Assessing medium- to long-term prospects for private equity is difficult at the best of times, but with financial markets in turmoil and investor confidence at a low, the task has become even more difficult.

Nevertheless, a number of observations seem safe even now. The most obvious is this: buyout fever in Asia never spread as high and wide as it did in Europe or North America – hence any pain caused by leveraged debt withdrawal should not be as severe either. Only Australia, the most “Western” of Asia’s economies, has experienced a comparable buyout boom so far, one which arguably stalled months before the credit crunch even had an impact. In growth economies such as China and India on the other hand, debt-free venture capital investments and non-controlling expansion finance deals are still more important than LBOs – and capital market volatility will of course do nothing to change t

To the contrary: general partners with money to invest in Asia could be forgiven for planning to upgrade their growth capital capabilities to make up for a possible slow-down in buyouts. Speaking in August during The Blackstone Group’s inaugural results announcement as a public company, CEO Tony James told analysts that opportunities in areas such as Indian minority investments were still attractive, and deal flow still strong. A couple of weeks later, the firm duly followed up with a $150 million purchase of a 12.5 percent stake in Nagarjuna, a Bombay-listed Indian construction company. 

Other regional private equity specialists have simply continued to pursue buyouts. When Macquarie Bank and MBK Partners announced the $3.2 billion purchase of Korean cable company C&M in late August, it was the world’s largest private equity deal announced that week. $3.2 billion is a tidy sum, but in the first half of 2007, with the global buyout frenzy at its peak, C&M would hardly have stood out. Korean banks are expected to help finance the purchase, which suggests local investors’ appetite for credit risk is not directly correlated to sentiment in markets elsewhere.

All this bodes well for those exposed to Asian private equity. A recent research note from global alternative asset manager Partners Group, whilst highlighting worsening conditions for private equity in North America and Europe, assigned “high relative attractiveness” to buyouts, growth capital and venture deals across Asia and the emerging markets. If Partners is right, firms that have already built up a functioning investment infrastructure in Asia will have spent their money well.

Two dangers come to mind immediately, however. First of all, the projections of relative calmness and prosperity in Asian private equity may simply be misguided. If the capital markets crisis worsens and the world’s real economy begins to suffer, Asian private equity could experience a serious set-back – and not for the first time in its young history either.

Secondly, if the Asian segment of the asset class really does hold up better than markets elsewhere, it faces the risk of a crowding-out effect. Fundraising for Asian private equity strategies is already at a record high. Asset prices have been rising, too, and if limited partners around the world begin to alter their allocation models to underweight Western markets in favour of Asia, too much money chasing too few deals could become a serious headache very quickly.