Friday Letter Confidence building

Investment and exit activity seen recently in Asia should provide a boost to the region’s flagging morale – and kick-start some private equity industry recovery.  

Morgan Stanley Private Equity Asia’s S$458 million ($317 million; €222 million) offer earlier this week to take private Singapore-listed Sihuan Pharmaceutical sent important signals to the market.

For one thing, the firm has already received a green light from shareholders holding almost 77 percent of the drug company, which means it looks set to complete. That's in stark contrast to many deals that fell apart over the past 18 months, like planned stake sales by Huawei Technology and PCCW — each of which were cancelled due to volatile market conditions and subsequently left out in the cold firms including Bain Capital, Silver Lake Partners, MBK Partners, Macquarie, Providence Equity Partners and TPG.

Morgan Stanley Private Equity Asia's willingness to deploy a substantial chunk of its $1.5 billion Fund III is also a positive sign. In fact, in the past few months, several large transactions have been inked. These include the HK$1.65 billion ($213 million; €150 million) investment in publicly listed Chinese retailer Wumart by TPG, Hony Capital and Legend Holdings, as well as KKR's and Affinity Equity Partners' $1.8 billion deal for Oriental Brewery, the largest private equity transaction in the region this calendar year, and also one of the largest globally.

Things are looking better not merely from an investment perspective, but on the exit front as well. In recent weeks, quite a few private equity portfolio companies have started readying for initial public offerings or secondary offerings, as in the case of Carlyle portfolio company China Pacific Insurance. The company is reportedly aiming to raise RMB24 billion ($3.5 billion; €2.5 billion) with a second listing in Hong Kong, having shelved similar plans last year amid uncertain economic conditions.

While not enough in volume or value to suggest a return to the level of private equity activity seen in the years leading up to the financial crisis, what these deals do illustrate is that there are private equity firms willing to invest and companies willing to sell.

They also indicate to limited partners that money can be put to work in Asia. After all, lack of capital is not the only constraint facing investors; a certain amount of constraint is self-imposed – why pay a 2 percent management fee when the cash will be set aside by the GP for the foreseeable future?

But perhaps the most important aspect of these deals will be the confidence in economic recovery they give to those watching the market – which in itself can inspire other firms to start writing equity cheques of their own. The perception that a turnaround is just around the corner can help make that turnaround a reality.