Global PE firms take on developed Asia

A number of global funds with a pan-Asian focus have come to market in recent months, suggesting they are confident they can raise a significant amount of capital to invest in the region.

Washington-based Carlyle Group and US buyout firm TPG are in market to raise more than a combined $6 billion for their Asia-focused funds. Blackstone is said to be targeting at least $3 billion for its first-ever Asia buyout fund which will invest in high-end manufacturing, healthcare and consumer upgrade sectors. Meanwhile Morgan Stanley Private Equity is set to raise $2 billion for its latest pan-Asia vehicle.

At least 148 pan-Asian funds targeting an aggregate of approximately $45 billion have launched since the beginning of 2016, according to PEI data. Of that amount, almost half are being raised by the global franchises. In June KKR amassed $9.3 billion for the region’s largest ever private equity fund, with most of the capital to be deployed in corporate carve-outs in developed Asia.

“Forty percent of KKR’s new fund is widely expected to be invested in Japan, whereas in the past that amount of money [would] go into China,” Niklas Amundsson, managing director at Monument Group told Private Equity International. “China does not offer that many big transactions. And once the deals are out, everyone is in the auction.”

Competition at auctions has intensified in recent years with more GPs coming up against Chinese corporates as well as large institutions and sovereign wealth funds, according to Bain & Company’s Asia-Pacific Private Equity Report 2017, published in March. Record-high corporate leverage ratios, inflated multiples and slower growth in the macro environment have made buyout activity in the region’s largest economy more difficult.

“There’s only a limited number of places where large global funds can consistently look for deals in Asia,” an Asia-based fund placement specialist noted. “Developed markets and cross-border has got to be a significant part of the funnel, that’s just the reality of the situation.”

Similar to KKR, these global firms are setting their sights on developed Asia – Japan, South Korea and Australia – and less so in China, marking a change in the regional exposure and the types of deals. Japan and South Korea present a similar investment thesis: a focus on corporate carve-outs and business succession.

A Hong Kong-based managing director of a global buyout firm recalled: “When the firm was raising its second regional fund in 2012 a lot of investors didn’t want us to do Japan. Some investors were even asking us for a hard commitment that we would not deploy more than 20 percent of the fund in the country.”

Today, market sentiment has shifted and deal activity has picked up in developed Asia. KKR struck more than $6 billion-worth of deals in Japan in the first quarter of this year. TPG re-entered South Korea in June with a $437 million investment in Kakao Mobility, a year after it re-opened its office in Seoul, and Bain Capital made a more than $800 million bet on Korean cosmetics company Hugel. In Australia, Carlyle teamed up with Pacific Equity Partners and bought pharmaceutical company iNova for more than $900 million.

“The value proposition these global firms offer is that they have scale and a global perspective on value chain and resources in industries that run across borders,” the Asia-based fund specialist noted.

He added that these global firms should be marketing on their consistency of returns – an area other GPs have struggled with in both developed and developing Asia – as well the consistency of their best practices in relation to manage assets and return capital back to investors.

Funds focused on the region have shown median net internal rates of return in the 12 percent range for two years running, and top-quartile funds have been producing returns of closer to 20 percent, the Bain & Company report noted. Limited partners have also been cash-positive in the region over the past few years. LPs got about $1.4 back for every $1 called in the first half of 2016, according to data from Bain.

Blackstone, Carlyle and TPG declined to comment on fundraising. Morgan Stanley did not return a request for comment.