Private equity firms that gained strong double digit returns from investing in Asia after the 1997 financial crisis can no longer expect the same, according to Joseph Bae, managing director at Kohlberg Kravis Roberts and Michael Chae, senior managing director at The Blackstone Group, speaking on a Private Equity Leaders panel at the FT Asset Management Summit in Hong Kong.
As KKR gears up to close its second Asia fund on $6 billion, the largest fund ever raised in the region, Bae explained, “[KKR] is not looking for 10x returns that come once in a decade.” He added that Fund I made 25 investments that all performed “reasonably well”, noting that the firm is hoping to make consistently good investments in Asia, rather than one-off blockbuster deals.
Chae added that as Asia does not have the fundamentals of a traditional private equity market – offering control positions to firms that can leverage deals with cheap debt – firms “have to be more artful in the private equity space and look for dislocations in sectors and geographies.”
For example, KKR has identified an opportunity to take advantage of India’s “thin banking system” and lack of available credit for businesses. The firm has launched a structured credit vehicle in the country, which will offer financing to Indian businesses in need of capital.
I don't think you can justify overpaying for a company just because debt is so cheap. That is part of the discipline people have learned from the last cycle
Joseph Bae, managing director, KKR
In August last year, KKR received approval from the Securities and Exchange Board of India for its India Alternative Credit Opportunities Fund I. Media reports said earlier the fund's target is $1 billion.
Bae revealed at the Summit that the firm will be using its own balance sheet to fund the opportunities, though he did not comment on the fund size.
Both Bae and Chae agreed that valuations in Southeast Asia, in particular Indonesia were high. Bae said, “There is a tremendous amount of euphoria in Southeast Asia,” adding that prices had increased dramatically.
Nonetheless, KKR is still looking at opportunities in the region, having opened its Singapore office in October 2012. The firm also made a $200 million add-on investment in Vietnam’s Masan Consumer in January, bringing its total investment amount to $359 million – the largest private equity deal in Vietnam ever and KKR’s largest in Southeast Asia, the firm said earlier.
The private equity pair also touched on global issues, saying that despite cheap debt available for deals globally, M&A has been stagnant due to the reluctance of corporate decision-makers to act in an uncertain market and due to robust valuations in the US.
Bae said, “I don’t think you can justify overpaying for a company just because debt is so cheap. That is part of the discipline people have learned from the last cycle.”