KKR: Asia corporates ripe for carve-outs

In a macroeconomic report on the region the private equity heavyweight predicts that opportunities will arise from Asian conglomerates which have over-diversified across industries.

There is a major opportunity in carve-outs among Asian corporations, especially for those that have over-diversified in to non-core business lines, according to Henry McVey, head of global macro and asset allocation at KKR.

In his Asia: Pivot Required report, he said a change in corporate mindset in developed economies such as Japan, South Korea and Australia, and to some extent India, is largely positive for investors as conglomerates in Asia are increasingly willing to shed non-core businesses in order to pay down debt and improve returns.

He added there are opportunities for private equity investors especially in Japan where “rates are low, banks need to lend, and many firms require the requisite expertise to help them expand abroad”. He added that there is “great potential for operational improvement in Japan” as many companies are trading at extremely favourable enterprise values to EBITDA.

The report said that while the consumption story is still prevalent in Asia, domestic consumption will dominate over globalisation. The demand for value-added services in food safety, healthcare and media will continue to gain investor attention, especially in large consumer economies such as China, India, and Indonesia.

Meanwhile in China as slow growth continues, cross-border flows are also becoming an emerging opportunity. “European and US firms can provide local knowledge [to Chinese companies] about consumer behaviour, help to overcome regulatory hurdles, and teach operational best practices,” McVey wrote. “Chinese firms will also need help with mergers and acquisitions, which should drive incremental need for local strategic advice, financings, and management talent.”

He also points out in the report that “the skill set now required to generate investment success, particularly in the private markets in Asia, will be quite different than during the last cycle” and that investors may need to “pivot to a more global focus, a more operational expertise, and more industry knowledge”.