The dominance of regional strategic buyers across Asia’s major private equity markets has prevented global investors and their managers from meaningfully penetrating the asset class, according to Olivia Ouyang, director of funds (Hong Kong) at Ontario Teachers’ Pension Plan.
“The most fundamental reason causing private equity to be a less important buyer is that in Asia you have dominant strategic buyer groups – the likes of keirutsu in Japan, chaebols in Korea, state-owned enterprises and tech giants Baidu, Alibaba, Tencent and JD.com in China, and family conglomerates in South-East Asia and India,” said Ouyang, who spoke at the Credit Suisse Asian Investment Conference in Hong Kong on Wednesday.
On the increasing importance of strategic buyers, Ouyang highlighted that these buyers have better access to bank financing, require lower returns and are more experienced in certain sectors and can bring more resources to the target companies to add value.
A recent survey by Bain & Company reflected Ouyang’s observation. The GPs surveyed by the consultancy said that competition has increased sharply, with regional/local private equity firms (63 percent) as the biggest threat, followed by strategic/corporate players (47 percent), global private equity firms (34 percent), and LPs/sovereign wealth funds direct investing (25 percent).
Chinese tech giants – Baidu, Alibaba, Tencent and JD.com (BATJ) – for example, have not just been snapping up assets in the region but also turned into asset managers over the last few years. For instance, Alibaba’s Yunfeng Capital is investing its 2013-vintage $1.1 billion vehicle, while Baidu is deploying a $1.1 billion expansion/late-stage fund, according to PEI data.
Ouyang added: “I feel in the Western world the playing field is much more even with financial investors and strategic investors having somewhat equal access to target companies. In China, BATJ accounts for about 40 percent of overall venture capital fundraising, while the likes of the Facebooks and Googles of the world only account for 5 percent of venture capital investing in North America.”
In the short-term private equity buyers may have some difficulty catching up with strategics, but Ouyang reassured the audience that cultural perceptions are changing.
“GPs nowadays are equipping themselves with operational as well as value-added know-how,” Ouyang noted. “And I think the GPs and strategics will gain more and more transaction volumes in this market.”