PAG navigates increasingly crowded pan-Asia market

Industry sources have no doubt PAG’s upcoming fundraise will be a success, but deploying such a large fund will not be without its challenges.

There’s no doubt that $6 billion is a lot of capital for a pan-Asia fund. But when reports emerged that PAG could raise as much as that for their latest buyout fund, industry sources told Private Equity International the Hong Kong-based firm would have no difficulty in doing so.

Weijian Shan

A large part of that faith comes down to Weijian Shan, a former senior partner and veteran China dealmaker at TPG, who heads up PAG’s private equity business. He is also the firm’s group chairman and chief executive.

At his former employer, he led a number of landmark transactions including the acquisition of Shenzhen Development Bank in 2004 – the first time a foreign investor had a controlling stake in a Chinese bank.

Shan joined PAG (then known as Pacific Alliance Group) in 2010 and led the firm’s effort to raise its debut Asia-focused buyout fund.

Industry sources agree PAG’s debut buyout fund, the 2011-vintage $2.5 billion PAG Asia Capital I, was raised because of Shan and his connections at TPG. The California Public Employees’ Retirement System and California State Teachers’ Retirement System are among investors in the fund, according to PEI data. The firm’s debut fund generated a 19.9 percent net internal rate of return and a 1.5x investment multiple, according to the latest fund performance data from CalPERS.

In January 2016, the GP raised $3.66 billion for its second Asia buyout fund, which garnered commitments from Canada Pension Plan Investment Board and Maryland State Retirement and Pension System, PEI data show.

It is the institutional backing from US and Canadian LPs that make PAG’s peers so sure it can easily raise the $4.5 billion it’s reportedly seeking for its third and largest Asia buyout fund. PAG has not yet finalised the size or the fundraising schedule, according to sources cited by Reuters in a previous report.

PAG declined to comment.

Industry watchers PEI spoke to said PAG would need to alleviate concerns from LPs that the fund might be too large, as well as that the market segment it plays in is now very competitive.

Capital raised by Asia-Pacific focused funds reached $66 billion in 2017, 6 percent higher than the $62 billion raised in 2016, according to Bain & Company’s latest Asia private equity report. What’s more, the total number of Asia-focused funds closed in 2017 fell by about a third, while the average fund size grew by almost 65 percent, indicating an increase in funds at the larger end of the spectrum.

“However, there’s no doubt PAG will do well with its fundraise, because there’s so much demand now for good and established Asian GPs,” a Hong Kong-based GP told PEI.

With the exception of Baring Private Equity Asia, which is reportedly eyeing a $5.5 billion target for what would be its largest offering, most pan-Asia funds in the market are part of global franchises. Bain Capital, CVC Capital Partners, the Carlyle Group, TPG and Blackstone are either in market or preparing to come to market with their latest pan-Asia offerings.

PAG stands out as homegrown talent, a Hong Kong-based placement agent told PEI, and the firm’s portfolio construction and strong track record make it attractive for overseas LPs wanting a slice of the Asian pie.

Industry sources PEI spoke to highlighted that what makes PAG stand out is its capability to execute large and complex transactions in its favoured thematic: consumer-driven industries. In 2016, PAG completed the $200 million acquisition of Golden Apple Education Group, a Chinese school operator. It took the firm 12 months of work, more than 600 separate negotiations with over 100 stakeholders to close the deal. Industrial gas company Yingde Gases is another example. PAG bought a 42.1 percent stake from the three co-founders of Yingde for $616 million in August last year, after a public boardroom clash.

PAG has traditionally focused on China buyouts. Its current portfolio includes investments in Zhenai, China’s largest online matchmaking and dating platform and consumer finance company Home Credit China. In the last two years, however, the firm has ramped up its overseas acquisition spree with investments in consumer-focused brands that want to expand in greater China. These include the $3.6 billion takeover of US printer manufacturer Lexmark International, $225 million for European dairy producer Food Union Group and $76 million for Australia-based The Cheesecake Shop.

But market watchers noted the firm would need to move from a China-focused buyout strategy to pan-Asia to put a larger fund to work. “If they raise $6 billion, there is no way they can stick to just China,” the Hong Kong-based GP said. China is still largely a growth capital market. Buyouts accounted for less than roughly 20 percent of deal activity in greater China in 2017, while growth deals, which include pre-IPO, mezzanine and expansion transactions, made up close to 80 percent, according to data from Bain & Company.