PEI Asia Forum: Liquidity to boost exits

Capital flows into Asia reached a new $1.5bn peak over the last three months, a development welcomed by the region's private equity firms.

Asia’s capital and bond markets had an unexpected rise last year, International Monetary Fund resident representative for Hong Kong SAR Andre Meier told delegates at the PEI Asia Forum. According to IMF research, capital flows into Asia have reached a new peak over the last three months of roughly $1.5 billion, after a year of volatility.

Prominent GPs on a separate panel agreed that this spike in liquidity helped many firms find exits last year, and expect that this same liquidity will make 2013 a good year for exits.

As Asia’s growth story begins to lose its shine, one of the foremost questions on GPs’ minds when they make an investment is how they will sell the company, and who could be the potential buyers, according to George Raffini, chairman of Headland Capital Partners. At this point, most of the buyers end up being strategics or multinationals trying to break into a specific region.

“So we always have to think: what does our portfolio company bring to the party?” Raffini said on the panel.

The rise in liquidity in both the public and private markets was unexpected last year, added CVC Capital Partners' managing partner Roy Kuan, but CVC was able to capitalise on that to sell some high-yield bonds for one of its portfolio companies – something the firm would never have been able to do in previous years.

Even though equity markets were rather tough in Asia, Bain Capital Asia managing director Jim Hildebrandt said he was “surprised” by the amount of liquidity, and that helped both start and close exits for firms across the region. He expects similar conditions this year.

What has really changed for Asian private equity is that firms now have to expect a longer holding period, Raffini explained. Markets like China got used to three-year flips to IPO, but a strategic buyer will more often want to see scale before they show interest, he said.

Buyers are also attracted to assets that are fully owned by their financial sponsors, panellists said. For example, Bain Capital does all control deals in Japan, and “there is tremendous demand, all the time, for our portfolio companies”, Hildebrandt said.

Headland’s exits in Korea also trend toward mergers and acquisitions because most of the firm’s deals there are control deals. Even in China, where deals are mostly minority stakes still and the IPO has always been the traditional exit route, Raffini expects to see transition towards M&A exits in the coming year.