Fishing in a small pond

At the recent PEI Forum: Asia, held in Hong Kong in April, the topic of secondary buyouts – and the likelihood of seeing more of them in Asia this year – was raised in a panel session on exits.

Echoing the view of most on the panel, Fredrik Atting, senior partner at EQT Partners Asia, stated: “I’m a believer that secondary buyouts will come to Asia; if nothing else because of the amount of capital around.”

Recent developments would seem to support Atting’s view. In April alone, Japanese private equity firm Daiwa SMBC invited firms reported to include The Carlyle Group, MBK Partners, CVC Asia Pacific, Advantage Partners and Unison to bid for vegetable juice producer Q-Sai; MBK Partners reportedly appointed Morgan Stanley to advise on the sale of Taiwanese cable television company China Network System, in a deal expected to pique the interests of several of the region’s biggest private equity firms; and the divestment route of Affinity Equity Partners’ Australian pallet maker Loscam has gone from being an expected IPO to a likely sale, with local firms CHAMP Private Equity and Pacific Equity Partners said to be through to the second round of bidding.

The trend has carried through to May. Unitas Capital, Baring Private Equity Partners and Permira are reportedly on the shortlist for the Asian business of restaurant chain Outback Steakhouse, a Bain Capital portfolio company.

Driving the trend is the dry powder to which Atting referred. Unspent capital in Asia was estimated to be $130 billion, according to statistics provided at the same PEI Forum by Bain & Company. Of the 2007, 2008 and 2009 vintage Asian funds, only one-third, one-fifth and a negligible fraction of the capital respectively has been invested, the management consultancy said.

For those firms which closed their last funds earlier – in 2005 and 2006 – the last five years have seen a lot of investments, but precious few exits. As the time draws near for them to return to fundraising mode, they will seek with increasing urgency to return cash to investors. Secondary buyouts are an attractive exit route, especially in a market like Australia where recent private equity-backed IPOs have performed poorly.

However, while secondary buyouts offer GPs a relatively straightforward way to both deploy capital and return cash, such deals can make LPs wary.

“For the LP, there’s always the concern that when a GP raises a large fund, it’s under pressure to invest money and will pay a high price,” said one Singapore-based LP. “In general, it’s not usually been a good experience when one buyout fund is buying from another. The sellers – being private equity investors – always try to extract the best price, so it’s not easy to buy from them.”

The potential for value addition by successive GPs investing in a company is also flagged by LPs as a cause for concern. However, successful secondary buyouts are not without precedent in Asia. In fact, Loscam – mentioned above – looks set to become one example. Affinity bought an 80 percent stake in the Australian pallet maker in a competitive auction from DB Capital Partners, the private equity arm of Deutsche Asset Management in Australia, for A$250 million (€153 million; $189 million) in late 2005. Now, with the resale predicted to raise up to A$800 million, Affinity looks to make a tidy profit from the transaction.

“Historically we have been a little skeptical of secondary buyouts,” says one Hong Kong-based fund of funds manager recently. “But we have also been the beneficiary of these transactions. I know of companies here in Asia that have had three private equity owners and along the way have continued to create value.”

In certain circumstances, however, a secondary buyout might be a good option for all concerned – including LPs. But a further constraint on the success of the transaction type in Asia is the size of the buyout market here. A quick glance at the news reports around any upcoming buyout deals – secondary or otherwise – reveals the same group of names: Carlyle, KKR, TPG, Bain Capital, MBK Partners, Affinity Equity Partners, Warburg Pincus, CVC, Advantage Partners, Unitas Capital, Unison for Japanese companies, and PEP and CHAMP for Australian ones.

With such a limited club of players in Asia, GPs will need to work hard to avoid accusations from LPs that they are simply playing “pass-the-parcel” among themselves with the same assets, earning fees each time.