Bending the rules

As the calendar ticks over into 2011, Asia’s buyout industry is collectively entering the New Year with a fair amount of dry powder to deploy.

One Hong Kong-based LP estimates that the rash of funds closed in 2007 and 2008 (including some of the “mega-funds” for the region, like the $4 billion funds raised by CVC Asia Pacific and TPG) are on average 50 percent deployed – so there is still some significant spending to be done as the funds’ investment lives shorten.

But on the investment side, deal flow has not necessarily been conducive to quick deployment.

“There is a shortage of good [pan-Asian buyout] assets coming onto the market – the people with assets are thinking they can get a better price if they wait a year or two,” says one Hong Kong-based M&A lawyer.

Indeed, there have been several notable examples in recent months of companies that were put into play and attracted significant interest and bids from both private equity firms and trade buyers – only to be pulled, reportedly because owners felt the bids weren’t high enough. Among these have been the Southeast Asian operations of French hypermarket chain Carrefour; San Miguel’s cured meats subsidiary Pure Foods in the Philippines; and the Asian assets of Bain Capital-backed Outback Steakhouse.

Several opportunistic private equity approaches have also met a dead-end due to pricing disputes; one notable example being Cerberus Capital Management’s A$2.7 billion (€2 billion; $2.7 billion) offer last September to Australian drinks conglomerate Foster’s for its wine businesses. The offer was said by Foster’s to “significantly undervalue” the business.

According to one Hong Kong-based buyout manager, towards the end of 2010 pricing expectations on some companies, especially in Southeast Asia, were approaching the mid-teens in terms of EBITDA multiples – not exactly where private equity funds want to be pitching their bids in the wake of a downturn.

Competition on the buy-side has also increased, with an influx of Western strategic buyers looking to buy into the Asian market at whatever cost.

“Not only do you have local conglomerates competing for businesses in their own territory to gain market share,  you’ve got international strategics coming in to expand their geographic footprint and get a foothold in Asia,” says Chris Heine, Hong Kong-based managing director of ICG in Asia.

“So where you have a market leader or a number two or three player coming out for sale, you often have that corporate buyer coming in that’s willing to pay more.”

With opportunities to deploy capital into traditional buyout situations thin on the ground, buyout funds have been pushed to be creative with the definition of a buyout in order to get deals done. Over the past couple of years, traditional buyout players have taken to writing smaller cheques and doing minority deals, like Bain Capital’s $61 million investment in Indian clothing firm Lilliput Kidswear for a 30.7 percent stake in April.

Some have turned to PIPE transactions, such as the pending Patni deal in India, which includes investment from Apax Partners, or pre-IPO plays such as the Dilli Group deal, which was funded by The Blackstone Group, Warburg Pincus and Atlantis Investment Management Capital in March. The three firms reportedly injected $600 million for a 30 percent stake in the Chinese agricultural company.

While GPs have primarily been concerned with finding good situations to invest in, even if they don’t fit the profile of a buyout, it is not clear that their LPs have been as adaptive to a looser interpretation of the remit.

This may become clear later this year, when several buyout funds could be readying to go back out to market. 

However, anecdotally, LPs have expressed skepticism over the wholesale sustainability of the strategy.

“The fundraising cycle has lengthened for buyout funds more than it has for growth strategies – LPs have higher hurdles on going into these funds,” states one Hong Kong-based secondaries manager. “There’s going to have to be a lot of effort put into understanding the deals they’ve done and deals they’ll be doing going forward.”

Of course, the wholesale demise of the traditional buyout strategy in Asia is unlikely – markets like South Korea, Australia and Japan, where the buyout is very much alive and well, will ensure that. But one trend that looks set to emerge in 2011 is the shrinking of the sector, and/or a retooling of strategies better suited for the regional opportunities.