Asia’s growth story is beginning a new chapter. Some of the central characters have fallen from grace, and there’s no happy ending in sight: deals and exits have become more challenging in China and India, hurting returns, while the latter (together with Indonesia) has proven particularly sensitive even to the suggestion that the US Federal Reserve might end its asset-buying programme.
Meanwhile other players are back in the picture: Korea, for example, is seen as a volatility safe haven and a potentially fruitful source of corporate carve-outs, while the investor mood in Japan is surprisingly buoyant.
Jean-Eric Salata, CEO and founding partner of Baring Private Equity Asia, believes that pan-regional funds like his are best-equipped to succeed in changing markets.
“I’ve always been a very strong believer in regional diversification. You realise things can change and markets are volatile in Asia. Who would’ve thought Japan would be the best-performing market in the region in 2013-2014?”
Ceiling-high windows in Salata’s office on the 38th floor of Hong Kong’s International Finance Center offer a postcard-perfect view of the ferries in Victoria Harbour and the taxis inching along the roads below – albeit through a lingering haze. It’s an apt metaphor for Salata’s outlook on the region.
“Everyone loved China when the markets were at 50x earnings a few years ago. But now that the stock market is at 8x earnings, no one likes China. It’s the old greed and fear cycle playing out. Markets are not always rational. There are fundamentals, and then there is price, which tends to overshoot in each direction. We’re in the midst of that cycle now, and it will continue for some time because of macro and political issues in some countries in the region. But valuations are attractive. For investments made today, returns should be very good.”
On India, he’s similarly upbeat – although he acknowledges that the rupee’s plunge against the US dollar has had a big impact on returns for private equity investors in the country.
“The importance of currency hedging really moved up in the minds of investors. From our standpoint, we do a lot more hedging than in the past. There are costs associated with that, but it removes an additional level of volatility from the portfolio.”
In particular, his team hunts for naturally-hedged investments. For example, Baring’s $465 million buyout last year of India-based IT services company Hexaware (the firm’s largest ever India deal), is essentially a US dollar business operating in relatively low-cost India and is therefore a natural hedge against rupee volatility.
In addition, valuations are attractive in India, he says: Hexaware had 29 percent year-on-year EBITDA growth in 2013, and Baring bought it for 6.9x EBITDA.
“We haven’t seen that level of value versus growth in a long time in India. It’s driven by the negative sentiment toward India’s macroeconomic picture. Historically the country has been very expensive.”
“Buying underlying growth at a reasonable price – that’s the core of our strategy. One of the ways of doing that is to buy when markets are bad and the outlook not so clear.”
It’s a contrarian take, not only from a market perspective (given that Asia deal value last year was the lowest it has been since 2005) but also in terms of the firm’s culture. Baring, at 17-years-old, one of the few veteran shops in Asia, has a reputation as a canny outfit with an ingrained sense of caution, sources say.