Wen Tan is the co-head of private equity Asia at Aberdeen Asset Management. He was previously with Squadron Capital and FLAG Squadron Asia, which Aberdeen acquired in 2015, where he served as managing director and partner and a member of the investment committee. Earlier in his career, Tan was with EY’s China transaction advisory services group and Lazard as an M&A investment banker.
Miranda Tang is the managing director of private equity at CLSA Capital Partners and heads a series of pan-Asia growth funds. Tang has private equity expertise in China, India, Indonesia, South Korea, Taiwan, and Vietnam. Before joining CLSA, she started her career with EY and worked with the Century City Group in the US and Hong Kong.
Peter Kim is a partner at Coller Capital responsible for origination and execution, and based in the firm’s Hong Kong office. Earlier in his career he was an associate in the healthcare investment banking team at Merrill Lynch and an executive in the real estate, corporate securitisation and infrastructure finance team at Barclays Capital in London.
Gavin Anderson is an international counsel with Debevoise & Plimpton in Hong Kong and a member of the firm’s private equity group. He has experience advising sponsors and investors on investment management issues, and acts for a range of sponsors in their fund formation, co-investment and related activities. He has acted for clients including Baring Private Equity Asia, CDH Investments, HarbourVest and Morgan Stanley.
Dennis Kwan is the managing director of MVision Strategic (Asia). Kwan is involved in deal co-ordination and execution as well as developing and maintaining relationships with investors. Prior to joining MVision, he worked on private equity and infrastructure fund investments at Sumitomo Mitsui Trust and KPMG’s advisory-business performance services team.
Asia-Pacific is the global economy’s most dynamic region at the moment. And its fast-changing landscape is a significant positive for private equity investors, agree the five participants at Private Equity International’s Asia roundtable discussion in Hong Kong.
Although growth across the region’s economies is expected to decelerate slightly to about 5.25 percent in 2016-17, there’s plenty of dry powder. Bain & Company’s Asia Private Equity Report estimates it at $123 billion, as firms try to take advantage of the dramatic demographic trend that is the rise of middle-class consumers.
Resilient domestic demand was a major driver of deals in the region in 2015, with more than $50 billion in internet and tech-related transactions. Media, healthcare and financial services also drew interest from private equity last year.
Our roundtable participants all confirm Asian insurance companies are an emerging force in global private equity. A clear indication of their growing status is the increasing allocations of Chinese, Korean and Taiwanese insurers to the asset class. Taiwan’s Fubon Life, with more than $95 billion of assets, and Cathay Life Insurance, with more than $140 billion, each plan to invest another $1 billion in private equity in the next 12 months, according to PEI data. Meanwhile, China Life Insurance Company said it would scale up its alternative investments to as much as 5 percent, or $18 billion, of its $360 billion-plus portfolio.
Wen Tan, co-head of private equity Asia at Aberdeen Asset Management, says: “One reason why insurance companies play a relatively larger role in the region is that the pensions system in many Asian markets is very much concentrated at the national level, with the exception of Japan. You don’t get the equivalent of the US and European pension funds – there is no Chongqing Fire and Police Pension Fund for example, unlike in the US where you get that proliferation of smaller second- and third-tier pension funds.”
Most Chinese insurers are momentum-driven and work on a relatively short-term time frame, Miranda Tang, managing director of private equity at CLSA Capital Partners, points out. “If you work with European or US pensions or insurance companies, they would match that time frame with a long-term product like private equity. If you go to them and say private equity’s investment return is 20 percent but it takes five to seven years to materialise and capitalise on the investments, they would say: ‘Why should I be interested when I can get in one to two years’ time a 16 percent guaranteed return?’ I think we would need to go through a few more cycles with Chinese insurers to get them convinced.”
“My concern is that the way in which many Chinese companies are executing their outbound M&A is not necessarily in the most optimal form at the moment”
Gavin Anderson, an international counsel with Debevoise & Plimpton, adds that the law firm is starting to see Chinese insurers come into offshore private equity funds, which could be a “very big development considering the amount of capital they have”. Anderson, however, adds that possible hiccups along the way include getting regulatory and currency exchange approvals. “Assuming that goes smoothly, that would be a big and interesting group.”
China’s pursuit of overseas acquisitions is a significant trend. Outbound mergers and acquisitions hit $111 billion for the first half of the year, smashing the full year total of $108 billion for 2015, fuelled by a huge appetite for high-end technology, chemicals and real estate, according to Dealogic.
Tan says: “From a strategic perspective, Chinese overseas acquisitions make good sense, ie the buying of commodities, technology, best practices, and/or customers, and we would expect that to grow. However my concern is that the way in which many Chinese companies are executing their outbound M&A is not necessarily in the most optimal form at the moment. For example, there are some who do not use advisors at all. It’s already challenging doing M&A – let alone cross-border M&A – and to try to do that in-house is very surprising.”
Tan stresses that an added challenge is getting into bidding wars, which has been the hallmark of some of the larger deals in recent years. “Chinese acquirers are seen to be willing to pay top dollar to seal the deal. This harks back to Japanese corporates and M&A in the 1980s, and we all know where that went – paying top dollar for every single investment gives no buffer for execution risks.”
Peter Kim, a partner at secondaries firm Coller Capital, agrees that Chinese bidders tend to pay a full price. “People do question whether the highest offer is valid and executable, or if going with another buyer will produce a better outcome.”
The consensus around the table is that the trend for outbound deals is only likely to expand, noting that the Chinese government is taking steps to smooth the path for overseas acquisitions. In May, regulators proposed to end a requirement that they approve deals of $2 billion or more. And they are likely to allow Chinese companies to vie against each other for the same target.
Dennis Kwan, a managing director with placement agent MVision, says he expects the trend to continue, especially in sectors supported by the Chinese government such as technology, internet, healthcare, fintech and advanced industrials. “Nowadays we also see a lot of Chinese banks and insurance companies supporting the One Belt One Road initiative and snapping up assets in transport, logistics, and infrastructure – this is an emerging trend that will be big in the very near future.”
Those around the table agree that general partners should only venture out of their core target geographies if there is a very compelling reason to do so. “You see the logic in a Chinese company listed in the US and it’s a take-private, but if it’s new platform deals outside of a core geography then those on average are worse off,” Tan adds.
VALUE CREATION RISE
Our roundtable participants concur that in light of slower growth in Asia and greater competition for deals, operational improvement is an important lever in value creation.
“Large Asian GPs now have operating partners and specialists on board, and increasingly you’re starting to see even smaller Chinese funds emphasising operational improvement,” Kim says. “Clearly this is a trend where firms are starting to realise it’s not just about growth and riding the economic cycle, but about differentiation. If the fundraising market gets tougher, this is one box GPs have to tick to secure investors’ capital.”
From the limited partner side of things, however, Tan wonders how much of value creation is a marketing ‘tick box’ and how much of it is genuine. “I’d say it’s slightly counterintuitive with the large-cap end of the market where the management fees are large enough to support a strong, diversified operational team. Those are the companies that perhaps aren’t as in dire need of operational support as the lower end of the market.”
“When it comes to investing in new markets, it all boils down to fundamentals and peripherals services”
“Smaller GPs buying smaller companies may find more lower-hanging fruit in terms of operational improvements especially if those companies have not been professionally managed,” Anderson points out. “If you are buying a big company that is already well managed, driving incremental improvements might need a bigger team and more experienced people.”
“Another trend, although a very small proportion in the overall market, is the increasing proliferation of sector-focused funds, similar to what we saw in the US a couple of decades ago and in Europe in the past decade,” adds Tan. “The challenge of operating in a more difficult environment given the expertise that’s required, coupled with the Asian minority deal context, means you are perceived to be bringing something more than just money to the table, and that might help you with a little bit of additional influence and a foot in the door.”
In terms of the opportunities for secondaries players in Asia, Anderson notes that the size of that market will always be linked to the number of funds and LP positions. “Realistically this is just smaller in Asia than in Europe and the US, and will probably be for some time, although I think the market has grown pretty quickly now compared to a few years ago based on what we have seen on the legal side in terms of the sophistication of the secondaries structured transactions going on.”
Kim says that there are more and more GPs with maturing funds who are unable to exit their portfolio companies. “This presents an opportunity for secondaries market players to work with LPs and GPs to restructure these funds, if it is agreeable to all parties.
“There are a few traditional Asian LPs who would think tactically about portfolio management. However most Asian investors are still in the asset-building stage, so their interaction with the secondaries market will be to help construct their portfolios.”
Kwan adds that, in his experience, there is plenty of interest for potential GP restructuring and the firm receives a lot of enquiries about it. “For us the question is: can we help them? Will they be able to resolve the issues and come back to the market, with us as a partner of theirs?”
NEW ASIAN MARKETS?
The discussion moves on to which new Asian markets are the most promising. The challenges and risks when investing in Asian frontier markets like Myanmar and Laos are many, according to our participants. Chief among them is weak appetite from LPs. Deal sizes and fund sizes are also smaller. And of course, the risks are magnified since the infrastructure to support these investments is sorely lacking.
“When it comes to investing in new markets, it all boils down to fundamentals and peripherals services: is the growth rate going to give you the type of return that will overcome the currency exposure? Also, you need to be a bit avant-garde in terms of where you see the next trends coming,” Tang says.
“At the transaction level, it is not just money going in. You also need to be certain of the ability to repatriate proceeds at divestment. Other considerations when investing in new markets include a clear banking system, favourable monetary controls, and the availability of comprehensive company secretarial, tax and accounting support.”
Kwan points out that Vietnam is a good example of an Asian private equity destination that is beginning to open. “Over the last 10 years, Vietnam has been trying to build up its PE environment and in the last one to two years, we see funds of funds investing and getting more comfortable.” Other countries are lagging behind. “Myanmar and Laos, however, would need another 10 years.”