Asia’s lower deal and exit data for 2012 reflects a poor macroeconomic environment and “a stunning turnaround in [GP] investor sentiment” for the region, according to a recent Bain & Company report.
Total deal value in the region dropped 22 percent to $47 billion, from $60 billion in 2011, the study found. At the same time GPs have about $130 billion in dry powder for Asia – worth around 2.5 years of future investments.
A major problem for Asia private equity has been an over-reliance on Asia’s growth story. Most markets were growing so fast that investors were often content to rely on beta for their returns.
It was a powerful investment thesis, the report said, but “throw sand in the gears of reliable GDP growth and the PE investment engine would seize up because GPs would no longer be able to trust their valuation models. That’s precisely what happened in 2012”.
Even though GDP growth forecasts are still quite good – China, for example, is still projected to grow 8.4 percent this year – GPs have become much more cautious and realise that they cannot rely on the same model they used when GDP growth in Asia was around 10 to 12 percent, said Vinit Bhatia, Bain & Co partner in private equity practice and co-author of the report.
“GPs remain dubious about forward-looking statements, anticipate that growth will remain slower than in the past and worry about overpaying for deals,” the report said.
One outcome is that emphasis is increasingly on finding specific growth drivers and value creation opportunities in the due diligence process. The search is on for companies that have the potential to grow faster than the market.
“The model has to continue to evolve into one where the funds are underwriting more specific growth creation opportunities within the companies, and relying less on a macro growth outlook,” Bhatia told Private Equity International. The key will be getting specific about how the private equity fund can help the company.
Bhatia believes private equity firms in Asia have already begun a “gradual shift” towards this model. For example, GPs have been expanding their deal and operations teams significantly.