Asia's entrepreneurs often prefer to make a deal with corporate buyers rather than private equity firms, according to a report by Baker & McKenzie. The report surveyed 350 company owners and found 44 percent of the respondents would rather sell to a strategic buyer than a financial sponsor such as private equity, 21 percent preferred private equity and the remainder had no preference.
However, Asian entrepreneurs are increasingly aware of the value created by some private equity firms and they are starting to factor that into a potential deal rather than just accepting the highest offer, according to Dorothea Koo, head of Asia Pacific private equity at Baker & McKenzie.
GPs are also finding new ways to attract entrepreneurs. “What is unique about a private equity transaction is, obviously there is a price put on the table for the business, but at the same time a lot of times [private equity investors] will look at how to incentivise and retain management and include things like sweat equity or more [sophisticated] variations of management incentives, like rachets, to attract management to stay on and invest with the company,” Koo told Private Equity International.
…in the event the private equity buyer becomes the winner [in a bid], it is quite common for the strategic buyer who was not the winning bidder in the first round to become the buyer when the private equity firm exits
Dorothea Koo, Baker & McKenzie
Koo says businesses in countries such as Indonesia and Vietnam will increasingly select private equity bidders over strategics as they start to understand these more complicated forms of compensation and realise how GPs can help them operationally and through international expansion.
However, she believes entrepreneurs will ultimately still look to partner with strategics. “When a [GP] is looking at an investment, they are already planning their exit in a few years’ time. If they have a strategic competing with them for the same business, in the event the private equity buyer becomes the winner, it is quite common for the strategic buyer who was not the winning bidder in the first round to become the buyer when the private equity firm exits.”
The biggest concern for corporations in developing markets is corporate compliance, the report showed. Of the respondents, 46 percent said corporate compliance was the top challenge to completing a successful M&A deal, with 29 percent believing corruption is the biggest hurdle when doing a deal.
For Asian private equity firms in particular, the Foreign Corrupt Practices Act (FCPA), outlined by the US Securities and Exchange Commission, is the most worrying legislation as many firms have US LPs that must comply with the regulations, Koo believes.
She added that cultural barriers are a diminishing worry for firms doing M&A deals in Asia – a trend driven in part by the private equity industry. “Particularly from a China perspective, [private equity] transactions have represented a number of cross-border transactions with China. We do see private equity firms teaming up with strategic buyers,” Koo said.