Strong deals pipeline

While many in the industry believe that the full impact of the region’s capital markets rejuvenation on PE activity will take at least “two or three more quarters to make itself known” many investors are already seeking to tap into the region’s more resilient sectors. “Given that Singapore is a hub for oil and gas, we have seen quite a few investments and divestments here in that sector, as well as a strong investor appetite for mining resources in Indonesia,” says Taylor, adding that he expects PIPE deals to continue to figure prominently in Singapore. “Clifford Chance has already acted on two deals where clients were looking to pump cash into Singapore-listed companies (through convertible loans or straight equity) which would then be used for organic or inorganic growth.”

The CCB deal in which Hopu and Temasek opted for a minuscule minority stake is one example. Here investors were offered a different path into public markets. Similarly Temasek’s/ Singapore’s SWF investment into one of its

own portfolio companies, Neptune Orient Lines, is also far from the run-of-the-mill value-driven PE investment. Yet whether they are the start of a longer-term trend is still unclear.

Taylor believes that the more likely outcome is that many PE investors will seek to return to the basics in the aftermath of the financial crisis. “Most of our clients are still following the ‘old’ structures – buyouts and growth capital – but of course there are those who see lots of opportunities for new structures as well.”

One such opportunity (which Taylor admits hasn’t kicked off yet) is for financial sponsors to use debt more creatively. “We have seen some, but not many, financial sponsors looking to acquire publicly listed bonds which are due for redemption, with the consequence that debt can then be used as leverage on any restructuring that takes place,” he says, noting that this aggressive approach is favoured more by the hedge funds and those specialising in distressed debt than the more traditional PE houses.

By and large, the approach of many investors will remain the same, with perhaps a little more caution added. “Private equity houses who are operating in these jurisdictions generally know the country risks, the potential pitfalls of any investment in South-East Asia and how to mitigate them,” he says. “Clients are, however, spending more and more time on all aspects of the due diligence, which means that deals are definitely taking longer to get done. There is huge pressure to ensure that there are no surprises later on…whatever the strategy or method of investment, this will never change.”

The India focus

While the factors Taylor highlights are applicable across all of Asia’s PE markets, in India the dearth of control transactions has resulted in a decidedly different focus for investors. The statistics are clear: India’s PE performance improved marginally over 2Q09; up from US$665m in 1Q09 to just over US$1.3bn. Just one to deal – the US$537.8m investment for a 35.8% stake in Indiabulls Real Estate by a consortium comprising of Farallon Capital Management, Fidelity International, Moon Capital Management and TPG Capital – accounted for close to half of this figure. “Post October 2008, the real estate sector in India was significantly impacted by the global meltdown, as financing ceased to be available and projects underway could not get financed,” said Vikram Utamsingh, executive director and head of PE and advisory at KPMG India. “As a result valuations of these business readjusted downwards significantly.” As Akil Hirani, a partner at Majmudar & Co tells ALB, a number of PE investors in the country’s real estate sector were seeking to pull out their investments in record numbers.”

But with the market beginning to stabilise the outlook has improved dramatically. “In recent months, domestic demand for real estate is beginning to stabilise and improve, and both foreign institutions and private equity funds have found opportunities at attractive valuations,” says Utamsingh. India, like the PRC, remains a hotbed for PIPE and growth venture capital deals. PIPE financings contributed just over 50% (US$665.5m) of investment activity during the quarter, while growth capital (37.3%) sank almost US$490m in the PE market.

On the other hand, buy-out activity was just 5.6% (US$74.1m) of the total investment activity recorded. TMT was India’s second-most active sector during this period, yielding US$135m from eight deals, while infrastructure and medical saw US$90m (three deals) and US$86 (five deals) respectively. “The national stock exchange deals are interesting for PE as the NSE is a high-profit monopolistic business with an excellent track record, and is well positioned in the future for emerging India opportunities like foreign exchange trading and the development of the debt market,” Utamsingh says.

North Asia

There is no doubt that the worst of the financial crisis is over for private equity in North Asia as well. At the height of the crisis, deals simply could not go through because of the difficulty Lehman’s collapse caused in respect to the pricing of assets. A bottomed-out market has forced people back into action very quickly, lest they commit what Jack Lange, a Hong Kong-based corporate partner with Paul Weiss, calls the ‘PE cardinal sin’. “PE players have sprung into action very quickly to avoid missing the bottoming-out by too far … do this and you have committed a cardinal sin,” Lange says. “Mind you, there has not been a deluge of deals, we are still far below the level of market peak seen in 2007 and early 2008, because in some situations getting clarity on valuations is still difficult.”

In Lange’s opinion, the key to returning to the heady days of 2007-2008, at least in China, involves targeting areas aligned with the country’s economic rise. “The important thing is to get into sectors that nobody else has noticed yet,” he says. Seven or eight years ago Morgan Stanley entered what was then the largely unchartered area of dairy investments, yielding  a steady flow of deals. The latest was KKR’s US$150m acquisition of a stake in Ma Anshan Modern Farming (on which Lange was lead counsel for KKR).

But in a market as attention-grabbing as China, are there any areas that anyone hasn’t noticed yet? “Any thing targeted at the consumer sector in China is considered a good medium to long-term play – things such as health-care, pharma, building-related infrastructure are all promising,” says Lange. Paul Weiss recently acted on China Pharma’s US$318m acquisition of Sihuan Pharmaceutical, acting for Morgan Stanley PE Asia III, the parent company of China Pharma.

While the sectors that the PE investors are targeting may be different to those mentioned by Clifford Chances’s Taylor, or KPMG’s Umatsingh, the reasons behind the investment remain categorically similar. Private equity was used as a stop-gap solution, to the dearth of bank financing at the height of the financial crisis in North Asia, but it’s the newer developments which are most exciting for Lange’s clients.

“To some extent we saw PE used as a replacement for debt financing, to tide investors over through the longer than expected IPO timetable, but throughout this we were starting to see a new cooperation between foreign PE and China’s SOEs [state owned enterprises],” says Lange. He adds that deploying private equity in this way affords SOEs opportunities from growth that hitherto may not have been open to them. “At the first phase of foreign PE in China there were joint ventures between them and SOEs, and this has now diversified to them working with emerging entrepreneurs. The local entrepreneurs are finding more and more cash from foreign PE. It will offer SOEs opportunities to move into areas of business and help them expand, and this is an interesting development.”

In a market like China, where the landscape for foreign equity investment seems to be changing by the day (mainly due to the coalescence of huge pools of growth capital) foreign PE has a vitally important role to play. “Foreign PE will need to fill gaps in the Chinese private equity landscape,”  Lange says. “It may need to get into that space where the huge pools of domestic capital isn’t and capitalise on emerging sectors and markets.”

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