After the initial bout of finger-pointing recriminations about the risk management failings which precipitated the credit crisis, debate soon turned to when the recovery might be expected to come. Now, hardly a day goes by without some form of significant comment about the march out of recession and who may lead that march.
Asia-Pacific has traditionally not been the happiest hunting ground for many private equity (PE) houses. In the pre-credit crisis days, their predominant focus seemed to be on Europe and North America, where deal opportunities were plentiful and access to debt finance was not a problem.
PE deals in the Asia-Pacific region were typically smaller and with so many leading PE players being based in the West, you could not really blame them for keeping their focus somewhat closer to home.
I believe that is all going to change now. PE contacts are already saying that the Asia-Pacific region is becoming the most important region to them as the world emerges from the global recession. The reason is simple. To their credit, many PE houses are showing an ability to “roll with the times” – to adapt their business model to the new circumstances in which the world now operates.
Key to this adaptation appears to be a watering down of the fascination which many PE houses previously had with assuming total control of a target company.
This idea of ceding complete control was something which never sat comfortably with business owners across the Asia-Pacific region. In fact, for some, it was a complete anathema. It was a cultural thing, but it quickly became a frustrating barrier to many PE houses’ aspirations during the bull market.
Now, I am seeing a far greater willingness on both sides to consider “growth investments” – a transaction which typically sees PE taking a 20 to 25% stake in a company. Previously, these were seen as the poor relation to the fully leveraged 100% buyout but no longer. I am now seeing them more often and am even seeing large global funds partnering with local PE players to achieve this.
There may well be innovative conditions worked into such minority stakes deals nowadays which allow PE investors to gain a little more influence than such a stake would traditionally confer. For example, such an investment may come with the insistence of a seat at the Board, new faces on the management team or a greater say over performance issues. This is just one of the ways that the rules of the game are being redefined, but it stills sits far more comfortably with Asia-Pacific owners than did the idea of a complete takeover.
I do not think that there will be wholesale change across the entire Asia-Pacific PE industry. I believe that plenty of players may still cling to the buyout model (especially in the more mature markets like Australia and Japan where buyouts have traditionally fared well), but this may mean that they would be sitting out of the game a little longer, waiting for the debt finance market in the West to return.
In the meantime, the growth investment approach is likely to continue to curry favour across the Asia-Pacific region, most notably in China, with deal values steadily climbing as more and more investors buy into the “economic growth miracle” which the region can still lay claim to.
Those funds which are enhancing their Asia-Pacific footprint have also shown a willingness to learn from previous mistakes by making better use of local staff. I believe it was in Japan where we first really learned that wholly imported teams just do not work. Now, I am seeing some PE houses sending their expat staff home while ramping up their local recruitment. They appear to have accepted that Asia-Pacific cannot be managed at arms’ length. Having talented local people on the ground is one of the keys to a successful regional strategy.
Just as important is going to be a focus on driving performance improvements through a portfolio company. It goes without saying that in the absence of rising valuations, so much hard work will have to go into performance management in order to secure a return on investment. As touched on earlier, this is where we may see PE houses becoming quite innovative in the way in which they use their minority stake to exert a disproportionate degree of influence over the way in which the company is run.
What all of this means is that an exciting time lies ahead for PE in Asia-Pacific. In return for showing a willingness to change a fundamental aspect of their previously successful business model, many are being rewarded with growth opportunities at a time when other investors remain sidelined. That willingness is also being backed up by some bold investment strategies.
Some investors have always harboured concerns about perceived regulatory obstacles across the region, but I feel that was something of a red herring. Such obstacles were driven as much by the aforementioned cultural fear of ceding control as they were by more basic protectionism, particularly in the Asian economies. Now that many PE houses appear willing to compromise in this area, they may find life far easier.
The Asia-Pacific region may not have been many people’s first choice for where the revival might come, but I believe that it is where the smart money is now going.
Honson To is an advisory partner with KPMG in China. He is head of KPMG’s Transactions & Restructuring Group in China and also serves as KPMG's Regional Head for Private Equity.