Some private equity firms have responded to this diversity by focusing on AsiaÆs more developed markets, or on those where they have specific, in-house expertise. Others believe that, despite the challenges of adapting the private equity model to diverse jurisdictions, the value to be gained from such an approach outweighs the structural and political risks.
Private equity continues to grow in Asia, although its form and character is likely to change considerably over the coming years as it adapts to the diverse requirements of Asia.
This article highlights some of the recent trends and developments that our lawyers, working across Asia, have observed during the past 12 months.
We also discuss the specific regulatory challenges, opportunities, deal structures and risks in:
China, India, Japan, Korea and Thailand
Trends
Over the past 12 months we have seen increased protection of strategic industries in China; well-publicised rebuffs for Macquarie and Newbridge in their attempt to acquire PCCW in Hong Kong; and significant regulatory and legal hurdles for Lone Star in its proposed sale of KEB in Korea.
These high-profile setbacks have not dented the inexorable growth of the private equity market across Asia. Deal flow in China and India continues to increase, albeit mostly at the smaller end of the mergers and acquisitions (M&A) market.
Activity in Australia, Japan and in the broadband sector in Taiwan has been particularly prolific. Sponsors continue to expand their teams and their regional footprints. Investment and commercial banks continue to grow their leverage finance teams.
As the number of players and the funds available increase, we are seeing changes in the nature of Asian M&A. Despite the PCCW transaction, there is still strong interest in financing take-private transactions in both Hong Kong and Singapore. These are deals which can offer high levels of transparency on asset quality, significant deal size, acceptable levels of deal certainty, clarity of execution and the opportunities to leverage fully.
In the private M&A market it is now rare to see any disposal which is not structured as a competitive auction aimed at both sponsors and trade buyers. This has handed considerable bargaining power to vendors, with deal terms becoming increasingly vendor-friendly. Despite the frailty of accounts in some jurisdictions, locked-box structures are becoming more common.
Meeting the challenge
The ability to leverage, the robustness of local legal and regulatory frameworks, and political, linguistic and cultural differences, all combine to create dramatically different risks and opportunities across the region.
For those who wish to profit from such diversity, the ability to understand and to price jurisdictional risk is paramount. For most sponsors, running a lean operation, this will increasingly mean augmenting their own resources and expertise with those of their legal and accountancy advisers.
In areas where law and regulation can be a moving target, there are strong arguments for turning to advisors such as the global accountancy and law firms which have long operating histories in Asia as well as familiarity with US and other fund structures and international execution standards. Whilst some rely on a multitude of local advisors, all agree that it is no longer enough to have only some parts of the puzzle.
The bidder which has the benefit of international expertise, seamlessly combined with strong, commercially based guidance on the local legal, regulatory and political landscape, will be best placed to price its risk most keenly. The current war for talent amongst the major advisory firms in almost every major jurisdiction in Asia demonstrates that the lawyers and accountants are as aware of the need to expand their Asia-wide coverage as their clients.
Even in those jurisdictions with more developed and accessible regulatory and political frameworks, the requirement for advisers to be able to provide in-depth regional coverage is increasing. Nobody wants to attempt a take-private unless they are supported by strong public M&A advisors in the relevant jurisdiction. And no-one wants to see their IPO exit prevented or delayed because the original acquisition structure failed to take account the requirements of the local listing rules.
As the market grows, expect the financing product to become more sophisticated, with increasingly stretched capital structures becoming a feature. As well as single-tranche senior debt structures, we are starting to see subordinated (mezzanine, second lien, PIK) and high-yield take-out components on Asia-Pacific deals. This requires legal advisers with familiarity with the US and European markets, who can draw upon expertise in the latest loan, bond and hybrid financing products, and who have international (English and US) as well as local law capability.
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