Asia has been an area of focus for a number of global and local private equity players for many years. The credit crunch has prompted an even larger number of financial sponsors from the US and Europe, and the advisers who look to work with them, to ramp up their Asian presence and make it a key market for their business. Of course, simply increasing presence and capital available in Asia will not be enough for private equity players to succeed in the region.
Asia continues to present some formidable challenges to private equity investment. While these vary from country to country, generally speaking they include a combination of cultural, commercial and regulatory factors that get in the way of successfully investing and successfully exiting in a time honoured fashion. In many markets, and in particular in the two markets which dominate Asian investing - China and India - this means that even the basic LBO deal model that has served private equity so well in the US and Europe often cannot be used. Having said that, certain innovative (and highly structured) solutions have been developed to overcome this issue in India.
This article highlights some of the recent trends and developments that our lawyers, working across Asia, have observed during the past 12 months. It draws some comparisons with markets and market practice in Europe and the US. It also takes a look in more detail at one key trend, the rise of sovereign wealth funds and the global reaction to them. Finally, we seek to hazard a few predictions for the likely trends and developments over next 12 months.
M&A markets in Asia - an overview
The M&A market in Asia is still active, with levels of activity for the year to date being similar to or greater than 2007 (although precise levels vary depending on how data is reported, the broad trend is clear). The Financial Times has measured Asian M&A at around $189 billion in the year to date, with Australia, China and India being by far the biggest markets. This represents an increase of 10% on previous levels, contrasting with a drop in the US and Europe of around one-third to one-half.
The available data suggests that private equity in Asia continues to form a smaller proportion of M&A activity than in Europe or the US. The Asian Venture Capital Journal reports private equity in Asia represented 17.9% of M&A in 2007, with $87.3 billion of transactions, compared to an historic 30%-40% in Europe and the US. Mergermarket reports this increasing to 23% in Q1 2008, which would be a significant upward trend if it continues. Of course, such figures have to be treated with caution given that many deals go unannounced and the general desire of players in the industry to avoid publicity in connection with their investment activities.
The suggested figures for private equity M&A stand in stark contrast to the amount of capital being raised for deployment in the region. On any measure, this capital represents a multiple of the numbers for private equity M&A deals done. Data compiled by the Centre for Asia Private Equity Research supports this and indicates that since 2006, north of $75 billion have been raised for Asia but only $20 billion have been spent. This demonstrates the point, although it is difficult to measure given the ability of many private equity funds to invest only a portion of their commitments in any geography.
Outside Australia, China and India, other markets have also been active. Japan continues to generate significant amounts of mostly domestic corporate M&A, but with less success for private equity relative to the size of its market. Singapore and Hong Kong have seen an increase in activity in the past two years, particularly with P2P transactions, and Thailand is very much the flavour of the month at the moment, with a number of interesting assets going to auction. Both Korea and Taiwan, particularly after recent elections, may also present an increase in buying opportunities, especially (in the case of Taiwan at least) in the P2P/LBO market.
There are a number of ôhotö sectors, but the hottest one û especially for investment into China and India û is infrastructure (power and utilities in particular). Activity in this sector has been further enhanced by the emergence of an increasing number of infrastructure focused funds seeking more stable, longer term investments in line with pension fund type liabilities. They are also seeking to capitalise on the opportunities afforded by what has been, historically, low levels of infrastructure investment outside developed markets.
Deals not yet seen in Asia are the debt buy-backs by sponsors from lenders to their portfolio companies û backed in some cases by newly raised debt funds û or significant levels of distressed M&A. This is symptomatic of the fact that the credit crunch has not had the same impact on an Asian market that has been far less reliant on leverage.
Key recent trends
Asia is a rapidly developing market for M&A, and is still subject to a high degree of fragmentation and regional variation. However, some common themes are prevalent across the region, and the following section highlights some of these in more detail.
The macro-economic factors at play (above all, sustained growth in Asia as the already vast markets of China and India continue to integrate into the world economy) mean that financial investors û like it or not û need to have (or claim to have) an ôAsia strategyö. This ôpullö has been accentuated by a ôpushö as the credit crunch has hit deal execution in the more established markets of Europe and the US.
The combination of a pull and push into Asia has resulted in financial sponsors, and the advisers who work with them, gearing up their presence in Asia. The local market has seen sponsors increase team sizes and/or open new offices in Asia, and financial advisers send heavy-hitting bankers into the region (such announcements from investment banks have been emerging on what seems like a weekly basis during 2008). Lawyers have also recognised the need to provide focused financial sponsor coverage in Asia, and Linklaters for one has materially increased its sponsor and leveraged finance coverage in the region with eight partners and over 20 associates now specialising in private equity.
As well as ramping up in terms of personnel, new Asia-focused funds are being announced on a regular basis (such as the $1 billion Macquarie India Infrastructure Opportunities Fund, or the new Hopu fund of $2.1 billion). Many of the largest US and European private equity players are launching Asia specific funds (either in succession to previous funds or as a new departure), thus further expanding the pool of funds seeking Asian opportunities.
