Asia's Alternatives Paradise?
Some of the world’s biggest private-equity firms have stepped up their presence in Southeast Asia this year, eager to benefit from the region’s growth. But even as the value of transactions surges, the region remains a tough place to make a deal.Indeed, good private equity funds bring a lot more to the table than just capital and the second generation of these families, which is typically educated in prestigious business schools abroad, recognizes this and is more receptive to working with PE funds.
One key reason: Valuations are rising quickly as competition heats up for assets. Companies, particularly those in Japan and Korea, are looking there for growth, more so as growth stalls in India and China, say bankers and deal makers. These buyers are often happy to pay more than private-equity investors.
“Our competition is very rarely private equity. Our real competition is strategic buyers,” as firms in similar industries are called, said Rodney Muse, managing partner of Kuala Lumpur-based Navis Capital.
Private-equity transactions in Southeast Asia have totaled $3.6 billion so far this year, up from $1.3 billion last year, according to data from the Centre for Asia Private Equity. This year’s figure includes a $1.7 billion buyout of snack-food franchises KFC Holdings (Malaysia) and QSR Brands by European private-equity firm CVC Capital Partners, which hasn’t yet closed.
Last month, U.S. private-equity firm Kohlberg Kravis Roberts opened its Singapore office, with co-founder Henry Kravis boldly announcing plans to invest more than $1 billion in Southeast Asia over the next five years.
Blackstone Group LP also opened a Singapore office earlier this year, while Carlyle Group LP recently closed its first Southeast Asia deal, an investment in Indonesian telecom towers operator PT Solusi Tunas Pratama for between $100 million to $150 million, according to people with knowledge of the deal.
“Strategic buyers can sometimes afford a little bit more given the synergies they expect to achieve. That has led to some aggressive bidding for assets,” said Sebastien Lamy, a partner at consulting firm Bain & Co. in Singapore.
High valuations in the stock markets could also be driving pricing expectations. Both stock markets in the Philippines and Thailand are up more than 20% year-to-date, and Indonesia is up 13%, for example. In contrast, China’s main indices are in negative territory for the year.
“Sellers’ expectations [in Southeast Asia] have become very high,” Navis Capital’s Mr. Muse said.
Some private-equity firms have benefited from the demand for Southeast Asian assets, by selling investments to strategic buyers at a hefty profit. Navis sold Singapore-based King’s Safetywear Ltd., a maker of protective shoes for industrial uses, late last year to U.S. conglomerate Honeywell International for $338 million. It had bought the company in 2008 for S$97.1 million ($79.2 million).
Apart from intense competition, one of the most common complaints is that it remains difficult to find deals, not least because of the dominance of large, family-owned conglomerates in Southeast Asia’s economies. The number of smaller startups are low in comparison.
“The entrepreneurial segment of the economy [in Southeast Asia] is still small,” Sigit Prasetya, managing partner for Southeast Asia at CVC, said on a panel at the Asian Venture Capital Journal conference in Hong Kong last week. He added that because these large business groups have great access to capital from banks, they are also asking what else private-equity can bring beyond just capital.
That may be starting to change, as the second generation of these families is more receptive toward the operational expertise that private-equity firms can offer, said John van Oost, managing partner of Singapore-based, Yishan Capital Partners, a real-estate investment firm that specializes in investing in Southeast Asia.
For example, Yishan recently formed a joint venture with Indonesian industrial group Rodamas Group, whose businesses range from chemicals to food, to manage and develop logistics facilities in the country.
Asian private equity deals are on the rise. In their latest weekly roundup, Reuters reports that Blackstone and China agribusiness company New Hope Group are through to the final round of bidding for Australia's largest poultry producer Inghams Enterprises, a deal that could be worth as much as A$1.4 billion (US$1.5 billion).
And Bloomberg's Ben Hui reports, BlackRock Sees Asian Demand in Illiquid Hedge-Fund Assets:
Blackrock, the world’s largest asset manager, said there is rising demand from Asia-Pacific investors for less liquid hedge-fund investments as European and U.S. financial institutions clean up their balance sheets.
More than half of the money BlackRock’s fund of hedge funds division drew from regional investors since January 2011 is dedicated to longer-term, special-situations investments, such as direct lending to companies that need cash and mortgage- backed securities, said Joseph Pacini, the Asia-Pacific head of Alternative Investment Strategy Group. Two-thirds of the allocation was made in the past year as macroeconomic concerns eased, he said.
“Asian investors today have a lot of cash and capital,” Pacini said in an interview in Hong Kong. “Over the last year, we have seen a noticeable shift from nervousness about investing to interest in where the markets are, what’s the dislocation and where we should be focusing now.”
U.S. and European financial institutions may have to shrink their balance sheets by another $3 trillion to comply with tighter regulation after the global financial and European debt crises, said Pacini. Asian investors who have survived the 1997- 1998 Asian financial crisis and escaped the brunt of the latest global turmoil are eying opportunities, including in commercial real estate and aviation financing, to boost returns amid low interest rates, he said.
Alternative Investments
BlackRock’s alternative investment arm managed $110 billion in assets globally as of September in private equity, real estate, hedge funds and infrastructure. BlackRock Alternative Advisors, the fund-of-hedge-funds unit, oversaw $18.7 billion as of early October, with about half of that raised from Asia- Pacific clients, Pacini said.
Large European banks may shrink their balance sheets by as much as 2 trillion euros ($2.6 trillion), or 7 percent of their assets, by 2013, Pacini wrote in a paper last month citing government and International Monetary Fund data. That compares with the $250 billion of assets sold off or cut from balance sheets during the savings and loans crisis in the U.S. in the late 1980s, and the $350 billion during the Asian debt crisis of the 1990s, he said.
Trophy Assets
While trophy assets in some markets have been sold, further deleveraging is expected, Pacini said.
BlueMountain Capital Management LLC, an $11 billion New York-based manager, said it raised $1.5 billion, double its target, for a fund that invests in structured corporate credit, including asset-backed securities and less-often-traded corporate credit, tapping investor demand for higher returns amid near-zero interest rates and bond yields as governments around the world try to stimulate economic growth.
The Lyxor Distressed Securities Index returned 6.3 percent in the first 10 months, while the Lyxor Special Situations Index gained 3.3 percent. Both outperformed the 1.6 percent advance of the Lyxor Hedge Fund Index in the same period.
Asian institutions have indicated interest in investing in such assets through BlackRock funds, tailor-made accounts or alongside BlackRock funds, Pacini said. BlackRock has allocated several billions of dollars to managers, often small and specialized, that invest in such assets or through co- investments with them, he added, declining to give a more specific number as it’s confidential.
Aviation FinancingAs banks retrench from certain activities to shore up their balance sheets, hedge funds and private equity funds will step in to fill the void, for a price. That's why bankers are jumping ship to hedge funds and private equity.
The fund manager is also looking to fill a void left by European banks such as Societe Generale SA and BNP Paribas SA that are winding back aviation financing even as aircraft deliveries increase, Pacini said. Aircraft deliveries this year may rise 23 percent to $95 billion from a year earlier, with aviation bank financing to slide 4 percentage points to 21 percent, London-based trade journal Flightglobal reported in January, citing a Boeing Co. forecast.
There is an estimated real estate funding gap of $86 billion in Europe and $31 billion in the Asia-Pacific region this year and next even after insurers and fund managers have stepped up to meet some of the refinancing needs, according to a report this month by property broker DTZ Holdings Plc.
“There’s refinancing that needs to happen because a lot of the commercial mortgage-backed securities and debt done in 2006, 2007 are coming due,” said Pacini.
Will Asia become an alternatives paradise? Not sure, too early to tell. There are plenty of opportunities but many pitfalls too. I would caution investors to temper their enthusiasm on illiquid alternatives in Asia. The deals are being bid up aggressively, raising concerns on pricing.
As far as Asian hedge funds, investors should approach them carefully. India's Economic Times reports that Kevin Kwong, a partner at Blackstone-backed Senrigan Capital, has left the Hong Kong-based hedge fund this month to start his own investment firm:
Kwong was part of the core investment team at Senrigan, an Asia-focused event-driven hedge fund that started in 2009 with seed capital from US alternative asset manager Blackstone Group. Senrigan, however, has racked up big investment losses over the past two years.Finally, Carlyle co-founder, David Rubenstein, says China is in transition, opening up to the rest of the world:
The executive's departure comes at a tough time for the Asian hedge fund industry which has seen investors pull out a net $1.35 billion through October this year, according to data from industry tracker Eurekahedge.
However, some Asian spinouts from global hedge funds such has Lone Pine and Perry Capital have collected hundreds of millions of dollars as investors still continue to back fund managers with a proven track record.
Kwong, who worked with Senrigan boss and one of Asia's best-known hedge fund managers Nick Taylor for the last eight years, is setting up The Aria Group, a family office that will run multiple investment strategies, one of the sources said.
China is in a historic period of transition and is evolving to become a more open society, according to David Rubenstein, co-founder of the global private equity fund The Carlyle Group.Below, David Rubenstein, co-chief executive officer of the Carlyle Group LP, talks about investment strategy, the outlook for the private equity industry and U.S. fiscal policy. Rubenstein talks with Erik Schatzker, Scarlet Fu, Cristina Alesci and Peter Cook on Bloomberg Television’s “Market Makers.” Listen carefully to what he says.
Rubenstein said China's fast growing population, along with the political transition set to take place under new president Xi Jinping, marks a turning point for a nation that in the past has tried to remain insular.
"It's impossible to take 1.3 billion people and keep them closed to the rest of the world," Rubenstein said Thursday at the Washington Ideas Forum. "You're not going to be able to go back to the system you had before."
Rubenstein, who has overseen billions of dollars of investment in China, also said the country is ripe with entrepreneurship. "There are more entrepreneurs per capita then there are anywhere else in the world," Rubenstein said of China. "In the business world, they are as determined to be successful as people are here."
Rubenstein also called on Congress to solve the fiscal cliff. He said doing nothing would cause harm to the U.S. economy and send a signal of incompetence to the rest of the world. "They know what they're supposed to do. They know they have to solve the fiscal cliff but they don't know how to do it," Rubenstein said of Congress. "How can this country be the leading country in the world when we can't solve these problems?"
Rubenstein added that he thought Democrats and Republicans would come to an agreement but that it would not solve long-term issues. "I think they will come up with a one-year bargain. There will be something for everybody," Rubenstein said. "I don't think it will be very pretty."
After the fiscal cliff is solved, Rubenstein says businesses will better be able to make decisions for their future. "What business people want is certainty," he said. "Just tell us what the rules are and we'll figure out how to deal with them."
Rubenstein, a noted philanthropist, also said that Americans, while the most generous people in the world in terms of money given to charities, could give more.
"The implication is that you have to be a billionaire to be a philanthropist," he said. "I want everybody to feel they should give some of their time or money. More people at all levels of income should do it."