In the wake of the global financial crisis (GFC), there was no shortage of doomsayers saying it would take years for private equity markets to recover. Some even ventured to suggest that when private equity markets did come back into market favour, they would remain far more subdued compared with the halcyon days before the GFC.
On the back of the Chinese and Indian economies, which have experienced solid growth in 2009 and with every likelihood this will continue in 2010, private equity is becoming an increasingly attractive investment option in the region.
So what does this economic picture mean for private equity? To begin with, and in what is surprising for many institutional investors, is the sheer size of the private equity markets in the Asia-Pacific region.
In 2008, private equity investments, at $60 billion, were bigger than North America ($56 billion) and Europe ($52 billion). Of this number, China headed the list at $14 billion, followed by India at $10 billion, Japan at $9 billion and Australia at $8 billion. Of the 20 largest private-equity-backed initial public offerings (IPO) in Asia from 2003 to 2009, China accounted for 17, an amazing statistic for an ostensibly state-run economy.
That the private equity market is so strong in China and India should not be surprising. In China, there are myriad investment opportunities, strong support from government economic stimulus packages, and rapid changes of the business models. In China today, one is constantly reminded of former paramount leader Deng Xiaiping’s famous dictum: “It does not matter whether the cat is black or white; as long as it catches the mouse, it is a good cat.”
Just as importantly, entry prices into private equity deals are typically at multiples about 50 per cent lower than the public market, and we expect to see reasonable prices for good deals.
There is ample international and local capital, with the latter especially growing with emerging institutionalisation in China. And the development of the public markets, and the anticipation of an increase in merger and acquisition activity, will provide the opportunities for those all-important exit strategies.
India is not as developed as China, but commercial opportunities still abound. There is, however, a shortage of capital and the corporate debt market is only just emerging. Like China, entry multiples are about 50 per cent lower than the public market, but it is harder to devise an exit strategy.
The recent uplift in the Indian stock market has prompted a rush of private equity-backed companies trying to exit either via the IPO market or secondary rights issues in the case of private investment in public equity investments. However, merger and acquisition activity is still largely on hold.
We are optimistic about India’s future as the new government, which has a majority, has promised to upgrade the country’s infrastructure and social fabric and will allow greater privatisations.
