Entry valuations are the key driver of returns for private equity firms in Asia, delegates heard at Private Equity International’s 2013 Asia forum in Hong Kong.
Speakers on the first panel of the day included Roy Kuan, managing partner at CVC Asia Pacific, who explained that Southeast Asia currently has higher valuations than China and Japan. He said that although CVC has had great success in Southeast Asia – the firm is well-known for its investment in Indonesia’s Matahari Department Stores – GPs “must have flexibility [as] valuations [in Asia] do move quickly up and down”.
CVC launched an offering for the sale of 40 percent of Matahari in March, with the total deal priced at around $1.36 billion. CVC acquired 98 percent of Matahari for $892 million in 2010 in Indonesia’s first LBO.
Jim Hildebrant, head of Asia at Bain Capital, agreed saying that there is “no correlation between macro growth and returns”, but instead it is vital to get the right entry valuations.
[There is] no correlation between macro growth and returns
Panelists discussed the common use of PIPE (private investing in public equities) deals in Asia limits the ability to drive down valuations when acquiring a company. Headland Capital Partners chairman George Raffini, said: “Valuations really matter. Nothing against PIPE deals, but flexibility on valuations is really important and drives investment decisions for us.”
Representing the LP community, Pierre Fortier, vice-president of private equity investments at Canada’s Caisse de Depot et Placement du Quebec, was also skeptical about GPs using a PIPE investment model. “If one of our GPs starts to do PIPE or hedge fund [investing], it is a kind of misallocation. We would like to see our GPs stick to what private equity is supposed to do.”
Fellow panelists concurred that PIPE deals only make sense if the firm can still wield significant control over the business. CVC’s Kuan said cornerstone investing in IPOs has become common for private equity in Hong Kong and China, however CVC would not make such an investment as the firm doesn’t believe it is private equity. The firm may consider a PIPE deal, though, if it retained “high levels of influence” over the company.
Bain’s Hildebrant also mentioned that take-private transactions, particularly of Chinese companies from US stock exchanges, will continue to offer good opportunities for firms. Many Chinese businesses listed in the US have been undervalued due to various accounting and fraud scandals involving Chinese companies. Bain took private China Fire & Security Group from the NASDAQ in 2011, a deal that has “gone very well”. Hildebrant says, “[This trend] will continue to go on until the supply is exhausted.”