About $200 billion of the current global total of $1 trillion in dry powder is earmarked for the Asia Pacific region, says consultancy firm Bain & Company in its Asia Pacific Private Equity Market Outlook.
The firms predicts Asia coulld see a return to 2007 investment levels by 2012 following the slowdown resulting from the global financial crisis, with the upward trend led by macroeconomic and sector drivers. The firm also states that the value of private equity deals in China will potentially double in the next two years.
In 2010, the outlook for Asian private equity remains modest according to Bain, but the firm still expects the region to outperform global trends. As the economies in the region have started getting back on track, public market valuations and seller expectations are increasing as well, the firm said.
Despite a decline in Asian private equity deal value of 20 percent in 2009, the region has seen a sharp spike in its share of worldwide investment as activity as activity levels in other regions have declined even faster. In 2007, private equity deals here accounted for 8 percent of the value of all private equity transactions closed globally. By 2009, Asia’s share had increased to 23 percent, according to Bain figures.
In 2009, deal volume in Asia halved, but the average deal size increased to $86 million. The region saw just six transactions larger than $500 million in size last year, as compared to 13 in 2008 and 33 deals larger than $500 million in 2007, the study noted.
Separately, the impact of the downturn on the various Asian markets was a “study in contrasts”, says the firm.
The Chinese private equity market regained momentum in late 2009 with higher value added manufacturing and services, consumption in rural areas and lower tier cities, alternative energy and consumer products.
India, on the other hand, saw a much deeper dip in deal activity, with 2009 deal volumes just one-third of the volumes witnessed at their peak in 2007/08. Moreover, the sharp rebound in India’s public markets has meant that firms no longer have the option to buy cheap and this may slow the recovery in deal activity despite improved investment conditions, the report noted.
The outlook for Japan in the coming years is fairly negative, according to Bain. The country’s market has shrunk to only $4 billion and the next few years will be “even more competitive and more challenging”, according to the report.
Things look better for South Korea, which was less affected by the recession and is seeing regulatory changes that make it easier for private equity to qualify as industrial capital and invest in companies with the aim of restructuring them.
The report also notes that Australia may see a rush for exits. It is a market with significant “exit overhang”, Bain notes. About 80 portfolio companies reached investment maturity in 2009, but the country only witnessed about 20 to 25 exits last year.
Going forward, Bain expects competition among private equity firms in Asia to intensify as they increase in number. The firm predicts “looming battles” for investment opportunities in areas such as domestic infrastructure, energy and distressed assets.