Ready or not, observers predict a growing number of control opportunities in emerging Asia for private equity firms.
Slower growth in the region, succession issues and changing attitudes among entrepreneurs about the imperative of maintaining family control of the businesses they founded are all playing a part in putting more companies in the region in play, industry veterans say.
The past year or two has seen “a lot more transactions” where the founders of a business or the founders' families have sold a controlling stake to a private equity partner, a recognition of the pressing need to transform their companies and the role private equity partners can play in achieving that, said Ray King, a Melbourne-based partner with Mercer's investment business and the firm's head of research on private equity managers in the Asia-Pacific region.
Opportunities for control deals — allowing private equity firms to pursue “wholesale” rather than “incremental” value creation — will increase, spurred by succession issues, a growing focus on core competencies seen in markets such as Korea and decisions by some entrepreneurs facing growing competition to turn to private equity partners better positioned to pursue a global opportunity set, said Chin Chou, the Hong Kong-based CEO of Morgan Stanley Private Equity Asia.
Even in China, where MSPE Asia has focused almost exclusively on minority investments, “we've completed one control deal” recently and are in the process of completing another control deal for a “Hong Kong company with China ambitions” — opportunities that never would have been available a decade ago, said Mr. Chou. He declined to name the companies.
“In our deal pipeline 10 years ago, most ... would have been minority deals, because the good businesses were just not available for sale. But today, the majority of our deal pipeline is control situations, buyouts,” said Partners Group's Mr. Driver.
Recent data from Preqin Ltd., a London-based provider of alternatives industry data and research, show deals in Asia involving private equity firms taking a minority stake in a business at 60% of total private equity deals year-to-date through July 14. In comparison, they accounted for 69% and 71%, respectively, for calendar years 2013 and 2012.
During the same period, deals in which a private equity firm took a majority stake or a controlling stake in an Asian firm climbed to 32%, from 25% in 2013 and 20% in 2012, according to Preqin.
By contrast, Preqin's data show minority stakes accounting for only 25% of the private equity deals in the U.S. and 28% of deals in Europe, year to date.
Meanwhile, data from industry tracker Asia Private Equity Research Ltd., Hong Kong, show the portion of overall fundraising for Asia-focused private equity funds dedicated to buyouts, or control investments, jumping to 44% in 2013 and 32% in 2012, from well under 20% in 2010 and 2011.
Funds dedicated to “growth” or minority investments dropped to 36% in 2013 from 52% in 2012 and 64% the previous two years.
In a telephone interview, Kathleen Ng, a managing director at APER, said a $6 billion Asia buyout fund raised by KKR & Co. LP last year helped lift that year's total. While the proportion dedicated to buyout funds eased to 31% of the $17.7 billion in Asia-focused private equity funds raised for the first half of 2014, that still amounts to a significant rise from earlier in the decade, she said.
Some market veterans point to a more challenging economic environment — from slowing growth to restrictions on initial public offerings in key markets such as China — as the factor driving entrepreneurs into a fuller embrace with private equity partners.
Others cite generational change as well as changing attitudes.
Opportunities for control investments are growing now in Asia amid generational transitions that, in some markets, are seeing the baton passed from a founder's children to grandchildren who've been educated at top universities around the world, said Eng Aik Meng, a Singapore-based senior adviser with TPG Capital. In many cases, that new generation comes back to Asia more open to considering what a private equity partner could do to take the company to the next level, he said.