Cross-border PE deals on the rise in Asia

Private equity investments that hinge on expanding a target company's geographic footprint as a key to adding value will be a bigger focus for the latest crop of funds being raised for deployment in Asia.

A confluence of factors — including the growing ranks of firms looking to move beyond their home markets and the greater willingness of owners to cede control to private equity partners to get there — is supporting that trend.

Meanwhile, in a private equity industry where the biggest players have gone from strength to strength in the global fundraising sweepstakes, private equity firms focused on midmarket companies mulling their first moves abroad could be relatively well placed to benefit.

Cross-border deals are likely to make up a bigger piece of the record $4 billion fund Baring Private Equity Asia closed last month than they have for the firm's previous five funds, said Jean Eric Salata, founding partner and CEO of Hong Kong-based Barings Asia.

The growing number of entrepreneurs looking to exploit opportunities beyond their home markets now is making that cross-border theme an increasingly important one for Navis Capital Partners (Asia) Ltd. as well, said Jean-Christophe Marti, a Singapore-based senior partner with the firm.

At the end of December, Navis Capital, a Kuala Lumpur-based private equity firm with offices in six Asian countries, closed its seventh fund at $1.5 billion, confirmed Nicholas Bloy, managing partner of the firm's investment teams.

Mr. Salata cited Barings Asia's August 2014 investment — in tandem with Canadian private equity firm Altas Partners LP — in St. George's University, a Grenada-based medical school, as an example of the opportunities. The region's pool of more than 1 million medical school applicants each year provides fertile ground for expanding the university's operations throughout Asia, he said.

For Barings Asia, that's a tried-and-true game plan. A year ago, the firm listed premium kindergarten and grade-school operator Nord Anglia Education Inc. on the New York Stock Exchange with a valuation of $2 billion, more than five times what it invested in 2008 to take the then-London listed firm private. In the interim, Baring Asia quarterbacked a tripling in the number of the firm's schools, and expanded its operations to cities in Asia, Europe and the U.S.

Such in-bound investments — bringing products or services from the U.S. or Europe to Asia — have grown in number with the rising wealth and sophistication of Asian consumers, but market veterans say out-bound opportunities are poised to pick up as well.

“The key to the evolution of the private equity industry in Asia is the growth of high-quality local investee companies working with local private equity managers ... to help (those companies) into foreign markets,” said Mercer's Ray King. A Melbourne, Australia-based partner, Mr. King is head of Mercer Investments' private equity manager research for the Asia Pacific region.

Supporting that outbound trend is the growing willingness of family-dominated businesses in Asia to cede a controlling stake to a private equity partner as a means of achieving the next stage of growth, said Christoph Rubeli, co-CEO of Zug, Switzerland-based private equity investor Partners Group AG.

That change has been particularly stark in China, where a growing number of firms are seeking a more global footprint just as the first generation of company founders from the 1980s are nearing retirement, with limited options for succession under China's one-child policy, Mr. Rubeli said.

The growing prevalence of “control transactions” in Asia has made the push to globalize a much easier one for private equity firms to facilitate, agreed Andreas Baumann, formerly head of private equity Asia with Partners Group and now the firm's New York-based head for the Americas.

Jenny Blinch, a spokeswoman for the firm, said such trends moved Partners Group over the past year to add “helping midmarket leaders grow internationally” as a key investment category for the firm's direct private equity business, alongside “investing in future growth” and “identifying investments with strong downside protection.”

Partners Group executives pointed to their firm's investment in Trimco International Holdings Ltd., a Hong Kong-based maker of garment labels, as an example of successful collaboration in helping an Asian firm expand abroad.

Navis, Trimco's first private equity partner, helped the firm expand to China, India, Thailand and Singapore. Partners Group bought the firm in mid-2012 to drive its expansion beyond Asia, adding manufacturing capabilities in Europe and Latin America to better meet the needs of global clients like Nike Inc. and Reebok International Ltd., noted Mr. Rubeli.

Meanwhile, even as bulge-bracket players such as The Blackstone Group LP and KKR & Co. LP continue to dominate global fundraising, the cross-border area remains one offering relatively attractive pickings for smaller players focused on midmarket opportunities.

With so much cash to deploy, the biggest players have to focus on bigger target companies, which by and large already have a presence overseas, leaving less scope for widening operational cash flow by way of expansion, noted Mr. Rubeli.

“The companies we look at are just starting to expand globally,” leaving midmarket-focused firms such as Partners Group in a good position to add value, agreed Mr. Baumann. n