Thirsting for value in a pool of capacity
By Paul Mackintosh - 15/07/13
Kohlberg Kravis Roberts & Co LP (KKR) this week announced the expected news that it had formally closed its KKR Asian II Fund at US$6 billion, the largest ever true private equity fund vehicle for the Asia Pacific. Some Chinese state-connected or captive corporate funds may target or claim bigger amounts, but the KKR fund is the genuine article, from one of the most storied investors in the business.
“The successful close of our second Asian fund is a testament to our strong track record in the region," said Joseph Bae, member and managing partner of KKR Asia. "We hope to continue generating positive results for all our stakeholders. Having invested more than $5.5 billion in Asia since 2005, we have demonstrated to investors our commitment to the region, as well as the effectiveness of our successful global-local and partnership approach.”
Yes, investors were obviously convinced. All the same, such a weight of capital raises the question of whether KKR can effectively deploy it. KKR might argue that if it was able to invest $4 billion from its Asia Fund I, the extra is not necessarily that significant. But I'd tend to disagree, and I know other commentators at Reuters and elsewhere have too.
Asia has historically been a region of proportionally small deal sizes. Partly this is a question of corporate size and maturity, where few Asian enterprises have grown to a size and a valuation to match their Western peers. But it is also a question of control. The really big assets have historically either been state-linked, or in the hands of the big Asian business families who are loathe to let them go. In the absence of a truly open market for control, private equity has often been reduced to picking up the leftovers.
Until now. Now would be the time to test a thesis long propounded by Maarten Ruijs of CVC Asia, that capital drives the market. In other words, that sufficiently large funds can unlock opportunities that have hitherto been out of reach, and truly put private equity on the top table of Asian business.
It could be so, up to a point. I suspect this amount of capital could allow KKR to solve problems for Asian families and governments in ways that have not been possible before. But I do not believe that they will truly free up the market for control, or offer situations that do not just allow more money to be put to work – or allow better entry valuations and higher multiples on exit. And KKR, under pressure to deploy that weight of capital, will make the investments anyway.