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Asian interest in PE down but certainly not out

By Paul Mackintosh - 20/01/14

Paul Davies in Hong Kong has just devoted an extensive article in the Financial Times to the proposition that “Asian tycoons shut out private equity firms”. His argument is that “Institutional private equity’s slow progress in Asia is due to the dominance of families as the fundamental investors in corporate activity. Asian tycoons lack trust in private equity funds and question why they should let these firms invest in their businesses”. For a number of reasons, I disagree.

A lot of this argument, for instance, is deployed to explain the fall-off in Asian private equity investment from US$33.1 billion in 2012 to $29.1 billion in 2013, according to figures from a joint EZ/Mergermarket report. And although figures from other sources may differ somewhat, I’m sure the overall trend will be the same. But, that kind of drop, although unwelcome, is still hardly disastrous, and certainly the kind that Asia, a very volatile region historically, has delivered more than once in the past.

And fine, Asian private equity investment may still be nowhere near the same levels as in the West, particularly the US. But many other reasons besides the dominance of Asia’s first families have often been cited to account for this. Besides the overall maturity of financial markets, legal structures, etc., there’s also the question of size. Many Asian assets, historically, have just not been big enough to deliver the kind of numbers seen in Western investments, and despite the wealth and power of the Asian magnates, that’s still the case. Few Asian-originated multinational corporations (MNCs) outside Japan are anything like the size of their Western peers. So naturally, smaller targets are going to deliver smaller deal numbers.

Furthermore, the region’s most important economy, China, is hardly the playground of the classic Asian business families. And its leaders, with perhaps more enthusiasm than understanding, have turned to private equity as a change and modernisation agent for their own still substantially state-owned economy. Local private equity firms, rather than taipans, are likely to pose the biggest competitive challenge for Western general partners (GPs) there.

Finally, there’s the awkard fact that Asia’s big families and magnates have often given Western private equity firms their biggest and most interesting deals – to solve their own business issues – fine, but still in a way that works. CVC, for instance, owed its early entry into Indonesia with the Matahari deal to the Riady family, who gave it an opening in 2011 that turned last year into a highly lucrative exit for the fund. And Richard Li was ready enough to sell his PCCW stake to TPG Capital in 2006 for $7.55 billion – before Mainland authorities told him not to. Asia’s tycoons seem ready enough to invite private equity to their top table, when they see they can get something out of it.