Walking the walk in Asia

By Paul Mackintosh - 24/12/12

Asia’s private equity year is ending with a bang and a popping of champagne corks, according to widespread reports. Although a formal closing is not due till next spring, Kohlberg Kravis Roberts & Co. has apparently hit the US$6 billion target on its KKR Asia Fund II buyout fund – the largest Asia Pacific-focused PE vehicle yet raised. If correct, the reports do signal a breakthrough in scale for Asia Pacific private equity – though elsewhere the report implies a less buoyant 2013.

For one thing, while the fund size may calibrate Western investor appetite for Asian private equity, is the market there to support such a capital volume? We are definitely in PE-hungry times: Preqin’s Private Equity Quarterly for Q3 2012 saw the asset class’s aggregate global AUM pass $3 trillion for the first time ever, with $1.2 trillion of that figure in buyouts. Funds focused on Asia and the rest of the world accounted for 23% of aggregate capital raised in that quarter, just beating Europe, though North America still attracted 44%. Nevertheless, KKR trimmed back the size of its KKR North American XI Fund, initially launched with a $10 billion target, in October, partly citing competition from LP demand for the Asian fund.

Whether or not LPs really insisted on a piece of Asia from KKR in preference to US exposure, the development suggests that the veteran firm is not infallible. It’s worth noting that KKR’s problems in raising its North American fund reportedly owed much to doubts about performance of the deals from its 2006 $17.6 billion vehicle.

What’s more, Preqin’s figures show aggregate Asia/RoW deal value for the past eight quarters as pretty steady at $10 billion per quarter, and down to half that in Q1 2012. Dealwise, there is little case for upscaling the volume of capital in the market. Meanwhile, Hong Kong’s IPO market has pretty much deflated, closing a critical exit route for PE-backed investments in Asia, and new tighter listing regulations promise a crimped future.

KKR could advance the thesis that capital drives the market – others have in the past. In this scenario, KKR’s brand, capabilities and connections combine with its new mega fund to unlock opportunities hitherto denied to smaller vehicles and lesser names, and seize the commanding heights of Asian economies. But as seen in KKR’s US fundraising and the latest Coller Capital Barometer, investors are in a sceptical and picky mood, hardly likely to accept such a thesis uncritically.

That is not to deny the achievement. With this fund, Asian private equity will start 2013 as a different animal than it was before. And KKR is the kind of firm to break records. Someone had to jump into this size range first. So long as the LPs are not the ones left nursing the hangover after the fizz dies.