PE Panorama: If in doubt, hire Bain

20 March 2017   Category: News, Asia, China, Global, Hong Kong, USA   By Paul Mackintosh

Bain & Company (Bain) is a name well-known to private equity (PE) stalwarts in Asia and beyond –in more ways than one. One well-worn anecdote of PE folklore has a general partner (GP) being asked about his value-adding capacity in an investment. His answer? “Hire Bain.”

Bain has been doing something else for the asset class in Asia this week though. Its Asia-Pacific Private Equity Report 2017, “based on secondary market research, analysis of financial information available or provided to Bain & Company and a range of interviews with industry participants”, has just debuted. This pretty authoritative statistical summary always attracts quite some interest, and it’s no different this year, as “2016 marked the third year in a row that the Asia-Pacific PE industry has performed at historic or near-historic levels”. Bain pegs those levels at US$92 billion for 2016, down from 2015’s peak of $124 billion, but still the Asian asset class’s second-best ever annual result, along with exits worth $74 billion.

There are some less appealing numbers around investment valuations, though. Bain cites “competition at a fever pitch, which in turn has pushed valuations into nosebleed territory... The average multiple of EBITDA-to-enterprise value for PE transactions in the Asia-Pacific region climbed to 17 in 2016 from a previous high of 16.6 in 2015, dwarfing the average of about 10 for US transactions”.

That is going create an interesting situation a few years down the line, when these investors go looking for other buyers, or for stock markets, willing to put an even higher valuation on those assets at exit.

Time was when Asia’s growth would have delivered that exit premium anyway. But now, according to the report, “the sources of value in the Asia-Pacific region are shifting. While top-line growth remains the strongest catalyst for value creation, a reliance on GDP and multiple expansion is giving way to a focus on performance improvement and improved margins. Amid fierce competition and record-setting multiples, GPs in the region will need to raise their game to produce market-beating returns.”

Any situation where PE investors are paying top dollar in their way in ought to set alarm bells ringing about valuation and returns on the way out. Funds are going to have to work and think hard to make a bigger difference. Would that mean hiring Bain, then? Or developing capabilities that can build value independently? Or even trading assets to each other to secure a decent return, or to strategic direct investors like sovereign wealth funds? We shall see.