April 21, 2017 6:07 pm JST

Asia-focused private equity investors have $136 billion war chest, Bain says

SINGAPORE (Nikkei Markets) -- Asia Pacific private equity funds are flushed with cash, but it has become harder to find attractive investments because of the high valuations demanded by companies the funds are looking to invest in, management consultancy Bain & Co. said in a report.

That said, Bain expects deal levels to stay high this year, with a large part of the money going into buyouts of companies in the consumer space as firms target the growth of Asia's middle class.

In its report released Friday, Bain estimated that Asia Pacific-focused private equity funds had $136 billion in unspent capital at the end of 2016, down slightly from $137 billion at the start of last year. The amount gives managers enough "dry power" to invest for another two years based on the value of deals reached last year.

"As the funds get larger, it's become just that much harder for them to move the needle in terms of their returns if they are looking at small deals," Suvir Varma, the Bain partner who heads the firm's private equity and sovereign wealth fund practice in the Asia Pacific, said at a media roundtable. "Even when they take stakes in early stage deals, they are actually putting more money to work... You are actually seeing average deal sizes stay the same or go up."

Bain said private equity deal value in the Asia-Pacific region reached $92 billion in 2016, a pullback of about 25% from 2015's all-time high of $124 billion. The 2016 figure was, however, the second-best year on record for the industry.

The picture was different for Southeast Asia alone, where private deal values bounced back to $6.8 billion in 2016 from $4.8 billion in 2015.

Private equity has become a major force in Asian equity markets, providing start-ups with an alternative to listing stocks on public markets and helping founding managers buy out and delist companies that they believe are undervalued.

In Singapore, private equity funds including China's Hopu Investment Management are in talks to buy warehouse operator Global Logistic Properties Ltd. in a deal that could be worth more than $10 billion. North of the border, CVC Capital Partners helped fund the $1.1 billion buyout of Malaysian-controlled but Hong Kong-listed Nirvana Asia Ltd., Asia's largest funeral-services provider by revenue.

Suvir said Bain was still seeing a healthy pipeline of buyout-type deals, and such transactions could account for some 40% of private equity deals this year.

Looking ahead, Bain said private equity funds that are focused on the Asia-Pacific region will have to grapple with higher valuations even as interest rates rise and economic growth slows in some countries, due to competition from new players like sovereign wealth funds and large corporations such as Chinese technology giants Baidu, Alibaba and Tencent.

"The wave of capital chasing deals of all sizes has kept competition at a fever pitch, which in turn has pushed valuations into nosebleed territory," Bain said in its report.

It noted, for instance, that the average enterprise value for private equity transactions in the Asia-Pacific region climbed to 17 times earnings before interest, tax, depreciation and amortization in 2016 compared to 16.6 in 2015. This was well above the average EV to EBITDA multiple of around 10 for transactions in the U.S.

For Southeast Asia, the average EV to EBITDA multiple rose to 14 in 2016 from 11.2 in 2015.

Commenting on the Bain report, Terence Wong, CEO of Azure Capital, which specializes in small and mid-cap listed companies, said that while there is now less chatter about possible privatizations due to the market's rally since the start of the year, the interest in buyouts could return quickly as there are still many companies trading at a discount to their peers in the same industry.

As for investments in start-ups involved in so-called disruptive technologies, Wong said the strong interest may not result in too many deals given the run-up in the valuation of companies that are growing rapidly but have yet to turn in a profit.

"I've seen the dotcom crash and there are similarities in that no one has made money yet. It's all paper profits from higher valuations."

--Kevin Lim

--Nikkei Markets is a real-time financial news service for South East Asia's markets published by Nikkei NewsRise Asia Pte Ltd, a Nikkei and NewsRise joint venture company. Nikkei Markets provides wide companies coverage in the region, including the Nikkei's Asia300 companies.

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