PE scene is meaner and leaner
While 2017 saw private equity funds in Hong Kong follow the same trend last year of amassing higher amounts of dry powder, or funds raised but not invested, there is a distinct difference in attitude this year: funds now seem more willing to get their skin in the game, according to analysts, and this has resulted in heated rivalries, recordhigh valuations, and a keener interest in tech-powered efficiency. Competition for deals, which has exceeded $6 billion in HK and grown 50% over the previous five-year average, is getting tighter.
With PE firms also now having more money to spend, this has led to larger valuations. Sovereign wealth funds and Chinese technology giants are also attempting to grab a piece of the deal pie, which further complicates an already highly contested deal environment.
“There is still a vast amount of dry powder at the disposal of PE funds, which they are actively looking to deploy,” said James Parker, partner at Norton Rose Fulbright, Hong Kong. “We are seeing that competition, particularly for the biggest deals, is being further increased by new entrants into the market like sovereign wealth funds, pension funds, and large Chinese corporations such as Alibaba and Tencent,” he added.
Parker warned that with valuations recently hitting record levels, there is a danger of PE funds overpaying for assets and struggling to achieve the levels of exit multiples desired by investors.
Sectors and trends
Unsurprisingly, large deals in HK originated from the financial and property sectors. Bryan Koo, consultant at Clifford Chance, Hong Kong, said that with asset prices remaining high and combined with the ample dry powder of PE funds in Asia Pacific, it is “very difficult for PE funds to find the right assets and the right price to deploy money.”bain’s Vinit Bhatia, for his part, said the largest deals were in a range of sectors, from traditional to technology, although interest in Internet and consumerfocused sectors have notably driven deal activities recently.
He noted that even though the internet sector has slightly slowed down, it remains a big focus area, which together with TMT and Consumer, now account for more than 70% of deal volume for 2015 to 2017 YTD. “The big question which people are asking is how sustainable the growth is and this will partly depend on how the macro story of Greater China unfolds,” said Bhatia.