PE scene is meaner and leaner

Singapore Business Review - - FINANCIAL INSIGHT: PRIVATE EQUITY -

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.

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