Source: www.asiaecon.org |

Private Equity Firm in Asia: An Emerging Presence in Emerging Economies

Over the past decade, the amount of private equity deals in Asia has grown exponentially. According to Dealogic, the total value of private equity deals in the Asia-Pacific region, excluding Japan, tripled in 2006 to USD 26 billion.(1) This has been attributed to factors like strong economic growth in the…

Over the past decade, the amount of private equity deals in Asia has grown exponentially. According to Dealogic, the total value of private equity deals in the Asia-Pacific region, excluding Japan, tripled in 2006 to USD 26 billion.(1)  This has been attributed to factors like strong economic growth in the region, severe competition for deals in the developed markets of Europe and America and more efficient local capital markets in the Asian region. Moreover, there exists a vast network of domestic companies in these emerging economies that have an immense desire to acquire global recognition via the expertise and network of foreign investors (2).  Factors like shoddy infrastructure, poor corporate governance standards, hostile local governments, severe shortage of skilled personnel and a relatively higher cost of borrowing, however, may tend to severely disrupt the current pace of expansion. (3) It is critical for the governments of these emerging economies to take the requisite measures to remove the aforementioned shortcomings if they still hope to remain attractive investment destinations in the near future.

Challenges to growth
Private equity firms primarily function as follows: They purchase publicly traded companies, take them private, restructure the acquired firms in the hope of reselling these companies at a huge profit a couple of years later. Yet in countries like India—despite the active presence of several heavyweights of the private equity arena like the Carlyle Group, Kohlberg Kravis Roberts & Co, the Blackstone Group etc.—the size and volume of the deals have been comparatively smaller as compared to similar deals being struck in North America and Europe. In fact, most of the big private-equity deals in India so far have involved the purchase of small, passive stakes in companies.(4) This is an unusual strategy for most of the big players who prefer to call the shots by acquiring a controlling stake in the target companies. In India, this can be explained by the fact that most large, publicly traded companies are family-owned, which makes it extremely difficult for a foreign company to aspire to buy a majority stake. Even more, these private equity firms are viewed with a considerable degree of suspicion by local governments and local citizens. The massive restructuring steps that typically accompany any large private equity deal invariably do result in countless jobs being lost and other cost-cutting measures. Another factor limiting the size of the deals in the region is the fact that most emerging economies of Asia like China and India remain grossly overvalued, which drives up the prices that the acquirer would have to pay for deals being struck with potential targets. According to a survey conducted by the Tuck School of Business at Dartmouth, most of the private equity firms seek returns of at least 25 percent on their investments in the emerging economies (5).
One principal reason why bank shares in a country like Taiwan seem particularly attractive to the private equity players is the fact that these shares are some of the region’s least expensive—trading at an average of 1.1 times 2007 book value as compared to 1.5 for the South Korean banks and 2.8 for the mainland China bank shares (6).


What lies ahead?
Despite the above setbacks, Asia still has immense growth potential as a region for several private equity players. Industry giants like Texas Pacific, which has earmarked roughly USD 4 billion for the future in the region, desire to make continued investments in Asia (7). Although these private equity players are driven primarily by the profit motive, they can still prove to be an advantage to the local economies they invest in. They possess the requisite global expertise, immense international experience, a highly professional code of conduct and a wide network. All these strengths can be leveraged by ambitious domestic firms who partner with these firms in the hope of eventually growing into full-fledged thriving global players in the years to come. Thus, the influx of long-term capital into Asia, coupled with the potential advantages that can be realized by the local firms via mutually advantageous partnerships with foreign firms, can help to further accelerate the economic expansion process in the Asian region in the immediate future.

Source: www.asiaecon.org |