Private equity

The quick comeback of the Asia-focus buyout fund

After a precipitous drop in early 2019, investor appetite for Asia-focused buyout funds appears to have made a comeback. With more cash in their bags, private equity funds, such as Hillhouse, CITIC Capital and MBK Partners, are gearing up to make big investments in 2020.

Service is resumed. After seeing a worrying drop in capital into Asia-focused buyout funds in early 2019, appetite has risen sharply in the last quarter of the year, recent data shows. However, it seems the bigger private equity names are getting the lion’s share of investment.

With only $1.6 billion raised in the second quarter of 2019, there were concerns that non-Asian investors were bearish on the region’s growth story. However, investment into buyout funds sharply increased to $13 billion in the last quarter of 2019, according to Prequin, a data provider.

But while the average fund size of each fund increased, the total number of funds closed in 2019 has fallen noticeably. In 2017, for example, 96 funds closed for fundraising averaging roughly $350 million per fund – a small sum by global standards.  

In 2019, the average fund closed with nearly $900 million invested, but there were only 37 funds that closed for investment. The fourth quarter of 2019 is where the real money came back – each fund averaging $1.4 billion before closing.

“The fundraising market is strong and the general market has supported that,” said a PE fund executive who declined to be named.

“Buyout fundraising will be competitive in 2020 as several big funds are coming back. Asia has become pretty attractive for investors as the region has high growth rate expectation and the penetration rate of the buyout fund is not that much compared to the US,” the executive added.  

Big names locking in sizeable sums of investment include Baring Private Equity Asia. It concluded the fundraising of its seventh private equity fund at $6.5 billion, exceeding its previous target by $1 billion. This is also its largest fund by size to date.

KKR is also raising a big buyout fund. Bloomberg previously reported that the fund size will be a record $12.5 billion. Other names include Hillhouse, CITIC Capital and MBK Partners, who are all raising fund for future buyout investments, three individuals with knowledge of the ongoing fund raisings told FinanceAsia.

Baring’s successful fundraising is a perfect example of the recent pick up in buyout fund investment. It had a straightforward fundraising process which completed in 12 months, according to an unnamed source familiar with the fundraising. “There’s been a lot of transaction volume recently in the market, and there are good opportunities for buyout fund to add value,” the source said.

Baring has already started deploying capital in Japan and India with its seventh fund, according to the source. For example, It is understood the PE firm wishes to capitalise on Japan Inc’s recent willingness to sell non-core assets to private equity firms, the source said. 

As buyout funds look to acquire a majority stake in one company, transactions in Asia generally require less leverage as valuations are typically lower than in the US or Europe, according to research conducted by Point Hope Group, a Singapore-based alternative investment manager. Asia requires leverage of about 50% compared to 80% from the US and Europe in order to achieve a return of roughly 25% IRR.

North American investors still contribute a lot to these Asia-focus buyout funds. For example, New York state just committed $65 million to MBK Partner’s fifth fund, while Ohio Police & Fire Pension Fund committed about $20 million, according to Pension & Investments.  

“The majority of the buyout fund investors are still US-based,” one buyout fund manager told FinanceAsia in an earlier interview. “They still have a high interest in the region.”

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