2014 is shaping up to be an exciting year for TPG Capital in Asia. It has nearly finished raising fresh funds for Asian buyouts and is set to seal a multi-billion dollar bank sale in the coming months. In addition, one of its veteran dealmakers is returning full time to the region.
TPG is also homing in on a major transaction in Australia. TPG is in the final round of bidding for Royal Dutch Shell's Australian refining and retail business according to people familiar with the matter, a sale which could fetch $3 billion. TPG has landed some of its biggest deals across the region in Australia, such as the acquisition of up-market department store Myer.
Closing its sixth fund is a priority. TPG is looking to raise about $3 billion and has already secured $2.3 billion, according to data providers and investors. TPG executives and spokespeople declined comment, citing regulatory limits on marketing.
TPG Capital’s Asia co-heads Ben Gray and Tim Dattels talked to FinanceAsia about how they think 2014 will shape up for corporate financiers and their investment plans. Among the destinations that TPG thinks look most attractive for investing some of that money are China and India. The Fort Worth, Texas-headquartered firm is also improving some of the companies it already owns such as Australian poultry producer Inghams Enterprises, which it bought in March last year and is performing ahead of plan.
Ben Gray and Tim Dattels (above) continue to see opportunities helping businesses across the region to expand, particularly in China.
China’s biggest banks have funnelled cheap loans to state-owned enterprises for decades leading to distortions in capital allocation across the country. This has created an opportunity for private equity firms to finance cash-starved companies in the private sector.
“There are a million points of light in China in terms of entrepreneurs building very significant businesses that have limited access to capital,” said Dattels who has a long history of working in China. Alongside Hank Paulson at Goldman Sachs, he advised some of the earliest Chinese privatisations.
Dattels is relocating from San Francisco early this year to run TPG day-to-day in Asia alongside Gray.
Co-managing partners Gray (above) and Dattels both said that the espousal of market principles by China’s new leadership would place the country’s economic growth on a solid footing.
Chinese firms are also looking attractively priced relative to other Asian markets, the TPG executives said. The benchmark Shanghai Composite Index is trading at a ratio of 10.26 times price to earnings versus 17.5 times in the Philippines and 19.1 times in Indonesia.
“On a relative value basis China is really interesting right now – over time we expect multiples will go up,” said Gray during a separate telephone interview.
TPG is not alone in highlighting China’s attractions. In an Ernst and Young survey of private equity professionals known as general partners, institutional investors or limited partners, and private equity-focused investment bankers in the Asia-Pacific region, 56% of respondents named Greater China as the Asian market likely to see the most deal activity in 2014, with respondents citing a relaxing of restrictions for foreign firms. The survey of a 100 people was released on Thursday.
TPG, headed by David Bonderman, has a long history of investing in China. It became the first foreign firm to control a Chinese bank since 1949 when it invested in Shenzhen Development Bank. The firm sold its 18% stake in 2010 to Chinese insurer Ping An for around 11 times its original investment, according to industry sources.
Last year it closed the purchase of a 12.15% stake in cable TV operator Phoenix Satellite Television for $213.7 million from Rupert Murdoch’s 21st Century Fox – what some have dubbed ‘Murdoch’s Divorce Deal’.
Many cite the difficulties of investing in mainland China, such as the complexity of financing deals from offshore, but TPG sees it differently. “Dealing in a currency that is not convertible is actually an advantage as it gives you relative stability as a dollar-based investor,” said Dattels.
He said TPG continues to look at further opportunities for investing in Chinese companies listed in the US but that it remains cautious. “The due diligence bar is high on those companies – it’s time consuming and expensive but you just have to do the work,” said Dattels.
It invested $108.6 million in NYSE-listed Xinyuan Real Estate in September. The Chinese firm focuses on developing residential property across the mainland.
TPG has also been reinforcing its team in China since China partner Weijan Shan’s departure in 2010 to Pacific Alliance Group. It hired Steven Sun from Goldman in 2011 to co-head its practise in China with Ricky Lau. Scott Chen moved to China to run TPG’s Beijing office and was heavily involved in TPG’s investment into sportswear brand Li Ning.
India is the next major market on TPG’s shopping list.
“There could be interesting opportunities in India over the next couple of years if international investors continue to stay away,” said Gray, noting the dramatic fall in the value of the rupee against other currencies. However, a lot depends on the general elections in India later this year, he said.
TPG’s stance in this respect is somewhat contrarian. The results of Ernst and Young’s survey found that only 7% of respondents said India would see the most investment.
Southeast Asia success
Southeast Asia is also on TPG’s radar. "Southeast Asia will be episodic and somewhat volatile in the near term but with a powerful underlying demographic hydraulic and an interesting opportunity for trade and business consolidations throughout ASEAN," said Dattels, who for the last three to four years has been focused on Southeast Asian deals.
“I’ll continue to work in Southeast Asia and probably take a deeper dive into the Greater China market, said Dattels.
Very few private equity firms have done well in the region’s largest economy, Indonesia, but TPG has benefited from its partnership with local firm Northstar.
“It’s easy to have a romantic view of Indonesia because it is such an attractive country but it is very hard to execute there. We started our relationship with Northstar because having a strong local partner makes a very big difference,” said Dattels, who founded Northstar alongside Patrick Walujo and Glenn Sugita and still sits on Northstar’s investment committee.
A highlight of their fruitful relationship is the ongoing sale of their 40% stake in Indonesia's Bank Tabungan Pensiunan Nasional (BTPN) to Japan’s Sumitomo Financial Group for $1.56 billion, or 4.5 times book value – one of the highest valuations ever paid for an Asian bank.
Japan's second-biggest bank by market value agreed in May to make the acquisition in two stages. SMFG's core banking unit Sumitomo Mitsui Banking Corp. first bought 24.26% of BTPN at 6,500 Indonesian rupiah in May for 9.2 trillion rupiah and agreed to buy a further 15.74% at the same price, pending regulatory approval. The stock is now trading at around 4,430 rupiah.
For the seller, private equity firm TPG, the deal looks very timely with a potential six to seven times return on investment. Market participants expect the second-stage of the deal to close in the coming months.
Northstar has growing regional ambitions and is now looking to raise $1 billion for its fourth fund, industry sources say, but TPG does not think this will rock their relationship.
“The world’s a big place. We’re happy to work throughout the region with them – they are good partners,” said Dattels. As an example, he said TPG is working with Northstar in Myanmar.
In Japan TPG has become more focused on niche investments of around $100 million in size rather than big trophy deals that are looking increasingly expensive.
“Competition is reigniting at the top-end of the deal range in Japan as people are excited about the prospect of some growth in the economy,” said Gray. “The trick is to find interesting deals in the middle market,” he said.
TPG bought Joint Corp in 2012. The property developer went bankrupt in 2009 and as a result the private equity firm secured the assets at a discount to face value. The fund wrote an equity cheque of just $125 million, with partner property consultancy Savills chipping in a small fraction of the deal's value, according to a person familiar with the deal. The value of the deal was not disclosed.
Bringing in the money
TPG is in the process of raising about $3 billion from investors, according to data providers and investors.
TPG was a bit slow out of the blocks when the fund-raising environment began to improve following the global financial crisis. This, industry sources say, was partly because it first wanted to demonstrate a recovery in its turnaround investments, such as Alinta Energy and Li Ning. But to an extent that’s now happening as the value of its 2012 investment in China's Li Ning has risen above its entry price.
Also investors, known as limited partners, wanted to see some exits – TPG has announced several lately such as the sale of UT Capital Group to Haitong Securities for $715 million, the exit of 10.1% of Shriram Transport Finance to Piramal and the sale of its stake in BTPN.
But things are different now. Private equity funds raised about $28.5 billion in 2013, roughly in line with 2014, according to researchers at PEI Media. KKR’s raised $6 billion fund last year.
Dattels’ return to Asia is also expected to give a fillip to fund raising as he is well known in the region.
Upturn in deals
Generally speaking TPG expects the environment for exiting portfolio companies to be brighter this year than last as investor sentiment improves and China’s A-share IPOs resume.
“IPO markets have recovered, which will lift deal activity,” said Gray.
When company managers have only private equity to sell they tend to be reticent about selling. “When there are viable alternatives people start selling assets,” said Gray.
Both Gray and Dattels are confident they can put money to work in 2014.
“Right now the backlog is as robust as it has ever been and is distributed throughout the region," said Dattels.
TPG focuses in Asia on investments in financial services, healthcare and consumer & retail.
However, private equity broadly is unlikely to be a significant player in the auctions of large banks around the region as they would face fierce competition from other banks and because the sector is highly regulated.
“Private equity will continue to be a significant player in smaller deals in the sector – in non-banking institutions in emerging markets and in distressed situations or where the banking sector is highly fragmented,” said Gray.
In the meantime, TPG will naturally also continue to work on its own portfolio companies such as Inghams.
The firm paid $871 million or 4.5 times Ebitda for Inghams, a lower valuation than Affinity Partners’ paid for New Zealand-based peer Tegel at 7.8 times.
“We feel good about the price we paid for Inghams,” said Gray.
Inghams had invested over a billion dollars in their facilities in recent years, as a result TPG’s capital expenditure will be low.
TPG is mulling a selling some of Ingham's property and then leasing it back with a long-term contract, according to industry sources. Many Ingham's peers have already sold their real estate and such a contract would make best use of Ingham's assets. The capital raised would be used to expand the business via acquisitions, the sources said.
The private equity firm is also working on boosting Inghams’ profit margins by expanding its product lines into ready-to-eat meals, along the supply chain.
“The business is already performing ahead of our expectations,” said Gray.