PE investors warily keen on Asia-Pacific

The latest review of private equity markets around the world by Partners Group shows continued favouritism for the Asia-Pacific growth story but a rising wariness about competitiveness and prices.

The six-monthly report, for the first half of 2011, has Asia and other emerging markets showing more attractive investment categories across the PE size and style spectrum than Europe and North America combined.

Of particular interest are mid- and small-cap direct investments and mid- and small-cap primaries; venture and growth direct and primaries; and consumer, IT and industrials in the buyout sectors.

Direct investments involve funds-of-funds managers, such as Partners Group, investing directly in companies, whereas primaries involve first investments through other fund managers. Secondaries involve the recapitalisation of a company or group of companies after initial PE investments.

The regular report by Partners Group, one of the largest PE managers in the world with about US$27.8 billion under management, highlights both areas of opportunity and areas for concern for a full range of PE categories.

It says: “Asia and emerging markets remain an area of special attention, in line with our positive economic outlook and the fundamental trends towards rising wealth amid the impressive expansion of the middle class…

“In general, we are convinced that private markets investments in China and other emerging markets offer more attractive investment opportunities than public market investments.

“While public markets in the developing world have seen immense capital inflows over the last years, the pace of private equity investing has been in line with the pace of fund raising. Another argument favouring private markets is that public equities are often skewed towards volatile financials and energy companies while private equity typically offers a more balanced exposure with its focus on consumer-driven industries.”

Andreas Baumann, Partners’ managing director for PE and co-head of Asia, said: “It’s nice to invest in an economy with strong growth prospects. But it is also true that these markets are very hot. There is a lot of money attracted to them. Even though there’s a good tailwind, at the end of the day it comes back to how much you’re prepared to pay. You have to be mindful of that.”

He said that most emerging markets were also very competitive, particularly in China, where there are hundreds of RMB-denominated funds, and where Partners Group has one of its 14 offices around the world – in Beijing.

With respect to China, Baumann said there are a couple of ways to deal with the high level of competition: investors can try to avoid the “next” consumer growth story. Partners is now looking for more specific themes in, perhaps, more niche industries. There are also certain sectors which offer long-term sustainable growth, such as health care and education.

Investors can also access China indirectly, through neighbouring countries with strong trade ties. For example, Partners has invested in a tyre mould manufacturer in Korea which derives most of its revenue from China. The purchase price was less than six times EBITDA, which would be difficult to source in China.

Similarly, in Latin America the PE market has developed such that investors need to look for opportunities which may be “below the radar”.

Baumann said: “For most people Latin America means Brazil. It’s the gorilla and we’re very bullish on Brazil … However some countries such as Chile and Peru are below the radar. Peru is more emerging and offers some good opportunities. Also Argentina. We haven’t done anything there for a long time and obviously there’s political risk, but an opportunistic exposure makes sense.”

As for Europe and North America, the Partners report shows only the financials category in venture and growth in North America as being in its most attractive grouping. Large-cap buyouts on both continents should be underweighted, along with media and telecommunications direct buyouts.

Asia and emerging markets have no recommended underweight’s across the various segments.