Demand still exceeds supply in Asia

The Asian private equity market continues to grow at a rapid rate, but a new report questions whether there are enough quality managers to invest the vast sums pouring into the asset class. James Taylor reports.

The Asian private equity market is still lagging behind its counterparts in the US and Europe – but it is catching up fast, according to a new report.

The report, by Swiss advisory firm Strategic Capital Management, reveals that Asian buyout volume was up 400 percent last year compared to 2004. Much of the growth was driven by the increase in large buyouts, which became increasingly prevalent in the region – in 2006 there were almost seven times more buyouts worth more than $500 million than there were two years earlier.

Australia saw a tenfold increase in buyouts in 2006

Australia was the biggest beneficiary of this growth, seeing a tenfold increase in buyouts during the year. Together with Japan, which remains the biggest economy in the region, it accounted for about half of all deal volume. “The opportunity is not so much in China, with its flurry of venture capital activity, than in the rather older economies of Australia and Japan… followed by Korea and India,” said SCM.

At 7 percent of GDP, Asian M&A activity is still well behind the more developed markets of the US and Europe, where M&A volume exceeded 10 percent of GDP last year.

However, the economic fundamentals remain extremely positive for further growth in the region, SCM believes. Many countries in the region are enjoying economic and population growth well in excess of western countries – China, for example, is set to become the world’s second largest economy, behind the US, by 2015. Indeed, the region as a whole is growing more than twice as fast as Europe, and GDP has doubled in the last ten years.

Nonetheless, SCM also sounds a cautionary note. It believes there may be a bubble in the making, since investor demand still outstrips the availability of good managers and deals, due to the immaturity of the market. This is particularly true in the venture capital space, it says – last year VC funds raised six times as much money as they managed to invest. According to the Swiss firm, this has resulted in a similar situation to that in Europe in the late 1990s, just before the bursting of the dotcom bubble.

Indeed, the biggest challenge for the region is likely to be in finding the capacity to invest the huge sums of money pouring into the asset class. In the recent PEI 50, a list of the 50 biggest private equity firms in the world produced by PEO’s sister publication Private Equity International, there was just one representative from Asia – Australian buyout firm Pacific Equity Partners, in 41st place having raised $4.74 billion since 2002. As a result, the market is largely dominated by global buyout giants like KKR, Carlyle and TPG.

As SCM puts it: “The bottleneck in Asia is the narrow skill base of the private equity industry, and there is no shortcut to circumvent that.” As a result, the Swiss group is taking a cautious view of future prospects: “While the opportunity in this segment is genuine and driven by sound economic fundamentals, many fund offerings in the region are not.”