Looking back on 2010, bankers and buyout fund managers alike note that while it was fairly subdued on the new investment front, the theme of the year was undoubtedly exits.
“On the buy-side, the largest number of transactions by volume were below $100m,” notes Toby Groser, Credit Suisse’s Hong Kong-based head of financial sponsors group for Asia, excluding Japan. He points to the number of larger deals seen on the sell-side as a contrast.
Among the headline exits – and taking the top spot in terms of size – was Lone Star Fund’s long-in-the-making sale of its 51 percent stake in Korea Exchange Bank (KEB). Though the deal has yet to complete, the firm reached an agreement worth KRW4.7 trillion (€3.1 billion; $4.1 billion) with Korea’s Hana Financial Group in November.
Also scoring high in terms of deal value was MBK Partners’ sale of its 60 percent stake in Taiwanese cable broadcaster China Network Systems to a group of investors led by Taiwanese food conglomerate Want Want. The deal, inked in October, is reportedly valued in the region of $2.4 billion. Similarly, after a year of waiting, The Carlyle Group secured regulatory approval in November for its sale of Taiwanese cable television operator Kbro, in a deal worth $1.19 billion.
Driving the focus on exits was no doubt the same factor that was holding the buyout firms back on the buy-side: namely the stiff buy-side competition being seen for the few assets that came to market, which in turn drove prices up beyond what many firms were prepared to pay. In fact, Groser cites Bloomberg data that showed the premiums paid last year on Asia-Pacific private equity deals rose to 30 percent from 13 percent in 2009.
“In 2008 it was a record 35 percent,” he notes.
Still, bankers assert that the premiums in many cases are worth paying. “Maybe sellers’ valuation expectations have improved,” Groser says, “but equivalently, investors’ confidence on achieving target returns has improved, particularly as the IPO market recovers – it gives the buy-side more confidence.”
He is seconded by Anand Narayan, Hong Kong-based head of the financial sponsors group at JPMorgan Asia Pacific. “There’s always going to be a gap in [valuation],” he says, “but the growth prospects of the assets in many cases have made the valuation compelling.”
Certainly some notable buy-side private equity deals closed in 2010, with Australia’s Healthscope take-private, backed by Carlyle and TPG Capital, topping out in terms of size at A$2.7 billion. Meanwhile, CVC Capital Asia made waves with two investments in 2010: firstly with its IDR7.2 trillion ($774 million; €547 million) joint purchase of a 91 percent interest in Indonesian retail chain Matahari Department Store in January; and secondly when it pipped bidders including KKR to the post on the $300 million-plus secondary buyout of the Asian business of Acument Global Technologies from US firm Platinum Equity in May.
On the banks’ side, following on from the recovery in lending appetite seen in 2009, it has been – and remains – pretty much business as usual.
In Australia, says Graham Lees, director in the Leveraged Finance Group at Credit Suisse in Sydney, “Things are continuing as they were – debt markets are at 2003/04/05 levels. Senior leverage then was around the 4x level, and many of the investments made were among the most successful ever from a private equity perspective.”
Lees states that deals in Asia would likely price inside of deals in Australia, where margins in the mid-400s are being seen and debt multiples around the 4x EBITDA level are being averaged.
In Asia ex-Japan and Australia meanwhile, Groser states that in “your typical LBO structure leverage, levels on a gross basis are peaking around 4x to 5x EBITDA”. However, he adds that there have been circumstances, “for example in some of the M&A deals seen in Taiwan”, where leverage has climbed as high as 6x EBITDA.
Opinion on whether the ball is still in the court of the lenders, or has instead bounced back into that of the borrowers, is divided depending on who you speak to.
“People talk about the pendulum swinging between the borrowers and the lenders – it’s fair to say it’s pretty balanced right now. Private equity firms are more realistic about how far they can push the banks, but in the last three to six months the banks themselves have become a lot more aggressive,” says Groser.
He continues: “Lenders, whether investment banks or commercial banks, still approach credit more prudently than in the years pre-GFC. Bank origination and syndication is structurally different than it was three to four years ago. Deals are very much being done in a club fashion, partially promoted by the larger private equity firms. In my experience, the move towards club-style syndications is resulting in more lender-friendly terms, though there remains debate on how the economics have changed.”
The other side of that debate is offered by one Hong Kong-based M&A lawyer who asserts that some of the financing terms and conditions he is seeing on deals “are what you would have seen at the top of the last market”.
This, he says, is due to fact the number of banks active in the leverage business in Asia has changed very little since the top of the market in 2007 – with RBS and ABN AMRO the only notable departures.
“For the most part, you still have about 25 banks in Asia providing leverage finance, but you still have the same limited deal flow,” he states.
In addition, the competition amongst debt providers is potentially being stepped up by what industry practitioners see as attempts to extend regional footprints by several local Taiwanese and Korean banks, which already have the private equity market in their home countries sewn up. One example is Korea’s Hana Bank, which, according to several sources, was part of the banking syndicate on Australia’s Healthscope deal – a first for a Korean bank.
“The local banks are looking aggressively beyond their borders – you are definitely seeing more of these banks trying to play a participatory role,” acknowledges JPMorgan’s Narayan.
For some, the deep and liquid pockets of these local banks and their apparent willingness to under-cut the terms of the international banks could pose a real threat to some of the more established players. However, the threat was dismissed as “over-played” by one banker at a global bank, who said, “They do participate, but they have a very small ticket size”.
Narayan notes there is always competition from local banks. “You will see Malaysian banks doing Malaysian deals, Taiwanese banks doing Taiwanese deals etcetera. But there is still value from the international banks more from the structuring standpoint. For public-to-privates, for example, sponsors typically prefer working with banks outside the local geography given risks associated with leakages and the know-how to structure such transactions.”
Putting debate aside, it is clear there is ample liquidity to support the Asian LBO industry. All that’s missing, in fact, are the buyout targets.
Refinancing worries overplayed
As recently as last year, one big blot on the private equity horizon was said to be the “wave” of refinancings expected in 2011 and 2012 for debt packages agreed in the giddy years of 2006-2007.
Now that 2011 is here, however, that blot looks more like a tiny dot.
Comparing the situation to the US, Brett King, banking and finance partner in the Hong Kong office of Paul, Hastings, Janofsky & Walker, comments, “Even two years ago everyone predicted this wall of debt coming due in the US. All those sponsors were easily able to refinance or rollover debt and we haven’t seen many of those deals go south.
“There’s so much liquidity in Asia right now, as long as an asset is doing well it should have no problem refinancing,” he adds.
Toby Groser, Credit Suisse’s Hong Kong-based head of financial sponsors group for Asia, excluding Japan, say the change of sentiment “reflects firstly an improving bank market, and secondly the robustness of the operating environment in the region – [private equity] portfolio companies have performed pretty resiliently”.
It also reflects the buoyant exit environment and improved capital markets across the Asia Pacific – after all, a firm’s first priority would be to sell.