Indonesia Agriculture 2009
PE Investments in Asia Return ‘Back to Basics’ Agriculture, Education, Renewable Energy and Services Hottest Targets
The turmoil in financial markets over the last year has no doubt reduced the appetite for risk, even in the most attractive markets. In fact, it has been one factor for a shift in focus within Asia’s Private Equity (PE) industry.
While PE leaders in Asia may differ in their growth expectations for 2010 and beyond, they all agree that investments will shift from traditionally attractive sectors such as Information Technology, Consumer and Retail, Financial Services and Real Estate. Investments in Asia will return ‘back to the basics’ as well as some new sectors.
Strong interest in Agriculture, Education and Renewable Energy has been driven by a tidal wave of interest in sustainable development projects across the board, many of which are subsidized by massive government spending.
Agriculture is also seen to hold big upside driven by strong secular growth in global demand for agricultural products combined with constrained supply and high commodity prices.
This was the view of the business leaders within Asia’s Private Equity industry who were interviewed by Global Intelligence Alliance (GIA) for their white paper entitled “Asia Private Equity Leaders’ Outlook”. GIA conducted wide ranging one-on-one interviews with senior executives from companies such as Apax Partners, Baring Private Equity Asia, CLSA, GE Capital, Morgan Stanley etc. and relied on market monitoring on PE industry trends for their analysis.
Positive Impact from the Crisis The strategic market intelligence and advisory company goes on further to say that as a consequence of the global financial downturn in 2009, Asia’s Private Equity industry has seen:
1. An improvement in valuations and deal terms for investors
PE firms with ample cash reserves benefited from the lack of liquidity in the capital markets by being able to negotiate more favorable valuations and deal terms.
2. Competition for deals moderated
Secondly, competition from “me too” deal-makers was moderated during this period as many PE firms with limited cash reserves on hand and difficulty in raising new funds shifted focus to supporting existing portfolio companies rather than seeking new investment targets.
3. Exits deferred and importance of portfolio management increased
PE firms opted to defer exits and to hold existing portfolio companies until more favorable exit conditions returned. In the meantime, increased focus was placed on improving portfolio company performance.
East vs. West
The analysis also showed that PE firms that were more focused on Asia were less impacted by the economic crisis as compared to many US- or Europe-focused funds.
Asia funds with less exposure to export oriented portfolio companies were least affected during the recent downturn. Moreover, many savvy PE investors used the downturn to generate value as a result of tempered competition for deals and fewer options for companies to obtain funding from illiquid capital markets.
Another factor that differentiates PE firms in Asia from those in the West is that they tend to source the majority of their deals from investment bankers and brokers, and then through their own research. Other sources of deals include referrals from their personal and professional networks, industry experts, and companies approaching them directly for funding.
Generally speaking, proprietary deal flow is far more attractive than deals sourced via bankers and brokers for a range of reasons. These could include less competitive deal terms and higher trust factor for example.
While the key success factors for growth capital investments in Asia remain similar to those in the West, there are a few key differences. The GIA white paper shows that developing strong proprietary deal flow in Asia in the pre-investment stage is essential, perhaps even more so than in the West. In a country like China, for example, there is far more capital available than attractive investment opportunities. Moreover, many of the best investment opportunities in Asia are available only via informal channels. Unless a private equity investor has developed strong proprietary deal flow, he or she will be competing intensely for the relatively few attractive investment opportunities, or altogether excluded from the very best ones. This ultimately means less attractive returns for the investor.
Lastly, while business practices in many parts of the region have come a long way over the past 10 years, there is still a huge gap when compared with the West.
Success in the year of the Tiger and beyond
As the industry becomes more developed and competitive, PE players in Asia will have to depend less on their informal networks and conduct deeper due diligence, especially in the face of growing concerns about and awareness of portfolio risk management.
There is still a lack of talent and experience in managing risk and portfolios across economic cycles in Asia. Until recently, there has been a tendency to rely on buoyant markets for successful exits. The response to the financial crisis illustrates how sudden changes in the business environment caught some unprepared.
Nonetheless, there are many opportunities to be tapped in Asia for 2010 and beyond, especially within the agriculture, education, renewable energy and business services sectors, particularly in markets such as China, India, Indonesia or Vietnam.
The year of the Tiger might yet start with a roar.
This article is based on the GIA white paper, Asia Private Equity Leaders Outlook, which can be downloaded from Global Intelligence Alliance Insights and Analysis
About the Author
Global Intelligence Alliance (GIA) is a strategic market intelligence and advisory group. GIA was formed in 1995 when a team of market intelligence specialists, management consultants, industry analysts and technology experts came together to build a powerful suite of customized solutions ranging from outsourced market monitoring services and software, to strategic analysis and advisory.
Today, we are the preferred partner for organizations seeking to understand, compete and grow in international markets. Our industry expertise and coverage of over 100 countries enables our customers to make better informed decisions worldwide.
Visit Global Intelligence Alliance
SAS 2009
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