Navigating the new world order

Asia is becoming an increasingly buyout-driven market in the face of regulatory change, consolidation and rationalisation:

The different factors driving change across the region are creating opportunities for private equity investors, SuperReturn Asia 2017 heard.

Manish Kejriwal, managing partner at Kedaara Capital, said India had undergone a significant transition in the past two years, with Prime Minister Narendra Modi introducing some fundamental reforms.

“In the short-term these have been quite painful, but I think eventually it positions the country for a significant cycle of growth going forward,” he said.

Kejriwal said there were currently three key trends creating opportunities in India.

The first is a significant amount of consolidation and rationalisation taking place in Indian conglomerates.

“You are seeing them sell-off subsidiaries, which historically they have never done”

Secondly, he said a lot of people in old world industries set up by first generation entrepreneurs were having significant succession issues, leading to businesses becoming available for transactions.

Finally, Kejriwal said the Prime Minister has sold India extremely well to global investors, and as a result there was a significant amount of strategic interest in the country.

“A combination of these three factors gives very significant opportunities to people like us,” he said.

“In the next five to 10 years, I think you will see much greater involvement of private equity in the growth of India".

Significant change

Wu Shangzhi, chairman and managing partner at CDH Investments, said China had also undergone significant change in recent years.

He said in the past five years the relative size of the Chinese market had become an important factor.

He said many Chinese companies, which had previously been small, had become global in size and now had the ambition to become multinational players.

He also pointed out that while 10 years ago the market had benefited from the privatisation of state-owned enterprises, now the opportunities were in the spin-off of non-core businesses from these enterprises, with management taking a stake in them.

“These opportunities represent good value,” he said.

Going forward, he pointed out that while most entrepreneurs in China were still young, they were getting older and some were likely to have succession issues, which could also create opportunities.

Unlike the high growth markets of India and China, Tatsuo Kawasaki, founding partner at Unison Capital, said Japan has been recovering since the earthquake in 2011, which “stalled everything”.

He added that this recovery had coincided with Prime Minister ShinzoAbe’s administration and the pro-business initiatives he introduced.

Kawasaki said the jury was still out on how effective Abe’s third arrow of structural reforms had been.

“We hope the initiatives will succeed but looking at the whole economy there is resistance from incumbents,” he said.

But he added that institutional investors and shareholders were now raising their voices about the performance of companies and pushing for reforms.

“There is lots of opportunity in the market but it is very risk intolerant”

“The kind of growth you would expect from China and India is not going to be there, you have to give management that extra incentive to take a step up. The market is not hot yet but it is starting to warm up.”

Strong fundamentals

Meanwhile, Scott Sang-Won Hahn, president and CEO at Hahn & Co, said the issues with North Korea had done very little to the financial markets in South Korea.

He pointed out that the stock market was close to an all-time high, earnings of South Korea companies were up 20% and foreign equity investment was at a 10-year high.

Korea also has a AA+ credit rating, the highest GDP growth of any OECD country and the lowest government debt to GDP ratio.

“Investors across the board realise that underneath this noise there are very strong fundamentals,” he said.

He said opportunities were being driven by the big family-owned conglomerates getting out of their non-core businesses.

“The industries they are in are much more competitive, they have technological disruption everywhere and most Korean businesses are running global operations,” he said.

But he warned that some high-profile companies came with very high valuations.

“There is an old saying in Korea when you are at a famous party there is nothing to eat,” he said.

“When you look at the returns you ask yourself what is the point of doing the investment, the valuations are very high.”

Hahn pointed out that private equity had accounted for only around 10% of transactions in Korea in the past seven years, and most deals involved family businesses selling and buying from each other on a non-competitive basis.

But he said private equity sometimes received private invitations to take part in transactions.

“If you are able to be invited into these deals they can be quite attractive,” Hahn said.