STILL SHOPPING
Private equity stays strong in Asia.
By Bennett Voyles

For an example of the havoc created by the subprime crisis, look to the U.S. and European private-equity markets. During the first half of 2007, the volume of financial sponsorship deals in the United States was a robust US$407 billion, according to Thomson Financial. From that high, the volume plummeted 58 percent for the second half, to just US$170 billion. Deals in the fourth quarter were a mere US$44 billion. Western private-equity deals typically require great sums of borrowed money, and right now large-scale borrowing is hard, if not impossible, to secure.

It’s a different story in Asia. Here, private-equity investments actually increased in the second half of the year, from US$12 billion to US$25 billion. And, unlike Western markets, where few expect a strong 2008 for private equity, in Asia the industry should see at least as much volume as in 2007, if not more, says Vincent Pun, senior research manager for AVCJ Research of Hong Kong.

Several factors explain the relative health of private equity in Asia. Deals here tend to use more cash and less leverage, and are thus less affected by the rising cost of credit. Asian companies themselves generally carry less debt than many of their Western counterparts, making them more attractive now to investors looking for less leveraged deals. Also, Asia’s continuing strong growth is attracting investors: GDP growth still hovers around 10 percent in India and China and total public stock market capitalization in Asia rose 50.4 percent in 2007 compared to 2006, according to the World Federation of Markets.

Within Asia, much of the money will go to India. India dominated Asian private-equity interest in 2007 (US$17.1 billion), ahead of Australia, Japan, and China, according to the AVCJ tally, a trend that Pun says is likely to continue this year.

“India is coming up very, very fast,” says Chris Rowlands, managing partner, Asia, for global private-equity group 3i. “A lot of capital is being raised.” Certainly, this is true for 3i. Since setting up shop in Mumbai in 2005, the firm has arranged 12 minority investments and two infrastructure deal investments for a power plant and a company involved in roads and hydroelectric projects, and an IPO for a port. “We’re feeling pretty good,” says the Singapore-based investor.

In terms of sector bets, infrastructure is the likely favorite of private-equity investors in other Asian markets as well, according to AVCJ’s Pun. AVCJ forecasts that financial services, consumer goods, and transportation company deals will also be in demand.

Another reason that deal flow may be staying strong in Asia is not just the supply of good opportunities but the growing strength of Asian private-equity firms. In AVCJ’s 2007 rankings, Temasek Holdings, the investment arm of the government of Singapore, ranked first, followed by Goldman Sachs. Advantage Partners of Japan ranked third, followed by Citigroup.

Strong economic conditions, strong companies, growing sophistication about financial statements reporting—about the only negative for Asian private-equity investors now is getting a new partner in their deals, whether they want one or not. A 2007 PricewaterhouseCoopers report noted that in China, the government recently created a new dividend tax on companies owned by private-equity or venture capital firms. In India, too, taxes are creeping in, as foreign venture capital investors recently lost their general exemption to taxation. The exemption now remains only for certain sectors, including nanotechnology and IT, dairy and poultry, and certain kinds of hotels.