TSCDY Tesco PLC (PK)

   (FROM THE WALL STREET JOURNAL ASIA 10/22/15) 
   By Alec MacFarlane 

HONG KONG -- Private-equity funds are raising tens of billions of dollars for Asian investments even as they sit on record amounts of money with fewer and fewer available targets.

While Asia has seen a mergers-and-acquisitions boom this year, just a sliver of the deals has come from private-equity firms putting their money to work.

The lack of such deals is a reflection of wariness about volatility in China, persistently high valuations on potential acquisitions, and fierce competition from corporate buyers.

"There's more capital than there are opportunities at the moment," said John Hall, a managing director and co-head of Asia mergers and acquisitions and financial sponsors investment banking at J.P. Morgan Chase & Co. "Valuations have been high and there have been a number of deals that private-equity firms have looked at but haven't worked out."

Like the rest of the world, the Asia-Pacific region has seen record levels of takeovers of its companies in 2015. Asia M&A this year is up by 48.7% from the same period last year, to a record $886.8 billion, Dealogic data show.

But private equity's share of that is just 3.5%, according to Dealogic. That is the smallest slice since 2009, when the financial crisis continued to cast a shadow.

That small portion for private equity is despite the $6.1 billion sale in September by British supermarket company Tesco PLC of its South Korean business to Seoul-based MBK Partners, Asia's biggest-ever private-equity deal. But purchases by buyout firms have been overshadowed this year by other M&A activity, which has been boosted by large corporate takeovers in China and Australia and a number of big restructurings that involved deals among affiliated group companies in Hong Kong and South Korea.

Meanwhile, cash is piling up at Asia-focused private-equity funds. They raised $39 billion in the first nine months of the year, according to data provider Preqin, and around 315 funds are currently looking to raise another $83 billion.

If successful, the fundraisings will add to the already record amount of unspent capital earmarked for deals in Asia. Asia-focused funds are sitting on $169.8 billion of dry powder, up 8% from the end of 2014.

Such funds have made just 142 acquisitions this year, the lowest in at least a decade and down 31% from last year.

Two of the reasons for the small portion of private-equity investments, say deal makers, are corporate competition to buy assets and expensive valuations of companies, despite falling stock markets.

The MSCI AC Asia Pacific Index has fallen about 10% from June 12, when China's once-booming stocks began reversing, through Tuesday. China's Shanghai Composite Index has lost 36%since June 12.

But sellers of companies aren't lowering their price tags.

"What tends to happen when you have these big shifts in public market values is deal flow goes down," said Jan Nielsen, a senior managing director at private-equity firm Blackstone Group LP. "In China you've had a run-up and then you've had a correction, so it is natural that buyers and sellers are having a hard time agreeing what the values of businesses are."

China's slowing economy could also act as a double-edged sword for private-equity firms looking for new deals. Some of the more bullish managers expect China's economic problems to result in the country opening up for more private and foreign investment. But volatility is also expected to increase competition for assets by cash-rich corporate buyers, which are likely to be just as keen to snap up bargains if and when valuations fall.

"If the Chinese government doesn't pump money into the market, private equity will have more opportunity as an alternative source of finance," said Richard Tan, head of private markets in Asia at Towers Watson, which advises investors on their investments in private equity. "Competition is expected to increase, because if the Chinese economy is facing challenges, this creates a good buying environment" for corporate buyers.

The challenges of investing aren't hampering private-equity fundraising, though that has slowed a bit.

RRJ Capital, the Hong Kong and Singapore-based firm founded by former Goldman Sachs Group Inc. dealmaker Richard Ong, recently raised US$4.5 billion. This makes it the second-biggest private-equity fund devoted to Asian investing ever raised, behind KKR & Co.'s $6 billion fund raised two years ago, according to Asia Private Equity Review.

PAG Asia Capital recently set a $3.5 billion upper limit for its latest fund, according to people familiar with the matter. Bain Capital is looking to raise $2.5 billion for its third pan-Asia offering, while Hony Capital is expected to target roughly $2 billion for its new fund, the people said. China's CDH Investments is also raising a $600 million fund targeting midcap companies, the people said. All firms declined to comment or didn't respond to requests for comment.

"There isn't too much money raised for all strategies, but the pace for private-equity [deals getting done] is below par," said Juan Delgado-Moreira, Hong Kong-based managing director at Hamilton Lane, which invests in private equity and advises investors about the asset class. "Private equity is also being forced to do smaller deals, given increasing competition by strategics for the larger assets."

(END) Dow Jones Newswires

October 21, 2015 13:35 ET (17:35 GMT)

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