U.S-based buyout firms with well-established operations in Asia remain active overseas despite the worldwide economic downturn.
In the Asia-Pacific region (which does not include Australia, New Zealand and India), U.S. firms are remaining bullish on the two mainstay countries of China and Japan.
Combined, deals by U.S. sponsors in those two countries made up 82% of all deals in the region, which includes Hong Kong and Taiwan in the tally with mainland China, according to Thomson Reuters (publisher of PE Week).
Worldwide, buyout shops stymied by shuttered capital markets have been chasing growth-capital deals that require little leverage. And that’s led many of them to China.
Majority-stake deals are possible in China, with the exception of heavily controlled industries, such as financial services and media. However, the country has proven much more fertile ground for growth capital deals, which typically involve equity investments in exchange for minority ownership.
Even reserved forecasts for China’s economic expansion in 2009 call for GDP growth of 6% to 7% at minimum. In addition, about 40 million people are expected to enter China’s middle class every year for the next 10 years, creating a mass of consumers that will fuel domestic consumption in that country, says Paul Edgerley, a managing director at
“Being part of growth in China is like being part of technology in the early ‘90s; it’s just a great place to be,” Edgerley says.
Many mid-market firms, too, have entered China. In August 2007, San Francisco-based
Other mid-market shops, including
On May 28, Boston-based Bain Capital was reported to be the frontrunner in an ongoing bidding battle with fellow mega-firms
Tough going in Japan
The slow pace of deals in economically battered Japan has prompted many firms to seek greener pastures. Some observers believe the country could see a meaningful pick-up in M&A in the next 12 to 24 months.
At present, however, many retirement-aged business owners remain reluctant to sell their companies at today’s depressed valuations. The same is true for big conglomerates that have non-strategic assets to unload.
But the macro-environment in the country is an obstacle. The GDP in Japan contracted at an annualized rate of 15.2%, as of March 31, thanks in part to an export-driven economy that depends on the buying power of the United States and other countries.
For some U.S. buyout shops this year, maintaining offices in the deal-stifled nation has become too big a resource drain to continue. Turnaround firm
But the retreat of some firms could benefit others. With fewer buyout firms in Japan looking for deals, competition will be thin when deal flow does return to the island nation. Although many elderly owners of privately held companies are not looking to cash out, many will partner with a firm that will both buy their interests and continue to build on the company legacy, says James DeGraw, a partner in law firm
Riverside, which manages more than $2.7 billion in assets and has Asia offices in Tokyo and Seoul, is working on one current deal that it hopes to close sometime next month. The Cleveland-based small deal specialist plans to acquire a Japanese software company from its elderly founder by the end of July, according to Stuart Baxter, a managing partner at the firm.
The deal agreement stipulates that the founder keep a seat on the company’s board to help steer it through the transition phase.
Baxter, who also serves as the fund manager for Riverside Asia Fund—the firm’s first Asia-dedicated investment vehicle—said the firm plans to close four additional platform deals and two add-ons in Asia this year. Still in fund-raising mode, the Riverside Asia fund has a target of $100 million, earmarked to acquire companies valued at up to $50 million.
Meanwhile, a deal struck on May 26 by
Through the deal, SG Investments and Hong Kong buyout shop
A version of this story appeared this week in Buyouts, an affiliate publication to PE Week.