Asia saw strongest growth in buyout deals on China's restructuring of state firms

SINGAPORE (Bloomberg)- Asian buyout deals showed the strongest growth of any region last year, driven by the restructuring of China's state-controlled firms.

The total volume of private-equity transactions with Asian firms as targets rose 68 per cent to US$41.6 billion in 2014, according to data from the research firm Preqin Ltd. That compares with a 16 per cent gain to US$94 billion for private-equity deals in Europe and a 8.6 per cent decline to US$160 billion in the U.S.

"Investments in Greater China have been rising very, very fast," said Sebastien Lamy, a Singapore-based private-equity specialist at Bain & Co. "China's large state-owned enterprises are undergoing restructuring and that's making them attractive for buyout firms, which also have more money available to put to work."

Among the biggest Asian private-equity transactions of 2014 was the purchase announced in September of a US$3.6 billion stake in the retail business of state-controlled China Petroleum & Chemical Corp., known as Sinopec, by various Chinese investment companies and Hong Kong-based RRJ Capital Ltd., run by former Goldman Sachs partner Richard Ong.

Other firms took direct stakes in the Sinopec retail business at the same time, raising the value of the total transaction to 107 billion yuan.

China's state-owned enterprises are being restructured following the decision by Chinese leaders in November 2013 to encourage private investments in state businesses, billed as the biggest expansion of economic freedom in China since at least the 1990s. State-owned companies, which according to the World Bank still account for roughly 30 percent of China's gross domestic product, are especially prominent in strategic industries such as defense, electricity and oil.

The larger deals were also supported by the willingness of global investors to commit greater sums to Asia, as they diversify and try to participate in the region's faster economic growth, Lamy said.

One measure of this interest is the unused cash holdings of buyout funds focusing on the Asia-Pacific region, also known as dry powder. Those funds increased sixfold to US$125 billion between the end of 2004 and June 2014, according to Preqin.

Another signal of investor appetite is the increase in total assets under management of Asia-Pacific funds, which includes both the dry powder and committed investments, as a proportion of global private-equity holdings. Asia-Pacific assets grew to the equivalent of 12.4 per cent the global total by June 2014, from only 4.1 per cent at the end of 2004, the Preqin data show.

Within the wider region, private-equity deals rose strongly in Southeast Asia last year. Buyout transactions with Southeast Asian firms as targets increased 78 per cent to US$6.6 billion from 2013, according to Preqin.

As 10 Southeast Asian countries gird for the start of the Asean Economic Community this year, companies are seeking to capitalize on the expanding common market or to gain protection against more competition, according to Nicholas Bloy, managing partner at Navis Capital Partners Ltd. Buyout firms can help in both situations, he said.

Transactions are also increasing as the private-equity industry matures and gains greater acceptance, said Ming Lu, the head of Southeast Asia at KKR & Co., the buyout firm run by George Roberts and Henry Kravis.

"Around a decade ago, if you knocked on doors and spoke to entrepreneurs, they had a limited idea of what private equity was," Lu said. "Today there's a much higher awareness across businesses, governments and general communities, which proves that we have come a long way."