Private equity firms looking "global" in the face of slowing growth

27 November 2012

  • Deal activity expected to remain positive in Asia Pacific
  • Foreign trade buyers seen as most likely exit route, notably those from Japan, China and Korea with Japanese trade buyers of greater importance
  • Dramatic drop in fundraising confidence and economic outlook across the globe
  • Funds continuing to achieve growth through overseas expansion and internationalisation of their portfolio companies


Private equity firms around the world are bracing for tough conditions for both fundraising and deal-making, according to the 2012 Global Private Equity Report, released today by Grant Thornton.

Now in its second year, the report is the result of 143 in-depth interviews with senior private equity practitioners around the globe and provides insight into their expectations across the fundraising and investment cycle.

Globally, this year’s report sees a marked decline in fundraising expectations of General Partners (GPs), with nearly three-quarters describing the fundraising outlook as either “negative” or “very negative”. In 2011, the figure was just 46 per cent.

In the Asia Pacific, over 50 per cent of respondents see the fund raising environment as “very negative”, a sharp incline from last year’s response of 33 per cent. All APAC respondents said track record was the key factor in attracting GPs with the quality of the team as the next most important attribute.

“Though fundraising remains a key challenge, for those firms with a successful track record, a coherent strategy and a quality team that can deliver that strategy, fundraising will be more straightforward,” said Paul Gooley, head of Corporate Finance, Grant Thornton Australia Ltd.

“This evolution will see a widening of the gap between the successful and less successful firms and inevitably winners and losers in the industry, as raising funds for those underperforming firms becoming increasingly challenging, if not impossible. This global trend has emerged in Australia with the recent successful fund raisings completed by a number of top tier performers,” Mr Gooley said.

Private equity firms are expecting to have to turn to a greater number of new investors – or Limited Partners (LPs) – and rely less on their existing LPs to make follow-on commitments to their next funds. This year, 45 per cent of Asia Pacific respondents said that they expect their next fund to be majority funded by first time investors, more than doubling the response in 2011 when it was only 20 per cent.

Private equity firms are looking across borders for exit routes, in particular to overseas trade buyers. More than half of respondents expect the majority of the trade buyers they transact with in the near term to be foreign, while a further 20 per cent expect the split between foreign and domestic buyers to be 50-50. Only 28 per cent expect to deal mostly with domestic trade buyers.

Globally, China and Japan, Europe and North America are the regions from which most GPs expect non-domestic strategic buyers to originate. This is consistent with GPs domiciled in Asia Pacific with trade buyers in China, Japan and Korea expected to represent over 50% of transactions.

Of particular interest is the expected significance of Japan, reflecting the fact that the strong Yen coupled with sluggish domestic demand is encouraging international expansion. PEs globally, and in the Asia Pacific specifically, expect Japanese buyers to have greater involvement in their exit processes.

Private equity firms based in high growth markets, such as those in Latin America, South Africa and the Asia Pacific, most frequently cited Indonesia as the foreign market with the most potential for private equity investment.

"Whilst the majority of Australian funds are restricted to investing in Australian or New Zealand opportunities, this search for growth is being pursued through supporting portfolio companies internationalise their businesses. Globally, a large number of respondents report that their portfolio companies were seeking assistance with their overseas expansion.

"In Australia, we expect to continue to see GPs assisting their portfolio companies expand overseas whether that be to access Chinese manufacturing capacity, Asian consumers, or the scale of European and North American markets," said Mr Gooley

The drive to harness growth is set against a backdrop of deteriorating sentiment around the global economy. Globally, nearly half of this year’s respondents have either a negative or neutral economic outlook for their portfolio businesses. This is a marked decline from last year’s survey, in which only 38 per cent of respondents projected a negative forecast.

In contrast, Asia Pacific respondents are much more upbeat about the economic outlook for their portfolio companies with 75 per cent reporting a positive outlook as against 50 per cent in 2011.

While respondents globally expect private equity investment activity to increase over the coming year, expectations are more cautious than they were in 2011 and differ significantly from region to region.

New deal activity in the Asia Pacific is still expected to increase with 50 per cent of respondents forecasting greater deal activity, however this is down from 71 per cent reported in 2011. This is consistent with the general positive economic outlook in the region when compared to Western Europe.

Many private equity executives expect both China and India to suffer a decline in deal activity in the next 12 months. This represents a dramatic turnaround in sentiment for both countries. In 2011, 78 per cent of respondents expected investment activity in India to increase, with the remaining 22 per cent expecting it to remain steady. This year, 45 per cent expect it to decline.

Click here to download a copy of the report.

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Click here to download a PDF version of this media release.

For more information about transfer pricing changes, or to speak with Paul Gooley, please contact:

Emma Cooney
National PR Manager
Grant Thornton Australia Ltd
T  +61 2 8297 2426
emma.cooney@au.gt.com

 

Notes to editors:

About Grant Thornton Australia Limited
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