A record $6 billion Asia fund announced by US private equity firm KKR & Co on Wednesday will be deployed at a time when an economic slowdown and emerging market sell-off has knocked the overall value of Asia Pacific corporations to historic lows.
While the market volatility should offer KKR opportunities to buy low, the record of the private equity industry in Asia shows that investing in the region is not as easy as it seems.
Regulatory hurdles, cultural obstacles and wild market swings have forced global buyout firms to swallow smaller investment returns than they hoped, with the exception of a few home run deals.
But KKR, a storied firm that pioneered the leveraged buyout back in 1976, has managed to find success in Asia even after arriving later than rivals.
The firm has invested and exited China Modern Dairy Holdings Ltd, Singapore tech firm Unisteel, Japanese recruitment firm Intelligence, and remains invested in South Korea beer and baiju spirit maker Oriental Brewery.
That success has encouraged investors to return to KKR's second Asia-focused fund in droves, despite companies across the region facing a shortage of available money amid concerns of credit tightening.
"In private equity, you can make a lot of money in horrible macro environments," said Doug Coulter, head of private equity for Asia Pacific at LGT Capital, which allocates money to private equity funds. He was speaking at a Hong Kong Venture Capital Association event last month.
Most private equity portfolios have a few investments that may prove to be more difficult than expected. For KKR, the stake it purchased in Chinese investment bank CICC looks to be under pressure. The bank, once China's top investment bank, has steadily lost market share since the KKR deal, hit by tough competition and a steep slowdown in Chinese stock issuance.
Patchy Performance
The MSCI Asia Ex-Japan index is trading at 1.4 times book value, 25.4 per cent below its 10-year median value, according to data from Thomson Reuters Datastream. The index's price to earnings ratio is also at historic lows. (To see a graphic click link.reuters.com/nej59t)
Investors who allocate money to private equity firms were quick to commit to the last round of Asia private equity funds raised in 2006 and 2007, though the patchy performance of that era has left the investors, known in the industry as limited partners, more selective.
Thus the low prices on offer have not translated to an easy fund-raising climate.
TPG Capital, which started raising a $5 billion fund around the same time as KKR, is still on the road raising money, and is expected to close short of its target, according to people familiar with the matter.
Carlyle is also still in the process of raising a $3.5 billion fund that will be its fourth for the region, sources have previously told Reuters. The third fund, closed in 2010, was $2.55 billion.
KKR's ability to raise a large fund relatively quickly was due in part to the performance of its first Asia fund, according to private equity investors who spoke to Reuters.
The California Public Employees' Retirement System, the largest US pension fund better known as CalPERS, has invested $237.5 million in cash into KKR's first Asia fund, according to the CalPERS website, after committing $275 million to it in 2007. So far, CalPERS' net internal rate of return on the fund stands at 13.5 per cent, CalPERS says.
By comparison, CalPERS has invested $314.2 million in cash into TPG Asia's fund V, after committing to $375 million that same year. So far, the pension fund has earned a net internal rate of return (IRR) of 0.3 per cent, according to the website.
KKR is ahead of peers in Asia, though Affinity Equity Partners - an Asia focused private equity firm -- earned CalPERS a 16.5 per cent net IRR on a $125 million investment into the 2007 Affinity Asia Pacific Fund III.
The wind appears to be at the back of KKR's Asia team in the current financial climate, as a drop in initial public offerings and bond volumes across the region means corporations have fewer options when it comes to raising cash.
"There are so many more interesting transactions you can do today in the environment we're in because there are challenges," said Derek Sulger, founding partner of China focused private equity firm Lunar Capital Management, also speaking at the HKVCA event.
The per ception of Asia's growing investment opportunities has kept money flowing to the buyout industry, with 22 per cent of the global total of private equity funds being raised as Asia-focused, compared to 21 per cent as Europe-focused, according to data provider Preqin.
Asia II
KKR has been actively scouting real estate investments in China, according to banking sources. Those investments could be made from the firm's global real estate fund, or its second Asia buyouts fund.
KKR has also developed a credit lending strategy in India, which it hopes to extend to other countries across Asia, although the firm cannot lend from the new Asia buyouts fund.
Lending directly allows KKR to develop relationships with companies which can lead to buyout opportunities further down the road, according to a source familiar with the strategy.
KKR was founded in 1976 by two cousins, Henry Kravis and George Roberts, and Jerry Kohlberg, after they worked together at Bear Stearns. Kohlberg left the partnership early on, but the firm went on to pioneer the business of buying a company on borrowed money, restructuring it in certain cases, and selling it later for more than the cash invested.
KKR, which went public in 2011, was immortalized in the book and movie "Barbarians at the Gates", which chronicled the takeover battle for US conglomerate RJR Nabisco.
The Asian II Fund follows the $4 billion Asia fund it raised in 2007 and a $1 billion China Growth Fund in 2010, KKR said in a statement. The New York firm says it has invested more than $5 billion in Asia since 2005, with its regional portfolio of 30 companies employing around 100,000 people.
KKR has invested in tech, consumer and financial businesses across China, Singapore and South Korea since it started its first Asia office in Hong Kong in 2007, led by Korean-American Joseph Bae, who remains in charge.