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Take control

10 October 2016 By Quentin Webb

Asia’s buyout barons are too quick to hail a new era. One top dealmaker says the region is finally giving up its heavy reliance on minority investments and moving towards full-blown takeovers. That would be great news for a private equity industry flush with capital. But a profound shift could be some time coming.

Carlyle’s X.D. Yang told the recent SuperReturn Asia conference in Hong Kong that regional “control buyouts” leapt to $60 billion last year, up fourfold in four years, and would keep gaining market share. They made up 44 percent of the deals by value, up from 23 percent in 2011.

The argument rests on two pillars. First, tougher economic times make the second generations of founding families more open to an exit, or to shedding divisions. The same goes for distant outposts of multinationals and for businesses owned by smaller investors. Second, an increasingly sophisticated market means buyers can tap Western-style leveraged buyout (LBO) financing, and access a deeper talent pool to run the businesses they buy.

There has certainly been a flurry of corporate carve-outs. Last week saw two big deals worth in the region of $1 billion each from Wharf Holdings and Hong Kong-based Bank of East Asia. McDonald’s is also selling restaurants in North Asia.

But this is a lumpy market. And some previous drivers of activity now look spent, like the management buyouts of Chinese outfits languishing on U.S. bourses. So the overall figures are unlikely to follow a smooth upward curve.

Asia’s business dynasties also still typically keep tight control of firms, and are reluctant to cede ownership. Meanwhile, others who have experience recruiting top executives to run portfolio companies say that it remains challenging to find good talent, especially in China.

A sustained LBO boom would help shift the $110 billion in unspent “dry powder” that data provider Preqin says Asian-based PE and VC firms are hoarding. Control deals usually mean bigger sums, plus more sway over a company’s future. It also makes any exit easier. So in theory, a shift from the status quo would be fantastic. Reality might prove somewhat harder to control.

 

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