Grant Thornton: Private equity in Asia Pacific set for buoyant growth

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1 Press release Grant Thornton: Private equity in Asia Pacific set for buoyant growth 26 January 2015 Hong Kong Private equity firms based in the Asia-Pacific region are the most optimistic about deal activity in 2015, according to the fourth edition of the Grant Thornton Private Equity Report, an annual survey of 175 senior industry practitioners around the world. Of those surveyed, 68% of firms in the Asia-Pacific region expect an increase in the number of deals in the next 12 months, up from 46% in the previous year. Asia Pacific recorded the biggest change in sentiment when compared with Europe and North America. DO YOU EXPECT PRIVATE EQUITY INVESTMENT ACTIVITY IN YOUR COUNTRY TO INCREASE, DECREASE, OR STAY THE SAME OVER THE NEXT 12 MONTHS? (%) One reason for higher expectations is exit activity, which is expected to increase in the coming year. Two-thirds (66%) of the firms surveyed around the globe said they expect exit activity to increase, up from 64% in the previous year. This will largely be driven by higher valuations, more interest in initial public offerings and a positive macro-economic environment. At the same time, firms are expected to buy rather than sell assets as they anticipate a strong recovery in the global economy. We have China to thank for much of the optimism in the region. Its macro economy has been on an upswing over the past year and the significant growth in industries such as technology, media and telecommunications (TMT), energy and healthcare has led to the strong performance in the private equity markets both in China and Hong Kong, said Barry Tong, advisory partner at ( Grant Thornton ). However, as the competition

2 heats up for private equity deals in this region, the real challenge for buyers lies in finding quality deals at good prices in face of increasing competition. Meanwhile, firms expect average returns and entry multiples in the coming year to remain positive, while transactions in the secondary market will become more prevalent among private equity firms, according to the study. Buying Well in a Crowded Market Globally, 79% of private equity firms say they are either influential or very influential when it comes to how much sway they have over deal prices. A majority of firms surveyed said they were willing to pay a premium for deals. In China and Hong Kong, for example, 86% of private equity firms said they were willing to pay a premium for businesses acquired through the secondary market. Growth potential is most often cited as the key factor for paying a premium, according to the study. More than half, or 56%, of private equity firms identify themselves as growth investors rather than value investors, in a reflection of the increasingly competitive landscape they operate in. In China, 40% of the firms surveyed said they were growth investors, while 20% said they were value investors. Another 40% said they were a combination of both. When selecting a company to invest in, there is a variety of factors to take into consideration but the important questions to ask are which is the right company?, what is the right price? and when is the right time to buy? said Eugene Ha, advisory partner at Grant Thornton. It is also important to note that Asian companies value the opportunity to work with professionals who can ensure the growth of the business rather than sell out to the highest bidder. Secondary Deals Here to Stay The study further shows that deals in secondary market have grown in importance as a source of private equity transactions globally. More than two-thirds, or 68%, of respondents believe the number of these deals will increase in 2015, and 39% of respondents view secondary deals as one of the most important categories of deals, ranking second to family or privately owned businesses. Historically, Chinese private equity firms have shown a preference for the IPO exit approach, but on the heels of the cooling IPO markets in China and Hong Kong last year, firms turned to channels like secondary transactions as well with increasing maturity of the PE market, Barry Tong said. Another factor driving this trend is the view that businesses bought through secondaries are lower-risk assets with better governance, and on top of that are led by management teams that understand how private equity works. However, acquiring companies through secondary transactions does not come cheap. Fifty-eight percent of firms globally and 86% in China and Hong Kong have a preconception that private equity firms pay higher multiples for businesses acquired via secondary transactions.

3 Post-Investment Management Issues is a Potential Deal Breaker Even though deals remain a key driver of recovering returns on an investment, the study shows that business performance, while being held in a portfolio, plays an important role as well. Twothirds of private equity firms surveyed highlight the importance of an improvement in a portfolio company s performance, while only 2% highlight arbitrage as a key driver of value. The significance of mergers and acquisitions as a growth driver has fallen, reflecting a shift in focus to organic growth and the realisation of high valuations. Firms are most likely to walk away from a deal after due diligence because of management issues, high valuations and a lower-than-expected growth outlook, according to the study. Much of what defines a good company comes down to the effectiveness of the management team, Eugene Ha explained. In a competitive environment, being able to accurately assess management s ability to implement the post-acquisition plan is a vital part of investment decision making. The Way Forward Globally, the study identifies increased competition and pricing as key issues for private equity firms in the coming year. The markets in China and Hong Kong are also likely to face regulatory challenges. That said, the growing number of investment and sector-specific opportunities in the region, coupled with higher disposable incomes and an increased level of consumerism in Asia Pacific, will offset these potential hurdles, said Barry Tong. Within the wider region, private equity deals will see strong growth in emerging economies in Southeast Asia, where global investors are now willing to commit greater sums, particularly across industries like construction, infrastructure, and food and beverage, to tap into the region s fast economic growth, he added. ends

4 Further enquiries, please contact: Eugene Ha T E [email protected] Barry Tong T E [email protected] Mavis Tsoi T E [email protected] Kris Cheung Bite T E [email protected] Bonny Wang Bite T E [email protected] Notes to editors About Grant Thornton Global Private Equity Report 2014/15 The fourth annual edition of the Grant Thornton Global Private Equity Report surveyed 175 top executives from private equity firms around the globe. This year the study focused on the themes of buying well in today s market, and the role that secondary buyouts are playing in this challenging but fast-moving environment. About is a member firm of Grant Thornton International Ltd (GTIL). The firm is fully integrated with Grant Thornton China and be part of a network of 20 offices providing seamless access to around 160 partners and 3,000 professionals across mainland China and Hong Kong. For more information visit GTIL is one of the world's leading organisations of independent assurance, tax and advisory firms. These firms help dynamic organisations unlock their potential for growth by providing meaningful, actionable advice. Proactive teams, led by approachable partners in these firms, use insights, experience and instinct to understand complex issues for privately owned, publicly listed and public sector clients and help them to find solutions. More than 38,500 Grant Thornton people, across over 130 countries, are focused on making a difference to clients, colleagues and the communities in which we live and work. For more information visit All rights reserved.

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