Private equity (PE) firms in the Asia-Pacific region are anticipating a busy period for new activity and exits in the coming months, as COVID-19 uncertainty dissipates and M&A deals that were put on hold due to the pandemic are relaunched.
PE deal activity in the region fell in 2020, with total deal value for exits, buyouts and secondary buyouts sliding from US$158.9 billion in 2019 to US$135.1 billion in 2020. As a consequence, high yield bond and leveraged and non-leveraged loan issuance for buyouts in APAC (excl. Japan) also dropped year-on-year, from US$19.6 billion in 2019 to US$11.7 billion in 2020.
This drop in activity was not surprising as the market all but shuttered in Q1 2020. Deal value more than halved from US$50.5 billion in Q4 2019 to US$21.9 billion in Q1 2020—the lowest quarterly total for the region since Q1 2015.
Activity, however, rebounded strongly in Q2 2020, almost doubling to US$40.3 billion, and, after a small dip in Q3 (US$32.5 billion), deal value for Q4 2020 was back up to US$40.4 billion.
PE returns with a vengeance
As their portfolios stabilized, PE firms in the region returned to dealmaking with confidence in H2 2020. Jumbo deals that were agreed in H2 2020 include the US$8.7 billion take-private of Chinese classifieds business 58.com by General Atlantic, KKR and Warburg Pincus in June; the US$5.3 billion take-private of 51job by DCP Capital Partners in September; and Blackstone’s US$2.3 billion carve-out of Takeda Pharmaceuticals’ over-the-counter division.
That momentum is showing signs of continuing, with CVC agreeing to acquire Shiseido’s personal care business for US$1.5 billion in February 2021 and other PE funds putting plans in place for their franchises to increase deal flow in APAC in 2021. For example, KKR made a number of high profile hires to its Japan team, in anticipation of a wave of post-COVID-19 deals in railways, manufacturing and real estate, while the Carlyle Group recruited former HDFC Bank chief executive Aditya Puri as an adviser to its Asian business and EQT Partners announced it is establishing an office in Tokyo.
The market is also set to be lifted by the surge in fundraising for special purpose acquisition companies (SPACs), which raise money in stock markets to invest in M&A targets. In a trend carried over from the US, close to US$3 billion has flowed into SPACs targeting Asian deals this year, according to Dealogic. Stock exchanges in Indonesia, Hong Kong and Singapore have all announced plans to explore setting up SPAC frameworks on their bourses.
Financing available for deals
Asia’s capital markets are well-placed to support this anticipated uptick in PE deal volumes and lenders in the region remain open for business when it comes to buyout deals.
As was the case among PE firms, banks paused to conduct health checks on their existing loan books through the initial phase of the pandemic, and process covenant waiver and forbearance requests from borrowers that were adversely impacted by lockdowns.
Despite this disruption, issuance for buyouts in 2020 was still the third-highest annual total for the region since 2015. As soon as deal activity resumed in H2 2020, lending levels increased steeply, almost quadrupling from US$1.4 billion in Q2 2020 to US$5 billion in Q3 2020. Lenders were ready for opportunities to fund deals, as illustrated by the US$2.5 billion-equivalent US$/Chinese yen loan secured to fund the 58.com take-private.
Unlike markets in North America and Europe, which have been characterized by highly borrower-friendly documentation despite COVID-19 uncertainty, lenders across APAC have generally been able to continue including leverage and other maintenance financial covenants in loan documentation. The confidence given to lenders by these protections, together with the deep pools of balance sheet capital available to them for lending, have meant banks continue to deploy capital.
Direct lending keeps climbing
PE managers have also benefitted from the emergence of the private debt asset class in APAC.
Direct lending is still nascent in the region when compared to the deeper markets of the US and Europe, but private debt players are entering the Asian market in increasing numbers. The options available to buyout investors in what has traditionally being a bank-dominated market are broadening.
For example, in a survey of 60 Asian mid-market PE firms and 20 private credit lenders conducted by Debtwire Par at the end of 2019, 68% of respondents said loans and financing from non-traditional lenders were critical for their businesses and 82% said they would seek financing from non-bank lenders in the year ahead.
Direct lending has continued to gain traction in the region despite COVID-19. PAG, one of Asia’s largest domestic private capital firms, closed its fourth private debt fund on the vehicle’s US$1.5 billion hard cap, while large international institutions, such as the US$34 billion Iowa Public Employees’ Retirement System, have started to look for opportunities to extend their allocations to include Asian private credit managers.
Private debt investors have been able to win deals by offering higher leverage multiples than those available from banks, and have also benefitted from restructurings and reforms across China’s banking sector, which has opened up opportunities for direct lenders to gain market share as some banks focus on capital preservation and protecting balance sheets.
As Asia’s dealmakers get back to business in 2021, the deal financing options open to them will be wider than ever.