Carlyle Group LP (CG.O) expects private equity firms and other investors to increasingly buy control of companies in Asia rather than minority stakes, particularly in China where slowing economic growth is likely to convince more owners to sell.
Private equity firms have seen growth in returns on Chinese investments slow along with an economy which in the second quarter expanded at its weakest pace since the 2008-09 global financial crisis.
To offset the impact of the slowdown, investors have been targeting companies in high-growth sectors such as e-commerce. As the value of such companies soar in line with global trends, investors who usually have to settle for minority stakes are increasingly seeking to have a greater say in their holdings, said X.D. Yang, co-head of Carlyle’s Asia buyout advisory team.
“Fundamental changes are happening in the Chinese economy and in the industries,” he said at the SuperReturn Asia conference in Hong Kong.
“The external environment is creating a situation that control buyouts can generate attractive returns and that trend is rising. That share of the industry is going to continue to rise.”
Buyouts in Asia ex-Japan where investors such as private equity firms buy control of companies rose an average 39 percent annually from 2011 through 2015, Yang said, citing data from the Asian Venture Capital Journal. Last year, the total value of deals reached $60 billion, the data showed.
Control buyouts reached 23 percent of all private equity deals in China last year, compared with 44 percent for the region, the data showed. The total deal value reached $15 billion from just $2 billion in 2011, representing annual growth of 59 percent.
As the economy slows, Yang said, conglomerates might seek to sell underperforming businesses while smaller or family-owned firms might be more willing to relinquish control to deep-pocketed investors. Elsewhere, firms seeking expansion might opt for control buyouts to quickly offset the impact of the slowing economy.
Investors may also be spurred on by increased credit for leveraged buyouts – in China, a relatively new way to finance deals that came to the forefront in 2013, when a Carlyle-led consortium bought display advertising firm Focus Media for $3.7 billion in the country’s biggest-ever leveraged buyout.
“Many years ago there was no leverage finance in China, no Chinese banks were willing to do leverage financing. Because of the Focus Media deal, it made leverage finance a mainstream thing for banks,” Yang said.
Photo: Chinese Yuan notes. Reuters