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Reuters: Buyout Firms Face More Scrutiny in Asia

HONG KONG (Reuters) – Private equity transactions in the financial sector across Asia are receiving heavier scrutiny from regulators worried about handing control of a regulated entity to a foreign buyout firm.

A panel of financial institutions’ M&A bankers, speaking at the Reuters Global M&A summit in Hong Kong on Wednesday, cited the increased attention toward private equity from Asia’s government officials watching over banks and insurers as a major concern.

The panel also concluded that China’s banks face no immediate pressure to grow through acquisitions. It also discussed the difficulty insurers face in Asia in finding takeover targets.

“I hear frequently from regulators around the region a growing reluctance to approve private equity investments in regulated financial institutions, whether banks or insurance companies, particularly in situations where it involves control,” Willard McLane, managing director at Morgan Stanley Asia Ltd, told the summit.

“I’m not sure this is necessarily a healthy trend. I think private equity has an important place in helping bring capital to different situations in the financial services industry,” he added.

Private equity firms have expanded their presence in Asia during the last five years, despite the difficulties foreign investors often have in doing deals in the region. One third of the $100 billion that buyout funds raised for Asia last year was targeted at China or Greater China, according to data compiler Preqin, up 15.2 percent from the year before.

Private equity investments in Asia, excluding Japan, rose 30 percent last year to $20.13 billion, though the total is still below the $29.5 billion reached in 2007.

Financial industry deals were the second most active globally in the first quarter, according to Thomson Reuters, though such deals in Asia have eluded cashed-up private equity investors.

“Simply what the governments and regulators are looking for around the world is those who come into the market to have long-term commitment to the market as an investor,” said Chad Holm, managing director of Asia financial institutions group at Bank of America-Merrill Lynch.

“Private equity is lumped into the category, maybe for wrong reasons, as short-term players,” he added.

The panelists touched on financial industry themes such as exchange consolidation and nationalism. Among the other views shared were that China banks don’t need to grow through acquisitions, and that while insurance in Asia is booming, available targets are scarce.

“There’s no question insurance in Asia is attractive. It’s not just fast-growing and under-penetrated, it also has the highest margins in the world,” said Charles-Everard de T’Serclaes, Head of Financial Institution Groups, for J.P. Morgan in Southeast Asia.

“One of the ways to grow is M&A, but the problem is obviously that there’s nothing available. Over the last 10 years of insurance deals, there’s only been on average two and a half deals per year in Asia of a size greater than $200 million,” he said. “So the scarcity value of insurance assets is obviously very high.”

William Nichol, head of Deutsche Bank’s Financial Institutions Group (FIG) for Asia Pacific and Japan, noted that insurance is a capital intensive business and that to break into the top five of a relevant market is tough to do without some type of acquisition. Lack of targets in Asia only makes that effort harder.

Nichol cited the October agreement by U.S. insurance company ACE Ltd. to buy New York Life Insurance’s operations in Hong Kong and Korea for around $425 million in cash.

“I think that was partially the driver for someone like New York Life to exit. They were not a distressed company, they are a mutual so there’s no shareholder pressure.

“They are very well capitalized. I think the argument for them, internally, was that they said ‘we’re not going to be top five in any market at any time in the near future,'” Nichol said.

“I think others may come to similar conclusions, but they tend to be people who are in the lower ranks by overall size, because they figure it’s going to be too hard to get to the top of the tree.”

(Reporting by Denny Thomas and Stephen Aldred and Nishant Kumar; Editing by Michael Flaherty and Muralikumar Anantharaman)