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Private Equity -- All Aboard?

Submitted by Leo Kolivakis on 10/18/2010 23:06 -0400

SmartCompany editor James Thomson reports, Private equity returns:

Yesterday’s
US-based private equity firm KKR shocked the market by unveiling a
$1.75 billion bid for Perpetual, one of Australia’s oldest and most
respected financial services companies.

For many, the offer is a
signal that private equity is officially back as one of the big forces
in the Australian market. While private equity deals have been slowly
firing up again after the GFC, this is one of the first really big,
dramatic plays.

But it does appear that private equity isn’t just looking at the big end of town. Last week, franchise expert Stephen Giles of Norton Rose revealed
that private equity firms are looking closely at Australia’s franchise
sector, which has proven over the last few years that it can deliver
above-market returns and keep growing through difficult economic
conditions.

Indeed, this morning we have a report on the acquisition of Perth-based franchise chain Chooks Fresh & Tasty by the private-equity based group Quick Services Restaurant Holdings.

The re-emergence of private equity firms is great for entrepreneurs on a number of levels.

Firstly,
with credit still tight from the banks, private equity can provide
entrepreneurs with another option to access growth capital.

Clearly,
the private equity firms have very strict investment criteria (a good
record of profitability, clear growth plans and strong systems are top
of the list) but there will be plenty of growing medium-sized companies
that will appeal.

Secondly, as Leon Gettler writes today in our main feature, the number of entrepreneurs looking to sell up completely is on the rise.

Private
equity could provide these business owners with an escape route. And
if we see a string of big deals, we could also see asset values start
to rise across the board.

Stay tuned – the private equity trend is one to watch carefully.

If
you want to know where private equity is heading, just look at public
equities. As long as global equity markets keep grinding higher, and
M&A activity picks up, you have conditions in place to
bolster PE activity.

And then there is liquidity, plenty of it, from sources like China. In fact, China’s Mr Private Equity explains the new frontier’s hopes and risks:

Victor
Zhikai Gao is staying at the Langham Hotel, down the road from the
Chinese Embassy. Just off a plane from Beijing, and sipping green tea
to stay ahead of his jet lag, he is in London to brief an investment
bank on China’s rapidly developing private equity sector. Although
jaded, he manages to be simultaneously charming and provocative.

Gao
started life as a diplomat, so he feels at home close to the Embassy
on Portland Place. Between 1983 and 1989 he worked as an interpreter to
Deng Xiaoping, before being posted to the United Nations Secretariat
in New York. “I was in London in 1985 with the Chinese Premier when
Margaret Thatcher was your Prime Minister. I met your Queen.”

He
has spent the last two decades working in business. A former China
policy adviser to the Hong Kong Securities and Futures Commission
(1999-2000), he is currently an executive director of the Beijing
Private Equity Association, he chairs an investment firm, and he is
director of the China National Association of International Studies, a
think tank affiliated to the Ministry of Foreign Affairs.

Despite
his international experience, Gao retains a distinctly Chinese
perspective. He is a regular guest on CNN and BBC because of his
ability to explain Beijing’s true intentions to western audiences. He
is back in London to talk about what he calls “the next step in China’s
experiment with the market economy”. China’s financial sector has come a
long way. “In the 1970s we didn’t have any commercial banks. In the
1980s we didn’t have a stock market. This year the Agricultural Bank of
China was floated on the Shanghai and Hong Kong Stock Exchanges for
$20bn (£12.45bn). Onshore,” he emphasises. “No US involvement
whatsoever. Not long ago this would have been unthinkable.”

For
the Chinese, geopolitics and business are interdependent; and at the
heart of this is an obsession with America. Gao reminds me that Goldman
Sachs has predicted China could overtake America as the world’s
largest economy as early as 2027. He concedes that China will remain the
junior power: its per capita GDP a fraction of America’s, and still no
match for America’s military power. But the prospect is nonetheless a
distracting one for China’s elite, and Gao suggests that many in the
Chinese leadership worry whether Washington will stand idly by.

We
track back to 1978, when Deng Xiaoping realised that China couldn’t
get rich on its own and began to open the economy to foreign capital.
Since then, Gao argues, China has survived a series of challenges which
have left it stronger and increasingly self-confident. In 1989, the
Chinese Communist Party survived the collapse of the USSR, becoming the
world’s leading communist regime. In 1997-1998 the Asian financial
crisis washed up against the Chinese economy; when the waters receded
China was left relatively stronger than its neighbours. And then there
was the global financial crisis. “This time it was the blue chips which
suffered tragedy” says Gao, shaking his head. “The US, UK, Germany!”
He accepts that China suffered seriously too, but argues that the swift
action taken by the Chinese state compares favourably with western
governments.

“In America the banks and the government were waving
their dirty washing in public. In China the state just got on with
it”. China’s bank managers received phone calls at the height of the
crisis giving them a deadline in which to lend as much as quickly as
they could, prioritising China’s stressed manufacturing base. The
crisis left Beijing feeling vindicated that state intervention, Chinese
style, trumped capitalism’s invisible hand.

Two
years on, and China’s otherness is demonstrated by its $2.5 trillion
of forex reserves. “Our banks and insurance companies are sitting on
huge amounts of money and they want somewhere more attractive to invest
it”. Which brings us to private equity. Companies like China Life
Asset Management with RMB1.5 trillion (£140.65bn) under management and
the Social Security Fund, a national pension fund managing RMB0.8
trillion, will shortly be allowed to invest 5 to 20 per cent of their
cash in private equity funds.

There has been venture capital and
some private equity in China since the early 1990s, when international
firms arrived to pursue emerging technology, media and
telecommunications (TMT) opportunities. The model was American, China
was the playing field and the exits were all offshore (there are 125
mainland Chinese companies listed on NASDAQ). Few Chinese entities
bothered to understand the intricacies of the underlying structure and
the modus operandi of private equity funds. Now US and European firms
are coming to China to fundraise as they build out their international
and Chinese portfolios, and China is regarded as private equity’s new
frontier. The Beijing Private Equity Association has more than 100
members. Similar organisations in Shanghai and Tianjin have over 100
members between them. Around 80 funds are headquartered in Hong Kong;
their fund managers commute to the mainland to avoid China’s 30 per
cent income tax rate. But Gao expects the centre of gravity to move to
Beijing and Shanghai: “if you are based in Hong Kong you may struggle
to raise a renminbi fund; you will miss opportunities.”

What
we are beginning to see, explains Gao, is private equity with Chinese
characteristics. China’s abundant and liquid capital is unique, as are
the many, constantly diversifying investment opportunities: consumer
products, TMT, health, education. “And just about anything with the
potential to grow a nation-wide franchise” he adds. “As China’s
domestic market just keeps growing, and there is increased integration
of domestic and international markets, China will become one of the
world’s top private equity centres.”

Before I leave him
to sleep off his jet lag we touch again on geopolitics. I ask Gao about
the pressure on Beijing to allow the renminbi to appreciate. “It will
clearly be in China’s interests to one day have a fully convertible
currency” he concedes, but not yet. “In China we are good at building
walls, and China is not yet ready to reduce the walls around its
economy.” Gao tells me about an op-ed he has just read, which estimates
the massive economic, geopolitical and military price the US would pay
if the dollar ceased to be the world’s reserve currency. “Isn’t that
the inevitable consequence of appreciation?” asks Gao, fixing me with
an owlish stare. “Why would this be in America’s interests?” And it
strikes me that history’s emerging winners in the East are just as
confused about what the future holds as us has-beens in the indebted,
anxious democracies of the West.

Does all this mean good times for private equity lie straight ahead?
Not exactly. There remains a considerable amount of economic uncertainty
and banks aren't willing to lend as much as they did to finance mega
buyout deals.

Nevertheless, there is plenty of liquidity out there
to fund private equity funds, and as long as equity markets keep
forging ahead, private equity activity will pick up in the coming
months.

- advertisements -

Wed, 11/10/2010 - 06:47 | 715747 cheap uggs for sale

Tue, 10/19/2010 - 08:14 | 660749 ZackAttack

But instead of a paper airplane made of folded currency, shouldn't the rentier be riding the backs of the unemployed whose former jobs he outsourced to China in his latest merger deal?

Tue, 10/19/2010 - 07:18 | 660676 BigDuke6

All aboard the bernanke put.

Tue, 10/19/2010 - 06:37 | 660651 Ned Zeppelin

MSNBC crawl this am: "Geithner: US will not depreciate dollar to compete with China." or something to that effect, which leaves out the rest of his thought, ". . . but we will do it to cover up the immense landfills full of bad debt hurting our Wall Street boys."

Tue, 10/19/2010 - 06:35 | 660647 mogul rider

That's 1.75 billion USD

1.75 million CDN

Just a point of clarification

Tue, 10/19/2010 - 06:56 | 660660 Leo Kolivakis

Yes, it was a typo in the aritcle, I corrected it this morning.

Tue, 10/19/2010 - 04:51 | 660604 Djirk

Lock and load on a 100 year low interest note, roll up some winners and take market share (80% are of workforce are still fully employed and purchasing), scoop up some "emerging" markets players.

Fortune favors the brave and losing is part of winning.

Tue, 10/19/2010 - 02:44 | 660542 Goldenballs

Private Equity - All abroad.

Tue, 10/19/2010 - 02:26 | 660532 Nihilarian

as long as equity markets keep forging ahead, then private equity activity will pick up

Why would higher equity prices induce buy-outs?

In a normal economy, market growth is predicated on economic growth. In which case, you may very well observe an environment where buyouts occurr with rising equity prices.

In a deflated economy, equity prices tend to reflect poor economic conditions and trade at a very low, cheap, price. This environment also breeds buyouts.

What we have is a bad economic environment with rising equity prices. The buyouts that happen here are with firms that cannot achieve organic growth, and are acting out of desperation, not financial prudence. The only thing these buyouts will likely contribute to is a higher unemployment rate.

Tue, 10/19/2010 - 01:24 | 660478 Poofter Priest

"...said Gao, fixing me with an owlish stare."

So is he asking the question to get us to think about what we are doing wrong?

Or...is he psy ops all over us?

Uh...., yeah Losing the world reserve statue would take away the ability to manipulate the global market.

Unless a new currency is in the loop.

Tue, 10/19/2010 - 01:29 | 660486 Bear

I propose the new global reserve currency be called the Bozo, after all those central bankers who would love to construct it. How soon will we have a singular global central bank (other than the FED)?

Tue, 10/19/2010 - 01:21 | 660474 CustomersMan

Is everyone retarded, or is the $1.75 million by KKR so out of the realm of possibility that anyone off the street would know the number was wrong.

Still I notice all search engine entries with the $1.75 Million entry.

And we trust these people for accurate news??

My fucking word! Is it me, am I over-reacting, but isn't some degree of knowing the subject, required anywhere?????

Tue, 10/19/2010 - 06:55 | 660659 Leo Kolivakis

Everyone should relax, it was a typo in the article, and I corrected it. Billion, not million.

Tue, 10/19/2010 - 01:24 | 660480 Bear

$1.75 million = hyper deflation

$1.75 billion = hyper inflation

Take your pick.

Tue, 10/19/2010 - 01:07 | 660464 gwar5

Regarding Bernannke's rush to devalue the dollar or force China to raise the value of the Yuan.

"...massive economic, geopolitical and military price the US would pay if the dollar ceased to be the world’s reserve currency. “Isn’t that the inevitable consequence of appreciation?” asks Gao, fixing me with an owlish stare. “Why would this be in America’s interests?”

Exactly. Rushing the USD over the cliff is a little too 'Thelma and Louise' for me. The only way it makes sense is if it a bluff or things are already so bad at the Fed it's a runaway train and scapegoats are needed.

I think they're out of control and don't know what they're doing. Ditto in the WH.

Tue, 10/19/2010 - 01:22 | 660476 Bear

How could anyone 'know' what to do. All anyone can do is 'guess' what to do, as we have never been here before and any correct leaning moves are politically nightmarish. So I think the TPTB will just keep kicking it down the road so they can blame their political nemesi. We will see no QE until after the election ... but what the hey, we really don't 'need' one if the markets keep going up and all the QE talk keeps them humming.

Tue, 10/19/2010 - 00:50 | 660444 luckyMiddlebrook

Is that 1.75 billion?

Tue, 10/19/2010 - 00:41 | 660434 tired1

Having a private central bank isn't one of China's problems.

Tue, 10/19/2010 - 00:33 | 660427 doolittlegeorge

Don't forget "the occasional arrest of billionaires who spend the rest of their life in a Chinese prison." Nice places from what I hear. REAL cozy. One moment you're workin' out at the Y facing Kowloon Harbor, the next you'r gettin' worked over by Uncle Zhong at an "undisclosed location."

Private Equity -- All Aboard?

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