June 19, 2017 / 7:35 AM / a year ago

Asia’s buyouts are priced for unlikely perfection

HONG KONG - (Reuters) - Nosebleed prices on Asian buyouts leave little room for error. The region is awash with private-equity money. Yet big targets are relatively scarce. Acquisitions, especially in ultra-pricey China, will only work out for the buyers if companies can grow fast, and market multiples hold up, for years to come – an unlikely combination.

A general view of Shanghai's financial district of Pudong is seen in Shanghai, China April 4, 2017. REUTERS/Aly Song

Earlier this month, KKR closed a record $9.3 billion Asian fund. Morgan Stanley is among others looking to raise fresh capital for regional buyouts, according to the Wall Street Journal. The new money will add to the existing supply-demand imbalance. Asia-Pacific fund managers ended last year with $136 billion of spare capital, according to Bain & Co.

Smaller, inexperienced firms can be undisciplined, especially in China. Meanwhile, it’s hard to find opportunities that include control of the companies concerned, since many are in the grip of tycoons or governments.

The result is that deals become costly. The average enterprise value in Asia-Pacific buyouts climbed to 17 times EBITDA last year, according to Bain’s research, versus roughly 10 times that measure of profit in the United States. In China, Mergermarket reckons private-equity investments since 2014 have averaged an eye-watering 26 times trailing EBITDA. Excluding sell-offs and purchases of minority interests, that figure falls to a still punchy 18 times.

Graphic: Eastern premium: tmsnrt.rs/2rDiubh

Suppose a U.S. leveraged buyout is priced at 10 times EBITDA, and an Asian one is struck at a 17 times multiple. Say each outfit raises debt worth six times EBITDA and writes an equity cheque for the rest. Then suppose the owners sell after five years at the same respective multiples, having repaid half their borrowings. For the American LBO to deliver a 20 percent annualised return, the company’s operating profit must increase just 5 percent per year, Breakingviews calculates. For the same return, the Asian deal requires 12 percent annual growth.

That is not wholly crazy. China and many other Asian economies are expanding faster than the United States, and some deals involve fast-growing technology firms. But any slowdown could crimp profit. Lofty multiples may not last, either – investors’ enthusiasm and resources wax and wane. For the hypothetical Asian LBO to generate the same return with an exit at a reduced 12 times EBITDA multiple would require sustained 20 percent annual growth. No wonder KKR, for one, seems keen on slower-growing but cheaper Japan.


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