PE buyouts are back, bankrolled by Asian lenders

Buyouts are back in Asia, with leverage for PE deals increasingly coming from banks in the region, noted participants at the Borrowers and Investors Forum in Hong Kong yesterday.

The financial crisis was once regarded as the end-game for large leveraged PE deals globally, as major investment banks were forced by regulators to reduce risk on their books.

However, leveraged buyout activity lives on, albeit in different guises, such as PE-led privatisations of listed Chinese companies that are thought to be undervalued.

“We’re definitely seeing more and more buyout deals,” Frankie Fang, who heads the Beijing office of fund-of-fund LGT Capital Partners, told the conference, which was hosted by Harmarket Media - publisher of three financial titles in this region including AsianInvestor.

While Australia and Japan have traditionally been Asia’s biggest markets for buyouts, given their maturity, a growing number of deals are coming from China.

“We’re seeing much more control transactions in China,” says Lindsay Chu, head of HSBC’s financial sponsors group in Asia Pacific.

Among them are a growing number of PE-led privatisations of mainland listed firms, with the model case being Focus Media. The mainland ad company was delisted from Nasdaq last year after a consortium comprising Carlyle Group and a handful of China PE firms acquired it for $1.75 billion in the largest mainland leveraged buyout deal to date.

“What’s fuelling that is banks in Asia are increasingly, slowly but surely, getting more comfortable with [such] financing structures,” says Chu.

A case in point, Chu notes, is Carlyle’s $1.93 billion acquisition of security business ADT Korea, which is being backed primarily by South Korean banks.

Debt financing for the all-cash deal – announced early this week – has been arranged through a banking syndicate comprising Korea Exchange Bank, Kookmin Bank, Industrial Bank of Korea, Korea Investment and Securities and UBS.

However, it does not necessarily signal a trend of local banks backing a string of  leveraged buyouts (LBOs) by global PE giants, say panellists.

LBOs are typically limited to specific sectors in certain countries. Deals in South Korea and Japan tend to be centred around cable companies, while in Southeast Asia they usually involve communications tower operators, says Fang.

“In China, it’s consumer deals. We think Focus Media set a good stage for fellow Chinese companies, because historically there were no LBOs in China,” adds Fang, who oversees LGT’s investment and business development activities in the mainland.

“Local banks have to become very comfortable with the LBO structure,” says Fang. “They have to realise it could be a good deal for them” if they select the right deals.