The risk of bad deals is rising as competition heats up in Asia’s booming private equity markets, Vinit Bhatia of industry consultants Bain & Co said at the Reuters Summit on Wednesday.
“In China and India, you could argue some of the competition is irrational, said Bhatia.
“It’s really pricing deals out of the market for more traditional, more established players, and that’s a big worry,” said Bhatia, who agreed there was a risk that companies scrabbling around for deals were going to get their fingers badly burnt.
Bhatia’s comments came on the same day as Reuters reported that two former D.E. Shaw and Goldman Sachs Group Inc partners were raising about $500 million for a China-focused private equity fund, to join growing competition for deals in the world’s No.2 economy.
“There is pressure to lower your standards to get deals done, and I think it’s going to become even more important as pressures to lower standards grows, that big firms push to raise their standards,” Bhatia said.
But big funds are also under pressure to show returns to their investors as they prepare for a new fundraising cycle.
“At the global level, 40 percent of funds over $1 billion are under significant pressure to invest because those commitments are going to expire in the next 12-24 months,” said Bhatia.
“If they don’t put the money to work it makes it harder to raise the next funds and the fees go away,” said Bhatia, adding that funds faced the same pressure in Asia and developed markets in the West.
Thomson Reuters data shows $73 billion in dry powder in Asia — money that was raised for private equity investment but has not yet been put to work.
“The discipline that funds are going to have to have is knowing when to walk away because they are sitting on so much dry powder,” said Bhatia.
Asia private equity has seen far fewer high-profile failures, largely because most of the industry’s investments are smaller growth capital injections, rather than the mega-buyouts seen in the United States. and Europe.
Among the bigger recent failures in Asia are U.S. buyout firm Carlyle Group’s investment in Japan’s Willcom Inc — the firm, which provides so-called personal handy-phone systems, went broke in 2010 and was sold to Softbank Corp.
In January this year, Unitas Capital and Teachers Private Capital lost their equity in Yellow Pages in New Zealand, as lenders wrote off NZ$1.05 billion ($777.2 million) in debt and took control of the company.
Bhatia said the industry should not have any trouble putting the funds it has raised to work, as companies grow in size in India and China requiring large growth capital injections, but he predicted that some players would inevitably vanish.
“There will almost certainly be a shake-out in the industry, I’m sure of that. That being said, I still think it’s in the growth phase and so you’re seeing a lot of new entrants coming in every year.”