Private Equity's Job Is Made Doubly Hard by Tech in Asia

(Bloomberg Gadfly) -- Private equity firms have a bone to pick with technology companies: Stop competing with us for deals.

From Singapore to India, rivalry is mounting for coveted assets.

It's little wonder. The likes of Alibaba Group Holding Ltd., SoftBank Group Corp. and Tencent Holdings Ltd. have deep pockets and plenty of patience. They invest in firms such as Paytm Mobile Solutions Pvt., Lazada Group SA and Ola to increase usage of their own apps, or sometimes just to kill the competition. Profitability, a key concern of private equity firms, goes out the window when the objective is eyeballs.

Someone should let the world's pension funds and family offices, the main investors in private equity, know. Fundraising for Asian targets continues apace, even as dry powder, or unspent capital, reaches record highs.

KKR  & Co. in June raised $9.3 billion for its third Asia fund, amassing the biggest ever pool by a private equity firm in the region. Carlyle Group LP is also raising money, as is China's Hillhouse Capital Management Ltd.

If competition from tech companies wasn't enough, private equity firms' own investors are getting in on the act.

Increasingly, pension and sovereign wealth funds are seeking to co-invest in deals. That is, they put a smaller sum of money into the fund proper, and then demand a first look at anything the private equity firm is considering. If they also invest in a company directly, they get a clear return plus they're lowering the management fees they have to pay.

Singapore's GIC Pte this week banded with Carlyle to buy Akzo Nobel NV's specialty chemicals unit, for instance. State-backed Chinese funds are also ramping up their exposure offshore, particularly in hot areas such as healthcare. Last May, Citic Capital and Wuhan, Hubei province-based Humanwell Healthcare Co. bought into Australian company Ansell Ltd.'s condom business.

Private equity operators can console themselves that, in the case of tech behemoths at least, they're working to their own agenda rather than trying to improve a target's financials. Tencent just wants to expand its WeChat messaging platform while Alibaba is on a mission to grow its own ecosystem. Perhaps they'll lose interest and move onto other areas like bricks and mortar, where private equity firms still have an edge.

As family-run firms find their children don't want to take over the business, more assets will come up for sale. And returns at present aren't too bad.

Five-year funds focused on the region are paying about 12 percent, according to Cambridge Associates LLC. That's slightly less than in Europe or the U.S. but in Asia, the discrepancy between outperformers and laggards is more pronounced, according to Johanne Dessard of consultants Bain & Co.

As competition from tech giants increases, the trick, more than ever, is backing the right winner.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

©2018 Bloomberg L.P.

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