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Friday Letter: It’s a start

Asian GPs rang in the New Year celebrating signs of a dissolving exit backlog. But the pressure is still one, because the trend has spread neither far nor wide enough

It may come as a surprise to some, but 2014 was a great year for exits in Asia. After years of wanting realisations from managers intent on raising new money but deterred by poor distributions showing from their previous funds, finally there was movement in the right direction.

The most recent data is certainly encouraging. About $107 billion was realised by Asia-Pacific funds last year, from 476 deals. Calculated by Bain & Company, the total reflects a 110 percent increase on the $51 billion worth of exits of 2013, from 391 transactions.

It is also the largest amount of value realised in Asia since 2010, when $111 billion worth of private equity-owned assets were sold. Back then, the strong exit performance enabled Asia-based GPs to raise a record amount of fresh capital the following year. Now, after their 2014 accomplishments, they’re hoping to repeat that feat.

Note the near-doubling in average exit value, from $130 million in 2013 to $220 million a year later. This was helped along by some big-ticket disposals such as the $5.8 billion joint sale of Oriental Brewery by KKR and Affinity Equity Partners, which gained the global private equity firm a 5.3x return multiple. Another big beneficiary of the benign exit climate was CVC, whose Asian arm generated $2 billion in distributions from a mixture of trade sales and IPOs.

The latter route through to public equity investors was an important driver of the exit flurry, and nowhere more so than in China. Even when discounting the $22 billion IPO of Alibaba, the Chinese e-commerce giant led by internet tycoon Jack Ma, from which numerous private equity funds harvested rousing returns, there is no doubt that the January 2014 reopening of the Chinese IPO market, after a 15-month lock-down, made a significant difference to those China managers that were sitting on a growing pile of unexited portfolio companies.

Bain data showed around $12.5 billion worth of IPOs launched in Asia during 2013, a number that jumped to about $60 billion in 2014 – most of which were China-based – analysts from the global consultant confirmed.

But although plenty of LP money was returned throughout the year, and the exit overhang reduced, there’s still a great deal more to be done before Asian private equity can really declare an all-out victory.

For one thing, not every market in the region has contributed equally to last year’s result. Says Johanne Desssard, a manager at Bain & Company who helped compile the numbers: “Market-wise, frankly, the story was that it was a great exit market for developed countries, such as Japan, Korea and Australia. It was more challenging for some of the emerging markets, like India and Southeast Asia; [China] was the exception.”

Even in those markets that did see plenty of activity, unrealised portfolio backlogs still remain. It’s not a given that momentum will continue to help reduce them further.

And even if it does: big distributions don’t necessarily equate to the big returns that limited partners were told would come out of the region.

Javad Movsoumov, an executive director in the private funds group at UBS in Singapore, warns that Asian returns do not compare favourably with the performance that is being generated elsewhere. He says: “For 2007-2008 vintages in Asia, the top quartile performance is around 10 percent net IRR, where in the US, the same vintage top performers [posted] around 20 to 22 percent.”

If these figures are correct, limited partners who allocate capital internationally will study them carefully. For them, the case for Asia won’t be easily made. And for hopeful Asian GPs looking to garner fresh commitments, therefore, there may still be more to prove before another fundraising frenzy can happen.