Published June 24, 2009

Private equity players sniff for deals again

This time they're on the lookout for defensive sectors instead of riskier plays

By OH BOON PING

	Email this article
	Print article
	Feedback

(SINGAPORE) After enduring some hard knocks, private equity (PE) players are on the hunt again. The difference is that now they have set their sights on defensive sectors, instead of the riskier and cyclical industries.

Hot spots: Healthcare and renewable energy. With valuations now at attractive levels, deals which were shelved earlier are being rekindled

For example, the Carlyle Group's US$500 million Middle East and North African fund is seeking opportunities in healthcare and pharmaceuticals, while Altor Equity Partners recently took medical devices company Pulse Medtech private for US$200 million.

Also, US private equity firm Welsh, Carson, Anderson and Stowe closed its latest fund, which took out a majority stake in GeoDigm, a dental implants products supplier.

'Private equity managers are still actively evaluating deals despite market constraints,' said Ciro Ahmad at private bank RBS Coutts, which offers investment in private equity funds as part of its wealth management services.

According to Vijay Sambamurthi, whose law firm Lexygen has represented a number of private equity players in India, valuations are now down to attractive levels and interest in deals which were shelved earlier 'is now being rekindled once again'.

In the second half of 2007, PE activity screeched to a halt, after liquidity dried up in the credit markets. The Singapore market, which earlier saw a number of tech companies taken private in the first half of FY07, now sees waning interest in its corporates.

Instead, industry observers see a marked shift in interest away from the information technology (IT) and business process outsourcing (BPO) segments towards healthcare and pharmaceuticals.

'IT and BPO continue to be interesting, but they are just not as hot as before,' said Mr Sambamurthi, adding that businesses in these segments have been hit by fluctuations seen in the foreign exchange market.

Instead, the corporate hunters favour the healthcare, drugs segments and even infrastructure sectors for their diversification benefits.

Also, Anil Ahuja, regional head of British private equity firm 3i, told BT that he expects increased investments not just in healthcare, but also in the financial services segment which is 'undergoing tectonic transformation, with increased demand for intense governance, which PE provides'.

In 3i's case, it recently pumped in some US$161 million in Krishnapatnam Port Company, and divested a 11.32 per cent stake in China's hotpot restaurant chain, Little Sheep Group.

The other sectors that should attract more interest include education, professional services and even renewable energy. For example, Barings Private Equity recently spent US$100 million to buy a significant minority stake in architectural design services business RSP Design Consultants (India), while a fund led by Olympus Capital injected US$55 million into Orient Green Power, which is in the renewable energy business.

Across the region, China and India continue to attract strong interest from PE players following the robust volumes seen last year. In 2008, China showed an 85 per cent jump in its fund pool to just over US$38 billion, while India showed almost 62 per cent growth to nearly US$26 billion.

For the first four months of this year, both markets attracted a total of around US$7 billion worth of investments, while only US$260.2 million poured into Singapore over the same period.

On when the sector may see a return to the strong volumes in 2007, the industry watchers said that much depends on the financial conditions, and also the impact of new mark-to-market rules imposed on the private equity firms.

The 'fair value' accounting, which took effect in the United States last year, requires companies to value assets at current comparable prices. Given the volatility seen in the market, this means that the industry could see significant mark down on the value of their portfolios.

Mr Ahuja said that it is difficult to predict when the market will recover, but 'what is certain is that the focus and models will change, including financing methods and compensation structures

'There is no doubt that PE will remain an active form of investing given the value of active partnership and superior corporate governance.'

Indeed, others feel that the use of growth capital - equity investments in mature companies without a change of control of the business - will become more prevalent, especially when credit is scarce, while deal sizes should be a lot smaller compared with those seen in the last bull run.

'I will be very surprised if I see a deal that is worth half a billion dollars or more,' said Mr Sambamurthi. 'There will be deals, but they are mainly in the range of US$25-50 million, and maybe a few worth between US$75 million to US$100 million.'

As valuations are poor, investment exits could slow in the near term, but this should not be of great concern to investors as private equity by definition is a long-term 'buy and hold' investment, said RBS Coutts.

Separately, 3i has reportedly pulled the plug on its Franklin Offshore stake sale, after bids for the stake came in below expectations.