61% of respondents to KPMG survey of 119 funds have assets in China
China is, and will continue to remain, the market of choice for private equity investors in Asia, says the latest report from KPMG - although Singapore is set to remain a firm favourite.
KPMG's survey this year of 119 private equity funds across the region, titled Private Equity: Implications for Economic Growth in Asia Pacific, saw 61 per cent of respondents saying that they have assets in China.
Coming in second was India - with 37 per cent of respondents saying that they have assets there - followed by Australia and Singapore with 29 per cent, Taiwan with 28 per cent and Japan with 21 per cent.
The survey's least penetrated markets were Vietnam with 10 per cent, the Philippines with 8 per cent and Mongolia with 3 per cent.
KPMG also asked private equity firms to project five years out into the future. In this respect, China was still their prime target market - with an even higher proportion, 74 per cent, saying that they expected to have assets in the country.
India became far more popular with the extended time frame, with 63 per cent. Thirty-eight per cent picked Taiwan, 37 per cent chose Australia and 34 per cent picked Singapore.
'What is significant is that even with the rise of China and India, Singapore should remain attractive as an investment destination,' said Diana Koh, head of the KPMG Private Equity Group in Singapore, noting that even more respondents indicated that they would target Singapore in the future.
Five years on, private equity funds were also likely to diversify their risks - looking at pan-regional investments, rather than those focused on a single country.
In terms of sectors, consumer markets were likely to overtake financial services, telecommunications and media as a key target sector - with a quarter of the respondents saying that they would invest in this sector in five years' time.
Other sectors which were expected to dominate in the next five years include environmental technologies, health care, telecommunications, media and technology.
Ms Koh observed: 'The growing wealth and personal disposal income of the middle class has elevated interest in personal consumption in markets like mainland China and India. Market players are also seeing a bright future for environment technologies amid escalating concerns about sustainable development and global warming.'
Overall, the attractiveness of Asia has increased as an investment location for private equity funds. In 2006, total private funds under management across the region were valued at US$158 billion, up 30 per cent from 2005.
Private equity funds in the region also raised US$32.9 billion in new capital last year - up 39 per cent from 2005, and five times the total just four years ago. Deal volumes jumped 79 per cent in 2006, with a total of 1,495 transactions completed and average deal size was up by 8 per cent to US$41.3 million.
And it is the region's economic growth - particularly that of China and India - that was cited as the key factor driving this interest. Almost all respondents said that the economic potential here was the main attraction, far above other factors such as favourable pricing or dealflow. Eighty-three per cent said that they expected to see deal sizes increase in the next two years.
The growth of private equity in Asia has also had a positive effect in driving economic gains across the region. KPMG's report suggested that private equity is fulfilling an important development function in mentoring entrepreneurs and mid and late-stage managements about operational best practices, transparency and corporate governance, and achieving regional and global competitiveness.
However, with the growth of private equity globally comes growing criticism. KPMG noted that there had been a growing perception that private equity firms saddled their acquisitions with heavy debt.
But respondents in this survey said that leverage was being adopted prudently in Asia and there was an appropriate balance between equity and debt. This could indicate that the US sub-prime crisis would have less of an impact in Asia than elsewhere in the world where deals have been more highly leveraged, the report noted.
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