Asia’s Growing PE Appeal

An aggressive push into Asian markets is key to KKR’s global expansion strategy.

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Joseph Bae has been busy since landing in Hong Kong in 2005. Not only did he launch Kohlberg Kravis Roberts & Co.’s operations in Asia, he also built the team from two executives in Hong Kong to 92 in six offices across the region. Despite the global economic slump, private equity firms like KKR are pushing to expand across Asia. Chief among their target markets is China, where some are establishing yuan-denominated funds with local partners.

Today, 22 percent of private equity funds raising money have Asia-Pacific as their primary focus, up from 9 percent in 2008, according to research firm Preqin. Asia now rivals Europe for investor dollars, with the latter accounting for 23 percent of fundraising in 2011, says Preqin.

KKR’s Bae manages the $4 billion KKR Asian Fund and the $1 billion KKR China Growth Fund. In total, he’s helped the buyout firm to invest or commit to invest a total of $4.5 billion in 22 companies, nearly one third of the 74 portfolio companies KKR currently has stakes in around the globe.

“The Asia-Pacific region is the fastest-growing part of KKR’s private equity business,” says Bae, the managing partner for Asia, who joined the firm in 1996 and previously worked for Goldman Sachs as a banker in principal investing. “KKR sees opportunities in much of Asia for the foreseeable future. There are compelling domestic consumption plays in many Asian markets.”

With some 70 percent of KKR’s $4 billion Asian Fund already committed, the firm expects to begin the marketing process for its successor soon. Bae refuses to say how much KKR expects to raise for its second Asian fund, but sources who asked not to be identified say the firm is in the process of raising as much as $6 billion in 2012 for Asian investments.

Despite having billions of dollars focused on Asia, KKR is playing an aggressive game of catch-up in the region. Carlyle Group has more than $10 billion in funds invested in some 100 companies since opening in Asia a decade ago. In 2010, Carlyle established a yuan fund with Shanghai’s Fosun Group, with each partner contributing the equivalent of $50 million to the Fosun-Carlyle (Shanghai) Equity Investment Fund. In addition, Carlyle and the city of Beijing have set up the Beijing Carlyle Investment Center limited partnership, with the target of raising 5 billion yuan. “Asia is one of the most attractive destinations for investment,” says Carlyle Group managing director Wayne Tsou, who heads Carlyle Asia Growth Partners.

Since 1994, Texas-based TPG Capital has launched five funds totaling more than $6.6 billion and invested in 57 companies. TPG is in the process of raising two 5 billion-yuan funds, both in partnership with municipal investment companies for the cities of Shanghai and Chongqing.

Although KKR won’t comment, sources say it’s looking for a partner with which it can launch yuan funds. So far, KKR has invested in sectors that include retail, logistics, telecommunications and manufacturing. In mid-December, KKR China Growth Fund announced it was investing $60 million in China Outfitters, a leading menswear retailer. Bae cites Oriental Brewery Co., South Korea’s second-largest beer producer, as an example of KKR’s Asia investment strategy. Since KKR and Affinity Equity Partners acquired the brewery for $1.8 billion in 2009, it has grown its market share by 1.8 percentage points, to 42 percent, and its volume by 4.4 percent.

KKR’s strategy is to take stakes in market-leading companies and expand the businesses into new markets. “KKR sees increasing growth opportunities in Southeast Asia, where we can partner with successful entrepreneurs who want to grow their businesses,” Bae says. “This is especially true for developed markets such as Japan.”

Asian equity capital markets were hit by global volatility in 2011, with issuers raising $172.6 billion in the first three quarters, down 31 percent from the same period in 2010, according to research firm Dealogic. China has been a challenge for Western investors: The environment is opaque, and until ten years ago the entrepreneurial pool was small. The government set up policies making it more difficult to invest with just U.S. dollars, requiring investments in yuan, which are difficult to obtain because of exchange controls. Many firms are looking for local partners to raise renminbi funds. The Asian financial crisis of 1997–'98 discouraged some investors, but like KKR, they’re returning. The prospects of higher regional growth in Asia relative to the rest of the world mean there will be plenty of exit opportunities for private equity investors.

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