Asia lags in PE value creation

General partners in Asia need to change the way they work with portfolio companies as gross domestic product growth in the region slows, according to a study conducted by advisory firm AlixPartners and PEI’s Research & Analytics division.

During previous years of strong growth in Asian GDP, growth by expansion at portfolio companies was the major goal, according to the report. However as growth slows, the focus has shifted to operational value creation, which is defined as ‘work that increases the value of a business through meaningful and measurable improvements in operations’.

Private equity firms in the region faced a number of challenges in this respect, however. The survey found that 66 percent of GPs said that Asian private equity firms were behind their counterparts in developed markets in terms of value creation.

“Anyone who has ways to overcome these challenges is in a good position to capture the benefits from value creation,” Masahiko Fukasawa, managing director at AlixPartners and co-head of Asia, told Secondaries Investor. “The situation today clearly provides secondary investors with additional opportunities.”

About 86 percent of GPs surveyed said the reason for this is that minority stakes are relatively common in Asia, making efforts to drive operational change difficult. Differences of culture, language and regulations also made value creation work harder for private equity firms. Challenged public markets in the region have also made public offering exits difficult.

“Given the limited organization size of many investors in the region, the use of outside experts can be a big key for success,” said Fukusawa. An in-depth understanding of the industry structure, its operational details and the key requirements needed to manage talent across various were also crucial, he added.

However, difficulty in finding experienced operational experts was most common challenge GPs faced in value creation work, the survey disclosed. Bringing in expatriates was a solution, but one that is becoming more expensive as both demand and salaries increase.

China was cited in the survey as the most challenging place for operational work. However, this may be changing, with company management teams becoming more open to professional assistance. Meanwhile, India is a patchwork of semi-independent states with varying culture therefore regulation is more challenging.