Asia-Pacific to be most optimistic about PE investment in 2015

Private equity deal volumes and average returns are expected to rise in 2015, according to the latest Grant Thornton Private Equity Report, an annual survey of 175 senior industry practitioners around the globe.

The survey reveals that 65 percent of global respondents foresee an increase in private equity investment activities over the next 12 months. GPs in the Asia-Pacific region are the most optimistic respondents, with 68 percent expecting an increase in deal activity, up from 46 percent in the previous year. Optimistic respondents in Europe also climbed to 67 percent from 58 percent, while North America shows a decline, from 58 percent to 53 percent.

The proportion of GPs expecting average returns to increase continues its upward trend, rising to 39 percent from 29 percent and 18 percent, respectively, in the previous two years. However, with increasing entry multiples, the challenge on delivering against this expectation is heightened.

Meanwhile, expectations for an increase in exit activity remain high in 2015, the report showed. About 66 percent of respondents, compared with 64 percent in the previous year, expect levels of exit activity across the market to increase, citing high valuations, improved IPO markets and a positive macro environment as key drivers. Despite this, the respondents foresee more buying than selling in the year ahead, as the volume of dry powder looking for a home rose to about $1.2 trillion in 2014.

Secondary deals on the increase

In the survey, secondary deals are viewed as the second most important source of PE transactions. Over two thirds of respondents believe the volume of such deals will increase in 2015, and 39 percent of respondents view secondary deals as one of the most important sources, ranking second to family or privately owned businesses. The expected increase is being driven by pressure on buying GPs to do deals and selling GPs to generate liquidity. The increasing maturity of the PE market in countries such as India and China has also stimulated further secondary deals, according to the survey.

In the view of buying GPs, businesses bought via secondaries are lower risk assets with better governance, usually with quality management teams that understand how PE works; working with professional sellers can also smooth the due diligence process and result in a higher chance of deal closure. However, GPs caution that acquirers of secondaries need the assets to have adequate remaining growth and value-added potential. There are also concerns that 'savvy' PE sellers may demand higher prices than other types of vendors.

"It is widely believed that it will be difficult to generate a sufficient return from these assets due to the perceived 'higher quality, lower risk' profile. However, in our view, there is an opportunity to exploit the secondary market. The lower risk profile, higher quality perception of secondary transactions implies safer, although less spectacular returns," said Xu Hua, CEO of Grant Thornton China.