Cash-rich corporates no longer threats to AsiaPac private equity

They're becoming more of a ''friend''.

According to Ernst & Young, one of the standout trends in their recent survey is that cash-rich corporates will no longer pose the greatest challenge to private equity in Asia-Pacific in the year ahead. Only 40% of respondents chose this option as opposed to 79% in 2012.

“Corporate buyers are becoming less the foe and more the ‘peng you’ – Chinese for ‘friend’ – of private equity in Asia,” said EY’s Private Equity Leader for Asia-Pacific Robert Partridge. “This shift in attitude has developed as corporates are seen as less of a threat in competitive situations and more as potential buyers.”

This in turn saw respondents lean toward trade sales as the exit strategy of choice in 2014. A number of private equity firms across the region, particularly in Southeast Asia, have already benefited from the demand for assets by exiting portfolios to corporates for a sizable profit.

Purandar Rao, Co-Leader for Asean Private Equity at EY observed that exciting times are ahead for private equity in Southeast Asia. “Entrepreneurs and executives across Southeast Asia are increasingly aware of the value and wealth creation opportunities that private equity can bring to their businesses. While deal volumes have been relatively flat, we expect this to pick up in 2014,” he said.

In terms of challenges, 62% of respondents expect overvalued targets to be a major hurdle. This follows an upswing in sentiment from last year, when only 48% felt valuation issues would prove most challenging.

According to 60% of respondents, regulatory issues will also remain a concern for the market, especially among foreign private equity firms new or unfamiliar with local investment landscapes.

Similarly, Asia-based funds are expected to chip away market share previously held by their global counterparts. These funds will be in the spotlight for global PE agendas in the year ahead, with 99% of respondents anticipating that competition in terms of raising capital will be significant. Likewise, 94% said executing transactions in Asia versus non-Asia fund situations will prove challenging for foreign firms.

On a country level, private equity practitioners are still at the base of a significant learning curve, adapting their Western model of investing to the diverse economies of Asia.