KKR Emerging as Asia Buyout Winner Beating Carlyle, TPG

KKR & Co. is emerging as the global private-equity winner in Asia, beating rivals Carlyle Group LP and TPG Capital in the performance of funds started since 2006 and their latest money-raising efforts.

KKR’s first Asia fund, a $4 billion pool from 2007, is producing a 14 percent net internal rate of return, according to a regulatory filing. The New York-based firm, run by Henry Kravis and George Roberts, plans to hit the $6 billion target for its second Asia fund by June, after beginning marketing last year. It’s the fastest finish for a pool its size in Asia, while Carlyle and TPG have been slower to gather fresh capital.

“The fundraising success shows investors’ endorsement of KKR’s team, strategy and track record in Asia so far,” said Alice Chow, a Hong Kong-based senior adviser at FLAG Squadron Asia Ltd., which invests in funds and makes direct private-equity investments.

Carlyle’s 2006 and 2008 Asia funds returned 8 percent and negative 2 percent annually as of Dec. 31, according to the Washington-based firm. TPG’s $3.8 billion fund from 2008, its fifth in the region, was marked at 1.1 times invested capital at year-end after falling below cost in the third quarter, according to a person with knowledge of the matter who asked not to be identified because the firm doesn’t disclose performance. KKR’s 2007 fund had a 1.8 multiple at Dec. 31.

More Selective

Being seen as a success is critical as global investors have become more selective about which firms to back at the same time they’re allocating more money to Asia. The Asia-Pacific region’s share of global private-equity fundraising almost doubled to 15 percent last year from a decade ago, totaling $43.9 billion, according to Zug, Switzerland-based Capital Dynamics AG.

This shows “a clear trend of rising allocations to the region,” said Ivan Herger, head of research at the $17 billion private-equity manager. The number of firms in the region more than doubled to 3,100 last year from a decade ago, according to the Asian Venture Capital Journal, which tracks the industry.

“Take a look at where the money is going and which of the funds raised more money globally,” said Sebastiaan van den Berg, a managing director at HarbourVest Partners (Asia) Ltd. in Hong Kong, an investor in private-equity funds. “If that’s a measure of perceived strengths by the global investors, it’s KKR which is on top.”

Targeted China

KKR has investments in 28 companies around Asia, including Japan, India and Australia. About half the deals since 2009, when asset prices started falling after the global financial crisis, have targeted China.

“There’s a tremendous proliferation of different funds, and there’s a lot more choice that investors can choose,” said Joseph Bae, a Korean-American whom KKR sent to Hong Kong to start its Asia business eight years ago when he was just 33. “With that choice, you’re going to have real winners and losers within the industry.”

CVC Capital Partners Ltd. will start raising its fourth fund, with a target of $3 billion, later this year, said a person with knowledge of the matter who asked not to be identified because the information isn’t public.

Following lackluster performance of its second fund in 2005, London-based CVC had success with its third, raised in 2008: Its recent sale of Indonesia’s PT Matahari Department Store and the exit of Infastech last year allowed the fund to return a net 22 percent, the person said, adding that its first fund in 2000 returned a net 31 percent.

Later Entrants

KKR set up shop in Asia in 2005, later than TPG, Carlyle or CVC. Other later entrants include Boston-based Bain Capital LLC, which started its first fund in 2007. Blackstone Group LP, which opened its first office in the region in 2005, has yet to raise a buyout fund specifically for Asia, though it’s putting together a $4 billion pool for real estate.

“Comparing the well-established players with new entrants can be sometimes like a middle-aged man running a marathon with a youngster,” said Piau-Voon Wang, a Singapore-based partner at Adams Street Partners LLC, which manages $24 billion in private-equity assets globally. “That KKR has done well fundraising doesn’t mean that TPG and Carlyle have fallen flat on their faces.”

Spokesmen in Asia for TPG, Carlyle and CVC declined to comment on fundraising or investment returns.

New Funds

Global firms are amassing new regional funds as their last rounds raised between 2005 and 2008 are nearing the end of their investment cycles. TPG, based in Fort Worth, Texas, has raised $1.3 billion for its newest Asia fund since last year and expects to reach $2 billion -- half of its goal -- by the middle of this year, and intends to keep the target, two people with knowledge of the matter said.

Carlyle has gathered slightly more than $1 billion, just a third of its target of $3.5 billion, for its fourth fund, the two people familiar with the fund said.

Carlyle’s first Asia fund, raised in 1998, was its most successful, returning a net 18 percent, or four times capital, to investors after it completed its sale of a stake in China Pacific Insurance Group Co. in January, the firm reported. Its second fund had a 1.7 multiple at Dec. 31, company filings show. The firm said today its third fund was 1.2 times capital invested with a net return of 1 percent as of March 31.

Stable Team

On the investment side, fund performance is measured by criteria including internal rate of return, multiple of invested capital and cash distributed to investors.

KKR has had a more stable Asia team than its peers since it came to Asia in 2005, with no departures among its partners, and has made fewer mistakes in its investment decisions, according to two investors considering participating in the firm’s second fund who asked not to be identified. KKR is also good at managing client relationships by keeping investors posted on its portfolios, they said.

Its first Asia fund has exited two investments, including Intelligence Holdings Ltd., a Tokyo-based recruitment firm, in April. That sale returned to investors five times more than capital invested, according to two people with knowledge of the matter who asked not to be identified because the returns haven’t been made public.

Investors’ Priorities

“Investors look at exits and cash returns first and foremost,” said Roy Kuan, a managing partner at CVC, whose current Asia fund has returned to investors 75 percent of its $2.9 billion at 3.3 times capital invested. “Many Asian funds simply haven’t returned very much cash back to investors yet.”

KKR’s sale of computer-parts manufacturer Unisteel Technology Ltd. in Singapore last year also returned about two times capital invested, the people said.

The firm’s $1.8 billion acquisition of Oriental Brewery Co. of South Korea in 2009 will probably generate the fund’s highest return, the two people said. Values of its stakes in China Modern Dairy Holdings Ltd. and Chinese financial-leasing company Far East Horizon Ltd. are already 2.5 times to three times the cost, based on recent stock prices, one of the people said.

KKR sold a 20.5 percent stake in China Modern Dairy this week, representing 2.98 times invested capital, the person said. The fund retained a 3.5 percent stake.

Not all KKR’s investments are a success. The firm is expected to mark down the value of its $300 million stake in China International Capital Corp. investment bank, the people familiar with the fund said. Bond and stock underwriting revenues for 2011 slumped 62 percent from 2010 when private-equity firms including KKR and TPG bought stakes, according to the Securities Association of China, a self-regulatory body for the industry.

Taishin Loss

TPG wrote down its 10 percent stake to 60 cents on the dollar last year, two people familiar with the matter said. The firm also took a loss for an investment in Taiwan’s Taishin Financial Holdings Co., the people said.

TPG lost four partners at its Asia unit, then called Newbridge Capital LLC, in 2009 and 2010, including Dan Carroll and Paul Chen, and raised concerns among investors that the firm wouldn’t be able to continue its track record. Another partner, Weijian Shan, departed in 2010 and successfully raised his own $2.5 billion buyout fund last year, the people said. Mary Ma, who had joined in 2007, also left in 2011 to start her own fund.

Fourth Fund

Despite the departures, TPG’s fourth fund, raised in 2005, made at least five profitable investments that boosted its value to about three times capital invested, the person with knowledge of the fund’s returns said. Deal makers include Ben Gray, Tim Dattels and Puneet Bhatia, all part of the old Newbridge team still with TPG.

Among the deals was Australian retailer Myer Holdings Ltd., which was sold in 2009 and returned six times capital invested, or a $1.3 billion profit, to TPG’s Asia and global funds, the person said. The fourth fund was returning a net 20.7 percent annually as of Sept. 30, according to a filing by the California Public Employees’ Retirement System, known as Calpers, which is an investor.

The fund also sold a 10 percent stake in Shriram Transport Finance Ltd. in February and a 24 percent stake in Singapore’s Parkway Holdings Ltd. in 2010. The two deals returned 4.6 times and five times the money invested. TPG’s investment in Indonesia’s PT Bank Tabungan Pensiunan Nasional is valued around seven times capital after shares rallied 55 percent in the past 12 months. The fund agreed yesterday to sell a 24.3 percent stake in the bank to Sumitomo Mitsui Financial Group Inc. for 9.2 trillion rupiah ($947 million).

Delta Dunia

Still, TPG’s latest fund from 2008 includes Indonesian coal-mining contractor PT Delta Dunia Makmur, whose shares dropped 85 percent since TPG’s investment in December 2010. Li Ning, a Chinese sportswear retailer, posted its first annual loss of $319 million for 2012, a year after TPG bought its convertible bonds.

TPG, which came to Asia in 1994 in the Newbridge venture, made big returns early on. The Newbridge III fund, started in 2000 in an environment of little competition for distressed assets, returned 30.8 percent annually as of September, according to Calpers, mainly buoyed by Shenzhen Development Bank Co., probably its most-profitable investment ever.

Carlyle, which started in Asia in 1998, suffered high turnaround with its departures in the last two years. Managing directors including Rajeev Gupta, who ran the India business, and Luo Yi, the firm’s eight-year veteran in China, left in 2011. Anand Balasubrahmanyan, who led the Southeast Asia team, departed last year.

China Focus

For Carlyle, returns for its second and third Asia funds have underperformed other global competitors in part because they’ve concentrated mostly on China and aren’t active in Southeast Asia, the two investors said. The two funds made 14 out of their 20 investments in China and Taiwan, according to Carlyle’s website.

“In private equity investment, it’s natural to see a J-curve showing low returns in early years and growing gains in the outlying years as it takes time to work with the portfolio companies to improve management and efficiency and create value,” said Brian Zhou, a Beijing-based spokesman for Carlyle.

The number of private-equity deals in China fell an unprecedented 43 percent last year, according to Asian Venture Capital Journal. Domestic initial public offerings, which funds count on to exit investments, tumbled 70 percent.

“It hasn’t been a satisfying experience in China and that always has an impact overall on Asia because it’s just a big part,” said Adams Street’s Wang.

Euphoria Waned

Starting in 2006, private-equity firms were betting on the boom in China, investing in companies readying for initial public offerings and seeking to profit from the high multiples in the public market. The euphoria died down since 2011 as regional IPO markets slowed.

“To be successful in the environment at this stage in the industry is a lot harder,” KKR’s Bae said. “It’s no longer based on pre-IPO multiple arbitrage or distressed situations.”

Operational improvements are key, he said. KKR boosted Intelligence Holdings’ revenue and earnings before interest, taxes, depreciation and amortization by 45 percent and 170 percent, respectively, in three years before its April sale.

Bae, who joined KKR from Goldman Sachs Group Inc. in 1996, came to Hong Kong in 2005 accompanied by Justin Reizes.

“When they first came to Asia with no track record, they approached the team from Morgan Stanley,” said Vincent Huang, a partner at London-based private-equity firm Pantheon in Hong Kong. “They hired the top-quality people in the region, made very few mistakes, and the team is getting stronger.”

KKR Hires

KKR hired Morgan Stanley veterans David Liu and Julian Wolhardt in 2006 to build its China business. Ming Lu, formerly with CCMP Capital Advisors LLC, also joined that year and now heads KKR’s Southeast Asia business. Reizes, who had come from Morgan Stanley in 1999, was made head of Australia in 2007. Sanjay Nayar, a former Citigroup Inc. banker, joined in 2009 to run KKR’s India business.

While the current return figures are interim estimates and may not indicate performance when the funds are fully liquidated, they generally reflect the financial health of the companies and help investors assess potential performance.

“We’ll have to wait till the end of this cycle to see who’s the champion at the end,” said Wang of Adams Street. “It’s too early to declare that KKR is the champion among the mega buyout funds.”

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