Baring Private Equity Asia is passing up on as much as $6 billion of deals as it awaits a further decline in valuations amid an outlook for a possible global recession, in a sign that this year’s slowdown in private-equity transactions may have further to run.
“There’s no shortage of investment opportunities, the issue is really about finding the right price level that we’re comfortable with,” Chief Executive Officer Jean Eric Salata, who oversees $22 billion of client assets, said in an interview. “At the moment, you have to build in quite a bit of margin of safety into those assumptions to reflect this uncertain outlook” over the next one to three years, he said.
Salata said his firm, which last week completed a $11.2 billion raising for its biggest ever fund, also walked away on deals in the past two months because of deteriorating revenue at the target companies during due diligence. Recent steep declines in many public-market valuations has offered up more take-private opportunities, though the outlook remains “muted” as the asset manager targets annual returns north of 20 percent, he said.
While private equity investments slowed down more than 30 percent this year after a peak in 2021, there’s plenty of capital in the industry ready to invest. Still, there’s a reluctance from some institutional investors to commit fresh capital after the retreat in public markets left their portfolios over-invested in private equity.
The risk of a global recession means Baring will only pay up for assets that will continue to do well in the uncertain economic outlook over the next three to five years, he said. Growth prospects around digitization and cloud migration are “very much alive and well,” he said, adding that the firm will continue to focus on investing in technology software, healthcare, education and industrial technology.
BPEA closed its VIII Asia fund last week and was able to hit the upper limit of $11.2 billion after focusing on returning cash to investors from selling $9 billion of assets in 27 transactions over the past year, Salata said. Its predecessor fund is generating a net mid-30 percent return, making it one of the best performing funds in more than a decade.
Salata expects the slowdown in deal activity in China to continue, as the world’s second-biggest economy shows strain from factory activity, consumer spending and export growth.
“China is a part of what we do but is not a major part of our program,” he said. “It pays to probably be conservative and just wait for the dust to settle a little bit more. Valuations are down a lot. It’s a trade off between uncertainty versus price.”
The country is the second-biggest market for its VII fund.
Other countries including India, Australia and parts of Southeast Asia are likely to pick up the baton, and Japanese corporates looking to streamline their businesses have shown a greater readiness to accept private-equity roles within their corporate finance solutions, Salata said.