First, we can see from Table 1 below a general increase—admittedly with year-to-year fluctuations—in the number of private equity transactions in Asia (excluding Japan) involving an acquisition of control, here very crudely defined as an acquisition of more than 50 percent of the equity of the target. I would have liked to have analyzed the aggregate and average deal size as well, however, the data on deal sizes is patchy at best, and therefore rather than provide an incomplete picture I have chosen to omit this from the table below.

This general trend suggests that private equity in Asia’s developing economies has begun, at last, to diversify out of its historic reliance on minority investments in rapidly growing companies where a vigorous and usually fairly young founder retained majority ownership. This model of minority investments was successful because it suited the newly developing economies of India and China, where most private sector companies were established only after economic liberalization became government policy in the 1990s and 1980s respectively. For many of these companies, the primary reason to bring in outside private equity capital was to expand the business (e.g. opening new factories, building out a bigger and better sales force, acquiring smaller competitors, developing and executing cross-border expansions, etc.). The founders of these companies, who were typically not ready to retire, still sought to retain control of the business they had built and which they continued to view as almost an extension of themselves, and viewed private equity investment as a means of obtaining capital and access to experienced international professionals that could assist them with developing their fledgling companies into national or regional enterprises.

Limited partners have also indicated—with their money—that they view buyouts as a desirable strategy. The proportion of private equity capital raised in 2013 and allocated to buyout-focused funds was 44 percent, a significant jump from 17 percent in 2010, as shown in Table 2 below.

Now, one can certainly have an opinion that: firstly, most limited partners are not exactly the best judges of what private equity strategies are optimal for any particular geography; secondly, most limited partners have a tendency to be swept up fads; and thirdly, many institutional limited partners are advised by the same set of investment consultants and thus subject to whatever biases and inaccuracies of prediction that those consultants might have. Accordingly, with due respect to my old firm, I find this trend less persuasive evidence of a swing towards buyouts. Furthermore, buyout funds tend to be larger than growth capital funds, and in particular 2013 was the year KKR & Co. L.P. raised its second Asian fund, which closed on $6 billion. That might well have moved the needle on buyouts as a proportion of funds raised.

Yet I do think that control deals will become more prevalent in Asia for a few reasons.

Succession issues in founder-led companies. In China, many successful mid-market private sector companies were founded in the 1970s and 1980s, at the beginning of the first wave of economic liberalization under Deng Xiaoping (邓小平). The entrepreneurs who founded them are now approaching retirement age (60 – 70) and are facing potential succession issues if they have no suitable heir and no alternative professional managers. Private equity fund sponsors can offer an opportunity to founders to cash out through a control deal while retaining a minority stake in the business. Furthermore, these sponsors can often tap into networks of executive candidates to find suitable professional managers in a way that most company founders cannot. For example, one can look to a transaction my old firm did in 2014, which was also its first buyout in China, the $450 million buyout of Suzhou Savera Shangwu Elevator Riding System Co. (苏州塞维拉上吴电梯轨道系统有限公司), which was a case of a founder was seeking to cash out while retaining a minority interest.

Succession issues in second or third generation family-owned businesses. In Southeast Asia and Hong Kong, where large family-owned businesses are commonly found and were often founded in the late 1950s or 1960s,3 the family may have successfully passed the baton to a new generation of family owner-operators once already. However, they may well be unable to pass the baton from the second generation to the third generation of the family, particularly as third generation family members pursue careers outside of the family business. Sale of a controlling stake to a private equity investor may provide the family with much needed liquidity and provide new professional management. It may also allow a branch of the family to divest itself of its holdings, particularly if there are irreconcilable differences between branches of the family.

Divestment of non-core assets. In many Asian countries, larger family-owned conglomerates have built up substantial business empires which include non-core assets. It may well become a viable option for private equity firms to pursue these non-core assets, particularly if the conglomerate is publicly listed and suffering from the conglomerate discount. There may also be room to partner with managers at these non-core assets to do a management buyout of the business.

Secondary buyouts from exiting private equity sponsors. As the number of buyouts done by private equity sponsors in Asia increases, there will be opportunities for private equity sponsors to engage in buyouts of portfolio companies owned by other private equity sponsors. It has been my experience that quite a number of the buyouts in 2012 to 2014 that I saw at my old firm were secondary buyouts. In fact, the two buyouts my firm closed in Asia in 2012 and 2013 respectively were both secondary buyouts, one from Navis Capital Partners and one from a syndicate including SAIF Partners, Goldman Sachs and Sierra Ventures.