A lack of investment opportunities in Asia, coupled with the rapid growth of established European brands, means Asia will lead a new wave of private equity investment in Europe, corporate financial advisor DC Advisory said a new report. While concerns over the opaque financial reporting standards of Asian companies means that there remains a dearth of investment opportunities in Asia, the rapid growth of the region's consumer markets has led to a resurgence of Asian private equity investment in European brands, and DC Advisory maintained that Chinese private equity firms will be the primary drivers of this trend.
Pointing to the decision by the Hong-Kong based firm Baring Private Equity Asia to acquire a substantial stake in the English home furnishing retailer Cath Kidston in July, Tosh Kojima, head of DC Advisory’s Japan-Asia Focus Group, said a primary reason behind this purchase was a desire by Asian investors to emulate the successful business models of Western brands. While there has been concurrent growth of Asian consumer brands to cater to the region’s new middle classes, Mr Kojima maintained that Asian consumers have a strong loyalty to Western brands, hence this shift to acquire them is part of a move to leverage the power of brand recognition.
“I believe this growing trend is a prelude to what will be an increase in investment from Chinese investors, who want to invest in very high-profile Western assets,” said Mr Kojima. “When people talk about China, there is a halo effect because it is the world’s largest market and one of the world’s fastest-growing economies. However China has been a really tough nut to crack for private equity firms and there is a scarcity of opportunities. In the case of Cath Kidston, this was part of a move by a private equity firm to shift into high-value, branded products. Thus the business model and the brand transfer of this acquisition is extremely valuable.”
Despite being one of the worst-affected asset classes following the 2008 financial crisis, when the average capital raised by Asian private equity firms fell from a high of $44bn in 2008 to $24bn in 2009, strong economic recovery across Asia has led to a surge in private equity investment. According to DC Advisory, while the average capital raised by private equity firms in 2013 was worth $39bn, a dearth of investment opportunities in China has led several firms to put by more than $129bn in capital. While Mr Kojima maintained that the UK will be a key investment destination for private equity firms, Germany and France will be joining it soon.
“The past couple of years have not been a good market for mergers and acquisitions but the debt markets are now on fire and there is quite a lot of refinancing activity,” said Mr Kojima. “The European markets have really started to open up and I also think that the Chinese are increasingly gaining more confidence. The UK will certainly be one of the most interesting countries for investors because it is home to iconic brands and consumer products. Yet Germany, which is home to precision engineering and luxury automotive brands, will also be another important country, and being home to fashion and luxury labels, France will also be a key target.”