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Lawyers in Asia specialising in private equity have their work cut out for them at the moment. US investor KKR surprised the region last year by closing a $9.3bn Asia-focused fund, the largest of its kind. Now, as if answering a challenge, Hillhouse Capital, one of Asia’s largest homegrown private equity houses, is seeking to raise up to $10bn, in a sign that local investors will not be shown up by western funds in their own backyard.
The battle to raise and then deploy capital into a fierce scrum for limited Asian assets means the private equity practices of law firms around the region are working overtime.
Investors are cutting some of the largest private equity deals on record in the region, such as Bain Capital’s $18bn buyout of Toshiba’s chip unit, or the $12bn purchase of Global Logistics Properties (GLP), involving a long list of Chinese investors. Buyout firms are also popping up in far-flung markets such as Myanmar, and local buyers are reaching out from Asia into less familiar regions, such as Europe and the US.
These developments are all putting pressure on the limited specialist talent at law firms in the region.
“With GLP we saw that there were lots of bidders and the calls just kept coming in looking for advice,” says Ng Wai King, a lawyer at Singaporean law firm WongPartnership, who worked for the winning consortium in the GLP deal. Compared with the volume of demand for private equity advice, he says, “the universe for available talent has shrunk”.
Private equity deal value in 2017, up 41% year on year
The GLP sale underlined not just how sophisticated Asia’s private equity market has become, but also its constraints, Mr Ng says.
The logistics business attracted a wide range of regional and global potential buyers that included Blackstone, Warburg Pincus, China Investment Corporation, Hillhouse and Beijing-based Hopu Investment Management, drawing nearly every global investment bank and top-tier law firm into at least some aspect of the deal. In the end, a consortium of Hillhouse, Hopu, property group Vanke and others, all of which needed their own legal representation, inked the deal.
High demand for private equity lawyers is forcing firms to specialise. “If you would have looked in this region five years ago, you would have found lots of M&A lawyers who did some private equity deal work. Now you see more lawyers specialising in private equity,” says David Allen, head of Baker McKenzie’s global private equity and funds team.
Unspent private equity capital reached $225bn at the end of 2017, a new high from $170bn at the end of 2016, according to Bain & Co. Private equity deal value hit $159bn last year, up 41 per cent on the year before. The surplus of available funds means deals are becoming bigger and, to beat the competition, the structures for financing more creative.
“My job has gotten a lot more complex in the past two years,” says Tsuyoshi Imai, managing partner at Ropes & Gray’s Tokyo office, and lead lawyer on Bain Capital’s buyout of the Toshiba chip business last year. “To be competitive in these processes you have to be able to come up with much more complicated financing structures for these deals.”
In the Bain deal, the US private equity house partnered several important companies such as SK Hynix and Apple to form a consortium of buyers that could have tripped up antitrust regulation. However, the deal was structured in such a way as to allay those concerns and win local regulatory approval, although it only recently received the green light from China’s ministry of commerce (Mofcom).
The big pricetags on some Asian assets mean individual investors may struggle to buy such targets outright, a trend that has led to private equity groups bringing in co-investors to provide extra capital. Not long ago such a structure was found mainly in developed markets, not Asia.
“We’re seeing more co-investment deals in Asia — European-style dealmaking that is becoming more prevalent here,” says Edward Freeman, a Hong Kong-based partner at Freshfields Bruckhaus Deringer.
A lack of private equity talent in the legal sector is a problem across Asia, especially as new private equity markets open up, says Nicola Yeomans, a private equity partner at Herbert Smith Freehills, based in Singapore.
“Not long ago you had people managing local deals from New York and London,” she says. “We foresaw the need [to hire] early and are now beginning to see the dividend from this.” Herbert Smith Freehills is investing in its network of private equity lawyers across the region, says Ms Yeomans, and the firm recently posted a private equity-focused lawyer in Yangon, the business hub of Myanmar. The country is emerging from decades of isolation and dictatorship, and foreign private investment is starting to take root. Private equity group TPG, for example, has been successful in the market.
The next frontier for Asian private equity lies in developed overseas markets such as the US and Europe, where auctions involve highly competitive processes and require great expertise, says Nicholas Norris, a partner at Kirkland & Ellis who has been based in Hong Kong since 1992.
Fifteen years ago, he says, law firms in Asia were tasked with guiding New York- and London-based funds into uncharted Asian territory in places such as Shanghai and Jakarta, which have become normal operating grounds for the likes of Carlyle and CVC.
Perhaps the biggest challenge facing private equity lawyers in Asia in 2018 is guiding the new local funds that are exploring Europe and the US, a move that requires close ties with important Chinese and Japanese investors. Asian funds, such as Hony Capital, continue to search out deals across Europe. “Now, much in the same way, we are guiding these Asian funds on what they need to expect when they are going into the US,” Mr Norris says.
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