When private equity firms go on the prowl

When private equity firms go on the prowl

Singapore's usually staid business landscape has been roused by a series of mergers and acquisitions (M&As) in recent years.

These range from the hotly contested $13.8 billion takeover of Fraser & Neave last year to the recently proposed $1.4 billion buyout of packaging materials supplier Goodpack by leading private equity firm KKR.

The total value of M&As in Singapore has risen significantly over the past few years, more than doubling from US$11.9 billion (about S$15 billion) in 2011 to US$28.1 billion last year.

Fuelled by the ready availability of cheap financing, this M&A trend shows no sign of abating.

Amid ultra-low borrowing costs, tighter anti-trust regulations and declining investment returns in the West, companies are looking to Asia in their search for better growth and profitability.

Hence, firms in politically stable and economically prosperous Singapore - particularly those with considerable local brand equity - have become prime targets.

Some of the keenest acquirers are private equity (PE) funds, whose emergence on the Singapore M&A scene has the potential to significantly alter the corporate landscape.

New players

PE firms have had a limited presence in Singapore since the early 1990s. But they have recently ramped up their activities, as some of the biggest players in the industry open offices here to scout for investment targets in South-east Asia, including Singapore. For example, KKR opened a Singapore office in 2012 and Blackstone did so last year.

Their modus operandi is to raise funds from third-party investors and use the money, along with a heap of debt, to secure controlling stakes in targeted firms.

They then try to quickly turn around the companies' operations before reselling them or listing them in a few years' time, usually for a significant profit.

PE firms also often use acquired companies as springboards for further purchases. They acquire companies with relatively low debt and strong cash flows, use these companies' cash and assets to settle existing debts, then load up the acquired firms with even more debt and use them as vehicles to acquire other firms.

As of now, PE investment still accounts for only a small proportion of the total M&A market in Singapore - about 2.4 per cent in the first half of this year. But in the past year, PE investment in Singapore has risen considerably. It has more than doubled to US$442 million in the first half of this year, from US$182 million in the same period last year.

In Singapore, L Capital Asia - LVMH Moet Hennessy Louis Vuitton's Asian PE arm - is among the most active players. It acquired controlling stakes in upscale club Ku De Ta and restaurant chain Crystal Jade in the last few months, after investing in Singapore footwear fashion label Charles & Keith in 2011. L Capital Asia has indicated its intention to embark on further acquisitions. It is likely to harbour intentions of creating a major lifestyle enterprise with overlapping interests in dining, entertainment and shopping.

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