Recent events surrounding the future ownership of Hong Kong fixed-line carrier PCCW [see Hong Kong: Wrong connections] offer evidence that Asia’s private equity market might be overheating. The zeal with which Texas Pacific Group and Macquarie have pursued an acquisition of the key assets of the group suggests that they might be struggling to find suitable investments in the region.
As much as $100 billion of capital, on a fully leveraged basis, is believed to be seeking a home in the region. Putting that kind of money to work in investments that will produce the kinds of returns limited partners have come to expect will be a very tall order. It is hard to see how TPG and Macquarie are going to further that cause with an investment in PCCW’s assets.
PCCW, the dominant fixed-line telecommunications operator in Hong Kong, one of the world’s most deregulated and saturated markets, also owns a cellular licence in the territory, operating in a ruthlessly competitive industry in dire need of further consolidation. In its fixed-line business, PCCW is losing market share to low-cost carriers and VoIP operators; the cellular market is completely saturated. True, PCCW has built a leading presence in business broadband services, including its NOW television offering, but it is already experiencing competitive pressures in these sectors too and the market is ultimately limited in size.
Some observers have suggested that an investment in PCCW might bring the funds access to China’s market. Were that so it would indeed completely change the complexion of the deal. But such claims are risible. PCCW chairman Richard Li himself tried and failed to access the China market through his company. Foreign private equity investors would fare no better.
So why are TPG and Macquarie so interested in the deal? Access to cheap long-term financing has certainly shifted some acquisition targets globally from marginal to feasible and the pressure to invest capital is immense lest it start to drag on overall portfolio returns. But smart investors such as TPG and Macquarie always eye the exit from any investment before they commit their capital and here the strategy is far from clear. TPG would presumably look to leverage PCCW’s assets, tidy up the capital structure and then effect a quick trade sale. The most obvious buyer would be Singapore Telecom, which tried to buy PCCW, then called Hongkong Telecom, in 1999, only to lose out to Richard Li.
Macquarie might have a more feasible exit strategy if it eventually sold its stake to one of its in-house infrastructure funds. That might make financial sense for Macquarie but, depending on the terms, would be less attractive for fund investors.
Beijing’s reaction to the possible TPG and Macquarie deals has now rendered such speculation academic since China is clearly no more comfortable with Hong Kong’s media and telecommunication assets being owned by foreigners now than it was when Singapore Telecom’s bid was thwarted. TPG and Macquarie are now said to be busily negotiating with the new controlling shareholder of PCCW and any deal either party eventually strikes will be a very different proposition.
It has probably been a frustrating couple of months for the funds. In hindsight, though, it could be argued that Beijing’s intervention has saved them from costly hubris. There must be better uses for TPG’s and Macquarie’s precious time and capital than chasing highly politicized and marginal deals. If not, Asia’s private equity market is indeed in trouble.
