US Rate Cut and China Stimulus Boost Optimism for Increased Asia Private Equity Deals

By Yantoultra Ngui and Kane Wu

SINGAPORE – The recent cuts in U.S. interest rates, along with China’s economic stimulus initiatives, are expected to foster private equity transactions in Asia. Industry insiders believe that lower funding costs and improved market sentiment will facilitate easier exits for private equity firms.

Last week, the U.S. central bank implemented its first interest rate cut in over four years, with further reductions anticipated. Elevated interest rates over the past two years have pressured private equity firm’s financing costs, complicating leveraged buyouts.

In contrast, China recently introduced an extensive monetary stimulus package and support measures for the property market aimed at restoring confidence in its economy. More fiscal initiatives are anticipated in the near future.

Private equity firms generally exit their investments through initial public offerings or trade sales, which have been challenging due to current volatile market conditions.

"With the Federal Reserve entering a rate-cutting phase, we see financing conditions improving, which should lead to a resurgence in exit activity and asset valuations, thereby reducing the valuation gap between buyers and sellers and creating more opportunities for transactions," stated Janice Leow, head of Southeast Asia for a prominent private equity firm.

She mentioned that improved liquidity would create a more conducive environment for private equity firms to achieve favorable exits.

An investor focused on Asia noted that the uptick in Asian stock markets could facilitate company listings and help restore reasonable valuations for many portfolio companies.

Private equity-backed mergers and acquisitions in the Asia-Pacific region, including Japan, surged 14% year-on-year to $105 billion during the first three quarters of this year, primarily driven by the substantial acquisition of Australian data center operator AirTrunk by a Blackstone-led group. However, the number of new deals fell by 43% compared to the same period last year.

Asian markets have witnessed gains following the announcement of China’s stimulus measures, coupled with recent data indicating the most significant drop in consumer confidence over the past three years, which has prompted speculation about another significant interest rate cut in the U.S.

"We remain hopeful that the decline in rates will benefit exits by general partners," remarked an executive from one of the largest institutional investors, referring to the fund managers responsible for investment decisions at private equity firms.

Blackstone has been actively working on liquidating assets recently. In July, the firm announced the sale of Japanese pharmaceutical company Alinamin Pharmaceutical to a North Asian buyout fund.

"We have successfully sold several companies in Japan and Korea to other sponsors. Overall, I would say that, fingers crossed, it is a very robust exit environment," said Amit Dalmia, a senior managing director at Blackstone, during a conference in Singapore this week.