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© Reuters. FILE PHOTO: A city view of Beijing’s central business district or Beijing’s central business district is reflected in a pond at sunset, China, October 17, 2018. REUTERS/Thomas Peter

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Written by Scott Murdoch and Ken Wu

HONG KONG (Reuters) – Buyout funds are expected to extend a record spending spree in Asia into the rest of the year, but will mainly seek deals outside of China, where concerns about the economy are likely to outweigh any easing of strict government measures. Deal makers said.

Mergers and acquisitions (M&A) activity in Asia excluding Japan is off to a record start to the year, with $167.4 billion spent since Jan. 1 in markets such as Australia, according to data from Dealogic.

But acquisitions in China, Asia’s biggest deal market, slowed sharply in 2022 as a two-month shutdown in Shanghai and other coronavirus-related restrictions hit economies and halted potential deals in many parts of the country.

Data from Dealogic showed that acquisitions of Chinese assets backed by financial sponsors totaled just $1.5 billion this year, less than a tenth of the value in the same period last year.

Deal makers said a sluggish transaction market in China could weigh on investment returns for private equity funds and prompt them to redouble their M&A efforts elsewhere. According to data provider Preqin, funds in the region are already standing at a record $642 billion in unspent cash, or “dry powder.”

“For China, there are still significant macroeconomic, geopolitical and epidemiological headwinds that could further weaken investment sentiment in China, at least in the near term,” said Stephen Tran, partner at law firm Mayer Brown.

However, the record value of the acquisition deal suggests that some funds focused on the Asia Pacific region may shift more of their dry powder away from China and redirect their investment activity to other parts of the region, he said.

Graphic: Asia-Pacific Financial Sponsor with No Japanese Participation in M&A Deals With Asia-Pacific Financial Sponsor with No Japanese M&A Participation (https://graphics.reuters.com/CHINA-REGULATION/TECH- LAYOFFS/lgpdwazeqvo /chart.png)

Despite signs that Chinese regulators may be easing restrictions on economic sectors, including technology, dealmakers do not expect an immediate boost in investment in the country.

Reuters reported last week that China’s central leadership has given the temporary green light for Ant Group to revive its initial public offering.

“I don’t think it (the policy changes) will lead to a significant rebound in private equity investment, as previously most investments were speculative and not a value investment,” said Richard Gee, chief investment officer at All-Stars Investment.

For now, however, the high-quality Chinese assets are undervalued. Ji, who is also a managing partner at the company that focuses on the tech and consumer sectors, said the reversal in regulations would reduce uncertainty about assets and discounts, leading to value investing.

Mergers and acquisitions are preferred prior to the IPO

Although China has remained quiet about the deals, the increase in new private capital in Asia has reached $30.4 billion so far this year, according to Brecken.

Big deals this year include an unsolicited bid of about $15 billion by a group led by KKR & Co (NYSE:) for Australia’s Ramsay Health Care Ltd in April – the largest PE-backed acquisition of the year in Asia.

A number of funds are also looking to bid for Hong Kong telecom operator HKBN Ltd as private equity investors TPG and MBK seek an exit, said three people familiar with the situation, who asked not to be identified because the information is not public.

HKBN, TPG and MBK declined to comment.

Samson Lo, co-head of mergers and acquisitions in Asia Pacific at UBS, said market concerns have also prompted some private equity firms to seek buyers for their portfolio companies that initially sought an initial public offering.

“Private equity firms still have a lot of capital, and any deal in any sector today would attract more than 10 private equity bidders in the first round.”

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