Private equity in Asia, investors are told, is the hot ticket. The region’s economy is experiencing a burst of growth, and limited partners won’t want to miss the chance to stake their claim in the future prosperity.
Skeptics, by contrast, dismiss the Asia funds as a “flavor of the month” phenomenon-a hyped group of investment vehicles bound to disappoint.
The debate described above takes place, in fact, in 1997, just prior to the economic crisis that enveloped the Far East, blindsiding many otherwise optimistic investors. But with the Asian contagion only now beginning to show signs of abatement, Asia funds are back and bigger than ever.
While the arguments for and against investing in Asia today resound with a familiar ring, what has changed in the last two years is the strategy espoused by the marketers of these funds. Before the crisis, U.S. private equity partners in Asia mostly had to play the role of minority investors riding passively on the back of undulating corporate dragons. Now, almost without exception, the pan-Asia funds being raised by newcomers and regional old hands alike are buyout funds geared to make control investments in divisions of the sprawling conglomerates that rule Asia’s economy like feudal lords.
Proponents of these new pan-Asia funds say scarce capital and the drive for economic reform have, for the first time, created an atmosphere in which buyout transactions can be found and successfully executed. Some report that control deals in Asia, particularly in South Korea, already are flowing strong. But other market observers, mostly veterans of private equity investing in Asia, wonder whether there will be enough buyout deals to support the more than $4.5 billion in new capital currently being raised (see chart, p. 30). They also warn that, in Asia, the buyout opportunities that blossomed in bad times may wither when the going gets good.
Anyone interested in committing capital to a pan-Asia fund certainly has a range of choices these days. The private placement memoranda currently making the rounds all have similar selling points of strong local connections and proprietary deal flow. They also describe an Asia profoundly changed by the recent crisis-with scarce capital, discounted prices and a business culture now more willing to yield control to foreign investors.
Things Are Different This Time
“For the first time, the opportunity is becoming available to do buyouts in Asia,” says William Seymour, a senior managing director at H&Q Asia Pacific, an associated company of Hambrecht & Quist Group, which currently is raising its third pan-Asia fund. “This is a result of the Asian economic crisis, which took banks out of the business of providing capital.”
Mr. Seymour says that approximately two-thirds of the deals H&Q Asia has done in the past three years have been control investments, whereas before that they were mostly minority deals. The crisis also has enabled the firm to move from minority to majority positions in a number of investments, Mr. Seymour says.
In addition to the need for outside capital, private equity professionals also say that the traditional Asian resistance to breaking up the family company is beginning to crack under the pressure for economic reform. “There’s been a philosophical change in families,” says Mary Lynn Putney, a managing director for global private equity at Citigroup Corp., which now is raising a $750 million Asia fund in conjunction with CVC Capital Partners (see story p. 5). “If you have 10 businesses, it’s now okay to spin out eight and focus on two.”
While the notion of selling a family company in Asia is still seen by some as tantamount to “selling your children,” Mr. Seymour says, “Many families are beginning to think that maybe it’s in the family’s best interest to take the money and run.”
Even the most seasoned and skeptical Asia private equity professionals describe a change in the environment. “I have to say, we are seeing more buyout opportunities than we have in the past,” says Anil Thadani, chairman of Schroder Venture Group, which is marketing the Schroder Venture Asia Pacific Fund, with a cap of $500 million.
Mr. Thadani, who has been making private equity deals in Asia for more than 15 years, says the ability to fund control deals is significant, because they allow a firm to realize much greater returns. He estimates that over the life of Schroder Asia funds, the first of which closed in 1990, 80% of the gains were made through deals in which his firm had a majority stake, even though less than 25% of Schroder Venture’s portfolio was comprised of control investments.
Indeed, Kevin Albert, the managing director at Merrill Lynch & Co.’s private placement group, attributes the historic lackluster performance of pan-Asia funds to a preponderance of minority deals.
Mr. Thadani says buyout deals now make up approximately 50% of his current portfolio, and more are in the pipeline.
Despite all the fervor for control investments, very few actual buyout deals have been done in Asia, which makes the success of such transactions difficult to assess. But the handful of recent buyouts in the region at least lends credence to the argument that the deal environment in Asia really has changed.
Perhaps the most well-known buyout in the region to date is the acquisition of Ssangyong Investment & Securities Co. by H&Q Asia. Ssangyong Investment was one of many divisions of Ssangyong Group, one of the quintessentially giant South Korean chaebol, or family business conglomerates. Ssangyong has interests in businesses ranging from cement to ski resorts, and the group last year found itself squeezed by the region-wide recession and in need of some serious divesting.
Last July, the South Korean H&Q Asia representative, a native named Lee Jae Woo, approached the management of the beleaguered division with the idea of a buyout. After five months of negitiations, the fund bought a controlling stake in Ssangyong Investment for $83 million. H&Q Asia also brought in as a co-investor Lombard Pacific Partners, a $325 million fund run by Lombard Capital Partners on behalf of California Public Employees’ Retirement System (CalPERS) and the Asian Development Bank. At the time, the deal was the largest ever for H&Q Asia. In fact, Mr. Seymour says he wishes the deal could have been bigger. In anticipation of more deals like Ssangyong Investment, the size of the new H&Q Asia fund has almost tripled (the firm’s second fund, from which the $30 million equity commitment was made, closed on $278 million in 1996). “Had we had a larger fund, we would indeed have put in more money,” Mr. Seymour says.
The investment in Ssangyong Investment, now called Good Morning Securities, has to date seen a 10-times return.
Mr. Seymour says his firm currently is moving into a control position on a deal that will be larger than the Good Morning transaction, though he declines to comment further.
Firms Queue Up for a Crack at Asia
Reports of buyouts and buyouts in the making come from every private equity shop with a shingle hanging in Asia.
Newbridge Capital, a joint venture between Texas Pacific Group and Richard C. Blum & Associates, in late 1998 acquired integrated circuit maker Astra Microtronics Technology from Indonesian conglomerate Astra International for $90 million.
Jim Griffin, a vice president at The Carlyle Group, says Carlyle already has signed a memorandum of understanding to acquire a telecommunications division of an undisclosed Korean chaebol. Carlyle expects to close its debut Asia fund in August somewhere between $750 million and $1 billion. The firm had a first close of $450 million in March (BUYOUTS April 5, p. 10).
Last December, HSBC Private Equity Management Ltd., which in early 1998 saw a final close on the $525 million HSBC Private Equity Fund 2 Ltd., closed a deal with Korean conglomerate Anam Group to acquire electronics division P.K. Ltd. for approximately $20 million. The deal was structured with all equity. Anam Group retained a minority interest in the new company. According to George Raffini, a managing director at HSBC Private Equity, the firm brought a Taiwanese strategic partner on board to help with due diligence on the deal.
When pan-Asia fund managers speak of Asian buyouts, many of them really mean South Korean buyouts. The region currently is the chief cause of excitement among buyout professionals, although Thailand, Taiwan and Singapore also get singled out for praise. And while there is growing interest in Japan, the country’s economy is seen as so structurally different from others in the region that few pan-Asia funds are considering investing there.
H&Q Asia is so bullish on buyouts in South Korea that it is raising a separate fund focusing on the region-the $75 million H&Q Korea Growth and Restructuring Fund. “We happen to think that Korea offers the best opportunities now,” Mr. Seymour says.
“Control situations will occur, but you’re not going to see an explosion. To have deal flow [in Asia], you’re going to need to do some minority deals.”
Carlyle, for its part, has been courting the Koreans with all the power of the firm’s formidable board of advisers. In May, the firm’s senior adviser, former U.S. President George Bush, paid a visit to South Korea, during which Carlyle sponsored large banquet dinners to enable Korean business leaders to “get comfortable with us,” Mr. Griffin says.
Carlyle has hired former Salomon Smith Barney investment banker Michael Kim, a South Korean national, to run the Seoul office. “He walked into our offices with eight deals,” Mr. Griffin says.
“With Korea, we didn’t think it would be this prolific,” Mr. Griffin adds. “But over the past five months, [the country] has made so much progress toward reform. We went from looks good’ to let’s concentrate.'”
Asian private equity professionals agree that Korea is where all the action is now, but some think this may be only temporary. Mr. Thadani points to the near-death negotiations between Newbridge Capital and Korea First Bank. Last December, Newbridge agreed to acquire a 51% stake in the troubled bank, but the two parties reportedly have clashed over how to value billions of dollars in non-performing loans. Mr. Thadani says he thinks the deal ran into trouble because the South Korean markets now are stronger than they were in December. “These guys [Korea First Bank] are changing the goal post,” he says. “They were willing to negotiate when the market was bad, but now that it’s back, they think the bank’s too good [to sell].”
Executives at Newbridge Capital could not be reached for comment, but reportedly still are optimistic that the Korea First Bank deal will close.
If the pan-Asia funds live up to everything limited partners hope they will, it will be a first. Asia-specific funds have a history fraught with difficulties:
* Arral Pacific Equity Trust II, which closed in 1990 on $170 million, had to be absorbed by Schroder Ventures in 1993 when Arral Pacific’s two managers, Mr. Thadani and Louis Bowen, had an acrimonious split. Mr. Thadani has acknowledged that many of the investments made by the fund turned out to be “lousy.”
* In 1997, Equinox Group Holdings Ltd. began marketing a $500 million pan-Asia fund which was later dissolved when the Asian crisis hit and key L.P. Samsung Life Insurance Co. pulled out.
* Italian investment giant EXOR Group recently decided to close its Asian arm, EXOR Asia Ltd., and focus on buyout opportunities in Europe, where opportunities are more abundant, according to Andrea Botta, president of EXOR America.
A History of Headaches
The funds that made it through the crisis have left some investors with a bad taste in their mouths. Some L.P.s, who declined to speak on the record, have expressed disappointment at the investment pace and strategy of HSBC Private Equity and Crimson Asia Capital, L.P., two funds which closed prior to the economic melt-down. Both funds have experienced personnel defections. In addition, Crimson Asia, led by Taiwan national John Paul Ho, has modified its original investment strategy to include high tech investing in Silicon Valley and Isreal, decisions which have caused some head-scratching among Crimson Asia L.P.s, according to sources familiar with the firm. Mr. Ho could not be reached for comment.
HSBC Private Equity’s Mr. Raffini admits that the onset of the recession caused his firm to “pull back a little bit,” but adds that HSBC Private Equity now is experiencing a robust deal flow and expects to complete a number of transactions in the next three months, including another buyout in Korea.
G.P. and L.P. sources also expressed concern over what they termed the perennial problems of investing in Asia-issues related to accounting transparency, scarcity of management talent, weak legal protections, the absence of available debt for transactions and the closed nature of the Asian family business community. “A lot of these families have their own money,” Mr. Thadani says. “These new funds may get the deals that the families don’t want to do for themselves.”
Investors in these pan-Asia funds say they are aware of the risks, but nevertheless feel that times really have changed.
No U.S. institutional investor has more money in Asia than CalPERS, which has a $325 million commitment to Lombard Pacific, a $75 million commitment to the Carlyle Asia fund, and a $100 million commitment to Rothschild Inc.’s Asia Recovery Fund, L.P, a distressed debt vehicle.
Barry Gonder, the senior investment officer at the California pension, returned earlier this month from a tour of Asia. He says Carlyle has a “really fabulous deal flow,” and that he doesn’t feel there is too much private equity money in the region yet. “I’m worried that the door may close, but I don’t see the signs coming,” he says.
Mr. Gonder also dismisses criticism of first-time Asia funds like Carlyle’s, which maintains that the newcomers don’t have enough experience in the region. Such criticism often comes from old hands who may have some duds in their portfolios, he says.
“One interesting question I tend to ask all these people is, What percentage of time are you spending working out the problems in your earlier funds,'” he says.
Marianna Umuduva, a senior analyst at The Common Fund, which has commitments to H&Q Asia funds II and III, says her fund is supportive of the change in strategy from minority to buyout, and feels H&Q Asia, because of its years of experience in the region, is well qualified to execute this strategy.
Buyout deals, Citigroup’s Ms. Putney cautions, “Are not going to be like Easter eggs laying on the lawn.”
A Shortage Before the Demand Begins?
Some market observers think there will only be so many buyout deals to go around, and the new batch of pan-Asia funds may have to backpedal on their buyout strategies once they start their respective investment phases.
For instance, when Prudential Asset Management Asia Ltd. wrapped its $540 million fund last year, the firm’s chairman and chief executive officer, Michael Kwee, reportedly said his firm would seek out control investments. So far, the firm has made minority investments in China, Japan, Korea and Australia.
“Control situations will occur, but you’re not going to see an explosion,” says Vincent Warner, finance director at HSBC Private Equity. “To have a deal flow, you’re going to need to do some minority deals.”
Even though his firm advised the Oregon State Treasury to invest with HSBC Private Equity, Kelly DePonte, chief operating officer at gatekeeper Pacific Corporate Group, remains unconvinced about the pan-Asia buyout strategy. He says he acknowledges an improvement in the region’s economy and an improvement in the buyout deal climate. But he says, “With Asia, I’ve gotten to the point where I’ll believe it when I see it.”
Pan-Asia Buyout Funds Currently Being Raised
Firm Fund Name Target ($mils)
The Carlyle Group Carlyle Asia Partners, L.P. 750 – 1,000
Chase Capital Partners Chase Asia Investment Partners 750
CVC Capital Partners CVC Asia Pacific 750*
Driehaus Asia Driehaus Asia Direct Equity Fund I 200 – 500*
H&Q Asia Pacific Asia Pacific Growth Fund III L.P. 750
Newbridge Capital Group Newbridge Asia II L.P. 350
Prime Partners Prime Enterprises II, L.P. 200
Schroder Ventures Group Schroder Venture Asia Pacific Fund 400
Talisman Capital Inc. Talisman Capital Asia Opportunity I 250
Pan-Asia Funds that Pursue Buyouts, Since 1996 ($200M+)
Firm Fund Name Final Close ($mils)
Crimson Asia Capital Holdings Crimson Asia Capital, L.P. 428
HSBC Private Equity Management The HSBC Private Equity Fund 2 525
H&Q Asia Pacific Asia Pacific Growth Fund II L.P. 278
Lombard Capital Partners Lombard Pacific Partners 325
Prudential Asset Management Asia Prudential Asia Private Equity Fund II 540
Transpac Capital Transpac 1996 Fund 318.5
Source: BUYOUTS * Currently in pre-marketing
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