Watching, Waiting On the Asian Markets

If it involves private equity investing in East Asia, Peter Brooke, chairman of Advent International, would rather wait until the dust settles.

Advent, an investor in the region since 1983, expects to face limited losses from the ongoing financial crisis in the region, largely because its portfolio companies have almost no external debt, except to the venture firm.

Advent, with offices in Hong Kong, Indonesia, Malaysia, Singapore, the Philippines and Thailand, will help its companies cope with decreased demand for their products and a potential recession. It will also consider extending additional cash to help weather a possible storm, Peter Brooke said.

Venture backers who invested in Asian companies in the local currency and whose companies have high levels of US dollar debt will suffer the most, he noted.

Since local stock markets were weaker than their US and European counterparts to begin with, the turmoil in Asia will make equity exits even more difficult. Another option, bringing Asian companies to Western exchanges, will have to wait until US and European investors feel more confident about putting money in the region again,, Peter Brooke explained.

Although he views the current situation as a “rough patch” for the region, he remains optimistic about its future: “I am not, in the long run, discouraged”.

With hindsight, Schroder Ventures managing director Solomon Owayda said his firm was both “smart and lucky” to have bypassed investment opportunities in countries such as Thailand, the Philippines and Singapore, instead opting to back companies in India.

In the light of the tremendous drop in currency rates and valuations in East Asia, however, now is the time to invest in places hard hit by the crisis, he advised: valuations may not yet have reached rock bottom yet, but they must be close.

Taking its own advice, Schroder anticipates a close on the 17 billion (ecu 125 million) Japan Venture Fund III (EVCJ August/September 1997, page 15).

“We think it’s a great time to buy,” Solomon Owayda said. “Japan has been in recession for seven years. Nothing lasts for ever: it’s bound to come out.”

Japan’s own recent financial woes have left it unable to assist its neighbours in recovery efforts as has been the expectation in the past.

Japan Will Face Changes

George Hara, a partner in DEFTA Partners, raises funds in Japan for investment in US high technology companies. He predicted that, in the coming months, Japan would face its own period of critical financial upheaval. Financial institutions will be forced to recall loans from badly managed companies unable to make the sudden payments and from solidly run companies also at risk of collapse.

Ultimately, said George Hara, a couple of Japanese banks and securities companies will be forced out of business. Despite the immediate bleakness, however, he expects a rejuvenated Japanese economy to emerge in about two years.

Although Japan has inched closer to loosening restrictions on foreign control of Japanese companies, levels of overseas investment as yet remain low. Conversely, even before the projected recovery, US financial institutions could benefit from a sudden influx of money from the Japanese public once a rule goes into effect on 1 April allowing Japanese private investments outside the country.

Les Brun, chairman and chief executive of Hamilton Lane Advisors, cautioned against generalising about the state of Asia’s economies, pointing out that China and Taiwan, for instance, have been unscathed compared to Malaysia and Japan. Overall, however, it would be wise to take a more circumspect approach to investing in Asia than in the past, he said. Investors need to research carefully, and venture firms should undertake their own due diligence rather than rely on the views of others.

Hamilton Lane’s clients do not have much private equity invested in Asia to begin with, Les Brun said, estimating that between $300 million and $400 million (ecu 275-370 million) of his clients’ aggregate assets of between $8 billion and $9 billion were committed to the region.

More generally, institutional investors’ appetite for Asia appears to have cooled between 1995 and 1997, according to the executive summary of the 1997 Report on Alternative Investing by Tax-Exempt organisations compiled by Goldman Sachs and Frank Russell Capital.

In 1997, international commitments to Japan fell to 3.3% of total alternatives investment, down from 5.4% in 1995. China garnered only 2% of international commitments last year, down from 7.2% two years previously.

The level of international private equity money invested in other Asian countries dipped to 18.8% of total commitments, down from 22.2% in 1995.