Baring Heads East With Fund II

As the U.S. and European economies continue to tread stagnant waters in the wake of last year’s tech wreck, Baring Private Equity Partners has chosen to seek higher ground in the Far East. The firm is currently in the midst of shopping its second Asian investment vehicle to limited partners, and last week announced a $206 million initial close. Targeted at $400 million, the fund is expected to hold a final close by year-end.

Baring kick-started its fund-raising efforts 12 months ago with a $75 million commitment from its parent, Netherlands-based ING Group, and has since made nine investments in Asian technology enabling companies. Additionally, the firm has already signed on a slew of new and existing investors, including Invesco Private Capital Inc. and CDP Capital.

Like 1997’s $305 million Fund I, Baring Asia Private Equity Fund II’s strategy encompasses data networking, wireless communications, information technology services, electronic manufacturing services and enterprise software plays in various stages of growth from start-up to expansion-stage and buyout deals.

“We’ve co-invested with [some of the region’s biggest players] Goldman Sachs and Warburg Pincus, both of which do later-stage deals that are mostly non-tech, and Walden International, which is purely early-stage tech,” said Jean-Eric Salata, a managing partner with the firm’s Asia fund. “We’re unique in that we’re the only fund [in Asia] focused on tech across all three stages.”

Moreover, Salata said it is a good time to be pumping new money into technology enabling companies in Asia because, while the U.S. communications infrastructure market has become saturated, the networking backbone in the Far East is still in its infancy and, as such, is wide open for new players.

What is more, although Asia is currently seeing significantly higher economic growth than the U.S. and Europe, it is among the most under-funded regions in terms of private equity investment, said Jack Hennessy, a partner who recently came to Baring from Allen & Buckridge to oversee the firm’s West Coast activities.

“We want to be the Kleiner Perkins of Asia in 10 years,” Salata added. “There is no leader there yet, so it’s a wide open space.”

Management U.S.-Style

While it touts Asia’s virtues from an economic standpoint, Baring still seems quite enamored with U.S.-style management teams. In many cases, it will handpick either native U.S. entrepreneurs with proven track records to head up its portfolio companies, or Asian nationals who have built successful firms in America and have returned to their home countries to start businesses there. In several instances, the firm has even relocated a company’s corporate headquarters to the U.S. while maintaining operations and manufacturing facilities in Asia in order to leverage lower labor costs.

Baring also looks to back companies that may have some strategic value to players in other countries down the line, particularly in Europe and the U.S.

“The key is to make sure you have a path to liquidity,” Hennessy said. “You have to make sure that, regardless of whether the public equity markets are high or low, there is some strategic reason someone would want to buy these companies.

“In Asia right now, the entry price is relatively low, so even if the private equity valuations are low at the point we exit, we’re still in good position to get a good return for our investors. At the end of the day, you want to buy low and sell higher than you bought.”

If Fund I’s success is any indication, there aren’t likely to be any complaints. That fund has already generated an internal rate of return (IRR) of 124% on investments realized to date.

Strategy Stats

Like its predecessor, Baring’s sophomore investment vehicle will likely invest in about 26 portfolio companies over the next three to five years. One fundamental difference is that the deal size will be a bit larger – in the $15 million to $20 million range over the life of an investment – given the low valuations in Asia right now, Salata said.

The firm has announced three of its nine investments to date. Most recently, Baring participated in a $48 million financing for Celeltron International Ltd., an electronic and optical manufacturing services provider based in India.

Investing alongside GE Lighting North America, Baring has also funded Global Lighting Technologies Inc., a Taiwan-based company that manufactures backlit displays for personal digital assistants and other handheld wireless devices, and Accelion Inc., a San Jose, Calif.-based data storage software firm with a technology and engineering center in Singapore. Accelion raised $10 million in its first institutional round earlier this year, and is nearing the close of a $15 million Series B financing, Hennessy said.