Crouching Tiger HQ AP To Spring $500M Fund

H&Q Asia Pacific may be a crouching tiger, but its plans are no longer hidden. The private equity firm will soon start to stalk $500 million for its fourth fund and it will dissolve its financial ties with the investment bank that it grew out of.

Ta-Lin Hsu, chairman of H&QAP, shared the firm’s plans with Private Equity Week in an exclusive interview last Wednesday. The firm needs to raise a new fund because its $750 million third fund is just about tapped out, with $650 million invested to date. Hsu says he has had preliminary discussions with all of the limited partners in the third fund (vintage 1999) and none has said it won’t come back the fourth time around.

H&QAP manages about $1.6 billion in more than 20 funds, but Asia Pacific Growth Fund II and III are by far its largest, according to the VentureXpert database.

The firm will start fund raising in a couple of months and hopes to hold a first close on about $120 million in September and a final close for Asia Pacific Growth Fund IV in March 2003, according to a source close to the firm.

Hsu says LPs are pleased with the firm’s historical performance. Asia Pacific Growth Fund II, a $278 million vehicle raised in 1996, has already returned all of its capital plus about $30 million. With two-thirds of its investments yet to liquidate, the fund will probably end up with a return somewhere between 2X and 3X, he adds.

It’s too early to say how Fund III will perform, but it has had a few hits already. It put about $16 million into Access Co. Ltd. of Japan, and the stake is now worth about $100 million, Hsu says. Access makes browser software for DoCoMo’s popular I-Mode phones and other devices that access the Internet. The company went public in February 2001, becoming the first U.S. venture-backed technology company to go public in Japan.

Asia Pacific Growth Fund III also did a turnaround deal in 1998 involving retail stock brokerage Good Morning Securities Co. Ltd. of South Korea. H&QAP has already liquidated some of its position in Good Morning Securities at 7X its investment, Hsu says. Like most private equity firms these days, H&QAP is scaling back the amount of money it plans to raise for its next fund, citing the new realities of venture investing. Following firms like Accel Partners, Kleiner Perkins Caufield & Byers and Redpoint Ventures, “those people with excessive amounts of money will cut back their funds within the next six to nine months, because there just aren’t that many deals,” Hsu predicts. He defines “excessive” as any venture fund greater than $450 million. With pre-money valuations now in the $3 million to $7 million range, the typical VC firm will do about 50 to 60 deals per fund, “and that’s a lot of deals, even with eight partners,” Hsu says.

For H&QAP, the round figure of $500 million is appropriate, Hsu explains, because the firm doesn’t just invest in venture deals and it supports about 50 investment professionals in 10 offices throughout Asia and one office in Palo Alto, Calif.

VentureXpert shows that H&QAP has invested at a very steady pace making between 16 and 18 deals in each of the past four years. Most of its 80 investments have been in Internet companies (16), followed by semiconductor makers (15) and software developers (nine). A majority of its deals have been in expansion and later-stage rounds, according to VentureXpert.

The new fund will adjust its geographic focus to reflect the changes in the economies of various Asian countries. For example, it plans to put 30% to 40% of its money into Japan and Korea, down from 50% in Fund III.

Also, it will invest about 30% of its money in China, up from 12% previously, and about 20% to 25% in Silicon Valley, up from about half that amount in the prior fund.

The firm will be able to invest in Silicon Valley because it is severing its relationship with the entity that was originally its largest limited partner: investment bank Hambrecht & Quist. When it was launched in 1985, H&QAP was given a mission to invest in Asia but not in the U.S., where it would bump into H&Q’s U.S.-based private equity group. But H&Q was bought by Chase, which was subsequently swallowed by JPMorgan. All of that merging put H&QAP in direct competition with the private equity arms of Chase, like Chase Equity, which invests in Asia. To eliminate conflict, both sides figured it would be better to have H&QAP buy out the 15% ownership stake of what was once Hambrecht & Quist. The “amicable” split is expected to happen in the next few months, Hsu says.

Lawrence Aragon can be contacted at: