Asia is once again making headlines – not so much for its political and economical turmoil, but for its private equity investment opportunities. International equity firms with an Asian bent, such as Newbridge Capital LLC, the Carlyle Group and Baring Private Equity Partners Asia are all raising funds, chasing deals, and proving doomsayers wrong in their prophecies of an illiquid market for private equity plays.
Industry observers say that regions such as Korea, Japan, India and China have enormous potential for private equity investors because of their size, population, and market inefficiency, which creates better investment opportunities than in more mature markets. In addition, Western buyout shops are taking a more serious approach toward investing in Asia because of the push on the part of Asian lawmakers for greater private equity reforms.
Making Rain, Raising Funds
Private equity in Asia was legitimized to an extent last year with New York-based Ripplewood Holding‘s groundbreaking acqusition of Japan’s Long Term Credit Bank. The group prominently followed that up this year by penetrating the country’s fabled auto manufacturing industry and purchasing a division of Nissan Motors.
Korea was also put on the private equity map by another New York-based deal shop, Warburg Pincus, which acquired credit card issuer LG Capital for a 20% stake. The group has also purchased a 50% interest in children clothing distributor Little Brenn Ltd. for $32 million, and NorthPole Ltd., a maker of camping goods. In addition, Warburg Pincus also holds in its portfolio China-based AsiaInfo Holdings Inc., a supplier of network software to Chinese telecom companies, as well as its biggest Asian investment Bharti Televentures, an Indian telecom play, and HDFC, a home mortgage lender in India.
More recently, Newbridge Capital, an affiliate of BLUM Capital Partners and Texas Pacific Group, are said to be in talks with Japan’s KDDI Corp. to buy its Tu-ka group of mobile phone operators for a 56.2% stake. Newbridge already owns a majority stake in Tokyo-based Internet portal Livedoor Inc. In addition, the group reportedly planned a formal opening of its Tokyo office on Sept. 11th.
Japan is seemingly the technology hot spot for the Carlyle Group and Goldman Sachs, which along with Japan Telecom Co. in August was reportedly negotiating to purchase a minority stake in eAccess Ltd., a major Japanese provider of broadband-Internet access, for $100 million. If it closes, the deal would give the Carlyle Group, which opened a Japanese office last year, giving it a presence in Japan’s technology sector.
On the fund-raising front, Baring Private Equity Partners Asia last month held a first close of $206 million for its Baring Asia Private Equity Fund II, which will focus on investments in the information technology and communications sectors. The fund is expected to raise $400 million by its final close. Baring Asia II LP will seek out investments in the North Asian makets of Hong Kong, Singapore, Taiwan, China, Korea, Japan and India.
John Eric Salata, a managing partner of the fund, said in a statement, “Asia has some very attractive investment fundamentals, entrepreneurial culture and large pools of low cost, highly educated labor. It also benefits from the lowest cost manufacturing base in the world, a high level of investment in IT infrastructure, and a very high penetration of wireless comunication devices.”
Warburg Pincus also recently held a first close of $2.8 billion for its Warburg Pincus Equity VIII LP, which sports a target of $5 billion. Although a majority of the fund will be focused on opportunities in the U.S., the firm says that it will also consider opportunities in Europe and Asia.
The Great Wall Comes Undone
Hong Kong and China ranked as the eighth most active private equity market in the world and the most active in the Asia-Pacific region last year, according to a survey recently released by PricewaterhouseCoopers and U.K-based 3i Group. Total investments in both markets increased 11.11% to $2.2 billion and a total of $5.8 billion in funds were raised there.
As for China, in an attempt to open its doors to Western private equity investors, the Chinese government recently passed reforms allowing foreign investors to set up joint ventures, wholly owned private equity ventures, or partnerships with Chinese companies. Also, foreign investors would be allowed to take their portfolio companies public on the Chinese stock exchange. These changes would no doubt make China more attractive to private equity investors.
Chip Kaye, a managing director at Warburg Pincus, says China has come a long way in the last 20 years, but added that the region has at least 10 years to go before it’s a completely viable country for investment from foreign parties.
Kaye notes that China in particular is still suffering from “a host of macro-economical, political and social challenges,” and that it “clearly has a ways to go” with there being “a decade until you can make more definitive long-run statements” about the country’s private equity market.
Additionally, industry sources are skeptical of China’s legal system. They say it is unreliable and that negates any positives in the region.
A Host of Problems
Aside from the few deals that have closed to date, buyout pros say that Asia in general remains a tough market in which to source and close transactions, and they’re remaining cautiously optimistic. To further complicate matters GPs also face a difficult debt market that is even more immature than the private equity market with more of a focus on assets and properties than cash flow-based lending. Sources say that Asian banks are less aggressive than their Western counterparts because they’re still recovering from the crisis of 1997.
“I have sometimes kidded with people that there have been more conferences on Asian leverage finance than there have been leverage finance transactions done,” Kaye says.
However, Daniel Mintz, executive managing director and co-founder of Olympus Capital Holdings Asia says credit is available in the more mature private equity markets of Korea and Japan, which also has an interest rate of 2% to 3%.
The lack of liquidity has also been a thorn in the side of private equity investors. “We look for companies that have the scale and quality to be priority targets of strategic buyers and/or are going to be successful as liquid public companies,” Mintz says.
Investors will no doubt keep an eye on Mintz’s group, which is rumored to be selling off a majority of its 34.33% interest in KEB Credit Service to Citibank, for telltale signs of things to come in Asia’s murky exit environment.
In general, sources say that the Asian private equity market is not for the faint of heart. But the markets are inefficient and opportunities do exist for firms that are well-positioned to take advantage of them.
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