HQ Asia Pacific Closes $750M Fund III

H&Q Asia Pacific closed the third in its series of pan-Asian private equity vehicles last week, with a final take of $750 million. Like its predecessors, Asia Pacific Growth Fund III (APGF III) will move quickly across its namesake continent, identifying technology plays in the region’s fastest-growing economies.

Although Fund II held investments in 10 Asian countries, it was concentrated heavily in Japan and South Korea, two of the region’s largest and most mature economies.

“Our geographic focus changes with time: Two years ago our focus was not in South Korea or Japan,these countries were isolated from private equity,” said Ta-Lin Hsu, founder and chairman of H&Q AP. “South Korea was in the infancy of its entrepreneurial structure, spirit and opportunity. But since the so-called IMF crisis in 1997, the country has totally changed – new enterprises and spin-off – so there are new opportunities.”

Hsu added that the situation in Japan has also changed in that, while the old economy has been stagnant for almost a decade, the new economy is booming thanks to the Internet, telecom and wireless industries.

APGF III will continue to make moves in those two countries, although the bulk of Hsu’s new investments will be concentrated in India and China. Such plays will primarily be in business-to-business development and network infrastructure companies.

Hsu said that India boasts a disproportionately well-educated population that has cashed in on the Internet explosion by converting its massive reserves of scientists into entrepreneurs.

“Three or four years ago, they didn’t have the personal wealth, so they couldn’t financially help the development of India,” Hsu said. “The world has changed because of the Internet boom and the opportunity in India there is very great.”

In fact, Hsu’s most recent fund, the Asia Pacific Growth Fund II, has already established a holding company, named @India.com, as a local investment vehicle. The venture is headed by Ramesh Bengal, the current chair of Seagram’s Asia Pacific arm and former general manager of Pepsico’s regional operations. Together with locally based corporations, the venture is investing in b-to-b start-ups and wireless technology.

As for China, the infancy of the nation’s telecommunications infrastructure has proved a boon as the broadband backbone for the Internet is already in place. Indeed, copper wire is a rarity in China, with fiber optic cable networks serving as the standard.

“Venture capital is a booming business over there,” Hsu said. “We’ve been approached by many parties to form joint ventures.”

Although the China Dynamic Growth fund has been successful, Hsu said he is hesitant to enter into another Chinese joint venture.

“In venture capital, decision-making is the most important,” Hsu said. “We value the local expertise, but we need to know we can maintain decision-making control.”

To take advantage of early-stage and seed financing opportunities, the new fund will create smaller, local holding companies in joint ventures with local Asian partners.

“These are the smaller deals you can’t do with a bigger fund,” Hsu said.

On average, the new fund will invest between $5 million and $50 million in a portfolio company. It is a pure private equity play, looking to take controlling positions and a board seat on all of its investments.

“We emphasize that we have a chance to add value,” said Hsu.

There are 38 limited partners in the fund with corporate pension funds, insurance companies and endowments topping the list. Some of the blue chip names from the U.S. and Canada contributed as much as $125 million. A handful of European and Middle Eastern entities also took a stake in the fund.

H&Q AP is the successor to a private equity operation developed originally by Hsu and San Francisco-based Hambrecht & Quist in 1985. It was spun off from the bank in 1996. To date, the firm has managed 16 funds, with over $1.6 billion in committed capital.