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The Asian attraction

The scaling back of activity in Asia by European private equity firms in recent months has left a wealth of opportunities for those that remain. Western funds should be targeting buy-outs, business process outsourcing and tech investments, argues the Asian Venture Capital Journal.

Europe's investment connection with Asia is a historical one, spanning centuries. Some of the early European trading companies could be called pioneers in regional private equity. Nowadays the options for Europe have become broad ranging compared with even a few years ago, when minority stakes in family-owned businesses were about the only deals around. Today, good opportunities can be found in buy-outs, outsourcing and technology - as the Sand Hill Road crowd and the large US buy-out houses have already discovered.   

European buyers scouring Asia for investments are finding good valuations, capable management teams and plentiful turnaround situations. Granted, some European private equity groups have retreated from Asia in recent years due to the regional downturn, coupled with increased opportunities in a unified European market. But their scaling back has only improved the hunting prospects for those who have remained.

Good valuations and exits
The European-Asian investment highway promises to get a little busier now that the industry recognises that Asian exits are attainable after all - and with good IRRs too. Consider the experience of Baring Private Equity Partners, which scored homeruns with two recent exits in the difficult Chinese market. What European groups have to offer to Asia is decades-long experience at the negotiating table and an ability to deal in a multicultural, multilingual environment that is as widely varying as Asia's diverse landscape. But at least in the buy-out space most of the large European buy-out houses are choosing to stay active mainly in Europe, where deregulation and privatisation opportunities have beckoned instead.

Opportunities in East Asia
Meanwhile, their US counterparts are in a buy-out gold rush in Asia, claiming opportunities in NPLs, recaps and distressed assets. Japan has been described as the   ‘mother of all buy-out markets.' Korea has shown that successful turnarounds can be achieved with foreign capital, such as Newbridge Capital's turnaround story with Korea First Bank. China, too, is seen as a frontier market for buy-outs.   

The Europeans have not hesitated to put down cash in outsourcing deals, however. Looking for a competitive advantage at home, European corporations are investing in India, primarily, but also increasingly in China and the Philippines. In these markets low-cost telecommunications and software development services can be found at world-class standards.   

Private equity players can't fund these outsourcing companies fast enough, and indeed, some predict that the sector is becoming overheated and that some outsourcing providers will go out of business.     

Chris Brotchie, CEO at BPEP, noted that some European manufacturers are under competitive pressure from low-cost Chinese manufacturing, a situation exacerbated by the euro's increased strength. Another driver, particularly in the UK, is deregulation of former state-owned assets and businesses that don't have the same obligation to buy their materials locally, and are increasingly adopting international procurement practices because prices are cheaper, he said. As an example, he cited an electricity supplier that might procure steel from India and insulators from China, rather than the local market.

Jean Salata, head of BPEP-Asia, further noted that European outsourcing of business processes is on the increase - not just helpdesks but also for accounting, business               administration, and publishing. ‘These service industries require high levels of English-language skill and education, which is readily available at a low cost in Asia, particularly India,' Salata said. 

High-tech source 
As Asia begins to develop homegrown technologies, European venture capitalists are finding that China, Singapore and other countries are good places to source cutting edge, high-tech deals. The management teams of entrepreneurial start-ups are better too, now than in the past as many Chinese and India engineers return home with Silicon Valley experience to start their own businesses. In some sectors such as wireless, broadband, microelectronics and semiconductors, Asia leads the world in the development of next-generation technologies.   

Facing an economic slowdown in both Europe and the US, the portfolio companies of European private equity firms are also looking to Asia to boost sluggish sales growth. The fast-growing Chinese market is touted as the antidote to poor demand at ‘home, and many private equity firms are taking managers of investee companies on trade missions to the region to check out the opportunities. At 3i, Jamie Paton, head of the North Asia Group, said that many of the firm's European portfolio companies operate in Asia - either selling into growing Asian markets or working with suppliers able to produce quality goods at a lower cost. ‘I was in Europe [in early September] and only covered Birmingham, London, Paris and Frankfurt talking to 3i portfolio CEOs with an interest in China - we saw over 200. The vast majority see this as an area of opportunity,' he commented. 

If more evidence of a cross-continent link is needed, consider that European institutional investors who have typically shunned the region are looking more favourably upon Asian funds. Among those about ready to commit more funds to Asia are Munich-based insurer Allianz Group, according to Wanching Ang of Allianz Private Equity Partners. Fund-of-funds Pantheon Group is looking to raise its recommendation of a 7.5 per cent allocation to the region, Partner Andrew Lebus said. Meanwhile, Adams Street Partners is close to an investment in a well-known Asian fund, according to partner PV Wang.

Likewise, Asian institutional investors are supporting European funds. About 25 per cent of the E1.6bn fund raised at Terra Firma comes from Asia, managing director Jennifer Dunstan noted.

But Asia is not for the timid - as can be seen from the retreats from the region by some major groups in recent years. Even the giant 3i group gave up on Japan earlier this year, shutting its Tokyo office and moving managing director Mark Thornton to Hong Kong.   

Others have reloaded for the region, meanwhile. ABN-AMRO withdrew from Asia a few years ago but it is back with a new private equity group for Asia called Fl EquityPartners. The team is led by CNR Kim, who moved recently to Hong Kong from Amsterdam.   

London-based Coller Capital has developed an appetite for Asia as well. The firm's Coller International Partners IV, which held its final close in September 2002 at $2.6bn,encompasses Asia as part of its global mandate. Even so, two transactions from the group this year have been European focused: the private equity portfolio sold by Deutsche Bank and the JV with British Telecom's venture portfolio.     

Looming large over the investment scene are the continuing geo-political factors, which have become more pronounced with terrorist attacks and the conflict in Iraq.  Needless to say, the SARS bout earlier this year too was a damper on investments in Asia.

Two-way traffic
Still, Gary Lawrence, managing partner of Capital Z Asia, said he finds the Europe-Asia connection real. ‘Two opportunities we are looking at today have significant European components - one, the acquisition by an Asian company of a European business, and the other, an Asian company with an opportunity to significantly broaden its customer base through expansion into Europe,' he noted.     

European ties with Asia are likely to grow stronger too, said Lawrence, as the US starts to take a more protectionist stance with tariffs on Chinese imports and proposals by US politicians to tie uniform labour and environmental standards to bilateral trade agreements.     

History too, continues to play a part in fertilising Europe-Asia links. Here's how Hiro Mizuno, investment director at Coller Capital, described it: ‘The historical family-style banking and trading relationships between Europe and Asia have left in place a mutual understanding of doing business between the two regions, including the flexibility to deal with any cultural and jurisdictional differences.'

Copyright © 2003 AVCJ

The Asian Venture Capital Journal is the region's leading publication on private equity and venture capital. With readers worldwide, AVCJ provides monthly coverage of fund raising, investments, exits and the people behind them. For more information please visit www.asianfn.com