A growing source of capital flowing into Asia since the Asian financial crisis of 1997-1998 has come from private equity funds investing in companies and commercial property. The greatest changes occurred in countries such as Korea, which had been inhospitable to private equity prior to the financial crisis, but radically changed course to welcome financial investors as an important element of its economic globalization and growth policy. Then, as all Asian economies grew rapidly during the first decade of the millennium, many countries across the region loosened the restrictions that curtailed private equity type investments, while global private equity investors sought to participate in Asia’s high growth environment. During those years until 2008, Asian economies grew at rates close to 10 percent while the number of private equity deals in Asia doubled and represented aggregate investment exceeding US$250 billion. (Also see the discussion of private equity investment in Chapter 5 under “Venturous Vitality.”)
The global economic downturn during 2008-2010 slowed private equity investments worldwide, but the portion of such investments attributable to Asia continued to grow, reflecting the region’s relative economic strength. According to the consulting firm McKinsey & Company, Asia accounted for roughly 10 percent of private equity investment activity in 2007. By 2009, at the depth of the global downturn, Asia accounted for about 25 percent of all private equity investment activity. In 2011, with the global economy beginning to return to normal, Asia’s share of all private equity deals settled at about 21 percent.
Comments by Karl Moskowitz *
Private equity investments have been growing rapidly in Asia in recent years for several reasons. First, both the policy environment and the business environment in large economies such as Korea, Japan, and China became more open and receptive to financial investors in addition to the corporate FDI they have always welcomed, and these same changes in regulation and attitude have been reflected in many countries across Asia, including India, Vietnam and Indonesia, which have loosened restrictions on foreign ownership and investment.
Second, the number of potential deal situations in which private equity firms specialize grew as some large family-controlled business groups in countries such as Indonesia, Malaysia and the Philippines were partially broken up during the decade as were many of the family-run Chaebol conglomerates in Korea, reflecting generational change and growing competitive pressures to specialize. Similarly, corporate restructuring in Japan and Korea and some other countries led to more business unit buy-out opportunities for private equity funds, while in other Asian countries steps to privatize certain state-owned enterprises opened opportunities for private financial investors.
In response, big private equity investment firms like Kohlberg Kravis Roberts, Carlyle, and Bain Capital opened offices in Asia’s leading money centers – Hong Kong, Tokyo, Singapore and Seoul, groomed local professional teams typically led by US-educated professionals from well-connected families, and raised new private equity funds targeted solely on the Asia region. In Korea, China, Japan, Singapore, Taiwan, India and Hong Kong, local private equity funds, often led by local professionals with experience leading the Asia operations of the well-known global firms, have raised their own independent funds, thereby making the private equity investment markets in Asia more competitive with even greater funding resources than before.
Despite the emergence and strong growth of private equity investment activities across Asia during the past fifteen years, a number of constraints still limit the scope and range of private financial investments in Asia, particularly in contrast to the unfettered deal markets of North America and Europe. All the policy restrictions and legal limitations on corporate FDI apply to foreign private equity investments, but typically none of the incentives offered to induce FDI are available, except for occasional instances in which the private equity investor teams with a corporate FDI investor that qualifies for the incentives. Though varying in importance from country to country, the family ownership and control of many businesses in Asia, including many listed companies and huge conglomerates, raise barriers to deal negotiation and, following deal closing, they raise significant barriers to execution of new business strategies to build value in the invested company. For the owner family, divestiture of business units or accepting investment terms that cede control of subsidiary companies can have severely negative repercussions for their business reputations and influence and even for the ongoing management of the companies they did not sell.
In many Asian countries there is resistance to foreign ownership, even when there are no formal legal barriers, and this resistance tends to be higher against foreign financial investors than foreign corporate FDI, because financial investors are vulnerable to politically-sensitive accusations of financial manipulation and “vulture investor” profiteering. Private equity investors in Asia also must learn to deal with business practices and accounting and record-keeping standards and organizational and HR practices at many Asian companies that do not meet international standards and lack transparency. Again, these are similar to challenges faced by foreign corporations in joint ventures with local partners or when making acquisitions in these markets.
Financial investors must exit investments to harvest their gains, and here too the options are more constrained than in the North American or European markets, where exit through public offerings or by sale by competitive bidding among strategic investors or other private equity firms are frequently used. In many Asian countries liquidity through initial public offering is often complicated by regulations or government regulators or by unattractive local market valuations. Though the track record is still young, until recently most exits have been by sale to private buyers, local or foreign. Finally, most of the private investment opportunities in many South and Southeast Asian countries are smaller in size than the large deals sought by global private equity funds and the large private equity funds they manage, which has caused the global funds to pull back from some markets or team with local players with experience in medium-sized and small deals.
Another sea change in the Asian private equity environment over the past decade has been the emergence of Asian sources of institutional investor funding for private equity deals. Local insurance companies and large semi-government pension funds, such as the Military Mutual Aid Association in Korea, have begun to allocate investment money into global and local private equity funds. These institutional investors have been prominent co-investors in certain domestic deals as well as international private equity deals in other countries. Certain newly prominent Sovereign Wealth Funds in Asia have been sources of investment funds for international private equity, often as co-investors. Sovereign Wealth Funds are investment funds sponsored and managed by a country’s government. Their purpose is to safely diversify the country’s financial holdings mostly outside of the sponsor country. They tend to invest internationally rather than locally and, in the case of private equity deals, often as co-investors rather than as investment managers.
A significant trend for the future of private equity investment activity in Asia is the rise of local private equity firms. These firms often have a better understanding of their home markets and local connections that give them preferential deal flows of potential investment opportunities, greater cultural and regulatory acceptability, and access to local institutional funding and potential co-investors. Their executives typically have worked for large private equity firms in North America or Europe and have returned home with considerable experience in the industry. There is now a great deal more local money available in Asian countries like China, Japan, India, Malaysia and South Korea for funds organized by these local firms. We can expect the local firms to grow in prominence while the large international private equity firms concentrate on large transactions and industry specialties in which they retain advantage.
Overall, the private equity investment industry in Asia is expanding, and local firms are growing more rapidly than their international competitors. In the year 2000, firms specializing in private equity investment – international or local – were found primarily in Tokyo, Hong Kong and Singapore. Now they can also be found in Seoul, Beijing, Shanghai, Mumbai and Jakarta.
* Karl Moskowitz is founder and president of KSA Ltd, a business development and consulting company based in Seoul, South Korea, with special expertise in new technology markets and venture capital/private equity in Korea and Japan. Prior to launching KSA Ltd in 1984, Dr. Moskowitz was a member of the faculty of Harvard University, where he taught courses on modern Korean history and economic development and served as the first executive director of the Korea Institute at Harvard.
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