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Asian private equity and the UAE investor

Financing rounds on hot deals were often led by the merchant banking and private equity arms of Wall Street investment banks such as Goldman Sachs, JP Morgan and Lazard Freres. It was the experience of a lifetime witnessing the birth of entire new industries - E-commerce, optical networking, Internet media with billions of dollars at stake and windfalls on NASDAQ for investors with the right connections in the right Valley boardrooms and New York I-banks. However, I passionately believe the next great secular private equity investment opportunity now lies in the Pacific Rim, the world's economic centre of gravity.So I have concentrated on developing contacts and deal flow across the Far East, on meeting the fund managers, bankers and private equity GP's everywhere from Hong Kong to Singapore to Bombay.

Private equity has transformed the Asian capital markets. For instance, Carlyle Partners and J.P. Morgan Corsair Fund invested in Koram, the Seoul bank Citgroup bought for $2.7 billion. Lone Star, a Dallas fund, paid $1.2 billion for the Korea Exchange Bank. Newbridge Capital has been an investor in private banks across the Pacific Basin. Goldman Sachs tripled the $500 million it invested in Kookmin Bank soon after the Asian currency meltdown in 1997-98. Ripplewood's buyout, restructuring and flotation of Long Term Credit Bank in Tokyo (renamed Shinshei) has become a legendary event in Japanese finance. Warbug Pincus generated the largest block trade in the history of the Bombay Stock Exchange when it exited from its stake in Bharti Teleservice ,the fastest growing cellular telecom firm in India (which has incidentally, more than tripled, since I first recommended Bharti shares in this column in 2003). Apart from the billions in profits made by foreign private equity houses in Asian bank restructuring after the 1998 crisis, their participation has transformed the landscape of Asian finance. For instance, foreign investors made South Korean banks innovative, shareholder oriented institutions, not passive financiers of debt addicted conglomerates (chaebols). After all, the near bankrupt banks that Carlyle, Newbridge and Corsair bought and restructured are now the targets for bidding wars between Standard Chartered, HSBC and Citigroup.

Yet there is no doubt that auctions processes, hot secondary markets and multi-billion dollar funds have made Asian private equity valuations at the trophy deal level way too expensive. In fact, as I learnt during the tech bubble in Silicon Valley, irrational exuberance is not limited to the stock market and infects private equity on as insidious a scale. Take India, for instance. Bidding wars among a handful of megafunds have made it impossible for private equity funds who invest now to make any real money in India. It is with great alarm that I learnt that the Blackstone Group will open an office in Bombay, as Carlyle, Temasek and Soros have done, then commit $ 1 billion to private corporate financing in India. An overheated market will just get more overheated and the bubble will inevitably collapse to the detriment of all investors eagerly buying into Indian private equity funds now. Caveat emptor is a term private equity investors learn the hard way as no other asset class offers the same divergence of returns among fund mangers. The good, the bad and the ugly are tough to figure out when your money sacrifices liquidity for 5 to 7 years. Middle East private equity? More hype than a real asset class. Never has so much money, to paraphrase Winston Churchill, chased such lousy deals with such awful transparency at such nosebleed valuations. Bubble financings are no anchor of value.

In Asian private equity, I notice that the best deals are often won by insiders, not foreign funds. The only reason Ripplewood bought LTCB is no other Japanese bank wanted it and the South Korean bank deals were all consummated at the bottom of an apocalyptic financial meltdown. Japan is the most xenophobic market for private equity funds in Asia. After all, when the retail store Daiei became available, it was snapped up by Marubeni, not Walmart and a US private equity consortium. This is not the case in China, India or even Southeast Asia. For instance, US private equity funds Oak Hill and General Atlantic Partners managed to snag the $500 million offshore business of GE Capital in India.

Still, local funds such as ICICI Ventures and Temasek have both the scale and the smarts to give Western private equity firms a run for their money. The Warbug Pincus profitable and painless exit from Bharti also proves that Asian capital markets have acquired a depth and sophistication inconceivable a mere decade ago.

Software, retail, pharma, oil and gas, mining, high tech manufacturing offer the best potential for triple digit IRR deals in China. I am primarily interested in middle market, pre- IPO deals in Hong Kong and Mainland China as the mega auction deals cannot offer major flotation windfalls. As Chinese companies scale up to global competition, as they integrate into the supply chain of the Fortune 500 and develop retail brands for a $1. 3 billion population, private equity opportunities will be fabulous. Hong Kong is my new Palo Alto and Central the next Sand Hill Road!