Market introduction

So far, the new millennium has yet to bring a message of joy to the global private equity industry. The Nasdaq meltdown began just four months into the new century and the financial merits of private equity have come under intense scrutiny ever since. Once hailed as the impetus behind the US high-tech boom, private equity is now condemned as the culprit behind Nasdaq's relentless fall and Silicon Valley's depressed mood.

Following the September 11 terrorist attacks on the US, private equity joined nearly all industries in unveiling some of its bleakest performance figures on record. But the journey ahead for the nascent Asian chapter will be arduous. For even before the September 11 catastrophe, the Asian private equity industry was already facing the daunting task of arousing fund investors' anaemic interest.

KALEIDOSCOPES OF INVESTMENT FOCUSES

Since 1997, the industry has explored a variety of investment models in its attempt to boost flagging investment returns. It first sought a fresh charter when the Asian financial crisis brought an end to the region's emerging market growth. In addition to a sudden growth of restructuring funds, a handful of firms chose to mint new identities as buyout specialists. Before others had found their own niche, the technology windfall swept across the globe and amid the strugggle for investment returns, it was a saving grace for the industry. It lured numerous firms to bet on any business plan that had a plausible chance of becoming a new star in the technology cosmos. However, when the era of technology correction arrived, casting a shadow over budding technology startups and even established companies, the industry was once again pushed into revising its strategies. The industry's movements in the first six months of this year bring to light an investment community deeply bruised after two macroeconomic assaults, but one which is seeking in earnest a new set of investment formulae to help it advance forward.

RETURN TO BASICS

For the first time since the 1997 Asian financial crisis, at the end of June 2001, funds for conventional private equity investment had increased to become the second largest component in the industry's fund pool profile. In the three years ending December 2000, conventional private equity was eclipsed, first by restructuring funds and later by technology funds. But in the first six months of the year they rebounded and commanded $1.6 billion, or 23.57%, of the $6.8 billion raised during this period. They trailed behind technology funds, but still were ahead of restructuring funds by a comfortable 5% margin (figure 1).

For a brief spell between late 1999 and early 2000, investing in internet companies was regarded as the hallmark approach. However, the profile for the first six months of 2001 was vastly different. Once mesmerised by internet plays, Asian private equity investors have been distinctively cool in deploying capital to this sector. In the period under survey, an estimated $1.8 billion was directed to 44 companies by private equity fund management firms based in Hong Kong, Singapore and those Asia-focused funds based in the US (regional firms). While the amount itself represents a modest 5.8% increase compared with the corresponding period in 2000, the number of transactions, in fact, has declined by 34%. Regional firms have chosen to park their capital in mature enterprises instead of young technology companies.

When the allocations to internet and information technology companies during the first half of 2000 and that in 2001 are compared, they unfolded a compelling statement of investors' fallen interest in them. In the former period, they attracted 50% of regional firms' capital investment, while in the latter time frame, they captured only a paltry 8.2%. Instead, the semiconductor and banking finance industries have become the two principal targets for Asian private equity investment (figure 2).

Regional Private Equity Firms' Investment Profile
Industry breakdown by amount  Amount: US$1.7 billion (Jan to Jun 2000)
Industry breakdown by amount Amount: US$1.82 billion (Jan to Jun 2001)
Figure 2	Source: Private Equity Review

Fifteen months after the dot.com fairy tale soured, the adjustments taking place in both the fund pool and investment profiles underscored one of the most turbulent periods experienced by Asian private equity. Some of the industry's oldest and largest firms have already crystallized their future investment blueprints, reflecting a new sense of confidence and direction.

FUTURE PLANS

In the early part of 2001, Asia Private Equity Review surveyed 24 leading firms to ascertain how management firms have responded to the challenges immediately after the April 2000 Nasdaq meltdown. Six firms are specialists in buyout transactions, another six are in technology plays, while the remaining 12 fall into the traditional private equity area. Their combined fund pool represents some $13.7 billion.

Although private equity firms have seriously questioned technology promises since April 2000, the majority of the 24 Asian firms surveyed have pledged their faith in technology. In the 12 months ending March this year, about 60% of the traditional private equity firms have also concurrently allocated capital to technology companies, which included internet-related or internet-enabled businesses.

Of these 24 firms, 14 of them disclosed their technology investment amount which added up to no less than $706 million. The Nasdaq index's April 2000 plunge did not appear to have diluted their enthusiasm in technology. Even internet companies captured an impressive $255 million or 36% of the $706 million. But recognition of the technology correction was clear. While virtually all firms have affirmed their continued commitment to the technology industry, they have also indicated an intention to reduce future allocation in it. An estimated total of $518 million is expected to be mobilized in the 12 months ending March 2002, 27% less than that in the preceding period.

CONVENTIONAL PRIVATE EQUITY AND BUYOUTS FAVOURED

However, putting aside private equity investors' interest in the technology industry, conventional private equity and buyout firms were focused on their future strategies. For the 12 months ending March 2002, funds to be deployed for traditional businesses and buyout situations will exceed those for the technology industry.

Of the 12 traditional private equity firms included in the survey, eight provided information on their investment capital for the year ending March. It amounted to $720 million. For the period between April 2001 and March 2002, these firms intend to increase their capital allocations by 27.4% to $917 million.

The buyout firms have taken the most optimistic outlook by far. The eight replies from this group of firms indicated that an aggregate of $1.1 billion would be labelled for investment in the 12 months ending March 2002, an increase of 37.5% from the $800 million in the preceding period. In fact, seven out of these eight firms have unveiled their plan to recruit further talent to keep up with the increased volume of investment activities.

While buyout, conventional private equity and technology firms may differ in their investment allocation, they were unanimous in voting north-east Asian countries as the primary source of opportunities. Figures released by 22 firms showed that they have collectively deployed an approximate $1.28 billion in north-east Asian countries for the period under review, whereas south-east Asian nations have received less than half of that sum, with only $463 million. Over 63% of the firms expressed their continued interest in the greater China economy, as well as Japan and South Korea, while south-east Asia attracted only three followers. The spotlight in southern Asia has largely shifted to India, which attracted five firms which declared their intention to explore opportunities there (fig. 3).

Survey on Selected Asian Private Equity Firms

The Asia Private Equity Review conducted a survey on 24 leading Asian private equity firms which represented fund pool of US$13.7 billion under management. They were asked on their investment allocations for the period April 2000 to March 2001 their future outlook for the period April 2001 to March 2002 Investment Allocations by Private Equity Firms 3a Investment amounts 3b Breakdown in internet and non-internet related technology companies Geographic Focus 3c April 00 to March 01 3d April 01 to March 02 No. of firms surveyed: 24   For period April 2000 to March 2001  -  8 buyout firms were surveyed; 7 responded . 11 Conventional private equity firms were surveyed; 10 responded. 16 technology firms were surveyed, 14 responded.   For period April 2001 to March 2002  -   8 buyout firms were surveyed; 8 responded. 11 Conventional private equity firms were surveyed; 11 responded. 16 technology firms were surveyed; 14 responded. In all, 22 firms responded.   Figure 3 Source: Asia Private Equity Review

ANOTHER SETBACK

Before the aforesaid investment plans had a chance to be tested, the September 11 disaster occurred. The UN revised the global economic growth from 2.4% to 1.4% and estimated an awesome $350 billion would be depleted from the world's coffers. While the global private equity industry is locked in for another round of adjustment, the outlook is particularly bleak for Asia. According to the UN's projections, economic growth in east and south Asian countries will be the most affected, with an expected drop of 2.4%. Instead of the 4.1% growth previously forecast, it has been revised to 1.7%.

In the three years ending September 2001, regional firms deployed an estimated $14.5 billion in 371 companies. While the investment profile during this period largely shied away from the most affected industries — airlines and hospitality — over 67.59% or close to $10 billion went to east and south Asian countries (Fig. 4). This latest macroeconomic assault will drag the industry's diminutive return figure to another new low.

Private Equity Investment by Regional Firms (1999 - 2001 September)
Figure 4	Source: Asia Private Equity Review

Already, in October, a consortium of private equity investors in South Korea-based LG Card (formerly known as LG Capital Services) felt the first repercussions of the September 11 tragedy, when their divestment programme was derailed. After having revised its listing schedule twice, it has finally postponed the plan. The single largest investment in the financial industry by a consortium of private equity investors, LG Card's shareholders unanimously resolved to suspend its November 6 listing that was scheduled on the Korea Stock Exchange. An October 12 report by the Financial Times cited investors favouring such a move "due to growing jitters in international financial markets following last month's attacks and subsequent retaliations". LG Card's delayed listing has not only detoured its investors' exit plan, but also blocked one of the LG Group's units' critical cashflow.

In December last year Warburg Pincus led four other investors and committed a total of $370 million in LG Card. It paid $200 million and took a 20% stake, while the others, including Government of Singapore Investment Corp, AMP Henderson Global Investors, Gems and another investor, committed an additional $170 million.

In July, to reduce a mountainous debt of KRW1,026 billion ($821 million), LG Industrial Systems, one of the units in the LG Group, sold a 11.89% stake in LG Card to Credit Suisse First Boston for KRW291 billion ($232.8 million). LG Card was originally intended for an October 25 listing which was to be a capital-raising artery to the group. One key unit of the LG Group, LG Electronics, had announced on September 7 that it would sell 92.6% of its stake in LG Card on October 25, to secure about KRW140 billion ($112 million). However, the listing day for LG Card was subsequently moved to November 6 and then in the face of the lethargic stock market condition, Warburg Pincus and other co-investors made the conscious decision to halt LG Card's listing plan.

OBSERVATION

In hindsight, the past two upheavals, the 1997 financial crisis and the technology meltdown that commenced in April 2000 were a blessing in disguise for the industry. Paradoxically, they have prepared it for the sudden advent of the September 11 catastrophe. As the industry faces its most severe downturn since direct equity investment first arrived in Asian nearly two decades ago, it takes the determined and the strong to weather this crisis.

Asia Private Equity Review
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