Asia: Market introduction

Author: | Published: 4 Jan 2001
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A year ago, the internet, one of the latest creations in the information technology (IT) cosmos, blazed into the Asian private equity investment universe. Its glowing prospects left many management firms enthralled, and it triggered off a frenzy of investment activities. Within four quarters, internet-related businesses soaked up some $1.35 billion from the regional private equity fund pool. It was worshipped - but now it is being distanced.

In the fleeting nine months from July last year, the internet has recultivated the Asian private equity industry's terrain. In early April, the dazzling internet era entered its first dark age when technology stocks listed on Nasdaq slumped. Reacting swiftly to the arrival of the ill winds, regional firms immediately tightened their allocations on internet-related businesses. From July last year to the end of March 2000, an estimated $1.24 billion was deployed by regional firms on internet-related business, representing a quarterly average of $423 million. But in the three months ending June this year, internet plays attracted a meagre $141 million, a chilling drop of 66.6% (see fig.1).


Fallen star

Across the globe, an increasing pool of investors are restraining their internet fervour as evidenced by Nasdaq's initial public offering (IPO) record. In the second quarter of this year, Nasdaq registered the lowest level of IPOs since the fourth quarter of 1998. Seven companies with dotcom in their names completed their IPOs, compared with 11 in the first quarter and 21 in the fouth quarter of 1999.

For internet-related companies already listed, the months between April and June this year unveiled record dismal performances. Of the 23 listed and backed by Asian private equity firms, none have been able to sustain a rise of their stock prices compared with the preceding quarter ending March 30. Those that made their listing debuts before the end of last year, were not spared either as the brutual decline in their share prices dominated the trading profile. Singapore-listed MediaRing.com was slashed by 75% in the six months ending June 30, while Nasdaq-listed Satyam Infoway suffered the most. From a height of $155 per share at the end of December, it fell to $22.25 at the end of June, a cliff drop of 85%.

Asian private equity investors wasted no time in responding to the warning signals. Since April, investors have adopted a vastly different approach and allocated capital principally in internet infrastructure-related businesses.

In the second half of last year, no investment in the broadband sector was recorded. Business-to-business (B2B) took up the lion's share in accounting for $415.9 million, or 67% of the total $619 million recorded during this period. Although the first quarter of the year saw the highest amount, $619 million, ever recorded in the deployment of internet plays, B2B slipped to secure 20% of the capital pie, toppled by telecommunications-related businesses. During this quarter, broadband began to capture investors' attention and attracted just under $30 million.

At the second quarter of the year, following Nasdaq's April crash, the total amount channelled to internet plays shriveled to a paltry $141 million. From this small pool of capital, internet service providers managed to scoop $50 million or 35.5%, followed by broadband which allured $40.2 million, or 28.6%. B2B, investors' star in the last quarter of 1999, saw only $24.22 million flowing in its direction. In a matter of just one year, the internet investment jigsaw was drastically re-grouped (see fig. 2)



Technology forever

Although the internet is undergoing a harsh scrutiny under investors' microscopes, its impact on the industry is extensive and deep. It set off the most widespread herd mentality ever witnessed in the industry, as the majority of the firms redefined their investment strategy to embody IT and internet in their investment profile.

Of the 29 regional private equity firms surveyed, only three could be identified as having previous investment focus on Asian IT businesses. The remaining 26 firms were largely concentrated in development capital financing in mature companies. Out of this number, with the exception of three, all indicated some sort of IT blueprints (see fig.3).



Both 3i Asia Pacific and E.M. Warburg Pincus & Co, Asia have firmly pledged their faith in technology and internet businesses and recently set up their respective Asian 'tech' funds. The former was by far the most committed as it contributed $300 million in its $400 million 3i Asia Pacific Technology Fund. Trailing not too far behind is Chase Capital Partners Asia, which is in the process of setting up a $300 million IT investment vehicle, with $150 million, or a meaningful 14%, coming from its $1.1 billion Asian Opportunity Fund.

In April last year, Pacific Century Regional Development spread the gospel of a back-door listing as the quickest and most efficient means in raising capital for technology investment. It took over Hong Kong-listed Tricom Holdings, which was renamed as Pacific Century Cyberworks. In the past 12 months, six private equity firms followed Pacific Century's footsteps in initiating reverse takeovers, with five in Hong Kong and one in Singapore.

On a broad basis, most of the firms that have been conventional private equity investors chose to allocate a percentage of their current or new funds for IT investment. H&Q Asia Pacific took an assertive position. It has designated its recently raised $750 million Asia Pacific Growth Fund III as a pure IT fund.

Hong Kong-based Baring Private Equity Partners (BPEP) was by far the most aggressive in pursuing its IT charter. An estimated 50% - 60% of its maiden fund, which has a capital pool of $305 million, is in this sector, making up 20 deals. BPEP's second fund will focus entirely on the technology sector. But it is set to face fierce competition in raising this fund. Three additional firms are expected to launch a respective fund that bears a similar investment mandate to BPEP's. They include Baring Capital (China) Management, BPEP's sister organization, Electra Partners Asia (formerly known as JF Electra) and Walden International Investment Group.

Observation

In the week starting April 10, US company shareholders lost $2.1 trillion as a result of Nasdaq's slide. Seven days before the debacle took place, the 81-year-old Nobel laureate, Franco Modigliani, warned that the internet was a bubble that would burst. "It is so hard to establish fundamentals, to understand how much is a bubble," he commented.

Further tests are waiting for private equity investors. Of the 23 internet firms listed, 12 went public during the first quarter of the year. When their lock-up period expires, it will trigger off another round of sell-offs. In a recent survey conducted by two assistant professors at Pennsylvania State University, after studying 2,000 firms that went public between 1988 and 1997, they found the price drop among firms financed by venture capital is more pronounced and getting larger while the decline is also permanent.

The abrupt cool down of internet fever during the past quarter mirrored investors' cursory knowledge on the complexity of infomation technology, and their uncertainty on the core assets of the internet. Yet the extensive investment reforms engaged by the industry during the past year signified investors' zest to identify a successful formula.

The guiding light is already in the internet sky. Two Asian dotcom leaders, Sina.com and Rediff.com India are among the only three dotcom companies, listed in the second quarter of the year, that are trading above their IPO prices. Despite sinking sentiment, investors remain upbeat on those solid dotcoms that can secure an anchorage in the IT universe.

Company profile

Asia Pacific Communications Ltd (APC) is a Hong Kong-based organization. Its activities are entirely focused on the Asian private equity industry. APC is the publisher of Asia Private Equity Review, the industry's authoritative monthly report. Its annual publication, Asia Pacific Private Equity Bulletin's Directory provides comprehensive and updated contacting information on more than 1,000 private equity investment firms in 20 countries.

APC organises topical conference/ seminars and country summits that address issues in the industry as well in Asian countries. It also produces and manages courses by the Institute of Asian Private Equity Investment, held twice a year. The Institute is the first to have received sponsorship from the Netherlands Development Finance Company to conduct courses in India (1996) and South Korea (1999).

 


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