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).
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)
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
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.
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.
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).
Asia Private Equity Review
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