A local business

As we continue to see casualties of the global economic crisis in Asia, it is worth noting that many of the headline private equity victims so far have been Western firms attempting to expand into Asia, writes Jenny Blinch.

In February, Florida-headquartered buyout firm Sun Capital Partners disbanded its Tokyo office, which was set up in September 2006, following a decision to move away from platform opportunities in Asia.

In the same month, US buyout firm Cerberus Capital Management was reportedly close to shutting down its Hong Kong office, less than two years after it was established.

This month, UK buyout firm Candover wrote down the value of its portfolio by 50 percent and told its Asian and Central and Eastern Europe operations – both added in the last 12 months – to either raise their own funds or face closure, as the firm desperately seeks to cut costs.

Also this month, there have been reports that Merrill Lynch Global Private Equity, the private equity arm of the banking major, has laid off “many” members of its Sydney-based Australian team.

It is of course no coincidence these firms are predominately buyout firms – the category of private equity firm the crisis has hit hardest. Like the investment banks before them, much of the pullback from Asia can be put down to a need to focus capital (and energy) on nursing wounded portfolios on home turf.

Jenny Blinch

However, there is another factor to consider here: While some of the region’s most established private equity firms are the global players that helped pioneer the asset class in Asia, those that arrived on the scene later have struggled to carve a niche for themselves in a market that increasingly leans towards the “local”.

The haste in which they rushed to set up in Asia to cash in on the exponential growth seen in the boom years meant in some cases inadequate due diligence was done on deals and little thought was given to the way in which teams were assembled. The thinking was that if they hired the best people from around Asia, they would have the best team – but as many local GPs have pointed out, this formulaic approach to team-building completely overlooks the most essential component in any team: the chemistry that acts as the glue to keep the team together.

The sickly portfolios and high staff turnover that have resulted from this rushed approach to setting up in Asia have coincided with a sea change in LP attitudes.

Investors targeting Asia now are no longer looking for the comfort afforded by investing with a Western name with a long pedigree and a solid track record in home markets; instead the overriding belief now is that local expertise is the key to unlocking value from a fragmented and difficult market.

Local firms also appear to offer greater stability than some Western firms – especially in the current climate. As one Singapore-based fund of manager told me recently: “You don’t want to invest with someone who’s going to pack up and go home.”          

As the downturn begins to cull those Western firms with weaker links to Asia and/or bigger problems at home, it is speeding up a process that was already well under way: the coming of age of private equity in the Asian region and the handing over of the reins to local players.