Asia

Asia
Monitor

The India-US connection
US venture capital firms are increasingly on the lookout for opportunities presenting themselves in India, particularly those that can bring costsaving benefits to US portfolio companies. Ricky Morton reports.

As India continues to establish itself as the world's most cost-efficient provider of outsourcing services, US venture capital firms have been keen to explore how connecting with the Indian market place can benefit their portfolio companies vying to compete in a global environment.

In November, a party of over 20 Silicon Valley-based venture firms went on an eight-day fact-finding visit to the sub-continent to assess the opportunity for ‘offshoring’ business activity to India. Encompassing visits to Bangalore, India's technology centre, and the financial centre of Mumbai, the trip demonstrated just how interested in India US venture practitioners are at present.

The event was organised by Silicon Valley Bank, and included such established venture capital firms as Battery Ventures, Walden International, Sequoia Capital, Worldview Technology Partners and Bessemer Venture Partners. “The attendees were very impressed,” says K. Ganapathy Subramanian, one of the founders of Jumpstartup, a US-India cross-border venture capital firm that invests specifically in US firms that can leverage their business with Indian operations. “They would like to see more of their portfolio companies do business in India.”

Savings
The benefits of such a linkup are clear, according to Subramanian: he says it can cost, on average, of between $30m and $50m to take a portfolio company to break even in the US; this can be reduced to between $15m and $25m if the portfolio company employs Indian back office operations. Indian tech companies, aware of the potential to forge links overseas, have been eager to win clients in the US. Increasingly Indian service providers are setting themselves up as US corporations in order to make it easier to work for US clients.

Ravi Mohan, a general partner at US venture capital firm Battery Ventures who for the last two years has been tracking developments in the business process outsourcing (BPO) sector, was one of the attendees at the SVBsponsored tour. “We wanted to see what could be achieved by offshoring and how our portfolio companies should go about doing it. We also want to understand the economic and regulatory situation in India.”

Links between India and the US have been enhanced as a growing number of Indian nationals are returning to their native country with knowledge of the American way of doing business. Furthermore, many of Silicon Valley's entrepreneurs are of Indian origin. According to Silicon Valley Bank, 25 per cent of all Silicon Valley tech companies have Indian leadership. One-third of Silicon Valley's companies already outsource some portion of their research and development to India. “We can barely imagine investing in a company without at least asking what their plans are for India,” said Sequoia Capital partner Michael Moritz, speaking in a recent interview with Business Week. “India has seeped into the marrow of the Valley.”

It is also worth noting that BPO services provided by Indian services go well beyond call-center related work. Equity research, human resources, insurance services in addition to the full range of software support and development services are all part of the offering.

Subramanian's India and Silicon Valley-based VC firm, Jumpstartup, is one of the firm's hoping to foment the link between US and Indian businesses. The firm is currently investing a $45m venture capital fund which invests in early-stage information technology companies that operate in the US-India technology corridor. “We have done eight deals in cross-border US companies. Four of these have accelerated their Indian activity during this year,” says Subramanian. “We coinvest in US firms that have an India strategy and need local support.”

LPs like it too
Further growth of relevant industry sectors in India is expected. International corporations are seeing the benefit of positioning their research and development operations in India, which is likely to lead to an increase in the number of start-up companies setting up there. Multinationals such as Intel and Oracle are already developing next generation technologies on the subcontinent, and the next generation of Indian entrepreneurs, according to Mohan, are likely to emerge from local talent currently working for these corporations.

The benefits of developing a strategy consisting of “multiple centres of production”, as Subramanian describes it, can be applied across the region. “India is definitely a good place to be now,” says Mohan, “but that might not necessarily be the case a few years down the line. You've also got to look at China and Eastern Europe.”

According to the Silicon Valley Bank, the strategy is also well received by investors in Silicon Valley funds. “Investors find cross-border involvement attractive because it indicates that a company is conscious of the need to cut costs, and, at the same time, is aware of the costsaving advantages of using cross-border talent and resources.”

Asia
News

Gabriel Li returns to Orchid
Gabriel Li, a managing director of Carlyle's Asian venture capital arm, has left the firm a second time to rejoin Orchid Asia Management, a private equity firm he served at from 1997 to 2000. Li has been named a managing director of Orchid Asia.

Between 2000 and 2003, Li held positions at Robertson Stephens and McKinsey & Co as well as being a director with Carlyle Asia Venture Partners. In his most recent stint with Carlyle, he oversaw Asian technology investments.

“We are very happy to have Gabriel join us and he will be a great addition to our firm,” said Peter Joost, founder and president of Orchid Asia. “Gabriel has character and ability and has built an outstanding track record of investing in Asia.”

Orchid Asia Management is headquartered in San Francisco and makes investments in Asian companies. The firm is currently investing from its second fund. Investments include semiconductor assembly and testing company ASAT Holdings, Chinese online travel company Ctrip International and infant products company Babycare Yaolan.

Daiei, Colony reach hotel agreement
US investment firm Colony Capital has reached an agreement with struggling retail group Daiei to buy its baseball stadium and hotel complex in southern Japan, marking the latest move by a foreign private equity firm to acquire a struggling Japanese asset. Under the deal, Daiei will sell the baseball stadium and hotel in Fukuoka on the island of Kyushu to Colony Capital for a nominal amount, with Colony assuming Y79bn ($723m) in debt, according to Reuters.

“This is not a distressed project. It is a complicated project,” Colony chairman and CEO Thomas Barrack told a news conference. “We think we can bring a global view to aiding and helping and directing the management of the future.” Barrack did not say exactly how long Colony would keep the Fukuoka operations, but suggested it might be for around a decade.

HSBC Asia announces $350m closing
HSBC Private Equity Asia (HPEA) announced an interim closing of its fifth Asian regional private equity fund, rounding up $350m for The HSBC Private Equity Fund 3 Limited (HPEF3).

Investors participating in the closing include Railpen Investments and Colorado Public Employees Retirement Association, according to David Conrod, managing director of Links Private Equity, the New York placement agent raising the fund.

HSBC Private Equity Asia, which raised its first fund in 1989, is led by George Raffini, managing director, and Marcus Thompson, chief investment officer. Conrod noted that since it was founded, HSBC Private Equity Asia's funds have made 93 investments, almost 70 of which have been fully realised. “The firm's level of cash distributions throughout its almost 15 year history is a key distinguishing factor,” Conrod said.

Most of the firm's investment activity has been in China, South Korea and Taiwan, said Conrod. “This degree of focus in such a vast region has contributed to the firm's superior investment performance over the years,” he added.

HPEA recently moved towards another liquidity event with the initial public offering of South Korean ship maker STX Shipbuilding, the first investment in Fund 3. In June, the firm invested roughly $34m in the company. STX went public on October 27 and the fund's stake is now valued at roughly $52m.

PPM Ventures to launch SPI offer
PPM Ventures, the private equity business of UK insurer Prudential, is expected to launch an $84m tender offer for SPI Technologies, the Philippine database services provider. The move, which is expected in December or early in the New Year, follows an earlier agreement that SPI's majority shareholders would sell their shares to PPM. “Discussions between SPI and PPMV are still ongoing and it is now anticipated that the proposed tender offer will be launched sometime in the latter part of December or the early part of January 2004,” SPI confirmed in a statement to the Philippine stock exchange.

Indian funds slow to invest
Indian private equity funds have raised more than $1.5bn from international markets in the first half of 2003, according to a report from the Asian Venture Capital Journal. However, only $110m of this capital has been invested in 19 deals. Across Asia as a whole, total investment was close to $6.2bn during the same period. A quarter of the capital invested has gone to banking and financial services, while the telecommunication sector has accounted for 21 per cent.

Jafco to raise funds in 2004
Japanese venture capital company Jafco is to raise $1.17bn worth of private equity funds in 2004, marking the firm's largest fundraising to date. The planned equity funds will target unlisted Japanese companies as well as US and Asian biotechnology and high-tech start-ups.

Jafco will invest Y50bn ($450m) each in an ordinary venture capital fund and a management buyout fund, according to Reuters. It will also invest a combined Y18bn in two funds that specifically target Japanese and US biotechnology companies, and Y12bn in Asian high-tech venture start-ups.

The firm has also launched a $100m JAFCO Technology Partners I fund. According to Joe Horowitz, managing general partner, the fund will be focused on investing in early expansion-stage technology companies. The firm has also made a number of appointments in its US team. “This, combined with a modest fund size, allows us to provide emerging technology companies with significant help, yet a lot of flexibility in structuring financing opportunities,” Horowitz said.

Warburg selected for Hyundai Autonet buy
US private equity group Warburg Pincus has been selected as preferred bidder for South Korea's auto parts maker Hyundai Autonet.

Under the proposed deal, Warburg will buy a 35 per cent stake owned by Hyundai Investment & Securities, the group's asset management arm, and a 23.4 per cent stake owned by Hynix Semiconductor, the chipmaker, which became independent from Hyundai Group two years ago.

Hyundai Autonet, which makes car navigation system and other parts, earned a net 65.2bn won ($55.3m) on sales of 545.4bn won last year. Its market capitalisation is $508m.

Nomura unveils Tungaloy buyout plan

Nomura Principal Finance (NPF) has launched a Y25bn ($230m) tender offer for 66 per cent of the outstanding shares of Toshiba Tungaloy, a toolmaker and subsidiary of Toshiba. NPF is offering 483 yen per share, a 26.1 per cent premium to the average closing price on the Tokyo Stock Exchange over the past six months and will be above 475 yen, the highest share price since 2002.

NPF said it would make a tender offer through NPF T2 Investment. Toshiba Corporation, the leading shareholder of Tungaloy with just under 37 per cent, and Tungaloy's management have agreed in principle to tender their Tungaloy shares.

The management of Tungaloy will remain at the business, with an NPF executive joining the toolmaker's board of directors and an NPF employee becoming an auditor of the firm. The deal is set to complete by next April, when Tungaloy will be delisted from the Tokyo Stock Exchange.

In October, Toshiba Tungaloy reported a 13.5 per cent rise in its April to September group net profit to $6.35m, on half-year revenues of $170m, up 9.7 per cent.

Carlyle plans China office launch
Carlyle Group, the US private equity house, has unveiled plans to expand its Asian operations with the launch of an office in mainland China in 2004.

Xiang-Dong Yang, managing director of Hong Kong-based Carlyle Asia Investment Advisors, said the firm was planning to open an office in Shanghai and had already started scouting for investments on the mainland. “Everyone prominent in the business is looking at a few deals, and that includes us,” Yang told the Financial Times.

Carlyle has also commenced negotiations leading to the sale of the firm's largest Asian investment to date. Carlyle and JP Morgan are preparing to sell their controlling stake in Koram Bank, South Korea's sixth-largest lender, when the mandatory lock-up period expires imminently.

Paragon lands $10m superannuation commitment
Australian venture capital firm Paragon Equity has received a commitment of $10m from the Australian Independent Schools Superannuation Trust as it targets a $50m final close next year. To date, the fund has raised $13m after launching in 2002. Paragon plans to raise further equity from South Australian superannuation funds and plans to position itself in the course of the fundraising program to qualify for the South Australian Government capital contribution. Paragon's first investment is likely to take place in the first quarter of 2004 and there should be three or four investments made next year, the firm said.

ANZ Private Equity invests in ACL

ANZ Private Equity, the private equity unit of Australian bank ANZ, has invested A$5m in ACL, Australia's largest private English language provider. The funds will be used to assist ACL's expansion both domestically and internationally. Jeremy Samuel of ANZ Private Equity said ACL's industry record was a major factor in the decision to get involved. “We spent considerable time investigating the industry and the various players and came to the strong view that the English language industry is a large and growing market with the ACL management team being a market leader.”