PLAYING THE LONG GAME

David Mahon should know a thing or two about what it takes to invest successfully in China. His private equity firm, Mahon China, has been backing small and medium sized businesses in the country for the last 12 years.

He says the track record of outsiders is not good. Those targeting the larger deals tend to head for the major cities such as Shanghai, where competition is hot and auction processes common. Those seeking to penetrate the interior of the country, meanwhile, face cultural obstacles that often prove insurmountable.

Mahon says mistakes can be made because the impression of China from the outside is often the wrong one. “Investors have a tendency to think they are bringing cash to a needy economy and that their role is terribly important. But capital in China is cheap: interest rates are low and banks are happy to lend. So just putting money in means nothing. What companies are looking for is a partnership, because they are lacking a culture of professional management.”

New Zealander Mahon began working in China 20 years ago and launched a private equity business in 1992. Mahon China now has a team of 12 – nine of whom are of Chinese origin – making investments throughout the country. Though based in Beijing, Mahon is keen to invest in remoter parts. “We tend to avoid the major cities and head for where the valuations are better,” he says.

So how can Western firms invest wisely in a country that frustrates and excites in equal measure? Perhaps one way is through teaming up with those who know the country best. Mahon says his firm is currently in talks with a UK-based private equity fund regarding the launch of a jointly managed fund that will be seeded with $40 million of capital and will aim to raise between $80 million and $100 million by the end of 2005. The fund will target investments in Chinese SMEs, mainly in the Northern and Western regions of the country.

With negotiations still ongoing, the identity of the UK partner has not yet been disclosed. What is clear is that it has decided partnership with a local firm is the key to success in China. If other Western firms are to avoid past problems, they may well need to arrive at the same decision.

MIZUHO UNITS PLAN $275M FUND
Two units owned by Japanese bank Mizuho Financial Group have announced plans to launch a new 30 billion yen ($275 million) private equity fund.

Mizuho Securities and DLIBJ Asset Management plan to establish a joint venture known as Polaris Principal Finance by the end of this year. Mizuho Securities said it would commit up to 15 billion yen to the fund, which will also seek money from external investors.

The new fund will invest in unlisted Japanese companies and will be headed by Shuichi Takahashi, a former executive of Bank of Tokyo Mitsubishi.

Meanwhile, Unison Capital, the Japanese private equity firm, has announced a first closing of its Unison Capital Partners II fund at 30.3 billion yen (US$277 million). The fund is aiming for a 50 billion yen target by the end of this year.

Fellow Japanese investor Advantage Partners recently announced a final closing of its third private equity fund on 46.5 billion yen ($US424 million).

LEE JOINS MEZZASIA FROM HSBC
Geoff Lee has joined MezzAsia Capital, the Singapore and Hong Kong-based mezzanine fund, as a director with primary responsibility for mainland China, Taiwan, Hong Kong and South Korea.

Lee joins from HSBC, where he was a director in the investment banking division, having previously worked for Peregrine Capital in Hong Kong. According to a MezzAsia statement, he has experience in debt and equity transactions and mergers and acquisitions across a number of industries in the Asia Pacific region.

MezzAsia Capital, which now has a team of four, is a dedicated mezzanine fund managed by CLSA Mezzanine Management, a unit of CLSA Asia Pacific Markets.

H&Q LINES UP THAI FUND
H&Q Asia Pacific, the private equity firm with offices in Silicon Valley and numerous countries in Asia, has announced plans for a fund of up to $120 million to invest exclusively in Thailand.

Virapan Pulges, a managing director at the firm, said the fundraising would probably begin next year. It will provide $10 million to $20 million for technology and electronics-related start-ups in the country.

Thailand is currently the second-fastest growing economy in Asia behind China, and some observers feel it now offers better value than its larger and much-hyped neighbour.

LONDON ASIA APPOINTS NEW FD
London Asia Capital, the AIM-listed China-focused investment banking and private equity group, has appointed Peng Mun Foo as finance director for its Asian operations.

Peng Mun, who will be based in the firm's Shanghai office, will take over day to day responsibility for the monitoring of portfolio companies as well as supervising due diligence on new projects and preparing documentation for follow-on funding and IPOs.

He was formerly chief operating officer for the Asian arm of US money manager Legg Mason Asset Management.

NVP MOVES INTO INDIA
Nokia Venture Partners, the California-based venture capital investor, has launched an office in New Delhi, India – its third in the Asia Pacific region after Hong Kong and Tokyo.

The announcement follows a recent $10 million investment made by the firm in Pune, India-based start-up Nevis Networks, an enterprise security software developer.

NVP began to explore the Asia Pacific region in 2001 after the firm closed its second fund. Since then it has helped portfolio companies pursue business opportunities in Japan, Greater China, Korea and India.

MALAYSIA'S OSK SEEKS LISTING
Malaysia's OSK Ventures International has announced plans to become the first venture capital firm listed on the Kuala Lumpur Stock Exchange

The firm hopes to raise 200 million Malaysian ringgits ($53 million) from the listing.

Founded in 2000, OSK says it will deploy a substantial portion of the new capital outside its homeland. Currently, only 30 percent of the portfolio is located abroad.

NZ FUND TARGETS RETAIL INVESTORS
New Zealand private equity firms ABN Amro Craigs and Direct Capital Private Equity have teamed up to launch the Pohutukawa Private Equity fund, which is aiming to raise $40 million.

The fundraising will aim to attract retail investors by allowing a minimum investment of just $10,000. The fund will target expansion capital and management buyout opportunities in established unlisted businesses in New Zealand.

New Zealand is one of the youngest private equity markets in Asia Pacific, with the first known fund having been established in 1993. But it is rapidly maturing, as evidenced by the recent launch of the country's first fund of funds by Falcon Private Equity.

Falcon NZ Fund of Funds 2005 is targeting up to NZ$50 million (US$33 million) to invest in buyout and expansion capital funds.

WOORI LAUNCHES KOREA FUND
Korea's Woori Bank is reported to have joined forces with Merrill Lynch to establish a private equity fund for investment in small and medium sized Korean enterprises.

According to a report on Joins.com, Woori Bank is planning to invest 100 billion won ($87 million) in the fund and Merrill Lynch 10 billion won. It said that the intention was to expand the fundraising to other investors at a later date.

Woori said it would invest in approximately 20 companies by the end of this year. The fund will be managed by Woori subsidiary, Woori Investment Management.

THAI FUND'S IPO JOY
K-Tech Construction, a private equity-backed Thai construction and engineering company, has completed a “several times over-subscribed” IPO on the Stock Exchange of Thailand. On the first day of trading, shares closed at 7.75 baht per share, a 10.7 percent premium to the IPO price.

The Thailand Equity Fund invested an undisclosed sum in K-Tech in December 2003 in exchange for a 15 percent stake. The $245 million fund is sponsored by San Francisco-based Lombard Investments and the International Finance Corporation (IFC), a unit of the World Bank.

IFC is an investor in the fund, as are the California Public Employees' Retirement System (CalPERS) and Asian Development Bank.

CARLYLE ON TARGET IN CHINA
Carlyle Group has invested US$15 million in Target Media, a Chinese media services firm, through its Asia venture capital fund.

Carlyle opened its first representative office in mainland China in April. Carlyle managing director and cohead of Carlyle Asia Yang Xiang- Dong said the firm intended to spend US$700 million to US$1 billion on acquiring Chinese companies over the next two years.