ZUG COMES TO ASIA

For anyone seeking evidence that European private equity groups have been persuaded of the merits of Asia, this month's news that Zug, Switzerland-based alternative investment specialist Partners Group has launched an Asian fund of funds from a new Singapore office is a noteworthy development.

Christoph Rubeli, the former head of UBS' Southeast Asian activities, heads the Singapore team, and has been joined by locally based recruits Kelvin Chan and Colin Chen, as well as Swiss transferee Mike Siebert. The team will invest a fund of funds that recently achieved a first closing on US$50 million, and which is aiming for a final close within a year of between US$150 million and US$200 million. Eighty percent of the capital has been earmarked for Asian buyout funds and 20 percent for Asian early-stage funds.

In an interview with Private Equity International, Partners co-chairman Urs Wietlisbach said the firm made its first “small-scale” investment in Asia in the late 1990s but was dissuaded from doing anything on a more significant scale by “unstable currencies, a poor regulatory environment in certain countries and a lack of experienced groups”.

Wietlisbach went on to say that, since the ending of the Asian financial crisis in 1999, the macro-economic picture has stabilised. He said the region has witnessed plenty of seminal private equity deals, particularly in the banking sector, and that a handful of “brand name” investors have emerged. He also cited the favourable competitive environment: “Contrary to the US and Europe, you can see a capital underhang there rather than overhang in the sense that there's less money being raised than invested. This lack of capital is resulting in some high quality deals being done”.

Wietlisbach also opined that Partners is “always a little early into new markets”. Indeed, some of the group's peers remain sceptical whether the time is ripe for private equity money to be made in Asia. Alas, Partners won't be alone in its new territory, as some of its international rivals have already made their mark in the region. Both Pantheon Ventures and Harbourvest Partners have had offices in Hong Kong for some time, while Hamilton Lane launched a Singapore operation under former Vivendi Universal executive Alain Vandenborre in February 2004.

Despite Asia's undoubted potential, there are plenty of dissenting voices when it comes to the merits of increasing exposure to the region. One European alternative investment specialist told PEI: “Deal flow [in Asia] is still weak, and there are few accomplished managers”. This professional thinks that there is a more convincing case to be made for lowering allocations to Asia rather than increasing them at the current time in response to the smaller average size of deals and the greater inherent risk characteristics of portfolio companies.

Some criticisms of the region appear contradictory. At a recent industry conference held in Europe, one delegate said Asian private equity was too “large” in the sense that within the region's vast boundaries, economic development is uneven and business practices diverse. Another delegate at the same conference opined that it was too small, arguing that there was not enough deal flow to justify the amount of capital being committed.

Wietlisbach acknowledges such doubts, and confides that he has his own reservations about aspects of private equity in Asia: for example, he is cautious of much-hyped opportunities in China and feels the region's venture market is over-regulated, despite being able to boast “exciting technology, a good research base and the presence of some canny investors”. Rather, more mature private equity markets such as Australia and Japan will be the focus of Partners' initial thrust into the region.

Nonetheless, he and others are inclined to forgive the region its faults, comparing the current private equity scene in Asia with the early days of the European industry – raw but full of potential. It may not be as transparent as it should be and not as institutionalised as its counterparts in the US and Europe, but that does not mean Asian private equity doesn't deserve serious consideration when it comes to the construction of global alternative asset portfolios.