Interesting plays ahead

Asia's private equity investors have had a bumpy ride over the past four years. First they were hit by the Asian financial crisis in 1997. Then, they started sifting through the region for reconstruction plays. This flowed into the technology boom of 1999 that became the bust of 2000, and now they must contend with the prospect of global recession.

At a time when investment in East Asian companies is vital to kick-start stalled growth in the former tiger economies, many private equity groups are in two minds about whether to participate. The chances of a swift, profitable exit in the short to medium term are low, but at the same time there are some quality investment opportunities in the market.

Cash is definitely not in short supply. Several big private equity players, such as Walden International, have raised hundreds of millions of dollars over the past year from banks, fund managers and high net worth individuals seeking alternatives to traditional equity investing. These investors are backing private equity managers who are out bargain hunting at a time when excess capacity and declining markets are throwing up more such opportunities than there have been in the past.

Despite the slowdown, there have been landmark deals, particularly in South Korea and increasingly in China. Marc Staal, chairman of the Hong Kong Venture Capital Association, says the Chinese mainland is a noteworthy bright spot in an otherwise dull market.

Semiconductors, banks and golf courses
?Momentum is growing in China and that should only continue following accession to the World Trade Organisation?, he says, citing the semiconductor industry as one of the most interesting sectors. In November, China's newest chipmaker Semi-conductor Manufacturing International Corp completed a $1bn round of private equity financing in preparation for a listing on Nasdaq in 2002. Investors included Goldman Sachs, H&Q Asia Pacific, Walden and a consortium of Singaporeans led by Vertex Management.

Further north in Korea, much attention is focused on the banking sector. Newbridge Capital, the private equity firm associated with Texas Pacific Group, recently scotched rumours that it wanted to sell out of Korea First Bank and announced it would expand the bank's activities in order to make further investment in other Korean companies. Newbridge, which recently closed its third Asian private equity fund at $742m, bought its 51 per cent stake in the bank two years ago in one of the first big deals designed to reconstruct the country's debt laden banking sector.

Goldman Sachs' private equity group is also playing a part in this project. The US bank has $500m invested in a 9.8 per cent stake in Seoul-based Kookmin Bank, which merged in early November with Korea's Housing & Commercial Bank. Sources familiar with the situation say the bank has more than doubled the value of its investment since taking the stake.

Banking has attracted equity sponsors to Japan as well. Ripplewood Holdings last year led the purchase of Long Term Credit Bank, which has since changed its name to Shinsei Bank. The first domestic bank ever to be bought by foreigners, Shinsei's new management has sought to bring greater rigor to the bank's lending policies and has refused to be drawn into government-sponsored company rescues. ?This is a case when equity investment can change a moribund corporate culture,? says one of the advisors on the deal. Given the wobbly state of the Japanese economy overall, private equity firms should find plenty of opportunities to do just that.

Often it is changes to moribund balance sheets that are needed, and there is growing demand for more specialist buyout funds. Bankrupt Japanese golf courses are particularly popular targets at present, with players such as Ripplewood and Deutsche Bank showing some keen interest.

Looking to the region's future, Marc Staal at the HVCA believes that the level of sophistication in the Asian market remains well below that in Europe and America, although niche funds are helping to even out the situation. ?Asia has always been a more difficult place to raise money and exit,? he says. ?But the market is still pretty healthy here and there are no shortages of deals and opportunities. I think next year is going to offer some very interesting plays.?