A bird’s eye view of private equity in Asia


  • Business
  • Monday, 19 Dec 2005

What is private equity?  

It is a broad term, which refers to any type of equity investment in a company or asset where the shares are not freely traded on a stock exchange, in other words, privately-traded investments in relatively small, high-growth companies.  

Private equity investments could mean a range of things to different stakeholders, from seed money, expansion and initial public offerings. These types of investments can often take the form of venture capital, growth capital, angel investing or mezzanine capital. 

The term “private equity investment firm” can be confusing because by definition, any equity capital not traded on a public stock exchange is deemed private.  

However, in recent years, this term has become a moniker for holding companies that engage in the activity conferred by that descriptor. 

In lieu of adding value to companies hungry for funding, private equity investors usually require more proactive management involvement. The private equity investor injects much-needed capital into a venture, often a substantial amount, to grow companies to the next stage.  

In addition, these private equity investors bring along management expertise crucial to young entrepreneurs, injecting much-needed experience and industry contacts that add tremendous value to businesses. This business-mentoring process yields more effective results in the longer term. 

Deal flows in Asia almost always involve some form of private equity. With the explosive growth of Asian economic giants like China and India, investors' radar screens have been focusing on this region. Asian private equity raised US$6.5bil in 2004, the highest amount recorded since 2001, according to the Centre for Asia Private Equity Research Ltd, which publishes the trade journal Asia Private Equity Review. 

This quantum is a 50% increase from the US$4.3bil recorded in 2003. The numbers indisputably show that the Asian private equity industry has fully recovered from any lingering effects from the Asian financial crisis. Entrepreneurs from all over the world still believe in the huge commercial potential from a variety of sectors, from water to utilities, to mining, not to mention the technology and telecommunications sectors. 

Last year, buyout funds comprised the bulk of private equity transactions, making up about 56%, or US$3.7bil, of the total fresh capital of US$6.5bil. The financing of growth equity positions totalled US$1.9bil, or 28%. Private equity investors were also hungry to capitalise on technology opportunities in Asia; US$1.1bil were utilised to fund technology and telecommunication ventures last year. 

According to the Centre for Asia Private Equity Research Ltd, the total private equity investments in Asia, as of end-2004, was US$11.6bil, with Japan taking pole position as the largest private equity market in Asia. The country is home to more than 76%, or US$6.6bil, of private equity investments made in Asia in 2004. China, meanwhile, pulled in US$1.3bil. India has begun to be a serious private equity investment destination, attracting US$1.1bil last year, compared with US$530mil in 2003. 

Private equity investors are bullish about Asia and this is partly due to the fact that the Asia Pacific region is rich in raw materials, which offer investors with deep pockets, great opportunities to drive entrepreneurial activities. With Asia the next region of strong growth in the foreseeable future, capital from all over the world will continue to be parked here. 

The region holds about 25% of the world's oil and gas consumption, according to a PricewaterhouseCoopers report. Asia Pacific also contributes about 10% and nearly 12% of global oil and gas production respectively.  

With China and India expected to drive the economic growth of the region over the coming years, there is likely to be an increase in their oil and gas consumption, which creates countless opportunities for private equity investors. Privatisation of major refineries and de-regulation of the industry offers significant investment opportunities. 

Water is another exciting sector. Experts have warned that by 2020, a shortage of potable water worldwide is a real possibility, as natural water sources continue to be strained and polluted by expanding economic activities and population booms around the world. This scenario is also being repeated in Asia. China has in recent years, been a favourite destination for private equity investors in the water-related sector. In fact, Malaysian companies are actively working out joint ventures in this sector worth billions. 

The Asian Development Bank (ADB) indicates that about 700 million people in the Asia Pacific region do not have safe drinking water, and an estimated 2 billion people lacking adequate sanitation. 

For the most part, the operation of water supply is still a government domain. But developments in China, where the water sector has been opened to foreign investors, is a precursor to what is to come. Private equity investors are well aware that state-run public water utilities will continue to struggle against the challenge to expand and maintain the system to meet service levels and, at the same time, keep water tariffs affordable in Asia. 

Water has already become big business in China and India, as population expansion continues to strain their water resources. Integrated Water Resource Management is crucial to ensure adequate supply, and to achieve this private sector involvement is inevitable. 

Another favourite investment destination in Asia continues to be in the information, communication and technology (ICT) and telecommunications sectors. It is interesting to note that Asia now has about 150 million Internet users - the largest number of any region in the world. What is striking is that this is a 50-fold hike from 1995. 

Mobile telephone uptake has been equally phenomenal, with Asian mobile users more than doubling to 560 million from 2000. What is exciting to investors is also that fact that annual ICT expenditures in Asia grew by 7% annually, which is twice the rate of Europe and three times that of the United States. 

Despite this, ICT and telecommunications services are far from saturation levels in Asia, an indication of the extent of the vastness of the continent's hinterland. Opportunities in this sphere are numerous, and equity funds, private or otherwise, will continue to be invested in these sectors. 

Private equity investors will continue to find opportunities in Asia even though the investing space continues to be saturated with new funds and new players constantly appear on the investing horizon. The key is to understand and capitalise on the cultural and business differences that make Asia unique. 

 

  • Colin Ng is senior corporate investment manager of Goldis Bhd. Goldis is a main board company on Bursa Malaysia, specialising in private equity investments in Malaysia, China and the region. Goldis has interests in high-growth businesses like life sciences, information and communications technology and water and waste water treatment.
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