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Silicon Valley smiles again on Asia

Silicon Valley private equity professionals are increasingly optimistic about investment opportunities in Asia, according to Rebecca Fannin of the AVCJ. Improved exit conditions, competitive engineering resources and lower cost structures in Asia’s technology market are among the reasons cited for a renewed interest in the region.

After a lapse of a year or so, American and European venture capital firms doing business in Asia are warming up to the region. Several Silicon Valley-based private equity professionals AVCJ talked to are optimistic about the future. They say the IPO window is slowly opening, mergers and acquisitions are offering more liquidity, and investment prospects are good.

Some of them pointed to recent exits or turnarounds even in difficult markets such as China. These exits are going a long way toward addressing a common concern that it was difficult to earn a dime from Asian private equity investing. In another sign of their optimism, several of these firms are in a fund-raising mode.

Emphasis on Greater China                
While many of the Western VCs continue to pursue early-stage investments in Asia, H&Q Asia Pacific is going in a new direction, focusing on later-stage and larger-size deals in Greater China, Korea and Japan, according to Chairman Ta-lin Hsu. Like other firms, China is getting a lot of emphasis and specifically one mega-deal.  Semiconductor Manufacturing Industrial Corp. (SMIC). Having raised some $1.5 billion from H&QAP and other venture firms, Goldman Sachs and Toshiba in 2000.

While the scale of this one project dominates most other deals in China, a lot of deal making is going on just below the radar. In the case of H&QAP, there are two recent investments in China - a $17 million investment in Data Systems, an IT back-up service for banks, and a significant follow-on investment in Array Networks, a web trafficking provider. In other signs of life, H&Q AP has divested publicly held shares in two Thailand-based portfolio companies acquired through late-stage, restructuring transactions. The firm also made a good return recently by divesting shares it held in Japan's Access, a service provider to I-mode that H&Q AP took public on MOTHERS in 2001, Hsu said.

Asked what he sees on the horizon. Bob Ackerman, Managing Partner at Allegis Capital, cited the return of a selective IPO market for companies with four to five quarters of profitability and a pick-up in M&A activity driven by large technology companies looking to fill their product pipeline with attractively valued companies after they slashed R&D spending during the economic downturn. In Asia, he pointed to the rapid growth of US-domiciled startups led by successful Asian entrepreneurs with R&D centers primarily in China and India as one engine for steady, though not explosive, growth over the next few years.

For Palo Alto-based Allegis Capital, Singapore, China and India are in the forefront for future investments, and in China its semiconductors and communications companies stand out.  "You look to where the legal, financial and IP infrastructure is in place and where there is a good risk/reward ratio compared to pure US or European development efforts," Ackerman said. "As for industrial sectors, it really comes down to where the skills are globally competitive. Lower costs with non-competitive engineering or IP protection is no bargain."

Asia's tech advantage
Longer term, he added, as the Asian technology market grows along with globally competitive engineering resources and lower cost structures, Asia-based technology start-up companies will have a compelling competitive advantage. "As the US has shown in technology, the combination of innovation with a strong, homogenous, domestic market and an entrepreneurial environment that supports capital formation (and predictable liquidity) with respect for the rights of investors is formidable," he stated.

To take advantage of some of these opportunities, he said Allegis Capital is raising a small side fund with strategic Asian players.

Jean Salata, Managing Partner at Baring Private Equity Partners, is downplaying any major changes in direction at the firm now that the group engineered an MBO from Dutch investment bank ING. Salata pointed to China, India, Taiwan, Hong Kong and Singapore for generating interesting opportunities and to outsourcing of BPO services to India as a long-term secular trend. Other strong areas are consumer financial services,
outsourced manufacturing (portfolio company Noreico is one example), automotive and telecom equipment sectors in China (such as Comba, also in its portfolio).

Burning desire to succeed
Asked if China is the future, Salata responded: "We are very impressed by the quality of companies we are seeing in China today, both in terms of management capability and low-cost production capabilities. Increasingly, we are also seeing world-class product development and R&D capabilities. One of the most interesting aspects of China right now is the staggering growth in domestic demand. But the single most important reason to invest in Chinese companies is the burning desire to succeed that is a characteristic of so many Chinese entrepreneurs."

But can a VC firm make money in China? Absolutely, he said, adding: "The notion that you can not make money in China is an unfortunate myth that plagues our industry." Heticked off two of the firm's recent money-making ventures in China - Netease, which listed on NASDAQ and now has a market cap of over US$2 billion and the recent sale of an SMS provider called Newpalm to Chinadotcom in a trade sale for a very good return.

Moving away from China, Salata noted that the firm is "more positive on the prospects in Asia than we have been in the last four years." He pointed to economic growth in most parts of the region coupled with improvements in corporate governance and a growing
recognition of the role of private equity in helping companies grow and restructure.

At Walden International, Chairman Lip-Bu Tan said the firm is about halfway through investing its PacVen V, having earlier reduced the mega $1 billion fund to $750 million. Some 25 companies have been invested in, ranging from participating in the SMIC deal to wireless deals to telecom infrastructure start-ups.

With Tan spending so much of his time in China, AVCJ asked him if he thought Chinese deals were becoming overheated. His immediate response was "not for us." The reason he had such a quick comeback is that the firm prides itself on going where other companies haven't gone before. Such was the case with UpTech, a telecom company that Tan started earlier this year in China and then rounded up $50 million-plus funding from venture capitalists in Silicon Valley and Asia.

And there are exits too
Investing in deals is one thing, of course, and exiting them is another. But Walden has a story to tell there too. It plans to take Malaysian online recruitment company, Jobstreet.com, public next year, according to Kwee Bee Chok, Head of the Malaysian office. Walden also saw an exit from a China deal it had made back in 1994. That company, A-S China Plumbing Products, is a Shanghai-based subsidiary of American Standard that manufactures and distributes kitchen fixtures and plumbing fittings. K. 0. Chia, Head of Walden's Hong Kong office, reports thatA-S had an IPO in July 2003 on the HK GEM, with the first day closing price at HK1.92. In early October, the price was hovering at HK$1.5.

Even so, Walden must be glad to have shed this relic of the early days of investing and turn its focus on the future of Asian private equity.

Firms with Asians footprints
Crystal Ventures, too, has kept a steady pace in Asia. The firm has made four investments over the past year or so, all of them based in the US but most of them with a footprint in Asia. In April, Exavio, a San Jose-based video delivery company with operations in Beijing and Shanghai, raised $ 14 million from Crystal and three other VC firms.

Crystal also invested in Buffalo-based Synacor, doling out (along with several other VC tech firms) $6.5m in a third round for the company, which enables Internet access providers to offer basic and premium content subscription packages to customers in an easy-to-use manner. In July, the firm led a $7.4 million, Series D investment in Brisbane-based Informative, Inc., described as a provider of customer dialog marketing solutions. With the investment, Crystal Managing Director Joseph Tseng joined the board. In addition, the firm invested in San Francisco-based Astoria Software Inc., described as a provider of structured document management solutions.                  Q

The Asian Venture Capital Journal is the region's leading publication on private equity and venture capital. With readers worldwide, AVCJ provides monthly coverage of fund raising, investments, exits and the people behind them. For more information please visit www.asianfn.com