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Southern horizons

Southeast Asia and the Indian sub-continent are attracting increasing attention from private equity investors. Significant increases in investment activity and fundraising are heralding a return to the South, according to the Asia Private Equity Review.

In the years immediately after the 1997 Asian financial crisis ('Crisis'), Southeast Asia assumed only a dim spot on the Asian private equity landscape. During this period, Northeast Asia became the dominant zone, with China attracting much attention of late. In a gradual adjustment of the equilibrium, Southeast Asian countries, along with the Indian sub-continent, are now taking on a more pronounced profile on the Asian private equity map. In 2003, the aggregate fund pool of India, Indonesia, the Philippines, Malaysia, Singapore, Thailand and Vietnam ('South Asia'), at US$931 million, rivalled the combined total recorded in South Korea and Hong Kong. The latter two ranked second and third in the 2003 record of fresh capital. Significantly, the transaction total boasted by South Asia reached over US$2.2 billion - nearly double the amount received by China, making it the largest private equity market, in terms of invested capital, outside of Japan. South Asia's status has been further boosted, moreover, by recent isolated successful divestment performances, especially in India.

Fund Pool

Compared with the US$419.7 million (including Pakistan) recorded in 2002, the US$931 million boasted by South Asian countries in 2003 represents a 122 per cent rise. Such growth could not have taken place without the concerted efforts of respective governments and development financing agencies. This is particularly obvious in 2003 in which over 60% of the US$931 million was subscribed by this group of organisations.

In two of South Asia's largest economies, India and Singapore, government support has been central in the development of their private equity industries. Of the US$236.4 million of fresh capital recorded in India, the government or government-affiliated organisations contributed 79 per cent. In Singapore, a number of the city state's investment arms have pooled together and provided approximately 33 per cent of the US$300 million raised thus far by Affinity Equity Partners for its first fund. Since the Crisis, South Asia has come to realise the glory and burden of relying on foreign institutions as sources of capital. In a sharp reversal from the pre-Crisis strategy, respective governments have taken the lead in providing modest pools of capital to local small and medium enterprises. Thailand, the epicentre of the Crisis, has been a strong proponent of such an approach. In 2003, Prime Minister Thaksin Shinawatra's government reaffirmed its commitment in leading small and medium enterprises to become the country's economic backbone in sponsoring the second SMEs Venture Capital Fund. With a capital pool of US$120 million, this fund is six-times larger than its predecessor, which was established in 1998.

In Vietnam, multilateral organisations have breathed life into the country as it begins to regain foreign investors' confidence. In the period after the Crisis, the country was largely abandoned by private equity investors. The handful of pioneer fund management firms in the country, such as Vietnam Fund Management, Beta Fund Management and Indochina Asset Management, had all ceased operations. Recently, however, Vietnam has witnessed an upsurge in foreign interest. The Singapore-based Keppel Corp., for example, revived its decade-old interest in the country when it injected a modest US$2.1 million into its Keppel Vietnam Investment. At the same time, Mekong Capital's Mekong Enterprise Fund closed at an impressive US$23.5 million when a Belgium-based development financing agency allocated US$2.5 million into the fund. Even the US-based International Data Group, which has been one of China's most active venture capital investors, is planning to enter into Vietnam's market through a venture capital fund.

In the far west of the Asian map, India has emerged as a powerful magnet against the backdrop of growing wealth in the country. The final closing of the US$123 million India Development Fund evidences the country's growing economic muscle and commitment to private equity. Managed by IDFC Asset Management, the sources of capital for India Development came largely from local government sources. The country is enwrapped in a fund raising mode. At least three government-related organisations are planning to raise funds, while a host of private sector initiatives are known to be taking place.

The world's second most populous nation is also greeting a strong inflow of foreign visitors, especially those from Singapore. The year recorded the largest foreign-sponsored private equity fund since 1996. The US$100 million Merlion India Fund is a joint venture investment vehicle subscribed by the Standard Chartered Bank and the Singapore government's Temasek Holdings.

Investments

While Northeast Asia remains a magnet to investors with an appetite for investments exceeding US$50 million, South Asia is gaining popularity with mid-sized fund management firms looking at smaller sized deals. With close to 82 per cent of the funds established in 2003 below US$200 million, most private equity firms are unable to entertain the larger transaction size offered in Northeast Asia and are instead looking South.

In 2003, South Asian countries (including Bangladesh) accounted for 38%, or US$2.2 billion of the transaction total in Asian markets outside of Japan. The 43 transactions recorded in this group of countries represents 34 per cent of the 126 total registered in the rest of the Asian markets, outside of Japan. Significantly, however, India's US$580 million transaction aggregate is 52 per cent higher than the US$380 million for Hong Kong. Even South Korea is feeling the competitive heat from the South. In 2003, excluding the exceptionally large US$1.2 billion acquisition of Korea Exchange Bank by Lone Star and the US$1.1 billion takeover of Hanaro Telecom by Newbridge Capital and AIG, only three deals amounting to US$260 million were known to have taken place in the country. The transaction total is a far cry from what South Korea recorded in its heyday.

In South Asia, the role of government, multilateral organisations and development agencies is all encompassing. In addition to providing capital to funds, they are also active investors. Bangladesh emerged on the 2003 private equity investment destination list, drawing US$449 million from two development financing organisations. CDC Globeleq invested the US$437 million in two power plants, while the International Finance Corp committed US$12 million in a manufacturing company. Their pledge of faith in Bangladesh has brought the country in the far north corner of the Decca Plateau to the forefront.

The Singapore government has also been a pivotal force in reviving activities in South Asia. In addition to being a substantial source of capital to funds in this region, its various vehicles have tirelessly shored up investment activities in South Asia. Of the US$2.2 billion transaction total known to have taken place in this group of countries in 2003, US$793.5 million was participated in or led by the Singapore government-affiliated organisations. Indonesia owes nearly 50 per cent of the US$453 million recorded in 2003 to Temasek Holdings. The latter participated in the US$223 million investment in Bank Internasional Indonesia during the year.

Even private investors are using private equity to access debt-laden assets. The US$215 million mobilised by the Singapore-registered Garibaldi Venture Fund to acquire both the chemical and oil units of Indonesia's GT (Gajah Tunggal) Petrochem Industries is largely believed to be funded by a consortium of Indonesian-based private investors. This one of the first cases indicating rising wealth in a country severely afflicted by the Crisis.

However, the activities in India are vastly different. The country is fast attracting the attention of non-Asian investors, especially those located in the Silicon Valley. Although India's investment total in 2003 was half that recorded by China, the number of transactions completed in the country, at 27, exceeded that recorded in China by four. In particular, after having weathered the technology meltdown, India has now solidly demonstrated its ability to attract a list of loyal investors such as Actis (formerly known as CDC Capital Partners), Schroder Capital Partners (Asia), and Warburg Pincus. Most recently, the country's venture capital industry advanced further when it welcomed a long list of legendary names from Silicon Valley including Greylock, Oak Investment Partners, Sierra Ventures and TH Lee Putnam Ventures. India has now become a force to be reckoned with in Asian private equity.

Observation

In this latest upsurge of activities in South Asia, the Indian factor is central. While both its fund pool and investment amount have been modest in the past two years, India has consistently demonstrated its ability to return capital to foreign investors. In the two years ending December 2003, there were 23 divestitures known to have taken place in India, of which 70 per cent were able to report profitable returns. With a host of companies slated for listing in 2004, including Patni Computer Systems Ltd., and Daksh eServices, the year shall further define India's position on the South Asian private equity scene.

In the first seven years of the last decade, Southeast Asia had been the focal point of private equity investors with Singapore being the centre. The boundary has now grown further to cover India. A new market in the Asian private equity industry is in the making.

Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit our website at www.asiape.com or email us at info@asiape.com