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Coda for Consolidation

The number of fund sponsoring groups withdrawing their Asian private equity programmes, or diluting their exposure to the asset class, has fallen to a handful in the year ending March 2004, compared to 16 in the previous 12 months. But it may be premature to celebrate the conclusion of the industry's consolidation movement in the region, as institutional investors' stance towards Asian private equity is notoriously fickle, according to the Asia Private Equity Review.

The end is nigh for the consolidation movement that began at the outset of the 2000 technology meltdown. The rate of senior management turnover in the Asian private equity industry has dropped for two consecutive years. Stability now pervades at the top rung of the private equity management ladder.

At the same time, during the period under survey, the number of fund-sponsoring organisations withdrawing their Asian private equity programmes or diluting their exposure has fallen to a handful in the 12 months ending March 2004, compared to 16 in the same preceding period. By any reckoning, the numbers indicate a sharp reversal to the past trend.

Sponsors' Withdrawal Tapers
In the 12 months between April 2003 and March of this year, there were only four fund sponsoring groups that were known to have either withdrawn or initiated the withdrawal process from private equity, while one joint venture partnership was terminated. On this latest exodus list, ING Group's decision to focus on its core business and shed its private equity interest was a major loss to the industry. Under the ING banner, there are three distinctive units engaged in private equity investment activities in Asia: the Singapore-based Baring Communications Equity Asia (now known as Crest Capital Partners), Baring Private Equity Partners Asia and Baring India Investment Ltd. The three firms managed an aggregate $693m pool of capital.

During the year, UBS has completed its Asian private equity withdrawal programme when its UBS Capital Asia Pacific spun off and became known as Affinity Equity Partners. Adopting a similar strategy as UBS is the Washington-based Darby Overseas Investments, although there is no change of name for its Asian arm, Darby Asia Investors. In August last year, Darby Overseas Investment sold Darby Asia Investors to Franklin Templeton Investments as part of a sale package, concluding a 15-month relationship.

Like Darby Asia Investors, the China Water Co. welcomed a new group of investors as Hong Kong Land and Temasek Holdings decided to reduce their exposure in the company. In July last year, Hong Kong Land and Temasek Holdings sold their combined 46 per cent to Malaysia's Sime Darby Group as well as a private investor.

In a significant departure from the past, however, the withdrawal of fund- sponsoring organisations did not lead to extensive disruptions of operations or the closure of their affiliated fund management firms. All those that have experienced a change of shareholder structure continue to operate and demonstrate their ability to move forward. This testifies to a rising level of confidence in the Asia private equity industry and fund managers' ability to reach out for new sponsors or assume independent status.

Even in Japan, where an independent spirit is not the norm, Globis Group has stepped up to take total control of its destiny upon the termination of its joint venture agreement between the U.K.-based Apax Partners, even though it has been a fruitful partnership for more than four years. Globis Group followed the footsteps of MKS Partners, which declared independence from Schroders in 2002.

The only institutional decision that led to the closure of operations was that of the U.K.-based Prudential Plc, which has adopted a staggered withdrawal blueprint instead of one calling for massive lay-offs and an abrupt departure. Following indications of its plans to rationalise operations in Asia, and while its Japan and Singapore offices were closed, Prudential Plc continues to maintain a substantial operation in Hong Kong. It was a well-conceived strategy that did not arouse a swell of acrimony and is in fact an approach being used by many other houses to define their presence in Asia. While 3i plc closed its Japan operation in April last year, it continues to operate with a growing presence in Hong Kong as well as Singapore. The Carlyle Group has decided to focus its resources in Japan on buyout situations and has eliminated its Japan venture investment arm. Newbridge Capital adopted a similar approach as Carlyle in redistributing its resources. The firm's presence in Singapore was substantially scaled down.

Human Capital Flight
Following the same pattern as the institutional withdrawal, senior management turnover in the 12 months ending March 2004, at 35, represents a significant drop of 33 per cent compared with that of the preceding year. This solidly confirms that the most brutal period of excess elimination ever witnessed by the Asian private equity industry is nearing its end.

However, management issues continue to be the dominant factor that cause the departure of senior managers. Resignations accounted for nearly 50 per cent of the movement in the past 12 months, while operational closures took up 37 per cent. The trend highlights a divergence of expectations within the senior management stratum of Asian private equity firms.

In the period under survey, the departure of the longest-serving managers is substantial. Eighty-three percent of the number falls within the "first tier category", or most-senior managers. Among the 29 departures in this tier, 38 per cent have been with Asian private equity for more than five years while 10 per cent of them have in fact invested more than ten years in the sector. It is somewhat alarming to note that the majority of the managers did not remain in the industry, leaving a huge vacuum of human capital. Over 90 per cent of senior managers and 67 per cent of second-tier managers have sought greener pastures in a new sector and are unlikely to rejoin private equity. As a result of the turnover, the industry lost an aggregate 163.16 years of private equity investment experience. It is a heavy toll that will undoubtedly impact the long-term development of this complex industry.

Observation
Much solace can be taken from the fact that for first time since the 1997 Asian financial crisis, there was no complete shut down of an entire Asian private equity operation following the withdrawal of institutional sponsorship. The recent impressive exit records of Ctrip.com, Shinsei Bank and Pacific Brands are powerful reminders that Asian private equity investing is a force to be reckoned with.

It may be premature, however, to celebrate the conclusion of the industry's consolidation movement. Institutions' stance toward Asian private equity remains flippant. Last year, PPM Ventures Asia, the private equity investment arm of Prudential Plc, was still engaged in expansion, opening two new offices in Southeast Asia while committing to a Thai fund. Since then, three of its four Asian offices were closed.

For Asian private equity to thrive after such an extensive consolidation that led to a vacuum experienced managers, it must find a feasible formula to retain talented fund managers and unwavering long-term commitment from fund investors. n

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