Asian Venture Capital and Private Equity

Three practitioners presented their perspectives on the venture capital and private equity industry in Asia on the Asia Business Conference panel “Venture Capital and Entrepreneurship.”

Andy Goldfarb, Senior Managing Director at JAFCO and HBS alumnus, started by providing a overall perspective on doing business in Asia. JAFCO, a leading Japanese private equity firm, has $750 million dedicated to venture capital investments in the US, and adds value to its US portfolio companies by helping them address the challenges of transacting in Asia.
The first of these challenges, according to Goldfarb, is realizing and dealing with cultural and business differences, such as the fact that the entrepreneurial community is relatively limited in Asia, and that a U.S.-type “failure is good” mentality does not exist. A second issue Goldfarb highlighted is the importance of choosing the right partners in Asia. JAFCO is able to assist its portfolio companies by leveraging its extensive network of relationships across Asia.

In addition, structuring the right deal with these partners is key. Goldfarb illustrated these lessons through the experience of one of JAFCO’s U.S. investments, Ocular Networks, which through JAFCO was able to get a key contract with Japan’s leading telecom company, NTT, to try its technology. This success opened the door for Ocular Networks to be subsequently acquired by Tellabs.

Jim Hilderbrandt, Managing Director of Bain & Company Hong Kong, then gave a bird’s eye view of the private equity industry in Asia and its developments. He started by noting that the average private equity deal size is now $20 million, up from $1 million seven years ago, with over $80 billion of capital dedicated to private equity in Asia.
The phenomenal growth of the industry took place over several stages. From 1993 to around 1997, deals principally took the form of pre-IPO investments in family-owned groups across the region. The 1998 crisis changed the rules of the game, as many of these deals “went south.”
The past four years saw the entrance of global players with large funds and sizeable teams typically based in Tokyo or Hong Kong focusing on restructuring and “value-adding” investment opportunities. In this context, Korea has been “an explosive market” over this period, accounting for 40% of deals transacted. Hilderbrandt believes that the capabilities of the large private equity funds, 20 of which now control in excess of $1 billion each, will make it increasingly difficult for small and medium players to raise capital.

Speaking of recent trends and opportunities, Hilderbrandt noted a new phenomenon: since the last quarter, a number of large Japanese companies became available for sale. On the other hand, while Korea is expected to continue to provide deal flow, it is not likely to dominate it as it did over the past three years.

Hilderbrandt expects more deals to come out of China, as it attracts ever increasing industrial activity. Because of the China effect, “the rest of Asia is left for dead,” he said, paradoxally also resulting in deal opportunities in the form of divestitures.

Maura Wong, Partner at JP Morgan Partners Asia and also an HBS alumna, focused on some of the challenges facing the industry. Wong started by identifying pitfalls associated with the two traditional investment themes in venture capital in Asia, namely the “Bridge to the U.S.” approach, where products are developed in Asia for marketing in the U.S., and the “Bridge to Asia” approach, which entails replicating successful U.S. ventures in Asia.

Wong pointed out that delays in research and development and disconnects between developers and marketers can destroy the savings anticipated by the first approach. Similarly, smaller markets in Asia and different customer expectations relative to the U.S. often result in the failure of the second approach.

Wong then proceeded to describe developments and issues as they specifically relate to the leverage buy-out business, noting that in more developed, auction-type markets such as Korea, buy-out firms now need to differentiate themselves through value added services to be able to close deals. In less developed markets, the scarcity of deals is in itself a challenge.

According to Wong, other issues include the lack of good management teams, undeveloped mezzanine financing markets, and the difficulty in exiting investments. Wong concluded by expressing her belief in private equity in Asia as a force for restructuring and globalization, with “a long way to go.”

In the intense Q&A discussion which followed, the strong potential and opportunities for private equity in Asia were further highlighted. Wong won the audience by concluding that despite the global economic environment, her group was looking to hire, and invited interested students to send her their CVs. No doubt her inbox is now flooded.