Devonshire Capital
September 2003

Asia Money

Extract from THE SEARCH FOR HIGHER GAINS - By Ben Davies

Of the US$10.45 billion of private equity invested in Asia during 2002, according to Asian Venture Capital Journal, almost 56% poured into Japan. Ironically the biggest reason for this has been the reluctance or inability of many local companies to successfully restructure their operations. That has provided an opportunity for the foreign private equity groups to acquire a majority stake turn the business around and hopefully sell out at a significant profit. Ripplewood Holdings set the pace three years ago when it acquired Long Term Credit Bank in the first takeover of a Japanese bank. Since then there has been a stream of deals by other private equity investors including the Carlyle Group, JP Morgan Partners and Newbridge Capital.

But it is Korea that has been in favour among private equity investors. "From our perspective, Korea is an extremely good market," says Andrew Affleck, partner at Devonshire Capital, a boutique investment bank that invests as principal and has established a strong track record in small to medium-sized private equity deals. "In the short term, there are still likely to be concerns about the level of economic growth. But looking ahead, we believe that we can quite comfortably achieve a return on equity of at least 15% to 20% per annum."

Devonshire Capital has been busier in the past 18 months than ever before. And it is looking at a number of potential deals in consumer related business, especially in food and beverage - with the emphasis on taking a controlling stake. The key to identifying successful private equity deals, says Affleck, is to have a local presence "You need to be there on the ground putting in the time doing extensive due diligence" he says "That provides the necessary comfort level."

But even that does not guarantee returns. While China and India are high on the radar of would be private equity investors, legal concerns and the need to safeguard the principal has meant that only a few, out of the vast number of deals that are discussed actually make the grade.

Elsewhere in South-East Asia, activity has been muted by the small size of the deals as well as low interest rates, which make bank funding a more attractive alternative. "Private equity players want to get a reasonable amount of money into play, "says Affleck at Devonshire Capital. "If you are looking to invest anything between US$30 million to US$50 million, you are likely to find a lot of the companies are simply too small"

That has not stopped some of the big US private equity houses from attempting to cherry pick financial institutions that fell on hard times during the Asian crisis. In the biggest landmark deal of all, the Indonesian government in March sold a 91% stake in Bank Central Asia (BCA), the country's dominant retail bank to US private equity firm Farallon Management for US$560 million. Despite being virtually unknown in Indonesia, Farallon outbid Standard Chartered Bank, which had been expected to win the deal.

"BCA was a milestone," says Richard Fisher, president director at Merrill Lynch, "It was one of the biggest asset sales ever in Indonesia for strategic investors. It attracted foreign money and it created additional confidence"

For most private investors, however, it is likely to take a lot more than a few big deals to lure them back to the private equity bandwagon. According to Ho at CLSA, most funding for private equity will come from pension and insurance companies for at least the next five years. Only when an element of stability returns to equity markets does he believe that private investors are going to commit more funds to so called alternative investments.

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