Monday, January 13, 2014

Asian Tycoons - direct investments

As pointed out in recent article in Financial Times, wealthy Asian families are doing direct deals now that the next generation are trained professionally.

That's what we do - sleuth global investments for such families ;-)

Here's the article:

Asian tycoons shut out private equity firms
What do Facebook, Spotify, BitPay, Summly and Siri have in common? They all got early stage private-equity backing from Asia’s richest man, Hong Kong’s Li Ka-shing.

The octogenarian multi-billionaire made his money from some of the oldest and simplest businesses going: property and ports – where people live, work and trade, the basics of any economy. But Mr Li’s Horizons Ventures has since 2006 made tens of millions of dollars of investments into some of the most uncertain and novel ideas for businesses around, ranging from the trivial to the frightening.

For instance, his most recent investment is a $3m punt on Bitstrips, a company that simply allows you to create a cartoon character of yourself. He also put a similar amount into Affectiva, one of whose products allows a computer to measure your emotional reaction to advertising.

Someone worth $31bn can afford to make a few wilder bets, but the really interesting thing is that Mr Li, like many other Asian tycoons and entrepreneurs, chooses to make so many such investments directly rather than through a specialist fund run by someone else.

This happens not just in highly speculative new technology, but also in other kinds of private equity investing too. Cheng Yu Tung, Asia’s fourth-richest man and the patriarch of the Chow Tai Fook and New World empire, last year turned a US dollar profit in nine figures from a private equity investment in Huishan Dairy, a Chinese milk producer, which listed in Hong Kong.

This kind of thing is the bread and butter of institutional private equity – but in Asia the question is: how much is private equity being crowded out by the tycoons?

Eric Solberg, a former CVC partner who now runs his own private equity deal shop in Asia, believes the region’s tycoons and rich families think they do not need to spend multiple layers of fees but can find their own private investments.
“Far more active than private equity as a whole or corporates as a whole are the Asian families,” Mr Solberg says. “It is very hard to track what they are doing in real time, but you should not forget that they are the ones really driving the [private investment] market here.”

It is true that private equity firms have struggled to deploy money in Asia. Buyouts that give funds control of a business are extremely rare, while deals for minority stakes have also been getting harder on an industry-wide basis, if not for some of the better connected individual funds.

Total private equity deal volumes in Asia last year were just $29.1bn, according to a report last week from EY, the consultants, and Mergermarket, the data provider. This is down from $33.1bn worth of deals seen in 2012 and by way of comparison is less than half the volume of deals seen in the first quarter of 2013 alone in the US.

So what are the issues? Fees are an important consideration, according to Brian Crawford, who is head of the institutional solutions group at UBS’s Asian private bank and who helps the region’s wealthy find investments. Also, many tycoons and their families do not like the perceived illiquidity of having money tied up in long-term commitments to a fund manager.

Most important, however, says Mr Crawford, is the lack of transparency the region’s wealthy families believe they get from private equity managers, and the lack of personal involvement they like to have in underlying investments.
“Making direct investments is one way in which family members can be properly involved in managing the family’s wealth,” Mr Crawford says. “But usually they are looking to get into something where they have a differentiated ability to understand a business and the risks involved.”

Their investments, therefore, are often similar to the family’s existing business, and can result in a lack of diversification. Mr Crawford says the need for diversification means many families still put some of their money to work in institutional private equity as well.

Many of these Asian families have highly educated and bright children who have spent time learning finance in investment banks and private equity firms. Sonia Cheng, for example, the granddaughter of Cheng Yu Tung who now runs the family’s hotel business, spent time in investment banking and at Warburg Pincus, the private equity firm.

Many offspring are bringing these skills back to the family and can operate without the constraints of institutional private capital.

Institutional private equity’s slow progress in Asia is due to the dominance of families as the fundamental investors in corporate activity. Asian tycoons lack trust in private equity funds and question why they should let these firms invest in their businesses. They also increasingly believe that when it comes to investing they can look after themselves.  --  by Paul Davies, Financial Times,  2014 January 13

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