Investing throughout Asia was a real challenge for many private equity investors during the late 1990s. No longer. The industry is now celebrating a significant increase in funding and a string of high profile and profitable exits. Talented Chief Executives backed by strong management teams have become role models for many others as sustainable shareholder value and wealth is seen to be created through the partnership with private equity. These companies have grown and become formidable players in their respective sectors, and the Asian private equity funds, formed in 2000 and 2001, which backed them are reporting healthy returns. There have been real home-runs for private equity in this period in some cases investors more than quadrupling the amount invested. . The private equity industry is providing the capital for ambitious management and their plans for growth and its future looks bright.

The performances of Asia's economies and financial markets have provided ideal conditions for the private equity industry to flourish. Current favourite destinations for investment are Japan, Greater China and India. The attraction? A combination of economic growth, investment opportunities and official policies and a financial and regulatory framework that private-equity funds can work with.
Significant returns have attracted a record-high inflow of funds into Asia. In the first half of 2005, some US$5.6 billion of fresh capital flowed into the region. That was 55.5% more than a year earlier, ((source APER)). Japan was the favoured investment destination for this new money -attracting some US$1.5 billion. The People's Republic of China was in second place attracting US$765 million. Buyout funds accounted for about 56% of the total money raised. A further US$1.65 billion was raised to expand and grow existing businesses -- an increase of 1.2 times over 2004's US$754 million.

Private equity investment in the region is estimated at a not negligible US$110 billion (source AVCJ)

The wider financial industry is becoming more aware that private equity is more than simply venture capital for start up entrepreneurs with smart ideas. There are Buy Out firms which take controlling positions. Well-known names include Ripplewood, Newbridge, JP Morgan and CVC. These players typically invest large amounts in large deals. Then there are those who focus on providing Expansion or Growth Capital. Players in this are include 3i and CLSA. These funds take influential minority positions and work alongside existing owners and management to deliver results.. Then there are the more familiar Venture Capital funds, such as Walden and JAIC that take early positions in start-up and newer companies. Private-equity funds encompass all these activities and are involved across all deal sizes, industries and countries. Their success has prompted investment banks, consultants and other intermediaries to consider private equity as a true alternative in M&A transactions, recognizing the industry's ability to deliver and execute at speed.

Perhaps the most interesting feature to emerge in the maturing private-equity industry is the significant role private equity now plays in helping Asia's companies to grow, out-perform and also in improving the general corporate landscape. Companies that source private equity can receive more than an injection of funds from their new investors. They also receive value-added services often through the directorships private equity funds take up in their investee companies. The private equity firms ensure "their" new partners receive the benefit of their own expertise in such areas as strategy and corporate governance. Private equity investors assist in shepherding through acquisitions and mergers and also recruitment. The alignment of interest possible between a private-equity fund, management and any key other shareholders if structured properly produces a real win-win situation for all. Some argue that the next wave of impressive blue chips and in Asia is likely to emerge from businesses connected to the private-equity industry, rather than the current landscape of government-linked companies and large families conglomerates.

Hong Kong fund management groups are at the heart of this business. With more than US$3 billion of the new funding being linked to Hong Kong-based funds, this is an industry where the Special Administrative Region plays a leading role. Hong Kong's infrastructure provides an excellent base for the peripatetic life style of the average private equity fund manager.

But success can breed its own challenges. The influx of private equity funds is creating more competition for deals. The visibility of the profits made is causing the authorities in both Japan and Korea to re-examine the taxation of private equity profits. And, the performance bar has been lifted. Investors will no longer accept lower returns than more mature markets, they expect the same, if not better. Yet the problems of poor corporate governance and inadequate financial reporting standards remain.

Overall, the private equity industry in Asia can look to the future with optimism. Increased competition among private equity firms is healthy and the success of the industry is increasing the size of the talent pool as more people, from graduates to seasoned and experienced financiers, want a new career.

Private equity has always been dynamic and evolving business. Success in Asia as elsewhere, is still traceable to getting the fundamentals right. The list is easy to make, but often harder to implement: access to good investment opportunities; judging accurately the commercial worth of investments and the integrity and skill of management; and possessing the skills to helping an investee company succeed. Success requires a combination of luck, patience, a good network, proper due diligence and valuations, formulating achievable business models , and of course, attracting the right people into private equity investment teams and to target companies. Asia has been able to pull all these factors together and Hong Kong has played a major role in this success.