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ADVISORYPRIVATEEquITYPrivatetuition:InsightsintohowprivateequityhousesnurturetheirinvestmentsinAsiaAfterfallingtorelativelylowlevelsfollowingthetechwreckof2001,privateequityfund-raisinghasundergonearesurgencerightacrossAsia.Infact,fundsactuallyavailableforinvestmentintheregionnowfarexceedthepooloffundsbeingraisedhereastheglobalbuy-outhouseshavebecomeincreasinglyactive.Privateequityfundsareattractedtotheregiontoacquireunder-performingcompaniesandprovideexpansioncapitaltothosecompaniesbenefitingfromyearsofstrongeconomicgrowthinChinaandIndiaandthepull-througheffectsrightacrosstheregion.ThisisatimeofgreatchangeintheeconomicpowerofAsiaastheglobalbalanceofcorporatecapitalisation,commerce,profitsandinvestmentcontinuestogrowintheregionatafargreaterpacethanelsewhereintheworld.Investmentinthisrapidlyexpandingregionhasneverbeenmoreattractive.TherewereneverdaysofeasypickingsforprivateequityinAsiaandthesituationisn'tchanging.Inthelate1990s,economicvolatility,combinedwithregulatoryuncertainties,madelifedifficultforaninvestor.Today,cashalonecannotsecureadeal:aninvestorneedstobringsomethingmoretothetabletosecureaninvestmentthatwillmeetthechallenginghurdleratesofreturnthatarerequired.Inthisworld,thedynamicsthatarechallengingemergingAsiancompaniestoglobalise,orpushingalreadyglobalisedfirmstodeconstructpreviousuncompetitive,high-costpractices,willcontinuetorevealnewandprofitableopportunitiestoprivateinvestorswhounderstandbesthowtointerveneanddoitfirst.Thismeansthatactivemanagementofportfoliocompaniesisessentialtoachievetheirgrowthambitionsandprofitabilitytargets.WhiledeployingprivateequitysuccessfullyinAsiaisnotgettinganyeasier,itmayalsojustbethebeginningforthosewiththebestintelligenceandinsightintothemarket.Forthesereasons,wearepleasedtopresentthisprofessionalstudybyKPMGandReutersgivingustheintelligenceandinsightintohowprivateequityfirmsarerespondingtothechallengetorealisevaluefromtheirportfolioofinvestments.ForwardDavidNottRegionalLeaderKPMGPrivateEquityGroupEricHallEditorNorthAsiaReutersPrivatetuition:InsightsintohowprivateequityhousesnurturetheirinvestmentsinAsiaKPMGcommissionedReuterstocanvasstheopinionsofmorethan30PEhouses,aswellasanumberofotherstakeholdersandprofessionals,togaintheirinsightintoportfoliomanagement.KPMGwantedtoknowmoreabouthowPEhousessetthemselvesapartandhowportfoliomanagementstrategiesdifferaroundtheregion.TheinterviewstookplaceinTokyo,Seoul,HongKong,SingaporeandSydneyduringAugustandSeptember2006.ThisreportalsocomparesandcontraststheviewsexpressedagainstaverydifferentbackdropforPEhouses,presentedinKPMG’s2003EuropeanInsightsintoPortfolioManagement1report.ThisreportcomparisonmayhelpglobalfirmsunderstandwhatmakesAsiaspecialatthisstageintheinvestmentcycle.Muchisatstake.GlobalbuyoutfundssuchasKohlbergKravisRoberts&Co,TheBlackstoneGroup,TexasPacificGroupandPermirahavearrivedinAsiainrecentyearstotakepartintheregion’sgrowth.TheyarealsoseekingdiversificationfromtheirmaturerdomesticmarketsinEuropeandtheUnitedStates.Tobesuccessful,globalfirmshavehadtoaltertheirstyle,andinsomecasesadaptthebusinessmodelsthathavebeensosuccessfulelsewhere,inordertoparticipateinthenewgrowthphasebeingexperiencedacrossAsia.In2005,PEhousesraisedarecordUS$20.6billiontoinvestinAsiaPacificcompanies.Withsomuchactivity,Thedaysofriskybutpotentiallyveryprofitablerelationshipsbetweenprivateequityandcash-strappedcompaniesarefadingfastforprivateequity.InthewakeoftheAsianfinancialcrisisinthelate1990s,companiescouldbeboughtforknock-downpricesandmanyprivateequity(PE)housesobtainedasomewhatpredatoryreputation.Today,fundsarebeingforcedtopaymoreforthechallengeofpartneringwithAsiancompanieswhileatthesametimetheyfindthatmarketincreasinglycomplexanddemanding.PEhousescannotsimplysitbackandrideouttheeconomiccycle.Theneedforproactiveandeffectiveportfoliomanagementisnowaforemostconsiderationfortheindustry.Introduction1InsightsintoPortfolioManagement,KPMG,2003Privatetuition:InsightsintohowprivateequityhousesnurturetheirinvestmentsinAsiabothgeneralpartners(GPs)andlimitedpartners(LPs)seemtoshareahealthydegreeofoptimism2.Acommunityofleveragefinanciers,M&Aadvisors,consultants,accountantsandlawyershassprungup,dedicatedtoservicingthefunds.InvestmentbankingrevenuesfromfinancialsponsorsintheAsiaPacificregionalonehavehitall-timehighsinrecentyears,totalingUS$403millionin20053.However,theconsensusisthatreturnsoninvestmentaredropping.LargePEhousesarenowtargetingreturnsbetweentheAsianregion’sshareindicesandtypicalhistoricalreturnsofaround25percent.ThishasseensomeinvestmentswithexpectedPEreturnsofaround15-17percent.Afewhigh-profileblackholesorblow-ups,asbadinvestmentsareknownintheindustry,couldbruiseinvestors’confidenceaswellaspromptarethinkbylenderbanks,inturnimpactingheavilyontheprofitsofnumeroussuppliers.Manysurveyrespondentsexpressedfearsthattheseverityofcompetitionmightcreateabubbleinthebuyoutindustry.Theywillbeanxiouslywatchingthisvintageyearofinvestmentbythefunds,hopingtheywillallsucceedinaddingvaluetotheirportfoliocompanies.2AsiaVentureCapitalJournal(AVCJ)database,S