Insider clarifies nuts and bolts of industry
"The private equity industry is often misunderstood," says Chia Kok-onn, co-president of the Hong Kong Venture Capital and Private Equity Association. He says there is a tendency to view the industry with mixed impressions.
"The various aspects of private equity and venture capital are not widely understood. Neither is the diverse range of job opportunities the private equity industry requires to remain successful," says Chia, who was previously managing director of a United States-Asia private equity-venture capital firm, with US$1.6 billion in funds under management.
To unravel some of the misconceptions surrounding private equity, Chia will present a Classified Post and Kornerstone event on April 20, the "Seminar on Private Equity: Private Equity Industry Offers Career Gains". During the presentation, Chia will focus on PE as a financial investment instrument in the alternative asset class, and the skills and training needed to succeed.
Chia says that fundamental to building a successful PE investment team is bringing together the right combination of professionals with a wide range of skill sets.
"The industry needs talented people with management operating expertise to nurture companies. People from different sectors of the finance industry are needed along with engineers for their problem-solving capabilities."
The industry also relies on analysts, psychologists and historians to look at economic cycles and aspects of an investment, he adds. "The diversity of skills brings different perspectives so as not to be blindsided when we evaluate deals."
Chia says the PE industry offers attractive careers for people from investment bankers and qualified accountants, to those with strong industrial experience to build regional or global businesses.
"The industry is ideal for those who enjoy a challenge and [are] prepared to work hard to achieve success," he says.
PE broadly falls into three categories, Chia says. Funding for start-up companies with little or no liquidity is usually referred to as venture capital because the investment strategy often carries a high degree of risk. PE growth capital involves investment in continuing businesses at different stages of growth via mezzanine or expansion financing. Offering the least risk to PE investors is the buyout investment strategy, which involves the purchase of a company or a controlling interest of a corporation's shares, often by an existing management team with investment from a private equity firm.
Chia says PE investments can help entrepreneurs to build their company into a major regional or global entity. PE can also act as a strategic pillar to accelerate economic development through investing in the next generation of industries, thereby creating employment. Chia says forward-thinking governments and economic development boards also realise that PE investment can springboard the development of industries in areas where other sources of funding may be lacking.
PE firms can add value in various operational aspects, Chia says, such as by providing assistance in product or service marketing including access to international markets. They can help provide strategic direction in improving cost efficiencies, recruiting key executives and assisting with transparent reporting and advice on corporate governance compliance. Increasingly, PE firms are helping the companies they invest in to achieve corporate social responsibility benchmarks.
Chia says a misconception regarding PE investment is that the industry provides a cheap source of capital. He says PE managers evaluate their investment options carefully when compared with investment into a quoted firm or a firm with financing capabilities.
"PE strategies carry a higher risk, so it is necessary for PE investors to look for a higher return to compensate for their investment risk," Chia says. "PE fund managers often have their own money tied up in an investment, which is an added incentive to make sure they get their due diligence and investment strategies on target."
Date Wednesday, April 20
Venue 15/F, Hong Kong Club Building, Central
Fee Standard rate - HK$1,170; early bird rate - HK$850 (by April 8)
'Risks involve high returns'
Without private equity investment backing, many of today's successful companies, including mainland household names, would struggle to evolve from being a good idea to a thriving business, according to Chia Kok-onn, co-president of the Hong Kong Venture Capital and Private Equity Association.
"PE firms frequently invest in companies that would have difficulty obtaining traditional bank loans. Start-up firms usually lose money before becoming profitable, making fixed-debt payments to banks difficult to manage. PE serves critical roles in helping small companies grow and become profitable and as a result contribute to the economies where they operate," Chia says.
Alibaba.com and Ctrip.com International are examples of companies that have benefited from PE investment. According to a Citigroup report, about 30 per cent of all initial public offerings (IPOs) in Asia, excluding Japan, last year, had a private equity company behind them. The report says as of late last year, private equity-backed IPOs hit a record US$28.9 billion and attracted US$27.9 billion in new investments.
While the mainland and India continue to attract the lion's share of PE investment, industry experts say private equity investors are starting to look at opportunities in Indonesia and Vietnam.
Across Asia, sectors ripe for deal-making include retail, IT, automobile, energy, agricultural related businesses and financial services.
Chia says provocative labels given to PE activities including "barbarians at the gate" and "locusts" fail to give credit to the real essence of PE investing.
"The goal is to take a long-term view and see a unique idea or promising company develop and grow to become a major regional or global player," he says. "The risk of an investment failing is very real and can be as high as one-in-five. Therefore, the risks involved justify the high return expectation on investment."