'Risks involved justify 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.'