Buyouts and expansion capital are the preferred platforms for building equity The two main ways for venture-capital companies to invest are through buyouts and expansion capital. Expansion capital, as the name suggests, is money provided to expand, perhaps by buying a new plant and equipment, or expanding into an offshore market. Buyouts involve a company selling off a business unit to a venture capitalist and, typically, some of the unit's existing management. The venture capitalist structures the deal with leverage, blending in a mix of debt and equity, and proceeds to build the underlying business once it has been spun off from its original parent. Jamie Paton, director, North Asia, for private equity provider 3i Asia Pacific, said expansion capital had been a main funding platform for venture capitalists and private equity players in Asia over the past five to 10 years. 'Expansion capital is looking to provide money to a company to grow. The investors provide capital to allow a company to expand, either by making an acquisition, building a factory or hiring staff. By providing that capital, the institution becomes a shareholder in that business,' he said. 'The company gets the benefit of having equity on its balance sheet. It is not debt. It provides a cushion for the company's progress. By choosing the right investment partner, management will also get someone who has knowledge of the sector, because they have done deals in other parts of the world or Asia in the same sector.' The venture-capital company typically does not structures the expansion deal as a loan - although part of the funding can be provided as 'redeemable' or repayable money - but as an equity injection, effectively buying shares in the business. It might get a seat on the investee company's board or bring in outside specialists to help the company grow. 'An alignment of interests between the parties is key because the equity investor needs a return, which will come through as either a trade sale or an IPO [initial public offering] of some sort,' Mr Paton said. Several funds are looking to invest in expansion capital deals on the mainland, and the investors are seeking the mainland's enticing benefits. 'The China company is utilising its lower labour costs to expand internationally, and there is domestic demand which is growing very rapidly. Those two dynamics provide an interesting opportunity for expansion capital through Hong Kong.' Mr Paton's company, 3i, was recently co-investor with the Carlyle Group in a US$30 million expansion capital financing for mainland polymer battery company Amperex Technology. Stephen King, managing director of JP Morgan Partners Asia, said the buyout scene in Asia was exciting but still in its infancy, having grown more intensely since the Asian financial crisis. Since then, the region's buyout market had expanded rapidly as conglomerates focused on their core strengths and chose to divest some business units that might appear unattractive within the original group, except to the managers running them. 'Often these management teams are very talented and quite entrepreneurial in their way. They are often buried within large conglomerates. Either their business is too small or their parent company does not look at their business the way management looks at it,' said Mr King. 'By teaming up with us, the managers can realise a dream of acting as owners of these companies that we buy with them. And they can also execute business plans that would be perhaps more difficult to execute under their old ownership umbrella.' Mr King said the Asian buyout market developed first and most quickly in South Korea, because of the level of corporate restructuring. Japan was another market with a promising future for buyout deals. He said that while it was too early to judge the performance of buyout deals, compared with other areas of venture-capital activity, his firm's experience was favourable.