Fallout from the subprime credit turmoil looks sure to put the brakes on private equity transactions in North America but that is no reason to assume a similar slowdown looms for deals in Asia. Marcus Thompson, managing director and chief investment officer for HSBC Private Equity (Asia), oversees a US$700 million regional private equity fund and a technology venture fund with committed capital of US$125 million. The aim in each case is to build a portfolio of 15 to 20 holdings, with an equity check - the size of an individual investment - of US$40 million to US$100 million in the private equity fund and US$3 million to US$10 million in the technology venture fund. The larger fund invests mainly in well-established companies in the consumer products, service and manufacturing sectors. They may need an injection of capital to expand production or launch a brand, or a shareholder may be looking to sell out. 'In China it is largely expansion capital. In Southeast Asia it is more buyouts,' Mr Thompson said. The smaller fund concentrates on companies with shorter track records which offer 'earlier stage opportunities'. Geographically, the focus is on enterprises in South Korea, Greater China, Southeast Asia and India. He noted that negotiations were often protracted. In-house teams had to size up prospects for each target company over the next three to five years, sit with the management team to develop a blueprint and fix terms. The process could take two months or two years. 'There is no prescriptive basis for helping out portfolio companies - it depends on the business and the set of objectives. We want to work out how they can drive the business to the next level,' Mr Thompson said. 'Funds seek to align themselves with the management teams, but they are also active in participating in portfolio companies. We are represented on the boards of just about every company we are invested in.' He described the private equity philosophy as more carrot than stick. HSBC is now the largest single net investor in the two funds, with about 37 per cent of the larger one. However, Mr Thompson said, 'Portfolio companies see the private equity relationships as a means of expanding the company's relationships with other parts of HSBC. 'However, there is no attempt to force feed bank products or services to companies in the portfolio which would be tantamount to poor corporate governance.' The funds' managers, supported by an investment committee, have full discretion over the deployment of capital. In doing this, they must monitor returns, report to investors on the performance of each portfolio company, and be alert to market timing and exit opportunities. The typical holding period for an investment is three to five years. After that, disposal may be by IPO, through a merger or acquisition, or in a secondary buyout, perhaps by selling to another private equity fund. New opportunities are also under constant review. 'India is an area where we have recently completed two investments and where we would like to deploy an increasing amount of capital,' Mr Thompson said. 'The tightening credit market is likely to impact activity in the United States and Europe directly, where leverage is a critical element in deals. It will limit firms in terms of what they do and less activity is expected. But, in Asia, leverage is not a significant aspect of deals, so I continue to be optimistic about the prospects.' He said that, while the billion-dollar buyouts attracted media attention most deals occurred in the mid-market and below. Investors make an initial commitment to a fund, which is then drawn down as needed over, say, five years. 'Investors do not hand over cash on day one. A feeder fund is put together with a private bank which manages the draw-down arrangements.' He said that the market was expected to remain active but, ultimately, rates of return would drive the sector. In this respect, the standard target was to achieve at least two to three times capital invested in each portfolio company over a two- to five-year horizon. 'In the past three years, returns have certainly fallen within these parameters and in some cases exceeded them. The industry will thrive if it can deliver good returns.' He said there was increasing discussion about the possibility of new tax laws applying to the sector in other jurisdictions. 'Taxation is a topical issue in the US and Britain and funds and individuals working for the manager could face higher tax bills in future. 'However, Hong Kong has a simpler system and I don't think the government plans to change it,' he said.