Page 1 of
2 Barbarians at Asia's
gates By Chan Akya
Private-equity firms [1] have become
increasingly controversial in the Asian landscape
after mounting stunningly successful bids for a
range of Asian financial companies in Japan and
South Korea, and more recently a range of other
assets, including Australia's national airline,
Qantas. Politicians of all hues, as well as
assorted left-leaning stakeholders such as trade
unionists, have protested the trend, calling back
the old term of "vultures" and "barbarians" [2] at
such funds.
The furor led to an intensive
investigation and finally an abrogation of a
successful transaction in South Korea's banking
sector late
last
year. More recently, leaders of Southeast Asian
countries have voiced concerns about the size of
such funds, which dwarf some of their stock
exchanges' entire market capitalization. To a
large extent, Thailand's attempts at imposing
capital controls last month were aimed at ensuring
that large private-equity firms did not end up
converting the country into a private limited
corporation owned exclusively by foreigners in
distant lands.
How it works Typically, private-equity firms collect funds
from the super-rich rather than the middle-class
investors ordinary mutual funds attract. These
funds are backed by large amounts of debt made
available by banks and, sometimes, other investors
such as hedge funds. The total pool of money is
devoted to identifying companies whose market
value (number of shares times share price) is well
below the "real" value of assets and operations.
Once the company is purchased from the
hands of public investors, new owners tend to
rationalize operations quickly, by focusing on
cutting excess costs as well as selling assets
that do not form a core part of the business
strategy. Such asset sales are usually used to pay
back outstanding debt. Over a period of time, the
company's operations improve and it achieves a
turnaround.
After such a turnaround, the
private owner of the company goes back to the
stock market for a listing, selling the "new"
company to public shareholders. Profits, and
losses, can be quite large in such a turnaround
situation.
Vultures and scavengers In much of Europe and North America, the
popular (rather than financial) press indulges in
name-calling when it comes to private-equity
investors. There seems to be something quite
sinister about a secretive group of people taking
over a well-known public company and turning its
operations upside down. Even Hollywood has been
unable to keep its hands away from such raiders,
as films such as Wall Street and Pretty
Woman show the opposite ends of the spectrum.
Indeed, in the latter film, a rapacious
private-equity investor is taught life's values by
a streetwalker.
Keeping this in mind, and
also Asia's natural surpluses of capital, why then
does the region need these private-equity
investors? Surely the markets in Asia are capable
of making rational judgments - or at least that is
how the argument would be framed. Why Asia
needs the barbarians Much of Asian
manufacturing capacity can be sourced back to
ministerial fiats issued as part of various
industrialization programs. Starting with Japan,
South Korea and Taiwan, and working toward the
rest of Asia, including mainland China and large
tracts of Southeast Asia, most capacity was
financed by cheap bank loans that were pushed
through by governments keen on achieving
industrial growth.
Many Asians save more
than they spend, leaving banks with substantial
funds at their disposal. While the process of
finding creditworthy borrowers usually proves
daunting for banks, doing so in an environment of
government-directed lending becomes more dangerous
still. Borrowing from banks for special projects,
though, allowed the industrial families to keep
risks to the minimum - if the project flopped, the
banks bore most of the cost, and could in turn
depend on the government for a bailout if such
losses threatened to make them bankrupt.
While in Japan most of the funds were
diverted toward a clutch of holding companies
belonging to powerful prewar industrial
conglomerates, in other parts of Asia the
financing route usually followed political
sycophants. Thus a number of the controlling
families in Korea, China and Southeast Asia owed
their wealth to political masters, who were duly
rewarded with monetary gifts, unstinting support
and other perks.
The result of all this
was both to distort the true cost of capital
across Asia and to establish a new group of
wealthy oligarchs. Neither point can be sneezed at
- the first is the main reason Asian countries
have excess capacity in many industries. This is
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
