Reputation and relationships are what matter in Asia. We have over two decades of experience in the region, so we have a very strong reputation. We also have 60 investors in the region, so we have the right relationships. Finally, we have the Morgan Stanley name on our business cards which opens doors for us.
From the outset we recognized that the private equity investment environment in Asia is distinct from the one in developed markets. Asia can be a very attractive place to invest because of the long-term secular growth trends and the rising level of consumption. That’s why investors are interested in gaining exposure to Asian emerging markets. But at the same time, Asia is clearly not for the faint of heart because it is less transparent, subject to shocks and experiences a high level of macroeconomic volatility.
First we start with the countries. Rather than focusing on all Asian countries, we concentrate on four or five, for very specific reasons. We are committed to China and India because they are the world’s largest growth markets. We invest in South Korea and Taiwan because they are leading industrialized economies where we believe we can buy businesses at very attractive valuations. The one country where we haven’t been as active, but we hope to be, is Japan, the second largest economy in Asia.
We tend to concentrate on business models that are well known, where the economics of the business (margins, return on capital, and so forth) enable us to conduct rigorous due diligence. This means that we spend a lot of time searching for opportunities in consumer non-durables, financial services and healthcare. The benefit of location in Asia, particularly in high-growth markets such as China and India, is that these businesses may be able to scale up quicker than their peers in the U.S. and developed Europe where growth rates are lower. One way that we manage risk is to avoid start-ups, restructurings or anything overly complex. In Asia, we’ve only invested in the top three or four businesses in a particular sector. That way we seek to avoid compound emerging market risk with business risk.
It depends. In lower growth areas such as Korea, we are almost always the single largest investor. In such markets we often need to make changes at the business level, so it is essential to own a controlling stake in a company. In high growth markets, such as India and China, we are more comfortable taking minority positions. Over the course of our history the size of our investment has ranged from 10%-100% of a company. We do insist on board representation, however, even if we are a minority stakeholder.
Generally speaking our investment threshold is between $10 million-$300 million.
We give greater emphasis to domestic rather than export businesses (although we don’t rule out export-oriented companies). Domestic businesses benefit from secular growth trends and can often build intangible brand or distribution value. We favor consumer-related sectors. We like retail businesses like restaurant chains and consumer products; financial services and wealth management companies; healthcare and education companies.
At times there is a less formal, less transparent method of deal sourcing in certain markets within the region. In the U.S., a company requiring capital will likely hire a financial advisor, who will then create a competitive process amongst various providers of capital. This clearly benefits the company, as it can often raise capital at the best price. In Asia, the process can be more opaque. I would estimate that north of 85% of our investments have been completed without the presence of a financial advisor for the company. We believe this situation may enable us to acquire high quality companies at prices that are lower than what comparable businesses command in the U.S. and Europe.
We believe reputation and relationships are what matter in Asia. We have over two decades of experience in the region, so we have what we consider to be a very strong reputation. We also have 60 investors in the region, so we have extensive relationships. Finally, we have the Morgan Stanley name on our business cards, which we think opens doors for us.