Baring targets high-growth companies with new fund

Jean Eric Salata, Hong Kong-based founding partner and CEO of Baring Asia, talks about the Baring Asia Private Equity Fund IV, a $1.52 billion private equity fund that the firm recently closed.

You target growing businesses in Asia with enterprise values between $100 million and $500 million. Why is that?
The $100 million to $500 million range is where the most favorable supply-demand balance exits in Asia. If you look at deals over $500 million, there were only 27 such deals in Asia in 2007, and only four of these took place in China and India. Whereas if you compare this with deals in the $30 to $100 million range, there were close to 800 deals in Asia last year alone.

We have always targeted companies of this size and we have been very successful over the years. Our last fund, Baring Asia III, was based on this approach, and is the top performing fund of its vintage in Asia. It had a net IRR to investors of 138% as of March 31st 2008, and has already returned more than 120% of its invested capital to investors.

We could have raised substantially more capital for Baring Asia IV, but we decided to size the fund to enable us to target mid-sized growth equity deals, which is where we believe the best investment opportunities are today.

You usually follow a strategy that avoids too much leverage, don't you?
Yes, growth equity is about backing founders of companies through primary stock issuance which channels capital into growing the business, rather than buying out shareholders. As a minority investor, generally the strategy is an all equity strategy, whereby returns are generated through earnings growth rather than debt pay-down.

Minority stake investments reflect the ownership structure of many of the businesses in Asia, where large, single shareholders have control at this stage of development of the economies of the region. Remember that the private sector in China is only 15 years old, so by definition, nearly all companies that we invest in are still owned by their founders, who are very committed to their businesses and are generally not looking to sell out. Our value add is our ability to bring the very best in industry expertise, international perspective and financing capabilities to add value to these portfolio companies, to take them through to the next level of growth and onto eventual market listings.

Growth equity is a major source of financing and job creation for Asian small and medium sized companies and Baring AsiaÆs portfolio companies currently employ 48,000 employees throughout the region. The 28 companies which currently make up our portfolio had combined 2007 revenues of $4.5 billion and net earnings of $488 million. Revenues at our top 10 companies increased by 51% last year.

In raising this fund, we found that at a time when highly leveraged US and European buyouts are starting to show signs of stress, private equity funds focused on growth investing in Asia, a strategy which largely does not use financial leverage, are continuing to attract interest from around the world. In fact, this fund was heavily oversubscribed and we had to raise its hard cap fundraising limit to account for high investor demand and even then we still turned away a substantial amount of investor demand.

How long do you think it will take you to deploy the capital raised in this fund?
We have already invested 30% of the fund since its first closing last year. The investment process for us normally takes around two to three years, but it may be faster than that for Fund IV due to the nature of the current market. The deal flow in Asia at the moment is very strong due to the slowdown in capital markets, which eliminates one of the key alternative sources of capital for companies. As a result, the timing for this fund is very good for us and weÆre confident weÆll be able to take advantage of some great investment opportunities.

What type of companies do you seek to invest in, in China? What about India?
We are generally sector agnostic and are mainly looking for a strong management team within a high-growth company, which has established barriers to entry in its business. These criteria are the same around the region and, while mainland China and India are very important markets for us, weÆll also be looking for investment opportunities in Japan, Singapore, Hong Kong, Taiwan and Southeast Asia.

In the past, we have mainly targeted companies in the alternative energy, media, financial services, consumer and industrial sectors, and we expect this to continue with Fund IV. Basically, our aim is to provide financing and strategic advice to help build Asian based companies into world-class companies. Some of Baring Asia and our affiliatesÆ transactions and portfolio company activities in 2008 include: a$43 million investment in ChinaÆs Solar Giga; a 30% stake in leading Indian infrastructure construction company, Rithwik; and a $65 million investment in Sharekhan, a leading Indian financial services company.

Do you think there are too many private equity firms vying for business out here?
Private equity in Asia is at a very early stage of development. If you look at P/E as a percentage of GDP, it is currently around one seventh or one eighth of the level of the United States. One could argue that because of the relatively under-developed banking and bond markets in Asia, private equity should be an even larger percentage of GDP in Asia than the US.

Another interesting data point to look at is the amount of capital invested each year in Asia compared with the amount of capital raised each year in the region. For the past five years, the amount of money invested has exceeded the amount raised by a wide margin. This supports the view that the market is absorbing the capital and that P/E is generally underpenetrated.

We are seeing more high quality investment opportunities today than we have for years, and this is another indicator that there is still a lot of room for private equity to further grow in the region.

We have also seen a great deal of confidence and commitment from our investors who, like us, believe there are still significant opportunities in the region. Our existing investors from our prior fund increased their commitment by 154% to Baring Asia IV, and over 40 new institutional investors also invested in the Fund. Approximately half the investors came from North America, a quarter from Asia, and a quarter from the Middle East and Europe.

Existing investors who re-invested into Baring Asia IV include Pennsylvania Public School Employees Retirement System, Pantheon and Global Investment House.

New investors include Ontario Municipal Employees Retirement System (OMERS), Partners Group, University of Texas Endowment, and Universities Super Annuation Scheme of the UK, and Goldman Sachs Asset Management.

We consider the response from investors as particularly encouraging, given the current investment environment, and look forward to taking advantage of the exciting investment opportunities available in Asia.