The Hudson river analogy

Staring out of the window of IFC Tower One into the bright blue Hong Kong harbour, David Kelso says it makes a pleasant change from the snow of New York. The general manager of JPMorgan Private Bank's Private Investments team does however add that the recent freezing over of the Hudson river has given him a good analogy for the current state of the private equity world.

"Frozen on top, with not much apparently going on - but a lot going on below the surface," says the former deputy director of the US Treasury's Office of Thrift Supervision.

Nevertheless in spite of that analysis he predicts that new money raised by the private equity world this year will only be $50-60 billion, a dramatic fall from the heady days of 2000. But he adds that the opportunities have improved because prices of potential acquisitions have come down by around 40%.

"We're inclined to think the climate for private equity is now good," he says. "Prices have come down and there's also a lot of forced selling of assets. This leads to opportunities."

He says high net worth investors looking to put their money into private equity funds have adjusted to the idea of holding the investment for a bit longer (four to five years versus two years in the dotcom era) and of making a 15%-20% per annum return. "This is much more in line with historical averages," he says.
Around 450 high net worth individuals invest in JPMorgan's private equity fund - with JPMorgan putting in three dollars of its own money for every dollar put in by the private clients.

As to this fund, Kelso is delighted to announce that JPMorgan Partners has just done its first deal in Japan, acquiring an auto components supplier from Nissan called Rhythm Corp. He is the first to admit that Japan has proven a difficult market for foreign private equity firms. By comparison, the fund has done two deals in Korea.

The acquisition of an auto components supplier fits into the fund's strategy of buying old economy style assets that have growth potential. It has also bought into auto components companies in the US and Europe.

Kelso says of the fund's style: "As a general rule we want to gain enough control to be able to hire and fire managements. But in only around 10% of situations do we change management. We want to buy high quality companies rather start-ups or companies we have to fix. And we invest to grow - not to break up."

He targets companies with sales of between $50 million and $500 million. Individual investments tend to be in the $20-30 million range and there are around 400-500 investments. These range from specialty chemicals firms to a company called Brands Services that makes mission critical scaffolding for the chemicals industry.

He says private clients should look to have 10%-15% of their portfolio in private equity funds. But he adds, "Clients in the US and Europe tend to have a higher allocation than Asian clients - because Asian clients tend to have a higher desire for liquidity."

But are Asia's high net worth individuals - who are typically business tycoons - not keener to do their own private equity through their own networks of friends and acquaintances.

"That sort of trend exists all over the world, not just in Asia," he admits. But he says investing through a fund can be more efficient and also offers a greater diversification of investments.

"There was a wealthy US family that set up a family office to make its own private equity investments," he says. "They closed it in 2001 and put the money into a fund of private equity fund we run instead. They came to the conclusion that it was too expensive to run the family office and a fund of funds approach was more efficient."

Given his investment philosophy in medium sized growth companies is China on his radar screen yet? "We are looking at the rim outside China - Korea, Hong Kong and Taiwan. But we have not yet looked at China itself. We consider the other countries mentioned as more appropriate for now."