Veterans’ views: Chin Chou of Morgan Stanley PE Asia on staying focused
The investment industry of Asia Pacific has evolved in leaps and bounds in the 20 years since AsianInvestor began publishing. To celebrate our 20th anniversary edition we asked a set of the most experienced and senior industry veterans to describe the major changes they have seen, both in their organisations and beyond.
Few individuals boast a longer private equity track record in Asia than Chin Chou. The 55-year old Chinese Korean arrived in Hong Kong in 1993 help to build Morgan Stanley’s regional private equity operation, particularly into China. He has been busy doing so ever since, helping it roll out several funds and notch up several successful investments.
Today Morgan Stanley Private Equity Asia manages roughly $5 billion, which includes the value of the current portfolio plus yet to be invested capital under management, and it has a staff of 65 dedicated professionals, and more support staff in legal, compliance and tax.
Q. When you came to Asia, how much did Morgan Stanley have in PE back then in Asia?
Back when we started, Morgan Stanley didn’t have any business in PE in Asia. In other words, we literally started the business, with our first investment in 1993 in Ping An. For that deal and the next two deals, we utilised capital from Global Funds, then in 1998 we raised our first dedicated fund.
Q. What did the private equity industry look like in Asia back in 2000 compared to today?
A. The estimated industry assets under management (AUM) today in Asia is $600 billion to $800 billion, whereas it’s globally about $4 trillion. Twenty years ago, I would estimate the global industry was about $600 billion and about $20 billion in Asia. So, today’s industry in Asia alone is the same size as the global private equity 20 years ago.
In addition, it was very fragmented back then, with quite a few small funds and small, young teams. Most importantly there were not yet any realised returns, where institutional investors could say ‘this strategy makes sense, and this strategy doesn’t make sense’.
Our first investment in China was in 1993, in a company called Ping An Insurance. At the time we valued it at $500 million.
Q. What’s your proudest achievement in your role?
A. One is to have helped in scaling up the industry to where it is today. I’m currently the chairman of the HKVCA (Hong Kong Venture Capital Association) which is the industry association, and it’s been great to see how the industry has grown and where it is in context of Hong Kong and China.
For us [as a firm], we created this business 27 years ago. We took the view that we were better off building our own private equity business rather than making a quick entry into the market and hiring from other organisations, which is fraught with risk. It took lot of time, patience, training and retaining and I’m proud we built the team from scratch, from hiring at the analyst and associate level.
Plus, this is a client business, and I think we have done well for our clients in realised returns to date.
Q. What has been your biggest regret?
A. We are financially and emotionally attached to every one of our companies and when the investment thesis doesn’t develop the way we expect then there is regret.
Generally, I don’t have lot of regrets, but there are a few companies I wish we’d held longer. Ping An Insurance for instance, which IPOed in 2004. It would have been nice to hold it for longer.
One of benefits of being around since the 1990s and early 2000s is that we lived through the Asian financial crisis and it was debilitating, in many ways more so than the global financial crisis. I’d say that managers who start businesses in times of crisis will generally be more attuned to risk and risk mitigation.
Q. How have private equity companies had to adapt, given the growth in the industry?
A. About 70% of our investment focus is in China. With the secular rise of the economy we have never lacked for deal opportunities. Deal flow is something I haven’t been so concerned about, for a couple of reasons.
Clearly, there is now a lot more PE capital here versus 20 years ago. Nonetheless, at that time there were still many groups chasing deals, such as Asian families, strategics, etcetera, and as such there has always been competition. And of course, 20 years ago there were fewer opportunities to pursue
Fast forward to today, more businesses are being created in this part of the world than other parts in totality. Secondly, we have stayed in the mid cap private equity space for the last 20 years, with a focus on businesses that have a profit of between $10 million to $75 million.
Many others have focused either on e-commerce or large cap buyouts. And so I think remaining committed to our niche has been helpful in warding off competition.
Q. How will your organisation change in the coming years to maximise its investment performance?
A. I’ve always taken the view that we make better decisions when we are able to get multiple of our senior people to focus on one investment or investment thesis we are pursuing. But it’s hard to do because everyone is doing their own deals. So the more I can get their attention and have the group focus on a certain situation or transaction the better decisions we make.
As an example, we have had a business in Korea for 20 years and they are very good at buying control of assets and being responsible for all aspects of the businesses they invest in. But in India to date we have focused on minority investments and we have only just done our first buy and control transaction. So the India team has less control deal experience so one of the challenges for us is knowledge sharing with the Korea folks who have that experience.
Secondly, there’s the challenge of recognising the different needs and opportunities in different countries. In Japan the average per capita income is $60,000 whereas in India it’s $3,000.
In China we have done a lot of deals related to spending on children. As people there get wealthier more money goes on kids than almost anything else. And so, we have invested in milk, and diapers, and maternity centres and kindergartens; 20% to 25% of our investments have been on kids spending. Spotting that sort of trend is essential.
When we first talked to clients about China [in the 1990s], its per capita income was $1,000 to $2,000. In the US in 1950 it was the same level, and it grew from there to $10,000 by 1975. And in that period people started going to department stores and buying branded goods.
Then there were the mid-1970s major crises, and the hollowing out of the rust belt. Yet despite this the US went from $10,000 to $20,000 far faster than before; the economy had changed from manufacturing towards domestic services.
So, in China today our emphasis is more services than consumer products. It took 15 years for it to raise its per capita income to $10,000; I guess it will grow this to the high teens over a far shorter period of time.
This interview was adapted from a feature that originally appeared in AsianInvestor's 20th anniversary edition, which was published in late June.