India and China present compelling investment opportunities, but there is considerable risk involved for players who don't understand how local markets operate in each country and who aren't willing to make long-term commitments.
That was the message from a panel discussion among venture capitalists and private equity firms doing business in Asia at the Venture Capital & Private Equity Conference held February 4 at Harvard Business School.
The panel discussion was titled "The Tiger or the Dragon: Where Do the Future Opportunities Lie in Asia?" It's a crucial question: With the private equity business in Asia estimated to be $120 billion, firms are moving fast to develop investment strategies.
"In terms of Asia, we know there is a tremendous opportunity for wealth creation in the region, but the key question is, who will benefit from it?" asked panel moderator Michael Chu, a senior lecturer at Harvard Business School.
The view from China
From a venture capital perspective in China, it seems inevitable there will be incredible growth, but enormous unpredictability as well, said Richard Lim, founder and managing director of GSR Ventures. But development will follow the standard protocol for any successful technology venture anywhere, he said—"it all starts with a successful product."
China's growing embrace of the Web and huge consumer demand will drive growth in the technology area, Lim said.
In the real estate sector, however, foreign investors may face a more difficult road to success. Chinese real estate firms have the advantage because local authorities, not the national government, often set regulatory policy for the region. That means local operators are more likely to have the necessary connections to get things done, said Bill Tsai, managing partner of Longridge Capital Advisors, a private equity fund focusing on distressed assets in the greater-China region.
| There is a tremendous opportunity for wealth creation in the region, but the key question is, who will benefit from it?" |
| —Michael Chu, Harvard Business School |
Tsai said that although China's booming economy has generally increased real estate values, fundamental analysis is still important in succeeding in this sector. For example, his firm has realized significant gains from real estate purchases in Macao, where property values were relatively low compared with Hong Kong but where GDP growth, boosted by casino operations, is on course to outpace Hong Kong by 2007.
The view from India
In India, meanwhile, investors can benefit from financial markets that are more open and developed than in China, said Ramanan Raghavendran, a managing director at TH Lee Putnam Ventures. New private equity firms are opening in the country each week, he said.
But, he added, India has a history of going "two steps forward and one step back" adding that "we might be in for one of those steps back soon."
Raghavendran said his firm believes the market in India is "wildly overheated" and has stayed away from deals that are exclusively based in that country. Instead, the investments have gone to "U.S.-based projects with India-based resources."
In both China and India, Raghavendran said, the legal and government regulatory environment for private equity deals is in its infancy—what you sign on paper is not necessarily what you get.
Continuing on the theme of the loose regulatory environment in this region, Lim said that given the liquidity problem in China, companies often incorporate in the Cayman Islands as a shell, and then operate as a subsidiary of that shell in China.
Real estate transactions can be difficult in China, Tsai added, because oftentimes there is no formal registration process for property and multiple people might have claims on the same property, particularly in the smaller cities. Because of this and other regulatory problems, property investment in China is often only viable for local players, he said.
In a general discussion, the panelists said both markets are experiencing incredible growth and that a bubble burst, albeit a small one, is likely to occur. Tsai said he preferred to refer to look at this as a cycle, and one that is inevitable given the sudden emergence of these new regional market players.
Despite the obstacles and risks, panelists agreed that the two areas where you can make money in Asia today are early-stage investing, and in later-stage pure play, cross-border private equity investments.
On many issues the panelists seemed to indicate that China and India were in the same cycle in terms of steady growth and did not feel that one was outpacing the other. All agreed that many local firms will develop in the next ten years, and private equity investment will increasingly be locally based.
So in the end, who will benefit? Moderator Chu summarized that the greatest rewards will go to those who are sharp enough to spot trends early, who are savvy about the local regulatory environment, and who partner shrewdly with either outside investors or local players. 