Like the title of the Animals' hit song, Don't Let Me Be Misunderstood, Chia Kok-onn, a private equity specialist, believes it is important to unravel the many misconceptions associated with the industry.
"Private equity is the use of risk capital in the art of nurturing the next generation of companies and entrepreneurs to expand the scale of their businesses," says Chia, who has more than 30 years of international corporate executive experience and was a member of a United States-Asia private equity-venture capital investment team managing US$1.6 billion in funds.
Chia says there are good and bad impressions surrounding private equity activities. "Private equity is about building businesses," says Chia, who is co-president of the Hong Kong Venture Capital and Private Equity Association (HKVCA). However, the private equity industry, or PE as it is commonly referred to, sometimes attracts criticism when a PE firm injects finance into a company, changes the management and sells it on quickly to make a profit, in a process known as "flipping".
Speaking at a "Private Equity Industry - understanding its multifacet role" seminar held last week and co-organised by Classified Post and Kornerstone, Chia says in its true form, PE investment is a long-term proposition, which can take 10 years to nurture a company before the investment produces mutual benefits. According to Chia, more than being another financial asset class, PE investment can help create employment across different sectors and act as a pillar for economic development. "It is not just the companies that PE firms invest in where employment is generated, PE-funded companies create employment along the supply chain," Chia says.
Employment opportunities in PE are as diverse as the sectors the asset class invests in. "The industry welcomes just about everyone, provided they have passion and commitment. The industry requires people with financial skills ranging from analysts, fund managers, investment specialists, chief finance officers and accountants to legal counsel, human resources and marketing specialists," Chia says.
He adds there are opportunities for engineers, not so much for their engineering abilities as for their problem-solving skills. Historians are also employed to look at past economic and social events that could impact a company's business operations and growth potential. "The fundamentals of PE revolve around people, so there is even a demand for psychologists to make sure a project doesn't become blindsided by human errors."
Moreover, fresh graduates and newly minted MBA holders should be prepared to start from the bottom and build a strong industry-wide platform based on experience. "There is no good or bad time to join the industry because by the very nature of PE, the industry is always evolving," Chia points out.
To gain the PE employers' attention, university graduates should project intellectual curiosity and a positive attitude. In addition to academic and professional qualifications and relevant experience, Chia says critical to any successful PE investment is the ability to work cohesively with the PE team and the companies they invest in.
"It cannot be over-emphasised that for a PE relationship to work, there has to be complete alignment of interests between the parties involved. Without taking the time to fully understand each other and the objectives of the relationship, there is going to be a lot of misunderstandings and emotional upset," Chia says.
PE investors look for concepts that can become successful regionally or globally, he says. To achieve this, PE management teams work with partners to improve cost efficiencies, assist with transparent reporting and advise on corporate governance compliance. This is an important factor for firms that have aspirations for a public listing.
"PE firms like ideas that can be disruptive in a market. For example, the company that produced the first touch-screen mobile phone keypad had a disruptive influence on the existing market," Chia says.
Chia says venture capital focuses on early stage investments, such as start-ups that have little or no liquidity. "Sometimes venture capital funds are invested in an idea that only exists on a piece of paper," Chia explains. At the next stage, growth capital is usually directed at expansion. At the third stage, which normally involves the largest investments, PE is used in the buy-out of corporate subsidiaries.
HK the ideal hub for big equity deals
Asia's high growth, and Hong Kong's strategic position within the region, make the city the ideal Asian hub for regional and international private equity (PE) activities.
According to the Hong Kong Venture Capital and Private Equity Association (HKVCA), with about US$60 billion, the city is home to the largest available pool of capital for private equity investment in the Asia-Pacific region.
The figure has grown from virtually nothing in 1997, following the Asian financial crisis which sparked the growth in private equity investments.
However, as HKVCA co-president Chia Kok-onn points out, only a small part of this money is actually invested in Hong Kong, which acts as a regional entrepot rather than a destination for investment.
"Hong Kong has nearly all the necessary ingredients to attract and administer PE funding," Chia says.
Highlighting Hong Kong's strengths, he says conducive laws and tax regulations, technical, banking and financial expertise, and a pool of PE professionals and entrepreneurs are vital requirements to execute and maintain deal flows.
Chia says that as the central government in Beijing continues to recognise and support the positive affects that PE has on innovation and economic growth, Hong Kong becomes more likely to be considered a strategic hub. "We need to realise the advantages we have and build on them," says Chia, who believes Hong Kong could become the Asian financial equivalent of Silicon Valley.
Chia points out that enterprises across Asia are putting more emphasis on innovation, research and development. New ventures are also rising and bringing new products and services to the market.
Chia says mainland companies that have benefited from PE investment include Tencent, Haier, Citic Group, and car and battery maker BYD.