U. S. Competitiveness and Private Equity
The rise of private equity in Asia: opportunity or threat?
Council of Foreign Relations December 13, 2005
kmills@mmpgroupinc.com
Karen G. Mills
Asia will become an increasingly viable venue for private equity deals
Opportunity
Available companies or technologies Strong end markets Brokers to deliver deal opportunities
Infrastructure
Experienced investors Consortiums to share risk Support Industries Legal Accounting
Environment/ Market Support
Regulation IPO Market M & A Market
Investment Banking
Industry Associations
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Investments are growing but little is venture
Asian Private Equity 2005 January-June ($Billions)
5.6
Venture
5.1
1%
No. of Deals (6) (77)
5.1
Japan 1.5
No. of Deals
14% 34%
(11)
Expansion/ Growth
28%
China .8
Korea .7
(22) (2) (42)
Buyouts 55% growth vs. YAG
58%
65%
(15)
India .5
Other 1.6
Asia: Funds Raised
Source: Asian Private Equity Review
(11)
Asia: Capital Invested
Investment: By Country 3
Firms raising funds or investing funds in Asia in the first half of 2005:
Specific Asia Funds $650 – 2 Billion
• Affinity Capital • CVC Capital Partners (Citicorp Venture) • Castle Harlan • CRCI • HSBC Private Equity • CCMP (Formerly JP Morgan) • Mitsubishi • SAIF (Formerly Soft Bank Asia) • Unison
Source: Venture Capital Journal
Allocating Existing Funds to Asia
• • • • • • • Blackstone Carlyle General Atlantic KKR T. H. Lee Warburg Pincus Ripplewood Holdings
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Latest news for foreign investors is mixed
Country
Θ Korea
Recent Actions
Current civil and criminal investigations of seven U.S. and European private equity firms New regulation in November 2005 creates more restrictions on establishing foreign venture backed companies Lifted ownership restrictions by foreign investors in telecom
Θ China
+ India
+ Japan
Relooking at more positive treatments of foreign direct investment
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Why do we care?
The dynamism and transparency of American Capital markets have historically served as a powerful contributor to U.S. innovative capacity” - Scott Stern CFR 2005 We worry
• Will there be enough capital for U.S. opportunities?
• Will Non-U.S. innovative capacity grow to rival ours?
6
Last year $57 billion was invested in private equity
Capital Commitments to Private Equity Funds 1979-2003
Source: 2004 NVCA Year Book
7
Institutions not individuals provide most of the funds
Private Equity Commitments By Limited Partner Type
Source: 2004 NVCA Year Book
8
Private equity is beginning to operate as a global business
Sources of Private Equity Capital Operating / Tax Home of Funds & Principals Geography of Investments
U.S.
• State Pension Funds • Endowments • Other Private
U.S. U.S. based Europe
Asia Non-U.S. Private Non-U.S. Government
Non-U.S Private Non-U.S. Government
Middle East Latin America Other Markets
Return of Capital
Illustrative
9
Non-U.S. investments in private equity are accelerating
Percent of institutions investing in private equity Institutions that invest in Private Equity
44 3 Now Invest Plan to Invest
28
9 41 27 20 14 4 4 U.S. Continental Europe U.K. Canada Japan 8 8 28 14 28
Source: Greenwich Associates
10
How does innovation translate into American jobs?
DISCOVERY
BUSINESS FORMATION
JOB CREATION
Basic Research
Invention Commercialization Innovation Growth
• Large Company Expansion • Entrepreneurship
11
Venture capital backed companies grow faster and create more jobs
Venture Backed Growth
2000-2003 Percentage Change
Sales Growth
12%
Job Growth
5 pp
7% 7%
9 pp
Venture Backed
Total U.S.
Venture Backed
-2%
Total U.S.
Source: National Venture Capital Association; Global Insights study
12
Venture capital funding spurs innovation more powerfully than R&D
VC Spending as a percent of R&D (1983-1992)
3%
Percent of Industrial Innovation* accounted for by VC Backed Firms (1983-1992)
8%
Percent accounted for in 1999
14%
* Innovation is measured by patent production
Source: Samuel Kortum and Josh Lerner, RAND Journal of Economics, Winter 2000
13
Venture and buyout investing are quite different
Venture
Small deal size Early stage High risk More likely technology driven More consortium investing
Buyout
Control stake Return comes from:
• Leverage • Multiple expansion • Growth
14
Buyouts and Mezzanine capital is also being used to grow businesses
Capital Commitments to Private Equity Funds
Other Private Equity Capital
Buyouts and Mezzanine Capital
Venture Capital
Source: 2004 NVCA Year Book
15
The trend is clear; the effect on the U.S. is unknown but not worrisome
1. Non-U.S. capital will be increasing investments in private equity of all kinds. 2. Non-U.S. deal opportunities will be increasingly attractive to U.S. based capital. 3. Private equity skills and market support will increase rapidly in non-U.S. markets particularly Asia. 4. There is no evidence that U.S. interests will be harmed.
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Karen Gordon Mills
Karen Gordon Mills was a Founder and Managing Director of Solera Capital, a private equity fund based in New York City. She has been in the industry since 1983 and is an expert in investing and growing companies in traditional U.S. based industries such as food, textiles, media and industrial components. Some of these companies and brands include Telex Communications, Mrs. Fields Cookies, Bruce Hardwood Floors and Annie’s Macaroni and Cheese. Her background also includes consulting for McKinsey & Co. and product management at General Foods. Ms. Mills received her A.B. from Harvard University in Economics in 1975 and her MBA from Harvard Business School in 1977, where she was a Baker Scholar. She currently serves on the Boards of the Scotts Company and Arrow Electronics.
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