Q&A: Brooklands Capital Strategies' Dan Carroll

Q: Your first job in private equity was with H&Q, Hambrecht & Quist’s Asian joint venture. How did that come about?

A: I started at H&Q right out of business school and had every plan to work in Silicon Valley doing tech investing but it happened that the managing general partner of H&Q Venture Partners was a guy named Ta-Lin Hsu who was building a PE business in Asia. In those days you did whatever your boss told you to do, so I found myself on a plane to Taipei in the fall of 1988.

Q: What sort of deals were you doing?

A: The first iteration of private equity in Asia, and this was pretty close to the beginning of it, was a version of venture capital. At the time, there was plenty of capital for venture deals from families, individuals, and companies, but what was missing was first institutional round capital. The typical case was a company in Taiwan or the Philippines or Singapore that was entrepreneur-owned and looking to bring in capital in anticipation of an IPO. Most of the local markets required there be some outside investor to validate that the books were accurate, and that is kind of how the business got started. For H&Q, the market timing was excellent. They started in 1986 when the market really took off and there were bunch of very strong tech investments. Acer, TSMC, and UMC were all early deals done by the venture community in Taiwan.

Q: And then in 1995 you joined Newbridge Capital…

A: I knew some of the founders of TPG who had launched this venture in Asia with Blum Capital and it sounded interesting. I had just moved back to San Francisco so my timing wasn’t great. I started in September 1995 when the firm had 3-4 people and had almost finished raising a $100 million fund. I worked out of the TPG office in San Francisco and commuted. I pretty much continued to do that for 10 years – it wasn’t my original plan but that is how it unfolded.

Q: How important was the Asian financial crisis to the development of the industry?

A: I think the Asian financial crisis was the key turning point in the industry. It was the first time that fund investors were really able to buy control of large businesses, mostly because so many businesses had been nationalized by governments in Korea, Indonesia and Thailand. There was a brief moment when the most powerful investors in the region – families, chaebols, and corporate groups in Japan – were so heavily levered they couldn’t buy assets. As a result, corporates and even governments were willing to sell to funds, which was a pretty outrageous concept at the time. I think Korea First Bank (KFB) was one of the early deals that created the foundation for the industry to take off, mostly because it proved a private equity owner could not only put up capital but also turnaround and build a business.

Q: The KFB deal took several years to close. What happened?

A: It was brutally difficult because there was a strong cultural bias against foreigners coming in and taking advantage of Korea in a moment of weakness. Our advantages were that we had a desire to buy a bank and we had a playbook. I remember a conversation I had with David Bonderman and [Weijian] Shan, and David said, ‘What you really want to do in a crisis like this is buy a bank. If you can buy a bank with a real franchise and enough downside protection you will do very well when the economy snaps back because a bank is a leveraged call option on the economy – it the economy does well, the bank will do better.’ David had very successfully recapitalized one of the largest failed savings and loan associations in the US about 10 years earlier. He developed a structure – a good bank-bad bank combination – and it worked very well. Armed with an Office of Management & Budget report that described the deal as one of the best the government had ever done, we went to anyone who would listen to us and explained how we might help. Korea had an explicit mission from the IMF: a condition of the $57 billion bailout package was that KFB and Seoul Bank, which had been nationalized, must be sold to any buyer. The government hired Morgan Stanley to sell the banks, and we showed up. But it was Shan who stayed over the Christmas holiday – when he essentially refused to leave Korea – and convinced them we were a credible counterparty. Shortly before New Year’s Eve in 1997 we signed an MOU to buy control of KFB. It took another two years to actually close the deal, because it was on again, off again. The government tried to back out and so it was not obvious the deal was going to happen.

Q: Once you made the breakthrough with KFB, did other deals come more easily?

A: We spent five years rebuilding the bank; we hired a lot of people and it was very hard work. But in doing this we developed a management team and a board of directors that became a valuable resource when we were looking at financial services deals elsewhere in Asia. We sold KFB in 2005 and closed Shenzhen Development Bank (SDB) almost at the same time. The key advantage from KFB was regulatory credibility: when one regulator approves you it gives a lot of comfort to regulators in other countries. We did a series of finance deals and bank deals all over the region, such as Shriram Transport Finance in India and BTPN [Bank Tabungan Pensiunan Nasional] in Indonesia. Some didn’t turn out so well – like Taishin International Bank in Taiwan and BankThai in Thailand – but the while financial services franchise was built on what we did and learned with KFB. Over time it became important to be less of a generalist and show you actually knew something about an industry. While we initially focused on banking and financial services, we then started looking at healthcare, TMT [technology, media and telecom], and consumer-retail.

Q: Who were the initial LPs in Asia-focused funds?

A: Families and also corporates that were interested in Asian exposure. For example, in the first Newbridge fund the biggest investor was Bank of America, which had a keen strategic interest in Asian expansion. Metlife was an investor. IFC and some of the multilaterals were often investors in the early development of these markets. I think IFC was an investor in almost every one of H&Q’s first country funds. At Newbridge, TPG helped us raise the first few funds and by the second or third we started to have a significant institutional following. TIAA-CREF and 3M’s corporate pension fund were among the early adopters. Fund-of-funds also played a pretty key role in the development of these markets. They had some very large corporate clients who basically learned about Asia and learned about the GP community in Asia through fund-of-funds, which was very helpful.

Q: What made fundraising difficult?

A: Raising capital was difficult because investors were not yet completely bought into the idea of China and that was ultimately the spark that really drove large capital pools into this part of the world. There was skepticism about that. There was a little bit of skepticism about what the right model was going to be. Was it going to be venture capital, growth equity, or control deals – of which there were very few? And I think a lot of limited partners, particularly the larger limited partners in North America who were familiar with the model in the US were looking for what model would work in Asia. It took time for that to develop. We invested in KFB at the end of 1999. We invested $500 million from a $320 million fund. We started with a $100 million fund, went to a $320 million fund, and then to a $720 million fund in the wake of the KFB deal. From there on it was really returns rather than the promise of the market that really drove fund size. We went to $1.5 billion and then $4 billion and that is when the business reached maturity.

Q: What other challenges did you face in the early days?

A: Finding the right partners and professional teams who were both Western enough to feel comfortable in a firm like Newbridge that had strong US roots to people who were Asian enough or from the local markets to really understand not only the language but also the culture and have a local network. People like that were very rare in the early days of the industry and there was a knock in investor circles on hiring bankers – although most of the best hires were folks who had M&A backgrounds with major firms. It was also difficult to buy control. You could negotiate influence or board seats and contracts, but most of those non-control deals that were done early in the life of the industry were relationship-driven. You might have a great shareholder agreement with your partner but at the end of the day if your partnership broke down that agreement wasn’t going to help you. The point at which you found yourself in court litigating an agreement was the point at which you’d lost. The ability to buy real control of companies and to begin recruiting management teams – much as in the way the private equity industry had developed elsewhere in the world – was a very difficult thing to get past. Part of it was cultural. The idea in a lot Asian business society that someone other than a family, a company or a government-linked company should own and control a business was relatively new.

Q: Have you been surprised by how the industry has developed since then?

A: It has become very competitive. The industry in Asia has grown up at a time when capital has been pouring into private equity. We had a huge increase in fund sizes in Europe and North America in the 2000s and a big expansion in the limited partnership pool around the world as not only traditional investors increase their allocations to alternative assets, but whole new pools of investors were created – sovereign wealth funds all over the world, the large Canadian plans. This huge influx of capital has coincided with the maturation of the industry in Asia and the development of local players. Asia is a very entrepreneurial place and anyone who is really good and establishes themselves as a PE investor is inclined to go off and set up their own firm. You now have this confluence of regional firms, global firms, and local firms competing in each of these markets.

Q: How does Asia differ from the US and Europe in this respect?

A: What has been different, certainly compared to Europe, is how rapidly the competition has developed and how multi-faceted it has become. Capital has always flowed very quickly in Asia. For the most part, it’s a very liquid part of the world and so you might have the same amount of capital competing for deals as in North America or Europe, but the market is not as deep. Money is therefore not a differentiator, and so the ability to build companies and have a strategic angle on deals and investment opportunities is important. 

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• Topics
• Greater China
• North Asia
• Buyouts
• Expansion
• Fundraising
• Asia
• Newbridge Capital
• TPG Capital