AVCJ at 25: Ta-Lin Hsu of H&Q Asia Pacific

Over the course of a 27-year career in Asian venture capital and private equity, Ta-Lin Hsu has seen plenty of nearly deals. One of his favorites came in 1994. H&Q Asia Pacific, which Hsu founded and where he now serves as chairman, identified Rongcheng Rubber & Tire Company, then China's second-largest tire and rubber producer, as a potential investment target.

As with many of the PE firm's deals, there was a technology angle. Most of China's tires were bias ply, comprising overlapping layers of rubber; the design allows plies to rub against one another as the tire flexes, which causes friction and overheating. H&Q wanted to bring in radial tires from developed markets; the plies are arranged at 90 degrees to the direction of travel, which means less friction, better power transfer to the ground and lower fuel consumption.

H&Q searched for a Western partner to work with Rongcheng and when Michelin and Goodyear passed up the opportunity, Continental stepped in. The Chinese and German parties made several visits to each other's production facilities and soon reached a joint venture agreement. Rongcheng would sell under the Continental brand in China, paying a royalty in return. However, the CEO never turned up to the signing ceremony.

"When I finally got in touch with him, he said, ‘Thank you, Dr. Hsu, we have learned so much, we photographed everything, and we've hired some people who were working for Pirelli in Qingdao. We just can't afford to pay Continental a 3.5% royalty, that's our profit margin.' They didn't realize that if you used the Continental brand and technology you could treble the price."

Hsu walked away, not wanting to do business with a company unable to understand intellectual property rights.

Placed in the context of H&Q's evolution, this was arguably a minor setback. When the firm started in Taiwan in the mid-1980s, no one had any idea what venture capital was, and few were willing to embrace the tax efficient structures, clearly demarcated roles and other conventions that underpinned GP-LP relations in North America.

"LPs put in the money with the pre-agreed outline, but after signing the document they can't tell the GP what to do - this was difficult for Taiwanese to understand," recalls Hsu. "Management fees and carried interest was another problem. They said, ‘Dr. Hsu, you must be kidding. You want us to pay you to play with our money but if you make a loss it's my responsibility and if you make a profit you get 20%? Come on.' I had to spend hours explaining it all."

Academic export

Hsu ended up in the industry by way of academia. Born and raised in Taiwan, he completed a PhD at the University of California Berkley and from there joined IBM's corporate research department in the late 1970s. His breakthrough came with the introduction of magneto resistance heads in mechanical hard-disk drives, effectively allowing larger amounts of data to be stored and retrieved efficiently from higher density devices.

At the same time, the Taiwan government was looking to make a breakthrough of its own. Policymakers had been tracking the development of Silicon Valley and they wanted to recreate it in Asia. Taiwan had universities, science parks and returnees from the US fresh out of Bell Labs and Intel contributing technological expertise, but no independent venture capital. There was an element of corporate venture, largely driven by the tax breaks companies could claim by participating in it.

In 1982, the government approached Hambrecht & Quist, an investment bank focused on the tech sector, and asked for help. Founder Bill Hambrecht wasn't optimistic, pointing out that no one on his staff could speak English and Chinese and serve as a bridge between Silicon Valley and Taipei. That changed three years later with the appointment of Hsu, who had the required skill set and was already actively promoting US-Taiwan technology ties on an informal basis.

H&Q Taiwan was set up in early 1986 with the launch of the H&Q Han Tech Fund. In order to work around the fact that limited partnerships were neither welcome nor legally recognized, investments were made by Han Tech, the fund company owned by local enterprises, government entities and Hambrecht & Quist, but it delegated decision-making powers to H&Q Taiwan, the management company. "The two-company approach with a hands-off contract simulated the GP-LP model," says Hsu.

The fund corpus was $20 million; 48% from the government via a development vehicle, and 52% from private sources, including food and beverage giant Uni-President and MitacSynnex Group. Half the capital was under the management of Hambrecht & Quist, which invested heavily in US biotech to little effect, and Hsu was responsible for the rest. As it turned out, a sharp jump in the Taiwan dollar against the US dollar meant that the local currency equivalent of more than two thirds of the corpus remained Taiwan.

"Our first investment was Acer - it went public about one-and-a-half years later and was exited over a period of three years giving us a return of 4-5x," Hsu recalls. "Our approach was based on US venture capital, but unlike Silicon Valley, there wasn't a lot of innovation in Taiwan. IBM had brought out the PC in 1982 and that is when Taiwan's high-tech industry took off, but it was mainly semiconductors, PCs and related components."

In addition to backing Acer, a PC integrator and manufacturer, H&Q put capital into companies producing everything from graphics cards to motherboards and keyboards to mice. It rode a manufacturing wave that saw Taiwan supplying roughly half the key components for PCs globally by the early 1990s. The investments were for minority stakes, typically Series A and B rounds.

A regional platform

From Taiwan, H&Q branched out into Southeast Asia, establishing operations in the Philippines in 1986, Singapore in 1988, Malaysia in 1990, Thailand in 1991, China in 1993 and Indonesia in 1995. Technology was always the primary focus but the nature of opportunities brought more sectors into play, particularly consumer-oriented areas that benefit from rising domestic spending. In the Philippines, for example, H&Q invested in fast food chain Jollibee and banana ketchup brands. It subsequently took Starbucks into northern China and launched MTV in Japan.

A number of these funds were mandates from governments, companies and development organizations. The first ASEAN vehicle came about because Singapore wanted to raise a $150 million hybrid fund with $30 million for PE. DBS was heavily involved as custodian and organizer, and it was generally assumed that the bank's venture arm would receive some of the capital, so H&Q successfully pitched for half. A Malaysia fund arose from a partnership with Malaysian Technology Development Corporation (MTDC), which was set up by the country's government in 1992.

In China, H&Q ended up working with international insurer Aetna. The company had teamed up with Bank of China to create a $90 million development growth fund as part of a wider effort to gain a foothold in the local insurance market. When the bank said it wanted the vehicle to make venture investments, Aetna invited H&Q to run it.

A major game-changer in the early 1990s arose from the US Overseas Private Investment Corporation's (OPIC) decision to launch a fully guaranteed $120 million ASEAN fund. "It was difficult to raise money so this was a godsend - at first I thought my staff had faked the invitation," says Hsu. "There was a beauty contest with many bidders and we were the second fund sponsored by OPIC."

For the first decade of H&Q's existence it was restricted to minority investments, even though there was a clear desire to pursue control transactions.

"At the time most companies were held by government or overseas Chinese families and there was no way you could penetrate that," Hsu recalls. "You have a government, a strong bank and a conglomerate in a cozy triangular relationship and it's extremely difficult to compete with that. For 3-4 years, before the Asian financial crisis, we wanted to get into this market but there was no way in. We couldn't break the triangle."

When the Asian financial crisis hit, H&Q quickly moved into private equity. Using William Perry, chairman of its advisory board and previously US Secretary of Defense during the Clinton administration, to make introductions, H&Q started investing in bankrupt companies in South Korea. The standout deal was Ssangyong Investment & Securities in 1998 - the first investment by a foreign company in a domestic brokerage. A commitment of $30 million delivered proceeds of $200 million when the holding was exited to Shinhan Financial Group four years later.

Korea's credit crisis also took root in 1998 and International Finance Corporation (IFC) asked H&Q to manage a $100 million restructuring vehicle. The new opportunities warranted larger fund sizes across the board. H&Q's third regional growth vehicle closed at $750 million in 1999 - the internet bubble didn't help what was still a technology-heavy investment thesis - while two Korea-focused funds each raised $300 million or more in 2006 and 2008.

Local and global

Over the course of three decades, Hsu has racked up more than three million frequent flier miles and now devotes a large part of his time to philanthropic activities. Looking back at private equity now versus private equity then, he fascinated by the interplay between globalization, which has made the asset class more accessible, and local nuances, which mean investment remains a challenge.

"There is no such thing as one country or region any more. Twenty years ago we would articulate the Asia opportunity and Fortune 500 CEOs looked at us and thought we were crazy, but now everyone has to be here," Hsu says.

"On the other hand, there are a lot of pitfalls doing business here. It might be intellectual property, scandals in Chinese politics where it emerges that the juicy assets are owned by princelings, or corruption in Southeast Asia and Korea. These factors are difficult to overcome."

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• Topics
• People
• Greater China
• Southeast Asia
• North Asia
• Venture
• H&Q Asia Pacific
• Ta-Lin Hsu
• Venture
• Asia
• Taiwan (China)
• Southeast Asia
• South Korea