Intractable tech

On the issue of investments in fast-growing but relatively unproven internet-based companies, there is a dividing line between Asia's major buyout players. The Carlyle Group, KKR, PAG Asia Capital and TPG Capital have all made commitments in the space over the last couple years, according to AVCJ Research; Affinity Equity Partners, Baring Private Equity Asia, The Blackstone Group, and MBK Partners have not.

This line was apparent at the AVCJ Forum in Hong Kong last week, when Chang Sun, head of China at TPG, and Weijian Shan, chairman and CEO of PAG, both described the technology opportunity in China as too significant to pass up, despite their preference for buyouts (although PAG has proved that control is sometimes available in the tech space). Meanwhile, Baring CEO Jean Eric Salata said that China is in the midst of a tech bubble – which is consistent with a view he expressed to AVCJ two years ago.

Some of these bets have already paid off, in many cases on paper and in some cases on the public markets. For example, earlier this month Carlyle-backed China Literature, an Amazon Kindle-style electronic bookstore that is majority-owned by Tencent Holdings, raised HK$8.3 billion ($1.1 billion) in its Hong Kong IPO. The company is currently trading at a 68% premium to its offering price with a market capitalization of HK$84 billion. Carlyle's stake is worth about $1 billion.

Needless to say, Sun and Shan added the caveat that substantial returns are available to those who are knowledgeable about what remains an incredibly dynamic market. Not all start-ups are created equal, especially if some have Tencent behind them, while others have achieved positions of dominance in their segments. This is justification enough for some large-scale investors to get involved – and even if pan-Asian private equity firms are not among them, they should still keep an eye on what is happening.

On one point all private equity executives are likely agreed: Even if you aren't making direct investments in the internet space, you must be aware of the potential impact of emerging technology-enabled businesses on portfolio companies in seemingly traditional industries.

"You could be trying to avoid all the hype by investing in a business that you can buy at a reasonable price, with good profitability and growth, and suddenly its whole business model has the rug pulled out from under it by these new entrants," Salata noted. "And many of these new entrants are not necessarily operating rationally at this stage – they are looking to scale and undermining the margin of the whole industry. It's very hard to compete in that environment if you are not one of those well-funded players."

Baring assesses the technology and disruption risk – positive or negative – for every investment, and it is not alone. A senior executive from a global buyout firm recently told AVCJ that his counterparts in the US hired a consultant to review the direct and indirect impact of e-commerce on every portfolio company, prompting him to do the same for the Asia portfolio. Meanwhile, various smaller GPs in Asia have talked about working closely with the VC community to stay on top of technology trends.

Some of this is talk, some of it is action. And for certain industry participants, it is another factor in the inexorable drive towards greater industry specialization in private equity. Evasive action is not an option. "You can never run away from technology," K.Y. Tang, chairman and managing partner of Affinity Equity Partners, told the AVCJ Forum. "You have to swim and play with the sharks or be eaten alive."

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• Topics
• Technology
• Buyouts
• Expansion
• Greater China
• Asia
• Affinity Equity Partners
• PAG
• Baring Private Equity Asia
• TMT