Private equity and corporate power

Although dressed up with all the proper private equity trappings, the fund soon outed itself as a fundraising vehicle designed to accumulate capital for the parent company’s development pipeline, and seeded with its current and upcoming projects.

A very nice ploy for the ‘GP’. The parent gets to raise capital without cutting into its bank credit lines, diluting its equity, or impacting its stock market performance. The LPs get … well, equity participation in a proven business, plus that much-sought-after exposure to Asian growth. Of course, you can forget about neutral and objective value-driven investing if you’re an LP in such a vehicle, or about first-call entitlements if things don’t work out quite as well as promised. After all, only an exceptionally high-minded and honest corporation is likely to put their investors’ interests before their own in such an arrangement – and only an exceptionally trusting, or diligent, LP is liable to go into one confident that they have adequate recourse.

To repeat, though: this was a follow-on fund. LPs had already ponied up once to invest into such a structure. And though the first fund may have all been connected capital, if the constant comments we hear from GPs, funds of funds and placement agents, about the raging fever among LPs to get into Asia is anything to go by, some institutional money is all too likely to find its way into these arm’s-length project finance ploys.

But this case only highlights a broader issue: that private equity is still a plaything, or at best a junior partner, for the true elites of Asia Pacific business. This isn’t just a matter of Asian family ties – some recent Australian deals, for instance, show that Aussie magnates can be just as adept as Asians at handing incautious GPs their own heads on a platter. But, from Nilgiri Dairy’s founding family claiming – in court – that its private equity investor is violating Indian FDI restrictions just by putting money into the company, to Asia Aluminum claiming – with PRC local government support – that its perfectly solvent business is bankrupt, there are all too many reminders that Asia Pacific business elites are not yet ready to give up or sell out their controlling powers to this new-fangled import. Try getting a genuine control transaction of size in India, for instance.

Some Asian business leaders may turn private equity to their own purposes. But few to none appear ready to countenance a truly open market in control that is the basis of much private equity, especially buyouts – but also of accountability and shareholder rights. And private equity too often appears content to play by their rules as the price of admission to the top table.

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• Topics
• Funds
• Fundraising