SARS Leaves Scar on Asian PE Business –

There was a collective sigh of relief in the private equity community in early June when the World Health Organization reported that Severe Acute Respiratory Syndrome (SARS) “is clearly in decline.” The WHO also reported that there were no new deaths due to the disease on June 4, marking the first day with no new SARS deaths since March 28. Still, caution ruled the day, with the sobering report that a total of 8,402 probable SARS cases with 772 deaths had been reported from 29 countries as of June 4.

How soon the Asian private equity business would get back to normal remained uncertain. The only certainty was that SARS has had a real impact that will take time to recover from. Among those feeling the affects of the outbreak are venture capital firms KLM Capital and WI Harper Group, private equity firm H&Q Asia Pacific, and buyout shop Newbridge Capital.

KLM has watched its fund-raising efforts nearly grind to a halt due to health concerns over SARS. The San Jose, Calif.-based firm is trying to raise $50 million in a joint effort with Ascendas, one of Asia’s biggest developers of science parks, and Beijing’s Tsinghua University, which is considered the MIT of China.

“We were working on the partnership agreements in late February in Hong Kong and Beijing, and planned to meet in Beijing in April [to finalize the agreements],” says KLM President Peter Mok. “But our Beijing partners couldn’t travel outside of China, so we had to work by phone and email [due to SARS].” KLM proposed alternate sites in Hong Kong and Singapore, but their business advisors, including law firm Morrison & Foerster, would not travel to either destination because of SARS concerns.

KLM and its partners finally settled on Bangkok, which is SARS-free and less expensive than the other proposed meeting places. The group hopes to be able to meet in Singapore in late June to finalize its private placement agreement, but that’s months later than originally planned, provided the meeting takes place at all.

KLM plans to invest in early-stage U.S. semiconductor design and manufacturing, in addition to enterprise software startups that will establish their manufacturing or programming staff in Tsinghua’s science park.

For Michael Lee, a managing director with venture firm WI Harper, the SARS epidemic can’t go away soon enough. WI Harper bills itself as “one of the first U.S.-based high-tech venture capital firms focused exclusively on creating a bridge between Silicon Valley and the Greater China region.” With $225 million under management, WI Harper has 30 employees in offices in San Francisco, Beijing, Hong Kong, Taipei and Singapore.

Regardless of SARS, Lee had plans to travel to Shanghai in July. He says his family was too concerned for him to spend time in Asia while the crisis was at its height. That meant that his person-to-person relationship building, which is so important for new deals in China, ground to a halt.

While waiting to return, Lee has been spending his time talking to his Beijing office via phone and email, working at home between the hours of 9 p.m. and 2 a.m. to make up for the time zone difference between California and Asia.

SARS has also slowed the pace of work for H&Q Asia Pacific, a private equity firm that manages $1.6 billion, most of which is invested across Asia through a mix of venture investments and buyouts. Ta-Lin Hsu, chairman and founder of the firm, says that the slowdown is due in part to his firm’s conservative approach to SARS. As of early June, there was no travel back and forth between China and the United States for his team because H&Q had a 10-day quarantine period in place for people coming out of the region. However, Hsu says he believes the situation is improving, and he predicts travel will return to normal by the end of August.

Newbridge Capital, a San Francisco-based joint partnership of the Texas Pacific Group and Blum Capital, isn’t so optimistic. It has faced tough times due to SARS over the last few months, trying to keep its investment projects moving despite quarantines, long distance negotiations and cancelled meetings.

“From our business perspective of investment flows, [SARS] will slow down the flow of [foreign direct investment] into Asia substantially over a six-month period, because most of the investment flow goes into China, and China will take the longest to get a clean bill of health [to the point that] folks are comfortable getting on planes and going there,” says Newbridge Managing Director Don Carroll. “I don’t know anybody in the deal business … or from the corporate side or from the investment community that will go over there.”

While economists disagree as to whether the downturn in China will cost 1% or 2% of the year’s gross domestic product, most experts do agree that the impact on the region is enormous. The World Travel and Tourism Council, for example, predicts that the impact of SARS on travel and tourism, will cost China 6.8 million jobs and $20.4 billion over the course of 2003.

“No one [will know] the true impact of SARS for one or two quarters,” says Gabriel Li, a managing director with the Carlyle Group in Asia, which oversees the firm’s Asian venture funds totaling some $320 million. But Li is confident that China will remain one of the fastest-growing economies in the world. Similarly, Li says, the situation for Hong Kong may look grim, but the city’s future is solid-as a financial center, as a tourist destination, as a logistics hub and a communications center.

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