Why 3i Plans To Double Its Asia Assets –

A week rarely goes by without 3i reporting a deal somewhere around the globe. Founded in 1946, the firm is one of the world’s oldest private equity houses. It manages about $12 billion in assets and employs 750 people worldwide. After Martin Gagen departed last year as head of 3i’s U.S. and Asian venture capital operations, Chris Rowlands was named Head of Group Markets. He was given oversight of all European, Asian and U.S. market activity (both private equity and venture capital), in addition to his previous responsibilities of managing Central and Eastern Europe. It’s a big job-he now oversees about 250 investment professionals and about 95% of 3i’s assets-and it’s going to get bigger, with plans to double assets in Asia to 10% of 3i’s total assets over the next three years.
Q How about a brief update on changes at 3i since you took your new position?
A We were organized until recently along two axis. One axis was our three business lines: venture capital, European buyouts and growth capital. The other axis was our global geographies, each of which had its own head. When Philip Yea became our chairman, the decision was made to have Europe and Asia report into one person, myself. Relating to Asia, we’ve started our business in India and recruited Anil Ahuja, the former J.P. Morgan head in India, to work for us. And we’ve made our first investment in India, in Nimbus. Allan Ferguson, based in Waltham Massachusetts, heads the U.S. business and works closely with 3i’s global venture capital head, Jo Taylor. We’ve opened offices in both Shanghai and Mumbai.
Q Why is Asia so important for 3i?
A It’s hugely important for us for three reasons. First is the attraction of Asia markets from an investment perspective, second is the growth of the consumer sectors in India and China, and third is the growth of exports from Asian markets.
From the investment perspective-for investments and exits-you can look at our most recent successful exit of Focus Media (Nasdaq: FMCN) in Shanghai via the Nasdaq. We also have an exit on the Singapore Exchange from Pearl Energy (SGX: P38). That is an oil and gas development and exploration company that exploits technology to free resources from older energy fields. We’re currently making another energy-related investment in Asia.
The second perspective-the impact of markets in China and India on our European portfolio companies-is important to most of our companies. So our knowledge and work in Asia provides connectivity for those companies. There is also an appetite of Chinese and Indian companies to acquire properties in Europe.
Q Tell us about 3i’s LP investment in China’s CDH.
A We already invest directly in China from our Hong Kong office. We will continue to do that. And we have just opened an office in Shanghai to increase our focus on China. Typically we’re backing returnees from Western countries or teams with experience in Western countries working in China. Those investments to date have helped us to learn about how to make those deals in China. But that is not enough. We have to learn how to source deals in China, as well. The CDH relationship is a strategic one in which we will learn how to originate deals on the ground in China. We’re the only significant foreign LP in the CDH fund and that is giving us increased exposure to deals made by local Chinese GPs.
Q Any changes in India?
A We’ve just added a third senior partner for Asia, Anil Ahuja, to head up India. That gives us a trio of senior managers in Asia: Mark Thornton in Singapore, Jamie Patton in Hong Kong, and Anil in India.
Q What’s going on in each of the three regional offices?
A They’re all growing. Jamie has added four investment execs over the last four months in Hong Kong. We’re recruiting a team for India of four to five people around Anil.
Q What does that translate into in terms of assets for Asia?
A Today we have about 5% of our assets in Asia, but our goal for the next three years is to increase that to 10% of the firm’s assets, which means about $300 million per year of investment spread across venture capital, buyouts and special opportunities. We don’t, however, have any specific allocations.
Q Any specific concerns for private equity in the Asian region?
A The rise of mega-funds. That’s a concern everywhere, but in Asia some of these firms are just learning what they’re doing. You have large entries by firms like Blackstone in India. That’s a market where there just aren’t large buyouts yet, with the exception of the possible acquisition of state-owned enterprises in India, and after last week that opportunity is dead. [Rowlands was referring to India’s decision to halt its 5-year-old policy of allowing the sale of state-owned enterprises. -Ed.] Japan and Korea are awakening to buyout opportunities and moving to a more normal LBO process [instead of the auction of distressed debts by governments]. China has no buyouts yet, apart from the sale of some state assets. So the dynamics of mega-funds is not clear yet what they’ll do. It’s not clear why these funds are so large, beyond the availability of capital.
Q Some say mega-funds will create an auction market in Asia.
A Yes. Prices are heating up in China and India. In China, the price of investment into companies with an 18-month window before their IPO is getting pretty high. The answer for 3i is that we have to originate proprietary deals. For example, the Nimbus deal was known only to us, via Anil Ahuja. I know that everyone says that to you every day: that their deals are proprietary. To insure that is true for 3i we take a sector approach, identifying the top competitors in a given field, and then go after the companies that we’re interested in.
Q Any concerns about changes in regulations in the region?
A In Japan and Korea there is a definite backlash [against foreign PE firms]. Whether attitudes in those countries will remain the same, there are two views. One is that we’re seeing temporary reactions to prominent deals, where governments have to be seen as being proactive. The second view is that the regulatory actions will have a medium-term impact on private equity.
China is different. The SAFE regulations have caused a pause in investment activities. In part the pause reflects stock market problems, in which private equity is caught up in a wider issue that concerns IPOs and M&A activity. The Chinese government regulators are concerned over tax flows and tax drains and the cycling of capital. China’s regulators want clarity in capital flows, which impacts PE work. So PE is stalled in China. But we think that [the SAFE] regulations will be resolved. The government there is clear about their need for foreign investment capital.
Q When do you think you’ll see a resolution?
A By the end of the year. Look, regulations are not a massive concern to private equity in Asia. It’s typical, however, that such issues pop up and then go away. The anti-American sentiment over a few private equity deals in Korea, for example, means that some firms won’t find it easy to do business there for a while.
Q What does your Asia deal flow look like?
A For 2005 we hoped for from two to four deals. So far we’ve done one deal and, given the deal flow we’re seeing there, I think we’ll do at least one other. We’re negotiating a deal now, so we’ll do two in our first six months. For China, we’re at a pause for venture deals. We have some transactions still active that were not caught up in the SAFE regulation, which were grandfathered in, or other deals that also fall outside of those firms caught up by SAFE. We’re expecting another two deals in China. We have a South Korea deal in the works, the Singapore energy deal that I mentioned, and a Hong Kong deal in the works. So overall, eight to 10 deals in the region for the year. But investing in Asia is not a race for us: We’re building a long-term business, focusing on quality investments.
Chris Rowlands
Head of Group Markets
3i Executive Committee Member
Age: 48
Education: Honours degree in law from London University, 1988.
Work History: Barclays Bank, 1973-83. Midlands Regional Director, 3i, 1984-86. Partner, Arthur Andersen, 1986-92. Executive Director, 3i, 1992-94. Head of Group Markets, 3i, September 1994-present.

Email: Jerry.Borrell@Thomson.com