How do you see private equity evolving in Asia?
The industry is becoming more concentrated: fewer funds are raising a larger percentage of the capital. We now advise funds with about US $10 billion of committed capital, and the US $4 billion fund that we recently closed is one of the largest in Asia. Private equity in this part of the world used to be a boutique operation that very few people were interested in investing in. Today it’s become much more mainstream. The majority of pension funds, endowments and other institutions that invest in alternative asset classes have some exposure to Asia in their portfolio. 15 or 20 years ago there would just be very, very few that ventured beyond North America and Europe. In addition, we are also starting to see more family offices and high net worth clients increasing their allocation to Asian private equity for portfolio diversification and to access opportunities not readily available in the public markets. So our industry is really poised for growth and continues to attract more capital.

How important is the size of a fund for its success?
We now have about 120 people across seven offices in the region. There’s an increasing trend in Asia of doing buy-out transactions or control deals. This requires more capital, because you’re buying one hundred percent of a company. It also requires more resources and capabilities. In addition to having investment specialists in your organization, for example, you also need operations experts that are capable of working with an acquired company to drive operational change and bring improvements. So in general the scale of a fund and an organization will be a factor in determining how many opportunities you can create and manage.

Where do you see the biggest investment opportunities?
Asia is a varied geography. It’s hard to talk about the region as a whole. China – which represents about a third of our investments – used to be all about very high growth rates and small, entrepreneurial companies that were expanding rapidly and seeking to go public. But in the past two or three years there’s been slowing growth, and a lot of industries are going through a consolidation. Still, we think the health-care sector is very interesting because facilities like hospitals and check-up centers are undeveloped relative to the aspirations of the growing middle class. The other big area of opportunity is environmental services. Due to rapid industrialization, issues like clean water and clean air are becoming very important, and people in the government are paying attention. They’re putting policies and budgets in place to address these issues.

In India, meanwhile, the macroeconomic backdrop is a lot more favorable, because India went through a very deep, cyclical downturn, and now there are opportunities to invest in recovering businesses. One of the sectors we like the most is IT services. It’s very well developed and one of the largest in the world. This is an area where India really excels. We also like health care and the financial-services sector, both of which are going to benefit from the growth in the demographics in that country.

Thinking more globally, one of the biggest opportunities is the fact that Asia has become such an important end market for many companies around the world, regardless of the sector or the location of the company’s headquarters, and as a result we are seeing interesting private equity investment opportunities involving cross border expansion by European and US companies into Asian markets.

What does your selection process look like?
We’re value-oriented as investors, so the starting point is really the proven history of a company’s financial performance – as opposed to relying on the future potential, which is a very different way of investing. That would be more akin to a venture-capital model, where you’re basically betting on the future.

We also look very closely at what sort of competitive advantages or entry barriers exist, enabling this business to continue to be successful. One of the biggest risks in our markets is that because we’re operating in relatively young economies the industries are less established, so you don’t always have a dominant number one, two or three in each industry. Instead, you often have dozens of companies fighting for a share of the market. Nobody has yet become the dominant player, and you have to try to back the company that you think can become a dominant player.

How intensely do you rely on partnerships?
Very much, from the very beginning. When private equity started 20 years ago in Asia, it was mainly family businesses and lots of entrepreneurs building companies. In order to be successful you had to become a friendly partner. We started off with what we call “growth investing,” meaning minority investments in companies run by founders or families. That required a collaborative approach, and it continues to be the way we operate.

In addition, we work with many organizations in putting together investments – from consultants that understand a specific industry to financial organizations that help us with due-diligence accounting, HR, and legal issues. And ultimately we need to find a way to realize the investments before the end of the life of our funds, which is generally 10 years. That usually involves taking the company public with an underwriter like Deutsche Bank, who we’ve worked with on IPOs before, or it could be a trade sale – selling the company to a corporate buyer, strategic buyer.

When you look back over the past 15 to 20 years, how has the investment environment in Asia changed?
We live in a pretty exciting time here in Asia. First of all, the economies have developed so much. With a GDP of more than US $9 trillion, China is one of the largest economies in the world today. When we started investing it wasn’t even one trillion. Also, the amount of reform in the private sector is really incredible. 20 years ago, it was almost entirely a state-run, centrally planned economy. Even in other markets in the region, not very much liberalization had taken place. But today the markets are much more open to foreign investment and much more privatized, and the capital markets are far more developed.

Another big change is the amount of cross-border activity between Asia and Europe and between Asia and the United States. You didn’t really used to have private equity deals that involve, say, a Chinese company buying a German company to expand their Chinese business. It was always very siloed into a single market. But today it’s very common to have investments that span multiple countries and even different parts of the world. That makes it a much bigger opportunity long-term.