Having closed on its seventh private equity fund for China/Southeast Asia, HSBC Private Equity Management Ltd., Hong Kong, has begun marketing its eighth direct-stake fund - the HSBC Private Equity India Fund L.P.
The fund is HSBC's first South Asia vehicle, and it will seek opportunities in Pakistan, Bangladesh, Sri Lanka, Bhutan, Nepal and the Maldives as well as its primary market of India. The fund is being offered to pension funds around the world, and HSBC officials hope it will close in about a year with up to $100 million in assets.
For HSBC, with its seven other China/Southeast Asia funds, addressing the Indian market "was the next natural step," said Jonathon Bond, HSBC's chief representative in New Delhi. HSBC Asset Management already has raised roughly $500 million for its direct-stake China/Southeast Asian funds, including $250 million for the recently closed HSBC Private Equity Fund L.P.
HSBC's total of about $500 million of Asian private equity raised thus far would be about 22% of the total raised by the China and Greater China funds surveyed by the Micropal Emerging Market Fund Monitor, said Ian Wilson, publisher, who is located in Glen Allen, Va.
The HSBC "group is trying to build an Asianwide private equity business, so India can't be ignored," Mr. Bond pointed out. He noted the Hongkong and Shanghai Bank (parent of HSBC Asset Management) has been "entrenched in India for 125 years," making the organization "well-positioned for managing a private equity fund there." In addition, opportunities for private equity investing "are just opening up in India right now," he said.
Until recently, the Bombay Stock Exchange was the easy way for companies to raise capital, because they could issue as little as $1 million of equity on the exchange, making private equity sourcing unnecessary. Alternatively, local companies could borrow money at low interest rates.
But changes on both fronts have started opening the door to private equity opportunities, said Mr. Bond. Recent reforms of the Bombay exchange have included tighter listing restrictions, such as raising the minimum issuance amount to $1.5 million and eventually to $3 million. Also, interest rate deregulation late last year has driven up rates to the 16% to 17% range.
"Last year, more than 50% of initial public offerings on the Bombay exchange raised less than $3 million each," said Mr. Bond. "The big question - now that more restrictions apply - is: Where will intermediate capital now come from? I think from the emerging private equity market."
To address the opportunity, HSBC Private Equity Management Mauritius Ltd., manager of the India fund, opened the liaison office in New Delhi. (HSBC Private Equity Management Mauritius Ltd. is 75% owned by HSBC Private Equity Management in Hong Kong, which in turn, is a subsidiary of HSBC Asset Management.) Already seeing "strong deal flow," the fund is in closing stages of negotiations on "at least two initial investments," said Mr. Bond. Although the fund has not yet lined up any pension investors, it does have a commitment of at least $5 million from the HSBC Group, he said.
As target investments, the fund will seek established profitable businesses, although not in high technology or real estate companies. Instead, the preference will be for companies with strong asset backing or those targeting the emerging middle class of India in industries such as pharmaceuticals, auto ancillary businesses, value-added textiles, engineering and food and beverages.
Officials expect a 40% return annual return on individual investments, and a 25% per annum return on the fund itself, net of expenses, said Mr. Bond.
Similarly, HSBC officials expect a 25% net annual return for the HSBC Private Equity Fund L.P. targeted for China/Southeast Asia.
Such returns should exceed what investors can expect from the stock markets of these countries, HSBC officials believe.
Firm officials said their $250 million Private Equity Fund was oversubscribed. The fund attracted 21 institutional investors (not including the HSBC Group) including 13 from the United States.
Among the U.S. investors were the pension fund of U S WEST Inc., Englewood, Colo., which committed $20 million, and the Amherst H. Wilder Foundation, St. Paul, Minn., which committed $4 million, said David Conrod, a vice president of HSBC Asset Management Americas in New York. Commitments from other U.S. investors ranged from $1 million to $50 million, he said.
"Such investments illustrate the growing appeal of international private equity from U.S. institutional investors," said Mr. Conrod.
The opportunity for investment appears abundant. In Asia, HSBC has found a "huge demand for capital to expand existing businesses," said Mr. Conrod.
Debt financing is difficult to obtain, in part because banks in the region are not accustomed to long-term lending; their growth has mainly come through trade financing, Mr. Conrod said. Also, while local stock markets would seem to be another source of financing for corporate expansions, many markets in the China/Southeast Asia region remain small and are limited in their ability to meet the capital demand, Mr. Conrod points out.
HSBC already has found a number of investments for its Private Equity Fund L.P. The fund has spent more than $73 million on investments in companies in the electronics, petrochemical, securities, shipping telecommunications and textile sectors - although other sectors will be considered during the life of the 10-year fund, officials said.