Past academic research about private equity is redundant in Asia because it pertains to the buyout deal model rather than minority investments, according to Francesca Cornelli, professor and chair of finance at London Business School.
On a visit to Hong Kong with a number of MBA students in April, Cornelli told sister title Private Equity International that more academic research was critical to gain a better understanding of the private equity model in Asia.
“The way you structure the deal, the way you select the deal, the things that are important are very different [in Asia] and this is a learning experience for everybody. [People] say there have been so many years of learning [now], but no [there haven’t] – because the private equity industry in Asia is still changing so much,” Cornelli said.
…in a situation of default or if you want to replace the management, you can’t implement those changes in the same way as in Western countries
She explained that many GPs underestimate the challenges they will face when making minority stake investments, the typical deal structure in most of Asia. For example, they do not realize how difficult it will be to replace the chief executive or management in the business.
Moreover, firms tend to underestimate legal protection in disputes and may have a lack of understanding of how laws will be implemented in various Asian countries, she said.
“This means that in a situation of default or if you want to replace the management, you can’t implement those changes in the same way as in Western countries. Of course you can hire someone [local] and they will know the culture and the language, but that doesn’t mean that person knows how to do it [from a private equity standpoint]. We’ve had learning experiences of private equity in Western countries, but we haven’t had enough here.”
Cornelli is currently doing data-driven research on China’s private equity market for an academic study about how to optimize private equity investments. The research will include information about manager and partner selection, the best company-types to invest in, as well as what size of investment and stake is likely to generate the best returns for private equity firms.
“Some very successful domestic funds had almost a ‘supermarket’ approach [in the past], because when the country is growing so fast do you really have to do due diligence and select a deal? If the country is growing at 10 percent on average, [you'll think] my deals will, too. That is how it used to be, but now it is changing and you now have competitiveness,” Cornelli said.
“Now it is going to become more and more about understanding the characteristics of a deal and the characteristics of a company that [make an investment] work.”