An Executive Summary An overview of the company/setting or problem addressed in your case [Ray] The case consists of a European multi-family office deciding whether to invest in private equity in Asia and if so how to do it. George Bergmann is the Senior Investment Director for one of the largest European multi-family offices, and in recent years it became clear to him and other seniors managers at the firm that they are underexposed to the growing markets in Asia as highlighted by Hong Kong becoming the largest center for IPOs in 2009. Asia was able to avoid the worst of the financial crisis in the late 2000s and was poised to continue its long-term growth. At the last shareholders meeting, they tasked Bergmann to come up with a proposal and investment strategy to whether to invest in Asia and if so how to do it so that the returns adequately compensate for the risks involved ranging from cultural barriers to underdeveloped institutions. Bergmann had to address to the shareholders where he sees the future potential for Private Equity in Asia and whether it has gone beyond the point where it makes sense for them to invest. Furthermore, he had to determine what a reasonable return target is for the firm in order to be compensated for the risks they will be taking and develop and implement an investment strategy using the information he gathered.  Specific responses to the assigned questions How do you see the future for PE in Asia? [Niannu] In which ways the current environment for PE is different from the mind-1990s? In your responses pls use recent research material and industry reports. [Jake] Back in the mid-1990s, institutional investors from around the world began exploring opportunities in Asia’s growing markets to obtain returns on their investments and diversify their portfolios. Several Asian private equity funds began emerging by promising remarkable returns to institutional investors. However, macroeconomic factors within the region including low standards of corporate governance, inadequate information regarding the investments, corrupt legal system, currency swings, and inefficient exit opportunities prevented these private equity funds from successfully implementing the private equity model. Most importantly, these private equity funds were usually managed by inexperienced fund managers that were executing mediocre deals that culminated in a majority of the funds’ poor performance. In 1998, Fortune published an article called “The Great Emerging Markets Rip-Off” that stated “You can’t trust the companies, you can’t trust the governments, you can’t trust the analysts, and you can’t trust the mutual funds managers. Watch out.” Once the Asian financial crisis occurred, these macroeconomic factors were in the spotlight to the private equity community and most institutional investors ultimately withdrew from the market. In the current environment, investors have recognized how private equity investments are driven and s ...

1. An Executive Summary
An overview of the company/setting or problem addressed in
your case [Ray]
The case consists of a European multi-family office deciding
whether to invest in private equity in Asia and if so how to do
it. George Bergmann is the Senior Investment Director for one
of the largest European multi-family offices, and in recent years
it became clear to him and other seniors managers at the firm
that they are underexposed to the growing markets in Asia as
highlighted by Hong Kong becoming the largest center for IPOs
in 2009. Asia was able to avoid the worst of the financial crisis
in the late 2000s and was poised to continue its long-term
growth.
At the last shareholders meeting, they tasked Bergmann to come
up with a proposal and investment strategy to whether to invest
in Asia and if so how to do it so that the returns adequately
compensate for the risks involved ranging from cultural barriers
to underdeveloped institutions. Bergmann had to address to the
shareholders where he sees the future potential for Private
Equity in Asia and whether it has gone beyond the point where
it makes sense for them to invest. Furthermore, he had to
determine what a reasonable return target is for the firm in
order to be compensated for the risks they will be taking and
develop and implement an investment strategy using the
information he gathered.
Specific responses to the assigned questions

2. How do you see the future for PE in Asia? [Niannu]
In which ways the current environment for PE is different from
the mind-1990s? In your responses pls use recent research
material and industry reports. [Jake]
Back in the mid-1990s, institutional investors from around the
world began exploring opportunities in Asia’s growing markets
to obtain returns on their investments and diversify their
portfolios. Several Asian private equity funds began emerging
by promising remarkable returns to institutional investors.
However, macroeconomic factors within the region including
low standards of corporate governance, inadequate information
regarding the investments, corrupt legal system, currency
swings, and inefficient exit opportunities prevented these
private equity funds from successfully implementing the private
equity model. Most importantly, these private equity funds were
usually managed by inexperienced fund managers that were
executing mediocre deals that culminated in a majority of the
funds’ poor performance. In 1998, Fortune published an article
called “The Great Emerging Markets Rip-Off” that stated “You
can’t trust the companies, you can’t trust the governments, you
can’t trust the analysts, and you can’t trust the mutual funds
managers. Watch out.” Once the Asian financial crisis occurred,
these macroeconomic factors were in the spotlight to the private
equity community and most institutional investors ultimately
withdrew from the market.
In the current environment, investors have recognized how
private equity investments are driven and shaped by a region’s
macroeconomic forces. Developing countries offer private
equity investors with many opportunities compared to
developed economies to obtain remarkable returns on their

3. investments. Unlike the inexperienced fund managers from the
mid-1990s, newly established private equity firms emerged
throughout the region emphasizing a more professional style of
management and increased levels of corporate governance.
These new firms adopted several standards and procedures that
were commonly applied in the United States and Europe to
provide the private equity community with a safer environment
for investing capital. Today, the private equity environment
within Asia has provided investors with greater transparency of
their investments and the amount of exit opportunities
improved. According to Bain & Company’s “Asia-Pacific
Private Equity Report 2018,” there were two key factors
including “investors’ growing confidence in the region as macro
climate improved, and company owners’ greater overall
acceptance of private equity funding” that resulted in the
growth of private equity in the region. However, investors must
be aware of risks that remain present in the current environment
including concerning business practices, legal issues,
macroeconomic stability, and political risk.
What should a target return for PE in Asia be? Think about PE-
specific and Asia-specific risks and how investors expect to be
compensated for them [Santi]
The private equity market in Asia has seen a strong growth in a
span of 15 years in AUM from $30 billion to $283 USD between
1994 to 2009. Even through the financial crisis of 2008, the
Private Equity Market saw a growth of 13-14% from 5-7%.
However, when dealing with performance, past or future, it’s
very difficult to set a benchmark or standardized return. The
lack of transparency in the private equity markets along with its
long-term and illiquid assets also pose a challenge in targeting
returns in PE.

4. The risks involved can offer suggestions on what returns to
expect. Some of the risks included political and macroeconomic
stability, investment & tax policies, along with legal issues.
Another implication is the limiting diversity many PE managers
had, that came from investment banking backgrounds whereas
the US and Europe had a more diverse mix. This limited
diversity had many managers seek deals where the exits were
IPOs.
Compared to the risk premium of 6% and 7.3% in developed
markets, Coller Capital expects to see returns for Asian
developing markets of around 18-23%. According to Cambridge
Associates Asian PE has returned 4.65% over the last 10 years.
This performance has been much worse in short term, but
significantly better in the long run.
What PE strategy do you think will be the most successful in
delivering high risk-adjusted returns in developing Asia and
why? [Sreekar]
What are the similarities and differences, if any in PE
transactions for Asia vs. United States? [Clara]
In the United States the nature of the securities or interests held
by managers is more varied, with managers typically holding
either options exercisable into ordinary equity, profits interests
or, occasionally, leveraged common equity, with vesting of
these interests subject to continued service and the overall
performance of the business or investment. The choice between
these different interests is driven by tax considerations and the
negotiating strength of management: options giving rise to
ordinary income treatment but a compensation deduction benefit
in the hands of the company, and profits interests and equity

5. giving rise to capital gains treatment for the managers, but no
compensation deduction for the company
The position across Asia is also more varied, and in general
there is no settled market standard for management equity
incentive arrangements, although it is more common for
management in transactions in China to be given equity
incentive awards that vest purely over time with no performance
requirements, whereas in the Hong Kong market managers are
commonly issued with a mix of ordinary equity as well as
options exercisable into ordinary equity and which are linked to
future business performance.
Conclusions