PrivateEquityCentral.net, February 21, 2001

Walden International was established in 1987 to open up a two-way investment avenue - for Western investors attracted by the opportunities in the Asia-Pacific region, and for investors from that region trying to break into the Western markets. The firm traditionally invests in the telecommunications, Internet, software, and semiconductor sectors, and now intends to add life sciences start-ups to its stable of portfolio companies. Walden is nearing a final close on its oversubscribed new fund, PacVen Walden Ventures V, and has hired two new partners, Amos Barzilay from CommerceOne, and Charles Hsu from Walden VC, a sister member of the Walden Group, to help develop its new investment strategy. Since its inception, Walden International has established 33 venture capital funds with over $1 billion in assets under management in the U.S. and Asia, and invested in more than 278 companies in the U.S., Asia-Pacific region, and Israel. The firm is moving away from its country-specific fund approach, which is preferred by other players in the Asia-Pacific region, such as H&Q Asia Pacific, in favor of making allocations from a large central fund.

PrivateEquityCentral.net spoke with Walden International chairman Lip Bu Tan to seek his perspective on the perils and opportunities emerging in the vast, diverse - and under-financed - corporate landscape of the Asia-Pacific region.

PrivateEquityCentral.net: When do you expect a final close for PacVen Walden Ventures V?

Lip Bu Tan: The final close will be sometime in the middle of March. Right now it is already over the target we are trying to raise. Our original target was $750 milion, but it's way north of that. We have close to $1.5 billion in commitments, more than two times our target. I don't think we want to take $1.5 billion; that's way too much for us. So we're trying to cap it somewhere around $900 million. We've already reached over $850 million, so the remaining $50 million will be a couple of investors who we'll try to get to cut back and the accept the lower amount.

For our latest fund, I think we have about 75% from U.S. endowments, pensions, and then we have about 12% from Asia and then another 12% from Europe. We truly believe in global investment.

PEC: Your firm recently appointed new partners. Does this signal an expansion of your strategy?

LBT: Yes. Traditionally we have had five areas of focus. We just added on one more focus to balance that, so we have six cylinders, or six engines of investment. The six areas of special focus are telecommunications, which includes equiment, components, and related areas.

Second is the Internet, and luckily we haven't had much investment in the business-to-consumer side. So it didn't have a major impact to our portfolio. What we'd really like to do is focus more on Internet infrastructure software and web application, vertical selective, vertical Web application software area. We're very happy to have Amos Barzilay join us. I think his experience with Commerce One will be very, very helpful. He's very much a techie, and his very strong domain knowledge will be very helpful for us.

The third area related to that is the whole outsourcing software model - basically tapping into the talent in India. As you know, there's a strong Indian community in Silicon Valley, and also India. We're running out of the software talent in the U.S. So we've been extremely successfuly in terms of backing quite a few Indian companies with research and development in India, marketing and sales in the U.S., companies like Sierra Atlantic, Mindtree, Growthspan, those are three that really stand out from our existing portfolio. We'd like to do more of that, so that's another area of focus for us.

The fourth area of focus for us is the semi-conductor area. I think that area continues to be the bread-and-butter for us in terms of being a traditional VC area that we've done extremely well in. So we're going to do more of that, but more on the communications side, the broadband, the optical area.

The fifth area that has traditionally done well for us is OEM manufacturing, really tapping into Taiwan, Singapore and China. If you look at Compaq, Dell and all those guys, they have manufacturing done in Taiwan, China, Malaysia, and Singapore area. That will continue to be a very important area for us. Also, in the communication area, equipment like Cisco, like Redback, those guys eventually had to outsource their manufacturing to Asia. So this will continue to be an important sector for us.

Our new area of focus is life science. We think that the U.S. and Asia is underserved in the life science area. Singapore just announced a $1 billion fund in life science investments, same thing with Hong Kong, China and Taiwan. We thought that would be a very important piece and also counter-cyclical with the other five areas that we have in the IT related area. So we thought that would be a nice add-on. I worked with Charles Tsu for five years in the U.S., and he has floated 12 life sciences companies in IPOs. When he became available, this whole industry made sense for us. So we talked to our limited partners and investors, and they all liked the idea. We asked for approval before the fund closed, and they all overwhelmingly approved that because of his track record, because of the whole industry, the balancing of the whole portfolio, that's why Charles came on board.

PEC: Does your firm have goals for how much you invest in any particular countries?

LBT: No. We invest in the U.S. and Asia roughly half-and-half. We don't break down Asia by specific countries, because we're basically driven more from an industry focus.

PEC: Your firm has, since its inception, established 33 venture capital funds in the U.S. and Asia. Now it seems you are raising one big fund.

LBT: That's right. Thirty-three is a lot because at the time we had a lot of country funds, and right now we are de-emphasizing that. It used to be a country-by-country approach. Now we're moving more towards an industry focus.

PEC: In the past, would your firm raise all its regional funds independently?

LBT: Yes, because in the past we liked to build the old boy networks. So we have a lot of local partners, local investors that keep us in the network. Very few venture capital firms have the kind of network that we have, from governments, from industry groups, from banks, from insurance, in every country. Now we're scaling up more towards the global approach, which is why we are focusing on just one big fund going forward.

PEC: How much autonomy do your regional offices have with regard to investment decisions?

LBT: In the past, we believed in small invesment committees, usually three or four persons, then maybe two from the country represented, and two from outside. Usually, I'm one of them, and maybe one other who had closer links to the country. For example, in Taiwan, someone from Hong Kong, would be good to be an adviser to the committee. But now we've changed. We've officially moved to become 15 senior partners, and within those 15 senior partners we break down into those six industry groups. A king of matrix from representatives of geographical and industry sectors work together now. What we usually do is, when deciding who will be the right person to be on the board, we take into account whether they have a very strong industry focus in that particular company or a particular geographical focus, becasue since he's on the ground he can monitor the company much better. In about 95% of our investments, we have a board seat, and in the last three years that has been the case almost 100% of the time. We are very active on the board.

PEC: Which countries do you see providing the best opportunities in the sectors that you invest?

LBT: We're very bullish on a few countries. We use Hong Kong and Singapore as our regional hub. They have the infrastructure to build venture capital out. So we took a lot of companies public in Hong Kong and Singapore. We are very bullish recently in Japan because of the telecom deregulations and also the whole business-to-business infrastructure is coming up. This is the second largest GDP outside the U.S., so we are very bullish. We're building up a team in Japan. We continue to very bullish about India becasue of the software outsourcing; their talent is tremendous. So, we've done very well in that area. Lastly is China, because there's a huge market potential. So we continue to be very interested in China, and through Hong Kong make those investments. Taiwan has been our bread-and-butter in terms of manufacturing in semi-conductor and peripherally related areas. We're not so interested in Indonesia and Thailand; those two countries have political and infrastructure problems, so we decided not to do anything there.

PEC: Asia has been in a prolonged slump in since 1997. Has this created challenges or opportunities for Walden International?

LBT: Both. I think opportunities for us arose because of the downturn. And a lot of governments in Asia are starting to look at technology development as their growth engine, as has been the case in the U.S. Contries like Taiwna, Hong Kong, Singapore and Japan in some way are moving in that direction, so it's very exciting for us. There's a lot of technology investments. If you look at other private equity groups in Asia, very few focused on technology until recently. So in a way, it really played into our strength.

The challenges we face have to do with attitudes and liquidity. For example, of the 29 IPOs we conducted last year, even though they were Asian companies, more than 70% were listed in U.S.- for example, Sienna.com. I think we just had to take advantage of the U.S. market. The local market is often thinly traded, with no quality research follow-up. So that lowered the return in Asia, which was a challenge for us. But the real bottom line is the management talent. It's not like in the U.S., where you can go to a headhunting firm and recruit a top-notch CEO; in Asia the supply of top-notch CEOs is very limited.

PEC: Would you say your preferred exit strategy in Asia is a direct sale?

LBT: No. So far, we've had more IPOs. That has to do with the culture. In Asia, if you're selling a company, that's still perceived as a failure. So the majority of our deals have been exits through IPOs in Hong Kong, Singapore and sometimes in Malaysia.

PEC: Since April, the U.S. tech sector has been in decline. Is Asia's tech sector now looking comparatively strong?

LBT: No, I think the Asian market has been declining, following the U.S. trend. So in an overall market downturn, we as a fund manager have to be a lot more disciplined in the quality of mangement we select. In choosing a sector we also have to be extremely selective. If you're not here, putting money into the business-to-consumer sector directly, then you're going to suffer a lot. If you invest in telecom equipment, the outcome is uncertain. If you're committed to optical networks, you're fine. If it's some other provider, liek a multi-service platform, then you're struggling.

PEC: What's the relationship between Walden International and the other Walden venture capital firms?

LTB: At the start of this year we decided to split the operation into three affiliate groups. We have Walden Israel, which only invests in Israeli technology companies; Walden VC, primarily focused on media investments; and Walden International, focused on the infrastructure side, the telecom equipment, semi-conductor, outsourcing software, even on the Internet, we're only focused on business-to-business infrastructure software area, and also life science. So it's very distinct. We don't overlap too much.