Asian investments set to soar

One of the key trends in Asia since the crisis has been the opening up of economies to direct and portfolio investment from outside. From Japan to Indonesia, foreign direct investment has arrived, attracted by cheap prices, high potential returns and stagnating economies elsewhere in the world. In the last two years, Asia has regained its position as the fastest growing economic region in the world. Companies are taking notice and are keen to acquire assets.

Open for Business

On the ground in many Asian countries, the response has been to encourage this investment. China presents a significant challenge for other Asian countries competing for foreign capital. With WTO entry and ongoing economic liberalisation, China is the obvious destination for the bulk of foreign investment. However other countries are reforming their regimes to ensure they are able to compete as investment destinations.  Across the region, barriers to foreign investment are falling and the authorities have been actively encouraging outsiders to invest in them. Furthermore they have been liberalizing stock markets and developing the growth of bond markets. If the crisis was caused by economic mismanagement, then the response of many policy leaders to the crisis has been one of economic liberalism.

"Governments now realize that economic liberalism is the best way to develop their broader economy," says Andrew Roberts, Asian managing partner of Linklaters. "For instance, most governments now recognize that to develop their economies they need to develop an efficient market for the purchase and sale of securities and companies. Also, enabling a start-up enterprise to raise funds through the stock market is a very good way of developing your economy."

However, Roberts believes that while the initial responses have been encouraging, there are still a lot of areas that could be improved. For instance, although foreign ownership restrictions have been relaxed in many countries, they are still not totally absent. Also, onshore M&A markets are stymied in many countries due to the lack of a functioning takeover code.

"Asia is not a fully open and free market yet," says Roberts. "There are still lots of barriers and inefficiencies. But in virtually every country we are seeing liberalization, deregulation and movement towards transparency and disclosure."

A Family Affair

But as the regulatory barriers fall, so the structural ones remain. Asian companies are mainly family held. This means they often have different economic agendas than publicly held companies. This can translate into apparent economic irrationalism, which can make it difficult for outsiders to invest in them. 

According to Roberts, it is this structural issue that is perhaps the biggest barrier to a fully functioning FDI and M&A market developing in Asia. "The biggest problem in Asia is still the structural barrier of family held companies. You can have as many rule changes as you like, but when you have a culture of tightly held family companies,  you have not got a fluid market."

He continues: "For these companies to grow, they need to cross borders and access more and more capital - and there are very few that can achieve that level of growth while remaining tightly held family companies. It is a feat to be able to do that for more than one or two generations."

Still Roberts believes that as the rules change so the culture will. Mainly this is because as you get a more open, liquid and transparent market, it becomes easier to price assets. Ease of pricing usually means an increase in pricing. So as the rules change and improve, so the overall value of assets in Asia should rise. This will encourage more transactions.

Furthermore, as markets open up, so they become more and more competitive. This means that companies have to grow to achieve a competitive scale. It is very difficult to achieve this growth while retaining a tight hold on the family equity. "If companies want to grow, then they need to free up some of their equity. Endless gearing has been seen to be a very risky strategy."

Deals, Deals, Deals

Investors seem to be very aware of these long-term changes in Asia and are keen to capitalize on this liberalizing environment. "We are seeing all manner of investors that are now active in Asia," says Roberts. "International companies looking to acquire assets are here. We are also seeing regional companies acquiring, especially Singaporean and Chinese companies. There is also a lot of activity from private equity investors - especially in China."

Linklaters has a unique perspective on this investment surge in Asia, as it has been topping M&A league tables in the region for a number of years. "At Linklaters, we have been increasing our corporate finance presence in the region and will continue to do so as increasing investment is an irreversible trend ," says Roberts. "As governments and regulators begin to see the economic benefits of providing a safe market for either domestic retail investors or foreign and domestic companies, this can only continue."

Crucially, Roberts believes that the market for buying and selling assets has now reached a level of maturity where legal issues do not need to be a problem. Primarily, this is because firms such as Linklaters have now done so many deals that they can ensure that any transaction can comply with all the local laws.

"There are very few transactions that now fail due to the legal pitfalls - there are a million other reasons why they fail," says Roberts. "What a firm such as Linklaters does is structure a transaction so that it fully complies with whatever the regulatory requirements are."

As an example of a successful deal, Roberts cites a situation where the firm managed to structure a deal for the large European insurance company Allianz to buy the insurance assets that CBA was selling in Thailand. There are legal restrictions on foreign ownership of insurance assets in Thailand but Linklaters found ways to comply with those regulations while letting the deal go ahead.

A key trend for investors in Asia is to look for advisors who can combine international and leading edge advice with deep local understanding.

"We offer a bundled service of tight teams of lawyers. Those looking at things from an international perspective sit alongside locally qualified lawyers who can understand the local implications. It helps out clients a lot and we are seeing more work that requires a combination of English, US and local advice."

The future looks bright for investors into Asia and for those companies that wish to grow through the sale and acquisition of assets. Linklaters will be there to assist in this process, providing the best legal advice for whatever the situation.