Good Things Come in Midsize Packages

Asia's fastest-growing companies are midsize operations that have flourished on a steady diet of venture capital and liberalized policies

by Brian Bremner

Asia has long been home to the world's most dynamic pack of economies, yet a defining feature of the region's business landscape has been corporate size. China's state-owned enterprises, the keiretsu business combines in Japan, or the mighty chaebol family-run industrial empires of South Korea tended to squeeze out the small fry in the struggle for market access and capital. Well, that all seems so late-'90s now.

This decade has witnessed a broad flowering of entrepreneurship throughout Asia. Factors driving this trend include a huge wave of private equity and venture capital funding, the region's enormous base of Net users and high-speed broadband networks, and regulatory easing on rules governing the listing of young companies at bourses from Seoul to Singapore.

Bantam-Weight Champions

This new-found verve among the small-company set is readily apparent in BusinessWeek's latest compilation of Asia's 100 Hot Growth Companies. This year's list of the region's best-performing growth companies—those with annual sales of $50 million to $500 million—is drawn from the Standard & Poor's/Citigroup Extended Market Indexes for the Developed and Emerging Markets of Asia as of Oct. 26, 2006.

Analysts at Standard & Poor's (like BusinessWeek, a unit of The McGraw-Hill Companies (MHP)) only consider listed companies with minimum sales growth, profit growth, and average return on invested capital of at least 10%—and then rank the 100 top finalists by performance over three-year time frames, to reward consistency. (See the full explanation of our methodology here.)

In many ways, the environment for the region's bantam-weight champions is ideal. The amount of startup capital sloshing around Asia right now is awesome. Private equity and venture capital funds have invested $44.7 billion in Asian companies in 2006, vs. $29.6 billion for all of 2005, according to Hong Kong-based AVCJ Research, which tracks such flows. And another $30 billion has been raised this year for future investments.

Smoothing the Way for Startups

In big, established economies such as Japan's—which fielded 34 companies for our list, by far the biggest number of any country—the adoption of international accounting standards in 2000 and liberalized regulations on startup capital requirements have made a huge difference. "The legal infrastructure is more suited to deal with small startups," says Kazuyoshi Komiya, president of Komiya Consultants, a management consulting firm in Tokyo. "There are also many Japanese stock exchanges that now allow small-cap listings, so there is a better chance a venture fund will recoup its investments."

In regional IT powerhouse South Korea, a huge base of Net-savvy consumers and mobile phone users, plus blisteringly fast broadband networks, have opened doors for small biz. It's "easier now to reach out to customers because of excellent Internet access through broadband and mobile networks," says James Yoon, a partner at Korea-based private equity fund MBK Partners.

Of course, the rise of China and India is attracting serious money, too. In India, there are now 53 foreign venture capital funds operating, vs. 39 at this time last year, and big investment funds such as Blackstone and Carlyle are chasing deals there. "They are all looking at the small stories which have the potential to become large-cap in the next three to five years," says Manish Shah, head of equity and derivatives at brokerage Motilal Oswal Securities. In China, private equity shop General Atlantic Partners and U.S. tech titans such as Intel (INTC)