There is a posh condominium development in Bangkok. It contains the sort of units that Hong KongÆs investment bankers (until recently) liked to buy off-plan as the ultimate discretionary purchase. After dark at the weekend, security guards open the gates and a flat bed truck reverses in to be loaded up with stolen bathroom fittings and the interior design knick-knacks that were about to decorate the apartments.

You can easily be ripped off on your long-term proprietary investments in Asia. Private equity firms are protected by lock-ups and arenÆt suffering the same problem of redemptions as hedge funds, but they have other problems.

Texas Pacific got chased out of town when they fell out with Nissin Leasing China. Their money, a $275 million investment for a 60% stake, didnÆt buy them much because when their representative was kicked off the companyÆs board and later tried to retrieve the company chop, the cops were called and he had to flee to the airport.

It's not easy to finalise due diligence before purchase. If a deal is being negotiated in a bull market, there might be the temptation to overlook the nitty-gritty in order to get the job done, and then tidy up the loose ends later.

Investigation firm Kroll says that big name private equity firms are getting jittery about some of their portfolio investments. If private equity marks are to stand any chance of improving on public market valuations, then signs of shake-downs donÆt fill them with confidence that they are adding value.

The sort of suspicious matters that Kroll is being called in to look at are, for example, products that have been purchased and not delivered, transactions with firms owned by connected parties and fictitious sales. At this level, they are perhaps the issues that in a robust market, an investor might turn a blind eye to. In a poor market, such incidents could be forerunners of investment doom.

ôIn cases where portfolio companies are suffering, private equity firms are asking for additional 'deep dive' due diligence after they are already invested and they can see operational areas that they think look suspect or need clarification,ö says Jack Clode, managing director of Kroll in Hong Kong.

ôIn some cases they may have invested too quickly and not resolved all the due diligence issues in advance, so are now spotting these red flags. Here, they perceive their investment might be going sour because of fraudulent activity, and they want to recover some of their investment, so they instruct us to carry out investigations to search for evidence of fraud or malfeasance,ö he adds.

The sort of issues are endemic in Asia, especially in third world-based growth companies, and implementing more sophisticated supply-chain management is exactly what a private equity can do to improve matters. Indeed, you might think thatÆs the kind of promise they make when they seek to partner with these Asian companies.

However, some are running for the hills and asking their lawyers to help them get their money out. This is the point where investigators get hired, in order to find if fraudulent misrepresentation had lured in the private equity investor. Kroll says that mandates in this field have doubled in volume recently.

In the next edition of AsianInvestor, we take a closer look at private equity in China and review how that traditionally boom/bust market is bearing up.