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Asia’s Private Equity News Source avcj.com February 2 2010 Volume 23 Number 5
ASIAN VENTURE CAPITAL JOURNAL
PRIVATE EQUITY ASIA
M&A ASIA
What’s in private equity for China?PRC and the impact of PE Page 8
Axiom closes Fund II ahead on $950 millionExcess interest post-crisis shows Asia, brand appeal Page 14
Fundraising report
AVCJ Private Equity & Venture Forum 2010 Conference series
AVCJ Private Equity & Venture Forum 2010
Australia & New Zealand 3 - 5 March 2010
Apollo gets hold of HoldfastKelley’s team plus c.$1 billion Asia fund Page 11
people Moves
editor’s viewpoint
New alignments, new businesses Page 3
avCJ researCh
Private equity and VC news of the week, with Actis, CHAMP, IDG, IFC, Khazanah, Kitara, RHJ, TPG, Woori Page 5
news
Legal Advisors League Tables Page 18
Private Equity Data File Page 20
people Moves
Guthrie leaves Providence Page 12
Affinity Loscam IPO gathers speed Page 13
CVC AP makes Indonesia retail play Page 13
deal oF the week
Fundraising report
CITIC hits $1.3 billion for RMB fund Page 15
proFile
Kaizen defines Indian education investment model Page 16
China aFF speCial
China: Globalizing the RMB Page 17
Contact Anil Nathani \ T: +(852) 3411 4938 \ E: [email protected]
A new dawn for Australian private equity?The Westin, Sydney
Contact Anil Nathani \ T: +(852) 3411 4938 \ E: [email protected]
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Number 5 | Volume 23 | February 2 2010 | avcj.com �
ASIAN VENTURE CAPITAL JOURNAL
PRIVATE EQUITY ASIA
M&A ASIA
Managing Editor Paul Mackintosh (852) 3411 4909
Senior Editor Brian McLeod (1) 604 215 1416
Associate Editors Maya Ando (852) 3411 4908
Christina Kautzky (852) 3411 4906Creative Director
Dicky TangDesigners
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Senior Manager, Delegate Sales Anil Nathani
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editor’s [email protected]
A littlE history: For thosE who haven’t heard this pitch already. The Asian Venture Capital Journal originated back in the late 1980s as an education and awareness-raising arm of an initiative launched by some leaders in the Hong Kong financial and business community who were eager to see the territory build a venture capital and private equity capacity to befit its aspirations as a global financial center. Fast forward almost three decades, with those aspirations well and truly fulfilled, and AVCJ still has an inclination, as part of its original DNA, to bang the drum hard on behalf of Asia Pacific private equity, both for local ears, and for the wider international private equity industry who, up until a few years ago, were practically, or selectively, deaf to the call.
Now major shifts are beginning to reshape that larger global private equity landscape, and are throwing Asia into higher and higher relief. The recent revelation that Citi was contemplating a selloff or spinout of its $10 billion Citi Private Equity division looks like delivering on President Barack Obama’s stated intention to split proprietary investment functions off from deposit-taking banks even before that initiative faced Congress. That news should cause little immediate concern in Asia Pacific, where Citigroup Venture Capital International has moved the needle far less as an investor than the other inheritor of the Citigroup name, CVC Capital Partners. And CVC itself shows how successful a good spinout can be.
All the same, if Obama’s initiative does carry through, some big new – or repackaged – players could be entering the private equity stage shortly. Whether or not Citi already had plans to ease its financial burdens with
a spinout, rather than heeding the legislative wind, the prospect is a bell-wether for others who may already be planning the same. And following soon after, we have the news that Apollo Management will be taking on board Grant Kelley and the team from Holdfast Capital to steer their new real estate arm’s expansion in Asia.
Apollo, up till now, had done few Asian investments, with its one major dip into the region’s private equity market, a $1 billion deal with Hong Kong-listed Malaysian cruise operator Star Cruises, effectively acting to split off an operation centered on Europe and Hawaii. But with Kelley and his people, the firm gains a running office and a highly-regarded business in Hong Kong, dedicated to a strategy that Apollo is apparently looking to push as its response to the opportunities generated by the global crisis.
Not every major global private equity player may be able to enter the region this way. As news elsewhere in this issue suggests, others may already have stumbled. But the few remaining laggards of global private equity – Clayton, Dubilier & Rice, Doughty Hanson & Co., Hellman & Friedman, to pick just a few names – as well as whatever new or spun-out entities emerge after the confrontation with Washington, can be expected to incorporate Asia Pacific in their strategies. There is still a lot of business to play for out here, and a lot of former market dominators who need to branch out into this region for the sake of their long-term business survival.
Paul MackintoshManaging EditorAsian Venture Capital Journal
New alignments, new businesses
AVCJ Private Equity & Venture Forum 2010
ContactAllen LeeT: +(852) 3411 4966 / 3411 4945E: [email protected]: www.avcj.com
AVCJ Private Equity & Venture Forum \ Australia & New Zealand3-5 March \ Sydney DownloaD to CalenDar
Global perspective, local opportunitiesConference series
AVCJ Private Equity & Venture Forum \ Japan21-22 April \ Tokyo DownloaD to CalenDar
AVCJ Private Equity & Venture Forum \ China27-28 May \ Beijing DownloaD to CalenDar
AVCJ Private Equity & Venture Forum \ USA24 June \ New York DownloaD to CalenDar
AVCJ Forum: Asia’s Private Equity Week9-12 November \ Hong Kong DownloaD to CalenDar
AVCJ Private Equity & Venture Forum \ India2-3 December \ Mumbai DownloaD to CalenDar
Infrastructure Finance & Development Asia \ India26-27 August \ New Delhi DownloaD to CalenDar
Number 5 | Volume 23 | February 2 2010 | avcj.com �
BoA will retain Merrill Asia property fundsBank of America is no longer selling Merrill Lynch’s $2.65 billion Asian property fund business, which the US bank had originally planned to divest among other non-core businesses following its acquisition of Merrill at end 2008 during the financial crisis.
BoA was reportedly in talks with several private equity firms, including Blackstone Group and Apollo Investment Management, to sell management rights to its Asia Real Estate Opportunity Fund, which BoA regarded as a non-core business. However, no deal was reached with potential buyers, due to disagreements over financial terms and the complicated structure of Merrill property funds, according to sources. Now the firm is said in the process of fundraising, and has recruited new staff in Beijing.
BTS targets new $150 million Indian clean energy fundBTS Investment Advisors, a private equity fund jointly headquartered in Zurich and Mumbai, will raise a new $150 million fund focused on the clean energy space.
It will launch with an injection of
$60 million in April, the balance to be secured over the next year.
Growing investor interest and commercial confidence in India’s clean energy sector is rooted in more conducive Indian government policy, specifically liberalization in the power trading market and more transparent tax structures. Also key is growing investor interest worldwide in clean power capacity in Asia’s top-producing economies. India and China are among the world’s top contributors to greenhouse gas emissions.
IDG India invests iCreateIDG Ventures India has made a $3.23 million Series A round VC investment in iCreate Software, a Bangalore business intelligence software company. With the investment, IDG MD T.C. Meenakshisundaram and Investment Advisor Ranjith Menon will join the board of iCreate. The proceeds will be used to build out domestic and global sales and marketing, and product development. iCreate, formed in 2006, focuses on data management and maximization platforms for core banking systems. “IDG Ventures with their experience in helping start-ups realize their full potential will definitely strengthen the iCreate team,” said Vivek Subramanyam CEO of iCreate. IDG
Ventures India parent IDG Ventures manages over $3.7 billion and has 10 offices across North America and Asia
Jain leaves IIFAjay Jain, one of the founding principals at IDFC Project Equity’s India Infrastructure Fund, is leaving the firm to head the Indian infrastructure initiative of an unnamed US company. Jain originally joined IDFC Project Equity in 2006 for the launch of the new fund, successfully warehousing some $80 million of assets for it, as well as working on fundraising, chiefly with US investors. Prior to this, he was an Assistant Portfolio Manager at Ontario Teachers Pension Plan in its Global Infrastructure Investment Group, and previously also worked in corporate finance and M&A in India with firms like DSP Merrill Lynch, Ernst & Young and Lazard. “As one of the founder members of IIF, I take pride in having played a key role in successfully introducing the infrastructure equity investment as a separate asset class for the first time in India,” Jain said.
KDB eyes Siam City BankKorea Development Bank (KDB), South Korea’s state-owned bank and private equity investor, has emerged as one of the potential bidders for Siam City Bank, the seventh largest bank in Thailand, which is 47.6% owned by the Thai government. The lender was nationalized in February 1998 after it missed a series of deadlines to meet capital standards. Local sources said that the CEO of KDB, Euoo Sung Min, is in Thailand to discuss acquisition opportunities for the target, reflecting KDB’s plans of buying at least two Asian lenders. The deal, which was said to be valued at around $900 million, is expected to complete by the end of March this year, according to Thailand’s central bank.
Khazanah may make Great Eastern playMalaysian state-owned investment agency Khazanah Nasional Bhd may be preparing to take an up to 30% stake in Great Eastern Life Assurance (Malaysia) Bhd. The deal would come in a move by Great Eastern’s Singapore parent to gain a takaful (Islamic insurance products) license, which requires the group to sell a portion of its conventional insurance business to a domestic stakeholder. Great Eastern is also evaluating several other options.
NAB invests WOWNational Australia Bank Integrated Capital Solutions, NAB’s private equity unit, has invested a substantial, though undisclosed, amount in WOW Sight & Sound, a Queensland-based electronics and AV retailer. The minority investment also carries appointment rights for one NAB non-executive director on the WOW board. WOW will use the funding to expand its business, reportedly from some 15 stores to 40 over the next three years, and build the company into a nationwide brand. The NAB ICS investment apparently complements NAB’s role as lender to WOW.
PE seeks pay-per-view IndonesiaIndonesia’s number one pay television platform, MNC Sky Vision, may sell a 40% stake to a foreign investor, in a transaction that would value the whole group at up to $800 million. The Carlyle Group, Quadrangle Capital Partners, General Atlantic and Providence Equity Partners are understood to be in the running, with Providence potentially a step ahead of the pack. Indonesia’s leading media group, Global Mediacom, currently owns 51%, while two local groups
Actis may exit troubled Nilgiri stakeEmerging markets specialist Actis may reportedly be about to exit its troubled 65% stake in India’s Nilgiri Dairy Farm group after reaching litigation with the company’s founding Mudaliar family, who still hold a 35% stake in the business. Despite its ostensible controlling stake, Actis has gone before the Chennai Company Law Board over a rights issue to fund expansion opposed by the founders, and over use of proceeds from the sale of the company’s real estate. Founders also have alleged that Actis’s stake violates Indian FDI retail sector restrictions. Actis may now seek to sell its stake to potential local suitors including entrepreneur C. Sivasankaran, and conglomerates Bharti Group and Reliance Retail, or even sell back some or all to the founders.
news
Nilgiri headquarters in Bangalore
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Number 5 | Volume 23 | February 2 2010 | avcj.com �
split the remaining 49%. The two latter might release some shares to investors, who might also receive new shares. JPMorgan and Standard Chartered are reportedly advising MNC Sky Vision on the sale.
Religare’s Chakraborty leaves for Oman’s Kitara CapitalAmitabh Chakraborty, formerly head of equity research at Religare Securities, has reportedly quit the leading Indian brokerage to join Kitara Capital, an arm of the Sultanate of Oman’s Ajit Khimji Group, as MD and CIO. Chakraborty will apparently head Kitara’s India operations from Mumbai, where the year-old firm already has some ten investment professionals. Kitara will reportedly seek to invest some $10-40 million per deal in mid-market businesses across a global footprint, but with a clear MENA and India focus, with a target holding period of around three to five years.
RHJ sold partial stake in Japanese auto play U-ShinRHJ International, the Belgium-based holding company operated by US buyout firm Ripplewood Holdings, has sold about half of its 20% stake in U-Shin, Ltd., a Japanese manufacturer of electrical auto components, for ¥1.9 billion ($20.85 million). The fund paid ¥8 billion ($88.5 million) in April 2006 for 20% of the Tokyo Stock Exchange-listed manufacturer, becoming the single largest investor in the company. Since the acquisition, RHJ has appointed Keisuke Takebe, former Representative Executive Officer and President of Niles Co. Ltd., another automotive portfolio company, to U-shin as a part of management restructuring.
Study Group International mulls IPOCHAMP Private Equity-owned Australian education services provider Study Group International
is reportedly exploring a listing on the Australian Stock Exchange in June, and has appointed Deutsche Bank and Credit Suisse as joint lead managers.
It’s estimated that the value of the float, if it materializes, could be up to A$600 million ($540 million). CHAMP acquired the business from the Daily Mail Group in 2006 for A$176 million ($157 million). Study Group is a major player in the foreign student market Down Under – which is Australia’s third largest externally-driven business segment. However, there are question marks about the viability of private equity-backed IPOs in Australia after share prices for Myer Holdings and Kathmandu Holdings sank below their issue prices after listing last year, and Archer Capital investee Rebel Sport effectively delayed its IPO. As a consequence, the two investment banks are reportedly developing a dual-track process to allow CHAMP an exit via a trade sale if necessary.
TPG buys into Indian green energy with Greenko TPG Capital has made its first investment in the country’s clean energy sector, with a c. $35 million buy-in into prominent Indian biomass power generator Greenko, as part of a placement of 51.4 million new shares and a $116 million capital raising from a selection of institutional and other investors. These include Arden Partners and Greenko’s original investors, Aloe Environment Fund and Aloe Environment Fund II. TPG, which is investing out of its TPG Growth division, will pick up around a 10% stake in the business.
The funds raised are to be used to realize immediate strategic goals, the company says. Presently, Greenko runs 41.5 MW of output of biomass plants, with 59.5 MW of new, small hydro power coming onstream starting in 2009. It has a further 168MW of capacity in licenses in development.
PRC BPO play iSoftStone attracts VCsEverbright Private Equity, a subsidiary of listed Chinese red-chip financial conglomerate China Everbright Ltd., and other venture capital firms, including AsiaVest Partners, Fidelity Asia Ventures, Infotech Pacific Ventures, Mitsui Ventures Global Fund, and Wuxi Jinyuan Industry Investment Development Company Ltd., have invested an undisclosed amount in iSoftStone Holdings Ltd., a Chinese business process outsourcing firm. Although the amount raised from the investors was not announced, the company’s CFO Michael Wu said in a statement that it had raised more than $65 million, including the Everbright-led VC investment and capital obtained from a number of domestic Chinese commercial banks, “which provides a strong capital base to support our continued growth.”
Woori PE might sell big Kumho Investment stakeWoori Private Equity, the private equity arm of Seoul-headquartered local lender Woori Bank, is reportedly planning on selling its 41.4% share of Kumho Investment Bank, a wholly-owned subsidiary of Kumho Asiana Group, the troubled South Korean conglomerate. The firm acquired the Kumho Investment shares in 2007 in a deal estimated at around KRW63 billion ($56 million). Local media reported an insider at Woori PE as saying that the company could sell the stake by the end of this year if the share price of the listed lender and brokerage is appropriately valued. The possible sale might take place amid Kumho’s restructuring. Kumho Investment Bank reported revenue of KRW163 billion ($141 million) in the first half of its last fiscal year.
IFC to support Indian hydro with AD Hydro PowerThe World Bank’s private investment arm, International Finance Corporation (IFC) has announced it will extend $15 million of equity and $67 million of debt to AD Hydro Power Ltd., a 192-MW project in Himachal Pradesh under joint development by Bhilwara Energy (a subsidiary of LNJ Bhilwara Group) and Norway-based SN Power. In exchange, IFC will receive a 12% stake in AD Hydro, and has reportedly agreed to invest a further $10 million in equity going forward.
The move marks one of the first hydro power plants to be financed on a merchant basis in South Asia, and is part of a broad expansion of hydro electric power generation capability in North India and Nepal. The primary aim is to address peak electricity shortages in the sub-region.
A strategic cornerstone for IFC is to increase its support for least-cost renewable energy. Run-of-the-river projects are considered low impact from an environmental standpoint, with additional benefits such as greenhouse gas emission reduction and increased employment in the construction and operation of the ensuing plant. These echo Indian government priorities.
news
The AD Hydro Power project
avcj.com | February 2 2010 | Volume 23 | Number 5�
China [email protected]
A NEw EUCC/BAiN & Co stUdy makes some bold assertions re: private equity’s economic and social impact in China.
Studies of the effect that China’s nascent private equity industry has had on the country’s overall economy – in which it is a still small, but very proactive element – have been limited-to-none, depending on how one categorizes these things. But a recent European Union Chamber of Commerce/Bain & Company joint survey – taking in as it does the social as well as economic impact – is unique.
As to how it came about, Andre Loesekrug-Pietri, chair of the Private Equity & Strategic M&A Working Group at the European Union Chamber of Commerce in China (EUCC) says it grew out of a sort
of ten-year celebration of private equity activity in China. The EUCC reckoned there was too little data on the broader economic and social impact of the asset class in
the country and decided to fill the gap.
“We think everything is linked to the social change happening here,” he told AVCJ. “Also, what we’ve seen in many countries, even those that are the most pro-private equity, is that at some point you inevitably have one, or even a few, cases of scandal or reports of people being laid off, at the same time when there’s a big carried interest waterfall for the team, which is shocking. We’ve seen it in the US. And in the UK, where four years or so back one such story emerged and shortly after there was a bill in the House of Commons proposing a raise in the carried interest taxation from 10% to 40%. Obviously, we’d like to avoid that.”
So EUCC approached a number of consultancies which had access to significant numbers of funds and deals, plus the people and procedures needed to do credible market studies, analysis and statistics – and were at the same time independent of EUCC. In the end, Bain & Company was chosen.
Comments Bain partner Weiwen Han, who headed their team on the project:
“We thought it was a good
time to do this because private equity investment had fallen to a low point, sparking speculation as to whether the asset class had been hamstrung long-term, and also about the real performance of private equity-backed portfolio companies.”
A wave of public approvalTaken overall, the results are complimentary to private equity.
For example, among the report’s more interesting claims is that private equity is widely perceived as having helped drive China’s remarkable economic growth story over the past few years, and by a much wider swathe of people than its immediate financial services peers; in particular , by the Chinese government, and stakeholders such as entrepreneurs and company management teams. These feel that the private equity effort has created
jobs along with entrepreneurial success.
This attitude stands in sharp contrast to the way private equity has been viewed in Japan and Korea, to name just two other jurisdictions in Asia.
But the EUCC study also cautions that this could all change if, for example, ongoing financial turmoil prompted poor returns, or stories of questionable management behavior, or evidence of failed deals.
As to hard data indicators – based on Bain’s data compilation – here are some interesting samples on the social impact side of the
equation: private equity-backed companies have increased their numbers of employees by 16% over the survey period; the equivalent number among publicly-listed companies was 8%.
(The study examined the period from 2002-08, and included more than 50% of all private equity investments. Deals after 2006 were excluded in favor of enabling the tracking of post-investment performance for a minimum of two years.)
So back on the social findings, not only did private equity-backed companies generate 50% more new employment than their public sector counterparts, salary growth rates among them were also 7% higher; and they tended to hire better-trained candidates and thereby increase job quality as well as quantity, which the study concludes, is “… helping to move
China’s economy towards greater domestic consumption and more social stability.”
Retail sector complexities“When you talk to a lot of private equity funds, they’ll tell you that, while every segment is complicated, retail in particular, in a fast-growing market like China, requires huge amounts of skills,” Loesekrug-Pietri explains. “And the difference in performance between the private equity-backed, consumer-linked companies and the listed ones is the biggest among the six industries we
PRC and the impact of PE
What’s in private equity for China?
A crane from Xugong, an earlier and less well-received PRC private equity investment
The Beijing Lufthansa Center, headquarters of the EUCC in Beijing
Number 5 | Volume 23 | February 2 2010 | avcj.com �
surveyed. This suggests that the value add that a private equity house can have for a retail business – because it mixes marketing skills, product development skills, logistics
skills, fast expansion skills, financial skills and the adept handling of working capital issues – adds up to this segment being the one where private equity investment is best deployed.”
He further notes that the listed companies in the PRC, because of the long lines of companies waiting to be listed, are assumed to be generally the best-performing companies in the country.
“That means that if they generate a 16% increase in revenues and profits versus the 47% gain shown by private equity-backed retail entities, the benchmark is already relatively high. We think this is very interesting.”
The study did not differentiate between international and domestic private equity funds, partly because, during the time period under surveillance, the latter had barely begun to be an important new factor. Plus, there was the complex issue of defining exactly what constitutes a domestic fund.
LBOs insignificantBoth Loesekrug-Pietri and Bain partner Han point out that 90% of the deals covered were either growth capital or venture capital. So unlike the phenomenon seen in the US and Europe over the past few years, LBOs in the Chinese market were a non-starter.
“There are good reasons for that,” Loesekrug-Pietri contends.
“First, buyouts don’t happen simply because you want to do buyouts. Rather it’s because a carve-out is in the offing and the company management can’t take
the majority (of shares) because they don’t have enough money. Or there are generational issues, all these entrepreneurs who set up their companies in the 1960s and 1970s who started selling out in the late 1990s and early years of this new century because they had no successor.”
These two were the main factors driving the LBO activity in the West, plus an identifiable pattern of relatively stable cash flows and relatively low growth.
“In China, it’s a very different pattern,” he continues. “There you have fast-growing companies, profitable companies, but usually very tight on cash because the cash is needed for working capital to be ploughed back into expansion and so on. 99% of the companies we see are first generation. So you’re essentially talking minority positions because people think that the upside is still in front of them, not behind. Thus leverage is a very small consideration.
Exits Another indicator that private equity is a real factor in improving PRC companies can be seen in the overall exits mix.
Worldwide, typically 75% of
exits happen via trade sales or management buyouts, compared to about 25% via IPOs. In China, it’s the opposite Pietri says, and this preponderance is evident even when compared to other jurisdictions in Asia.
A key factor underlying China’s IPO exit dominance is rooted in measures taken on financial markets there since 2006 aimed at increasing the number of shares available for purchase. This grew out of a chronic shortage of paper in the years before.
“The simple fact of this big, growing and constant flow of IPOs with new products to buy for retail and institutional investors alike was obviously fuelled by private equity, in part because of the criteria that needed to be met in order to get a listing,” Loesekrug-Pietri notes. “First, companies seeking to list obviously needed to show they are profitable. And while private equity isn’t needed for that, it can be a big help.
Secondly, they needed to show they were fast-growing which again provided an incentive for private
equity involvement. And thirdly, they needed to have relatively good governance, audited accounts and so on.
“We found that there was a kind of virtuous circle shaping up, evidenced by the fact that by 2007 a lot of companies didn’t have to be pushed for audited accounts anymore – the push having been already provided by the IPO criteria.”
In reverse, it was very useful for the private equity funds to have this pressure because while having high potential for IPO exits and liquidity is a staple objective for them more than any other type of investor.
Further bolstering this, the fascination with IPOs is unlikely to diminish in China because it is multi-faceted, comprised of desirable visibility and social status for the entrepreneur as well as a means to raise capital.
R&D enhancementAnother key finding on the social
side, according to the study, is that private equity funds provided more resources for research
Beijing’s Jianwai Soho business district.
China [email protected]
“Everything is linked to the social change happening here.” – Andre Loesekrug-Pietri
avcj.com | February 2 2010 | Volume 23 | Number 510
CHINA [email protected]
and development in investee companies than did companies in the public sector, while also helping to ensure that these directed their R&D spending to clearly identified goals.
As one private equity fund manager put it:
“We help to create a framework for prioritizing R&D opportunities and put in place criteria for decisions around R&D investment.”
This goes beyond the amount spent, though that itself is about three times more vis-à-vis the percentage of sales in private equity-backed companies (1.8%) compared to listed companies (0.6%).
Overall, the big theme that became clear was focus: the capacity to focus on priorities rather than spreading the R&D funding over a lot of different projects. Just as important is having real teams.
The problem with R&D seems to be is what, precisely, is R&D? Are the people involved actually improving processes? Or are they in labs that are essentially separate from the company? You can be very much
an ‘R’. But that doesn’t necessarily transmit to product development, for instance.
There’s also the push to patents to consider. There has to be a readiness to spend the money because a patent is an investment. And it’s a risk too because the process involves disclosing confidential information in exchange for protection. But first you need to disclose.
Go west, young entrepreneurAnother, and at first glance
somewhat curious, social impact the report cites is how private equity is contributing to China’s ‘Go West’ policies. It’s claimed that since 2002 private equity investments
have flowed more or less evenly to the hinterlands as well as the much better known eastern coastal destinations.
“From an investment standpoint, the government has its influence as to where the economic river is flowing, so to speak. But from a strictly private equity investment perspective, inland cities, Tier 2 and 3 particularly over the recent stressed period and maybe even longer, have provided two things. One is stability. During the crisis a lot of coastal cities much more focused on exports actually got harder hit than the inland cities. Actually, many of these didn’t get hit at all,” explains Weiwen Han, Bain’s project leader. “But the main point is that these Tier 2,3 and even 4 cities are where growth is entering a takeoff stage; so they offer better growth prospects for investments made.”
The inland investment curve had been accelerating prior to 2008, when it leveled with inland companies attracting $5.6 billion in total private equity deals over $20 million.
Loesekrug-Pietri concurs and adds that while government
concern over growing social and economic imbalances between inland and coastal regions, the GFC provided a tough test to rank regional growth with. The
result? The hinterland tracked as performing at 7-10x that seen on the coast. There’s also probably only one international private equity fund represented in, say, Chengdu compared to Shanghai. The competition can be scorching, so it too is spurring the move west.
Loesekrug-Pietri makes another interesting point in emphasizing that thus far the private equity impact on Chinese stock markets has been marginal:
“When you look at the number of deals, the number of listed companies, there are 2,400 of them. I’d estimate maybe 1,500
of these are in Shanghai or Shenzhen. Whereas when you look at the total number of deals done over our 6 year survey period, there were about 170 over $20 million
(though many more below),” he says.
“Yet 20 of the 28 companies listed on the new Chinext Growth Enterprise Board in Shenzhen, the country’s third bourse launched last October, have private equity in their equity structure.”
Food for thoughtBut in the here and now, AVCJ data indicates that last year’s general breakdown of investments by investment stage in Asia showed buyouts once again in front, comprising 56.4% of all deal activity over the year, aggregately valued at about $30 billion. PIPE financings added a further 20.5% in the runner-up slot ($10.8 billion) with growth capital third with 12% ($6.4 billion). Also, depending on what criteria are used to demarcate the various categories, consumer products and services investments amounted to just 6.2% of the year’s volume ($3.3 billion).
Nevertheless, private equity’s effort in China has been inarguably significant, and there are results that underscore this. So sometimes success is best viewed as a journey rather than a destination
The opening of the Chinex Growth Enterprise Board in Shenzhen
CHINA - Private Equity Investments by Financing Stage (2009)
Start-up/ Early Stage2.0%
Expansion/Growth Capital 19.6%
Turnaround/ Restructuring0.02%
Buy-outs (MBO/MBI/LBO) 5.3%
Mezzanine/ Pre-IPO12.4%
PIPE Financing60.7%
Weiwen Han
Source: AVCJ Research
Number 5 | Volume 23 | February 2 2010 | avcj.com 11
people [email protected]
lEAdiNg wAll strEEt alternatives giant Apollo Global Management is taking on board Grant Kelley and the entire team of his own real estate platform Holdfast Capital, as part of creating a new Asian entity, Apollo Global Real Estate Management, Asia Pacific Ltd., which reportedly will manage a real estate distressed investment fund of between $500 million and $1 billion.
According to the Apollo materials, Kelley will lead the new unit, headquartered out of Hong Kong, reporting to Joe Azrack, Managing Director and Head of Apollo Global Real Estate Management, and managing seven other investment professionals formerly with Holdfast.
“We are very pleased that Grant and his team will be joining us, to strengthen our presence in the Asia Pacific markets and bolster our investment capabilities in the region on behalf of our clients,” said Azrack. “Grant will add a wealth of expertise and proven abilities to our organization.”
New business, same approachThe new Apollo unit will initially target Australia, Japan and South Korea as particularly rich in opportunities, but is able to invest across the entire region. China and India are cited as probable destinations for later expansion. Apollo’s materials indicate that the business will look at various distress-driven real estate themes, particularly NPLs and the recapitalization of distressed REITS and real estate operating companies. Furthermore, Kelley’s team will look at distressed individual real estate-linked assets with an enterprise value between $100-500 million.
Also, Apollo will reportedly look to launch a dedicated Asia Pacific real estate fund, targeting to raise $500 million-$1 billion, although the new unit will be able to access Apollo’s global capital pool to invest in regional opportunities from the start. Apollo is not understood to be incorporating any raised capital from Holdfast, which had been constrained from much active fundraising until very recently by various legal restrictions. As at September 2009, Apollo, founded in 1990 by former Drexel Burnham Lambert banker Leon Black, had some $51 billion of assets under management.
Kelley’s pedigree in Asian
real estate investment is typified by his tenure as CEO of Colony Capital Asia from 2004 until late 2008, where he helmed some major real estate private equity deals, including the 2005 buyout of Singapore’s Raffles Hotels and Resorts. After leaving Colony he founded Holdfast Capital as CEO, looking to launch an independent team and fund to invest in real estate private equity across the region. Judging by the public materials on Holdfast, the entire
Hong Kong staff, including MD Pietro Cinquegrana and CFO Neville Chan, will be transferring to Apollo, indicating that the new owner has taken on board the entire Holdfast operation as a going concern.
Apollo Global Real Estate, meanwhile, is a separate entity from the long-established Apollo Real Estate Advisors, which now is officially separated from Apollo Management. Azrack joined Apollo to head up the new division in August 2008 from Citi Property Investors, where he formerly was CEO. At the time, Azrack already indicated that he was looking to expand the business further, and was positioning it midway between Apollo’s buyout and distressed capabilities.
Strategy and prospectsThe strategy of Kelley’s team
at Apollo will be similar to the new parent’s approach in other regions, sources indicated, with frequent use of debt positions to gain access to a highly-leveraged target. Holdfast’s original thesis apparently centered on the wealth of discounted and distressed opportunities available in Asia Pacific’s more developed economies post the global crisis, and the investment approach detailed in Apollo’s materials follows the Holdfast approach pretty exactly.
Holdfast does appear to have been screening investment opportunities for some time, on a more or less formal basis, and quite a number of these are now believed to be well-diligenced and immediately available for the new Apollo unit to invest into. Sources indicated to AVCJ that the new entity will have a substantial pipeline.
Under the new dispensation, Kelley and his team will gain comfort and support from a very large and high-quality parent, plus access to resources and abundant capital from within the Apollo network, and a superb platform for future fundraising. Apollo, meanwhile, gets an entire investment business ready to go, with well-qualified opportunities ready for capital commitments. Furthermore, it gains immediate access and stature in a region where it has hitherto lagged behind industry peers like Colony Capital, Oaktree Capital, and the Blackstone Group. The new arrangement remains subject to the usual clearances and approvals, but should be ready to go soon. The deal really appears to be a win: win from both sides – and brings one of the remaining standout Wall Street private equity names into Asia Pacific in fine style.
Apollo gets hold of HoldfastKelley’s team plus c.$1 billion Asia fund
Grant Kelley
Joe Azrack
Raffles Hotel in Singapore, one of Kelley’s signature real estate investments
avcj.com | February 2 2010 | Volume 23 | Number 512
Providence equity Partners deals in asia Pacific
DealType
An-nounce-
DateAmount (US$m.) AcqInv TargetInv
Deal-Stake
Target/Investee Country
Target/Investee Industry
Target/Inves-tee ParentIn-dustry
Financing Stage
Deal-Status
PE Invest-ment
Oct-06 1,028.0 2i Capital (India) Pvt. Ltd. (India); ChrysCapital Management Co. (India); Citigroup Venture Capital International - India (United States); GLG Partners LP (United Kingdom); Macquarie Investment Management Ltd. (MIML) (Australia); NSS Ventures (United States); Providence Equity Partners LLC. (United States); Sequoia Capital India (United States); Spinnaker Capital Limited (United King-dom); TA Associates, Inc. (United States); Undisclosed Investor(s) (India)
Idea Cellular Ltd.
34.5 India Cellular Commu-nications
Telecommuni-cations
Mez-zanine/ Pre-IPO
Closed
PE Invest-ment
Feb-07 68.2 Providence Equity Partners (United States) Asianet Satel-lite Communi-cations Ltd.
India Commu-nication Network
Telecommuni-cations
Expansion/ Growth Capital
Agree-ment in Principle
PE Invest-ment
May-08 428.0 Providence Equity Partners (United States) Aditya Birla Telecom Ltd. / ABTL
16.14 India Telecom-munica-tions
Telecommuni-cations
Expansion/ Growth Capital
Closed
Private Equity Buyout
Sep-08 227.4 Ayala Corp. (Philippines); Providence Equity Partners (United States) eTelecare Global Solu-tions, Inc.
78.4 Philip-pines
Other IT Products/Services
Information technology
Buy-outs (MBO/MBI/LBO)
Closed
the asia Pacific oPeration of Providence Equity Partners has seen another high-level departure, as Michelle Guthrie, Managing Director at the Hong Kong office of the leading media and telecoms investor, leaves the firm, destination unknown. Although, according to AVCJ sources, Guthrie’s exit was very amicable, this makes two very senior exits from the group’s Hong Kong office since its establishment in January 2007.
“We appreciate Michelle’s contributions to the firm over the last two and a half years, most recently as a senior advisor, and wish her well in her future endeavors,” said Patrick Corso, Managing Director of Providence Equity Asia and co-head of the Hong Kong office.
Providence’s personnel movesBefore joining Providence in April 2007, Guthrie was previously CEO of Rupert Murdoch’s Asia Pacific satellite TV operation, Star TV, with over 12 years of pay-TV experience. She came on board at Providence’s Hong Kong office soon after its establishment under Andrew
Rickards, himself former head of NM Rothschild & Sosn in Asia Pacific and previously co-head of Communications, Media & Entertainment Asia Pacific for Goldman Sachs. Rickards then left the firm in May 2008, around 16 months after his original appointment, apparently to return to his former position at NM Rothschild, with Sean Tong, previously with General Atlantic Partners, coming on board in Hong Kong as MD in September 2008.
The news of Guthrie’s departure did not surprise other private equity professionals, given the relatively light flow of deals from its Hong Kong office. Much of Providence’s deal track record in Asia Pacific is outside the Greater China region (see table), with many of the most significant deals, such as the $428 million 16.4% investment in Aditya Birla Telecom in May 2008, apparently originating from its New Delhi office. That said, the firm does ostensibly enjoy good deal access, with one potential deal – a possible
commitment to Indonesian pay-TV player MNC Sky Vision – apparently germinating as the news of Guthrie’s departure breaks.
“We continue to see strong deal flow across the media, communications, education and entertainment industries which are our sectors of focus and expertise,” Corso told AVCJ. “This is driven in large part by rebounding growth in our sectors following the economic crisis, as well as by more realistic valuation expectations of sellers.”
Whatever problems Providence might have had in translating M&A and management experience into private equity investments, the outcomes of some recent private equity media deals suggest that they could have nonetheless dodged a bullet or two. CVC Asia Pacific’s A$4.6 billion ($4 billion) investment into PBL Media in 2006 (topped up to A$5.1 billion or $4.5 billion for 50% in 2007) for instance, done at 11x EBITDA with a heavy debt load, has turned into a struggle in a crisis-hit market.
Reportedly, CVC AP had to inject more capital in December 2008 to avoid breaching covenants on its debt, and although the business appears in no immediate danger, the investor may face a major dilution when it finally has to refinance its debt in 2013, with one analyst recently awarding the group a discounted cash flow valuation of just A$252 million ($224 million) and bleak prospects for CVC AP to recoup its original investment,
despite apparent sustained operational improvement at PBL’s core properties. Markets or strategic buyers may reward CVC AP’s patience later, but the odds appear against a win that is anything like proportionate to the initial expense and subsequent effort.
The CVC AP story, though, is only one instance of the general challenges that media investment faces in Asia Pacific. As media investment professionals maintain, the sector worldwide, and particularly in this region, has regulatory and incumbency hurdles found in few others, with governments and official bodies maintaining FDI limits and other constraints on financial investors in media in many jurisdictions. Added to this are the unique dynamics of a volatile and often uncertain industry, which currently is facing potentially terminal technical challenges in such key areas as magazines and free-to-air broadcasting. Finally, the media sector tends to lag the economic cycle, as advertising revenues rebuild after a downturn, further exacerbating the impact of the current crisis on media investments. Given all these factors, Providence and other media specialists can be given credit for continuing to deliver deals in a multiply tough environment.
“We are therefore generally excited about the investment opportunities available to us across the Asian region,” Corso concluded.
PEoPLE [email protected]
Guthrie leaves ProvidenceDeals coming, sector still challenging
Michelle Guthrie
Source: AVCJ Research
Number 5 | Volume 23 | February 2 2010 | avcj.com 1�
deal oF the [email protected]
CVC CAPitAl PArtNErs AsiA PACiFiC (CVC AP) caught the market off-guard as it came to light that its Indonesia venture had purchased the department store arm of PT Matahari Putra Prima for 7.2 trillion rupiah ($773 million). With CVC AP taking a controlling stake in a JV alongside the only other shareholder, the original owner, the deal further supports the Indonesia consumer story, which continues to frame deals in the country and showcase one of its impressive and unwavering strengths – its people.
Like the great majority of CVC AP’s deals, it is understood that Matahari came through the
firm’s own relationship network. The transaction was primarily cash-based, and contrary to reports claiming up to $405 million in leverage courtesy of Standard Chartered and CIMB, a source close to the deal said the loans totaled far less than that, describing it as a “low leverage deal.”
Matahari currently operates 88 stores in 45 cities and is the number one department store in Indonesia. With 70 cities in the country boasting populations of more than one million people, CVC AP is likely looking to expand the operation in an economy driven by domestic consumption. There is certainly room for the modern retail market to grow, with just 16% of all retail shopping done in malls, and the majority taking place in street stalls and markets.
Southeast Asia’s largest economy has seen its GDP per capita increase fourfold in the past decade. With 44% of the population under 25 years old, the earning potential – and spending potential – of this youth population over their lifetime is something both economists and analysts expect will lend itself to investment in consumer-driven companies.
Over the past year, the crisis has led households to decrease discretionary spending, according to CLSA research. That said, clothing accounts for 6% of consumption – the same percentage as education. Only basics like food, housing, telecoms and transport rank higher on the list of priorities, putting Matahari and CVC AP in an excellent position.
Immediately after the announcement of the deal, both Standard & Poor’s and Moodys placed Matahari’s B1 rating on review. Ken Chan, a Moody’s Vice President explained, “Moody’s is concerned that the sale of MDS will negatively impact the company’s operating and business risk profiles,” and will result in a loss of MDS’s EBITDA contribution to Matahari.
However, others point to the strengthening of the group’s cash position and its other businesses, including hypermarkets, family entertainment zones, bookstores, and more.
CVC AP makes Indonesia retail playBuys Matahari Department Store for $773m
Expansion of Matahari department stores
AFFiNity EqUity PArtNErs AUstrAliAN investee Loscam, a pallet supplier, has reportedly appointed Credit Suisse and Deutsche Bank as advisors for its planned ASX IPO, which could reach up to A$800 million ($720 million).
Affinity first acquired Loscam in 2005 from DB Capital Partners, paying some A$250 million ($220 million) for around 77% of the asset, in what was already a private equity secondary transaction. The original Loscam MBO in 2003 was Australia’s largest ever secondary MBO up to that date, with GE Capital selling a stake in Loscam to the Pacific Handling Solutions investor group and Deutsche Asset Management.
Investment banks were reportedly first invited to pitch for the Loscam IPO back in November last year – at the time, the likely value of the IPO was given as A$500 million ($441 million). Affinity may be considering other parallel options, and the IPO process might even serve to flush out other potential strategic acquirers. Local groups Brambles and Toll Holdings are already reputed to be eyeing the target. Investment banking firms not involved in the IPO– including some unsuccessful suitors for the mandate, sources suggest – may now be trying to drum up M&A interest in the target, with other private equity firms among possible buyers.
Indeed, AVCJ sources indicate that other GPs may be pushed to consider Loscam and similar secondary opportunities by a relative dearth of privatizations in Oz. “It’s hard to privatize a public company now, because bosses are so nervous about being seen to privatize it too cheaply,” one source said.
However, sources also indicated that: “It’s a good time to do an IPO in Australia, because the market is so buoyant.” Sources ascribed the recent indifferent performance of some private equity-backed flotations to the quality of the assets and the story, rather than the sentiment
or capacity of the market itself, with local institutions ready to back a good play. “The super funds are sitting on record amounts of cash,” one noted.
Loscam may be lucky enough to attract this investor appetite. The company is apparently the market leader in many growth markets outside Australia, including almost all Southeast Asian economies, and has considerable expansion potential in China and India. Furthermore, the logistics sector appeals to both private equity and institutional investors as, “A very steady business that throws off tons of cash and allows it to pay a high dividend.”
Affinity Equity Partners, Credit Suisse and Deutsche Bank formally declined to comment to AVCJ.
Affinity Loscam IPO gathers speedValuation up, trade sale possible
Loscam pallets piled high for the Asian market
avcj.com | February 2 2010 | Volume 23 | Number 514
siNgAPorE-hEAdqUArtErEd independent fund of funds Axiom Asia Private Capital has delivered major corroboration for those who hoped that 2010 would see a rebound in private equity fundraising. The firm’s second fund, Axiom Asia Private Capital Fund II, has closed on $950 million – well over its $750 million target and over double the size of its debut fund, the $440 million Axiom Asia Private Capital Fund I.
“We basically have been raising this over the period of the global recession,” Chihtsung Lam, founding Managing Director at Axiom, told AVCJ. We had a target at $750 million, a hard cap at $950 million; we have ended up at about $250 million over our hard cap in terms of subscriptions and hard indications of interest.”
Interest – expressed and explainedTotal firm indications of interest in the fundraising, supported by placement agent Probitas Partners, apparently exceeded $1.1 billion. Furthermore, some $400 million of the commitments to Fund II came from new investors, while 98% of investors from Fund I stayed on into Fund II.
Discussing the factors behind the success of the fundraising in the current climate, Yewhong Goh, fellow founding MD at Axiom, said “It’s a combination of a few things. Investors continue to have a positive view of the Asian private equity market … The team, with over 70 years of combined private
equity experience, we count as a key attraction.”
Five out of ten investment principals at Axiom are former colleagues from GIC Special Investments in Singapore, while Alex Sao-Wei Lee recently joined from Coller Capital as Investment Director and Head of Secondary Investments and Olivia Tan from McKinsey & Co as VP.
Goh also pointed to Axiom’s track record so far as a plus in the raising. “We have been very careful about building up a relatively diversified portfolio of funds in our Fund 1, which has actually stood up pretty well.”
Axiom’s LPS were ready to give their own account of their views on the new fund. “We believe this is an interesting time to be increasing our exposure to this dynamic region, and Axiom has proven to have differentiated insight and diligence capabilities in their fund selection efforts,”
Christy Richardson, Director of Private Equity at the William & Flora Hewlett Foundation, a $6.29 billion charitable endowment and LP based in Menlo Park, California, told AVCJ.
Other sources pointed to the key differentiating value of being able to access, and assess, proven growth capital and late-stage VC funds
across Asia, as opposed to the pan-Asian buyout space, where some LPs apparently feel access and evaluation has become too commoditized. Axiom, in contrast, has proven its capacity to reach less well-known groups, and often to diligence them on less formal criteria, frequently through direct access to investee companies, in ways that support solid long-term
views on performance, sources indicated.
According to Lam, around 98% of LPs from Fund I re-upped into the new fund, but a considerable number of new LPs also came on board. “Our LP base is about two thirds US; Europe is about one quarter. The rest comes from Asia, Middle East and Latin America,” he told AVCJ. “About three quarters
is institutional. The largest groups are endowments and foundations; then we have pension funds and insurance companies.”
Success and strategyAxiom is not positioned to get direct information on overall fund of funds performance in Asia, but its strategy appears to have been comparatively effective. “What we have heard from some of our LPs who have invested in f-o-fs is that we performed pretty well,” Goh told AVCJ. And despite the firm’s highly diversified investment platform, across subsectors of the asset classes and countries, “Axiom’s focus from its inception has always been somewhat on mid-market country funds,” Goh continued, citing the importance of market inefficiency in allowing some firms to gain privileged access and outperform.
“Inefficiency is most found in the smaller funds, typically in $500 million or below. These are typically country funds.”
Axiom’s materials specify that the new fund will seek to invest up to $100 million each into funds across various strategies in Asia Pacific, from early stage venture to buyout, covering almost all national markets in the region. Also, the new
fund has some capacity to invest in secondary interest and to co-invest alongside its GPs.
“We are actually targeting roughly $200 million into secondary investments over the next 18-24 months,” Alex Lee told AVCJ. “Naturally, we’re looking to purchase secondary positions in Asian funds, and we have the ability to invest in highly funded as well as unfunded positions.”
Lam notes that, despite the firm’s success, the overall fundraising market is still challenging, with the denominator effect and other inhibiting factors still offsetting the appeal of Asia to global investors. In this still-difficult environment, LPs appear to be placing larger bets with fewer firms. “The overall market is still fairly lukewarm,” he told AVCJ. “That flight to quality aspect is still fairly accentuated.”
Axiom, meanwhile, will probably enlarge its own commitments to its chosen managers rather than seek many new ones. “We have been targeting the top tier from the start,” Lam emphasized.
Axiom closes Fund II ahead on $950 millionExcess interest post-crisis shows Asia, brand appeal
“That flight to quality aspect is still fairly accentuated.” – Chihtsung Lam
Yewhong Goh
Fundraising report [email protected]
Alex Sao-Wei Lee
Fundraising report [email protected]
CitiC PriVAtE EqUity FUNds Management Co., Ltd. (CITIC PE), has hit a new high in RMB fundraising, accumulating RMB9 billion ($1.32 billion) for its debut vehicle, the CITIC Mianyang Private Equity Fund.
The Beijing-based private equity arm is a subsidiary of CITIC Securities, China’s top brokerage, which is operated under the CITIC Group, the largest conglomerate in China and directly led by the State Council, China’s cabinet.
Investors and commitments With this relatively vast capital, the new CITIC PE fund is ostensibly the largest RMB-denominated fund ever in China, and the first to complete its fundraising out of the four other funds authorized to raise capital by the State Council during a recent second round of approvals.
About 50% of the capital was raised from the National Council for Social Security Fund (NSFF), China’s state pension fund, as the single largest investor, with the remainder subscribed by large PRC financial institutions, such as social security funds, and public and private local
enterprises, according to CITIC PE.The successful closing comes
about a year or so after the firm’s formation in June 2008, and took place during the onset of the global economic downturn, when most international private equity and VC firms struggled to raise funds.
Yibing Wu, President of CITIC PE, told AVCJ, “Surprisingly, we have investors who are new to private equity without having any experience as LPs before, but we felt the enthusiasm from investors in private equity while we were fund raising”, adding that the firm can help to educate the local private equity market.
According to AVCJ research data, despite its near 40% annual growth between 2003and 2008, the Chinese private equity market is still relatively small when compared to the size of the Chinese GDP (0.2% of GDP vs. 0.8% of GDP for the US in 2008).
Asked for the reasons for this success in fundraising as well as investment activities, Wu said, “I think that we have a strong institutional background with deep local roots, with our professional team comprising 60 members, of whom 40 people work with the investment and portfolio team. It is also that our investment committee is purely comprised of investment professionals.”
The firm’s size has doubled since its formation, with staff hired from leading global companies such
as McKinsey & Co., GE and Proctor & Gamble. Wu himself is also an investment veteran who previously worked with Legend Holdings, overseeing overall business operations and investment activities. Wu is still a non-executive director of Lenovo Group, and sits on the advisory board of China Unicom, as well as the board of the China Social Entrepreneur Foundation. On top of this strong manpower, the firm also invited Lefei Liu as Chairman of CITIC PE from China Life Insurance Ltd, the largest local insurer, where he worked as Chief Investment Officer and General Manager of the Investment Management Department.
Sector specificsWith primarily sector focuses on financial services, consumer goods, energy and resources, and manufacturing, the firm to date claims to have closed 10 deals with a total transaction value of more than RMB 2 billion ($293 million). Portfolio companies include Kuaijishan, the oldest Chinese liquor brand, and Wind Info, a rising star in data management. Altogether, the
team collectively possesses a strong investment track record; in fact, the value of private equity investment transactions led or supported by the members of the Investment Committee totals over RMB 76 billion ($11.1 billion), according to a statement.
Wu said, “When we look at target companies, we will see if there would be any space for a target company to create value, and of course, we study the fundamentals of the business.” The firm’s investment strategy is to take minority stakes in companies (likely between 20-40%). Wu said the firm does not believe in control acquisition in the local market, but investments could add value to portfolio companies with their management support and understanding. “Local people like having institutional management with a background of strong local characteristics,’ he added.
Overall Wu’s views on investment opportunities in China are very positive, partly because of the government’s intention to promote local private equity players. But as to what would happen to existing foreign players as local GPs enhance their track records, Wu said, “Foreign private equity players are dominant factors, but we see a clear trend in favor of domestic GPs, emerging as fully competitive forces with world-class talent competing in private equity investments.”
CITIC hits $1.3 billion for RMB fundPRC GPs aim for world class: Wu
AVCJ’s india e-letter provides a closer look at the local private equity and venture capital scene
Published biweekly, AVCJ’s India e-letter provides a closer look at the local private equity and venture capital scene. Written and edited by the team at Asian Venture Capital Journal and Private Equity Asia, the e-letter is produced in a concise bulletin format to match the pace of Asia’s accelerating growth and exploding private equity markets.
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Yibing Wu
“When people hear you are investing in education, they assume you are only looking at schools,” says Jetu Lalvani, Director of Kaizen Management Advisors Pt Ltd. “But like any sector, education is actually really diverse.”
Sandeep Aneja, managing director, explains that for the team
of four investment professionals, “Education is our common background and a common interest for all of us. Education also happens to be the largest market in the country. Education also happens to be the largest capitalized market space in the country, and one that is growing rapidly and changing for the better in terms of regulatory structure.”
Kaizen’s own research identifies 25 sub-segments in the sector, 10 of which are bigger than $500 million, and many of which are expanding faster than 20% per year. The three larger subdivisions within education on which Kaizen will focus are: core – K-12, colleges, tertiary education; parallel – services like vocational training, corporate coaching, tutoring and test preparation; and ancillary – books, IT services, equipment, busses and the like.
The group plans to invest in all three fairly evenly as a percentage
of total capital, and has a unique approach to deals. “I had a broker come to me and say he found us six deals,” said Aneja. “I told him, ‘I like none of them already’.”
Lalvani adds, “Because we are an education team, we already have access to deals through our own network, and we create the deals that we want to do.” Unlike banks or even other private equity firms, he says, “We speak their language. We go in talking about education and building a business, not just throwing a lot of financial terms at them.”
In an industry that caters to nearly 600 million people through the age of 30, its market size is currently around $86 billion. The fundamentals of a country demanding better and more prolific education options create an industry rife with opportunity for all types of deal structures – from growth investments to buyouts and roll-ups to PPPs .
Kaizen will take controlling stakes in targets in the core segment of education and work with entrepreneurs who represent the best in the field in the parallel and ancillary segments.
“If you want to sustainably and predictably provide better quality [education], you need to have control,” explains Aneja. “We control our point of entry to make sure that prices are low and that we can create something out of it.”
“What we do will always be
best in class,” adds Lavlani. “There is a business case for that. Better education leads to better returns.”
As regulation continues to focus on the core segment, new legislation has farther-reaching effects on the education industry as a whole. Says Aneja, “The
government has recognized the private sector’s role in creating quality,” which is precisely what Kaizen intends to do.
Profile [email protected]
Kaizen defines Indian education investment model Firm to create and embrace opportunities across expanding sector
“Education also happens to be the largest market in the country.” – Sandeep Aneja
Jetu Lalvani
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Number 5 | Volume 23 | February 2 2010 | avcj.com 1�
whilE thE rEst oF thE world is struggling with recession, China is different. The PRC keeps injecting stimulus capital, while its consumers are happy to spend their money for the first time on what they have been wanting to buy for ages. As PRC tourists gain reputations as bid spenders, RMB payment systems with UnionPay, the nation’s exclusive national payment network established under the approval of the State Council and the People’s Bank of China in 2002, are now being adopted by 83 countries, encouraging the Chinese to shop overseas. With the RMB increasingly recognized abroad, China’s central government is apparently preparing to globalize its currency when it’s ready.
GDP and RMBMeanwhile, China’s foreign currency reserves (FCR) reached $2.4 trillion at end 2009, up $453.1 billion from a year before, making them the world’s largest FCR pool, paralleling GPD growth of 8.3 % in 2009. Dr. Huang Haizhou, managing director and head of the sales and trading department of China International Capital Corporation (CICC), one of the largest investment banks in China, said at a China-focused session during the recent Asia Financial Forum in Hong Kong, “The US dollar has depreciated by 35% over the last ten years, and it has been weakening as a foreign currency reserve,” adding that globalization of the RMB would benefit many countries.
Dr. Huang also noted that US GDP has declined to 15% of total global GDP in 2009, from 60% in the 1960s. Yet the US stock market remains Number One in terms
of market capitalization, with approximately $1.08 trillion. China is narrowing the gap to $3.21 billion, meanwhile, becoming the world’s second largest and overtaking Japan’s $3.2 billion.
China’s GDP growth is predicted by the Chinese Academy of Social Sciences to be about 9.1% in 2010. According to Dr. Huang, the market capital of Chinese shares accounts for between 7-8% of this.
But, Dr. Cao Yuanzheng, the chief economist of the Bank of China, also a panelist on the same session, said, “To globalize the Chinese RMB is still difficult until a control mechanism is properly formed. It is also very important to stabilize the RMB’s value.”
He noted that part of the reason that the weaker US dollar has had so little impact on the PRC is that the country has already introduced an RMB payment system. About 400 companies in five cities, including Shanghai and four cities in southern China – Shenzhen, Guangzhou, Zhuhai and Dongguan – are using a duplex currency of US dollar and RMB. “It is very important that we build RMB-based assets,” Cao emphasized.
China’s potentialWhile the rest of the world is still trying to recover, China continues to achieve outstanding economic performance by itself, despite the fall in external demand. The PRC appears on course to overtake Japan and become the world’s second-largest economy. But observers looking at the numbers should remember not only the China upside, but also possible side effects of the massive RMB4 trillion ($586 billion) economic
stimulus scheme that the central government has detonated in the country. The scheme generated more than 85% of the country’s overall economic growth last year, partly because China was already in the midst of nationwide infrastructure improvements when the crisis hit, creating job opportunities.
Stephen Roach, chairman of Morgan Stanley Asia, opined that China’s growth was helped by “artificial stimulus.” And the stimulus spending that led the revival has spurred speculation, raising alarm over potential asset bubbles.
Asked if the current economic growth in China is resilient, Roach said “yes”, but in answer to the question whether it is sustainable, he added a clear “No.”
Roach raises concernsOver the next five years. China’s stimulus package will start to ebb, commencing in the middle of next year, and lack of external demand support for exports will be visible, said Roach, adding that China’s economic growth may slip to 7% or even lower. Then the government may consider addressing another stimulus plan, but Roach said that this should not be necessary.
Instead, he recommended that the PRC should support domestic wage-earners’ income structure; support the blueprint for the development of a large-scale
consumer products sector and industry; and introduce a social safety net – all as part of its twelfth Five Year Plan. Actual Chinese policy has not come out yet.
Roach warned that China is still heavily dependent on external trade demand, and the country needs to support the growth of internal demand. The service sectors in China account for only 40% of local GDP, and Roach noted that this number should be increased to 65% over the next 12 years.
“China commits to opening its capital account, making its currency convertible, but I do not think that it is in China’s best interests to move aggressively on its currency,” Roach added.
China is potentially a consumer market of 1.3 billion, and if the
government keeps implementing the correct schemes to create jobs and increase household incomes, the country has huge potential for domestically-driven organic growth. When global trade eventually turns around at some point, China will play a key role in global trade patterns, but the appreciation of RMB and the depreciation of US dollar need to be balanced in order to restore trade flows in the global market. The globalization of the RMB is still too early, but it might be realized one day in the future if China can keep on its current growth path.
China aFF speCial [email protected]
China: Globalizing the RMBAsian Financial Forum outlines PRC prospects
Stephen Roach speaks at the Asian Financial Forum in Hong Kong
avcj.com | February 2 2010 | Volume 23 | Number 51�
avCJ researCh | LEGAL ADViSORS LEAGUE [email protected]
(CoMPlEtEd dEAls with tArgEts iN AsiA) ASIA BY VALUE yEAr to dAtE, throUgh dECEMBEr 31, 2009
Legal Advisor Completed Value (US$million) Announced Value (US$million) Total Value (US$million) Total No. of Deals (No. of Completed Deals)
Allen & Gledhill $20,886.88 $499.23 $21,386.11 36 (28)
Skadden, Arps, Slate, Meagher & Flom
18,365.54 9,592.46 27,958.00 29 (14)
Simpson Thacher & Bartlett 15,849.66 2,711.39 18,561.05 18 (9)
Paul, Weiss, Rifkind, Wharton & Garrison
14,040.85 - 14,040.85 12 (12)
Freshfields Bruckhaus Deringer 12,593.69 13,047.97 25,641.66 46 (24)
Baker & McKenzie 11,976.92 2,563.26 14,540.19 31 (21)
Lee and Li 11,451.21 3,992.46 15,443.66 27 (17)
Cleary, Gottlieb, Steen & Hamilton
10,714.01 - 10,714.01 4 (4)
Sullivan & Cromwell 9,405.31 6,653.18 16,058.49 22 (13)
Weil, Gotshal & Manges 9,030.60 - 9,030.60 6 (6)
thE Crisis-rACkEd yEAr JUst ended, during which, according to some analyses, spending on consultants and advisors fell to a new low, delivered an unambiguous win to Allen & Gledhill, Kim & Chang and Freehills as lead legal advisors in Asia By Value, Asia By Number of Deals, and Australia/New Zealand By Value respectively. But the overall record for the sector was pretty dismal, with Allen & Gledhill only
managing almost $21.4 billion of total value over 2009 compared to $76.5 billion for Sullivan & Cromwell over 2008, and Freehills achieving just short of $31 billion under its heading, compared to Mallesons Stephen Jaques with over $40.7 billion of total value in 2008. The comparison in International By Value was even worse, with $10.4 billion of total business for 2009 for Vinson & Elkins contrasting with $55.7
billion for Sullivan & Cromwell over 2008.
In the Asia By Value category, at least there are signs of widely distributed activity. Second to Allen & Gledhill, Skadden Arps actually managed a bigger total of just under $28 billion, though only just over $15.8 billion of this was completed, at 14 completed deals out of 29. Freshfields, down at fourth place with almost $12.6 billion completed, actually had over $25.6 billion in total, with 24 deals done but 46 announced for the Magic Circle firm. Overall figures may hence look better soon.
By contrast, Kim & Chang was well ahead of the competition in its ranking, bringing home just short of $7.6 billion of total value off a grand 74 deals completed and 12 announced. Second on the podium was Allen & Gledhill, scoring highly in a second category, but with just 28 deals and 8 announced, barely above bronze medalist Khaitan & Co., who managed 27 deals, plus 3 announced, for just over $3.5 billion.
Down Under, Freehills also topped a league with several strong contenders and many deals still to close, auguring well for M&A advisory activity in the year ahead.
Second placing Mallesons Stephen Jaques completed just over $17.2 billion but had a total of almost $29.5 billion from 63 deals, 51 completed. Third placing Allens Arthur Robinson came higher than both in completed value, at over $34 billion from 35 deals, 21 completed, but only just under $15 billion of this business actually closed.
In the International By Value section of the tables, Vinson & Elkins came out top in an area that saw a slump in business. Skadden Arps, though performing well across several rankings, will not be adding the over $5.7 billion of completed and almost $8.7 billion of total business from 16 deals, 9 completed, to its record books; while bronze medalist Paul Weiss saw all its deals close, but only four of them, for just over $5.45 billion.
Finally, Linklaters and Baker & McKenzie shared the honors for Widest Coverage at 10 countries regionwide, with Mallesons and Skadden Arps sharing the silver placing at 7 countries, and Minter Ellison, Jones Day, Allen & Gledhill and DLA Piper all bronze medalists with 6 countries apiece.
Allen & Gledhill, Kim & Chang, Freehills out in front as lead lawyers for 2009Figures show 2009 activity well down on 2008
Number 5 | Volume 23 | February 2 2010 | avcj.com 1�
LEGAL ADViSORS LEAGUE TABLES | avCJ researCh
(CoMPlEtEd dEAls with tArgEts iN AsiA) ASIA BY NUMBER OF DEALS yEAr to dAtE, throUgh dECEMBEr 31, 2009
Legal Advisor No. of Completed Deals (*) No. of Announced Deals Completed Value (US$million)
Kim & Chang 74 (12) 12 $7,582.88
Allen & Gledhill 28 (1) 8 20,886.88
Khaitan & Co. 27 (6) 3 3,552.10
Freshfields Bruckhaus Deringer 24 (4) 22 12,593.69
Jones Day 23 (7) 13 3,170.14
Baker & McKenzie 21 (1) 10 11,976.92
Linklaters 20 (2) 21 8,655.68
Lee and Li 17 (3) 10 11,451.21
WongPartnership 17 (1) 8 6,363.47
Morrison & Foerster 17 (3) 8 3,763.23* deals with undisclosed value
(CoMPlEtEd dEAls with tArgEts yEAr to dAtE, iN AUstrAliA/NEw ZEAlANd) AUSTRALIA/NEW ZEALAND BY VALUE throUgh dECEMBEr 31, 2009
Legal Advisor Completed Value (US$million) Announced Value (US$million) Total Value (US$million) Total No. of Deals (No. of Completed Deals)
Freehills $17,314.11 $13,652.92 $30,967.04 71 (58)
Mallesons Stephen Jaques 17,210.73 12,287.11 29,497.84 63 (51)
Allens Arthur Robinson 14,928.25 19,362.94 34,291.19 35 (21)
Blake Dawson 9,293.29 1,836.06 11,129.34 58 (42)
Clayton Utz 6,284.73 13,041.89 19,326.63 72 (59)
Freshfields Bruckhaus Deringer 6,164.56 2,025.00 8,189.56 3 (2)
Corrs Chambers Westgarth 4,749.11 403.70 5,152.80 17 (15)
Gilbert + Tobin 3,963.99 212.42 4,176.42 32 (29)
Minter Ellison 3,626.45 3,414.86 7,041.32 48 (35)
Baker & McKenzie 2,837.24 631.77 3,469.01 26 (22)
(CoMPlEtEd dEAls with tArgEts oUtsidE oF AsiA) INTERNATIONAL BY VALUE yEAr to dAtE, throUgh dECEMBEr 31, 2009
Legal Advisor Completed Value (US$million) Announced Value (US$million) Total Value (US$million) Total No. of Deals (No. of Completed Deals)
Vinson & Elkins $10,431.50 - $10,431.50 4 (4)
Skadden, Arps, Slate, Meagher & Flom
5,785.40 2,902.22 8,687.62 16 (9)
Paul, Weiss, Rifkind, Wharton & Garrison
5,457.53 - 5,457.53 4 (4)
Lee and Li 3,370.40 - 3,370.40 3 (3)
Weil, Gotshal & Manges 3,091.00 - 3,091.00 2 (2)
Norton Rose 2,600.00 - 2,600.00 1 (1)
Lovells 2,575.00 - 2,575.00 1 (1)
Linklaters 2,065.83 73.54 2,139.37 4 (3)
Simpson Thacher & Bartlett 1,915.00 135.00 2,050.00 5 (2)
Clifford Chance 1,770.40 - 1,770.40 1 (1)
(trANsACtioNs iN Most AsiAN CoUNtriEs) WIDEST COVERAGE yEAr to dAtE, throUgh dECEMBEr 31, 2009
Legal Advisor No. of Countries
Linklaters / Baker & McKenzie 10
Mallesons Stephen Jaques / Skadden, Arps, Slate, Meagher & Flom 7
Minter Ellison / Jones Day / Allen & Gledhill / DLA Piper 6
Freehills / Lovells / Lee and Li / Blake Dawson 5
Allen & Overy / Allens Arthur Robinson / Clayton Utz / Freshfields Bruckhaus Deringer / Morrison & Foerster / Paul, Weiss, Rifkind, Wharton & Garrison / Stamford Law / Sullivan & Cromwell / Simpson Thacher & Bartlett / Shearman & Sterling / White & Case / WongPartnership / Latham & Watkins
4
Standings based on Completed Deals. Announced Deals are those not yet completed. Excludes withdrawn deals, corporate restructurings and share buybacks, includes debt assumption, convertible securities. Based on deals completed between January 1, 2009 and December 31, 2009.
avcj.com | February 2 2010 | Volume 23 | Number 520
PRiVATE EqUiTY DATA FiLE | avCJ researCh
PriVAtE EqUity iN AsiA
Investment Breakdown by Country From January 1 to January 31 2010Investee Country Amt. Invested US$mln No. of Deals (Disc.) No. of Investees
Indonesia 616.32 1 1 1
China (PRC) 461.67 13 11 13
India 155.78 8 8 8
Australia 150.70 3 3 3
Japan 80.21 5 5 5
Hong Kong 28.09 2 2 2
Singapore 24.95 1 1 1
Malaysia - 2 0 2
CLOSED FUND
Location Singapore
Fund Name Axiom Asia Private Capital Fund II
Closing Amount (m) US$950 (final close)
Launch Date June-2008
Fund Manager/Advisor Axiom Asia Private Capital
Stage Focus No preference
Industry Focus No preference
Geographical Focus Australia, Greater China, India, Japan, Southeast Asia, Korea
Contact Chihtsung Lam
Phone (65) 6336-8886
Email [email protected]
Website www.axiomasia.com
Update Axiom Asia Private Capital has closed its second fund of funds, Axiom Asia Private Capital Fund II, at US$950 million, exceeded its initial target of US$750 million. The Fund will invest in a portfolio of management buyout, venture capi-tal, growth capital and other private equity funds in Greater China, India, Japan, Southeast Asia, Korea and Australia. The Fund will typically target investments of up to US$100 million per invested fund and will also target select investments in secondary fund interests and portfolio companies alongside invested funds.
Location China (PRC)
Fund Name Mianyang High Technology Industrial Investment Fund
Closing Amount (m) RMB 9,000 (final close)
Launch Date June-2008
Fund Manager/Advisor CITIC Private Equity Funds Management
Stage Focus Start-up/Early Stage, Expansion/Growth Capital
Industry Focus Computer-related, Ecology, Information technology, Manufacturing-Heavy, Utilities
Geographical Focus China (PRC)
Contact Lefei Lui
Phone (86) 10-8522-1870
Email [email protected]
Website www.cs.ecitic.com
Update CITICS Private Equity Funds Management has closed its fund raising on Mian-yang High Technology Industrial Investment Fund at RMB 9 billion, exceeding its original target of RMB 6 billion. The RMB-denominated Fund is the first industrial fund approved by the State Council of China to make investments in the western part of the country. The fund aims at financing and supporting the high technology projects/enterprises located in the Mianyang Technology City of Sichuan. CITIC Securities, China Gaoxin Investment Group and ZKC Environmen-tal Group have committed 20% of the fund’s capital in total.
NEW FUNDS
Location Japan
Fund Name ant Catalyzer #4 Private Equity Invest-ment L.P. (Ant Catalyzer No.4)
Target Amount (m) Yen 20,000
Launch Date Jan-2010
Fund Manager/Advisor Ant Capital Partners
Stage Focus Buy-outs (MBO/MBI/LBO)
Industry Focus No Preference
Geographical Focus Japan
Contact Takako Yada
Phone (81) 3-3284-1711
Email [email protected]
Website www.antcapital.jp
Update Ant Capital Partners is planning to estab-lish a Japan-focused buyout fund, Ant Catalyzer No.4, targeting at Yen 20 billion. This will be Ant’s first to look for funding from overseas.
Location China (PRC)
Fund Name DAC China Special Opportunity and Situation Fund II
Target Amount (m) US$500
Launch Date Jan-2010
Fund Manager/Advisor DAC Management
Stage Focus Buy-outs (MBO/MBI/LBO), Turnaround/Restructuring
Industry Focus No Preference
Geographical Focus China (PRC)
Contact Philip Groves
Phone (1) 847-922-1739
Email [email protected]
Website www.dacmllc.com
Update DAC Management is raising a $500 mil-lion DAC China Special Opportunity and Situation Fund II. DAC plans to using the fund to purchase distressed debt, and either restructure the loans or seize the underlying assets that serve as collateral.
FUNd-rAisiNg MoNitor