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Emerging Markets Private Equity Association

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EMERGING MARKETS PRIVATE EQUITYQUARTERLY REVIEWA Publication of the Emerging Markets Private Equity Association

TABLE OF CONTENTS

In This Issue ...... 1

..... 13Global Private Equity

Conference Sells Out

To join EMPEA or advertisein this newsletter, please email [email protected] orcall +1 202.449.1155

Published by EMPEA with assistance from Liberty Global Partners, LLC

While investors have been feeling pain from the sharp six-week decline in emerging

market stock exchanges around the world, the World Bank's recently published

Global Development Finance report indicates that those same exchanges have

increased in value from US$1.7 trillion in 2002 to US$4.4 trillion in 2005. The

report also details how US$6.14 billion was invested in emerging market equities in

2005 and an additional US$237.5 billion was placed in direct investments. In

previous corrections, uncertainty in public markets choked off all investment

activity, but today investors seem to have a longer-term view, and IPOs, bond

issues, and private equity investments are still moving forward. The World Bank

report is a timely reminder that emerging market economies are now deeper and

more fundamentally sound than ever before.

In this issue, our country feature covers China, where the first five months of 2006

private equity investments were a remarkable US$4.96 billion, with no signs of

diminishing. The continuing attraction of the China market is linked in large part to

an enormous improvement in returns over the past few years, as shown in the

Cambridge Associates' emerging markets benchmarking data, which we analyze in

this issue. The achievement of scale in emerging markets private equity is also now

attracting the attention of secondaries market players, which is explored in our

feature on the subject. Long-term confidence in emerging markets private equity

was also a key theme of discussions at the sold-out IFC/EMPEA annual conference

held in Washington, DC in May, which is reviewed in these pages. With a tone of

caution, however, Richard Laing of the CDC argues in a guest article that long-term

growth and success in private equity requires fundamental reform in private equity

structures and incentives. Finally, investors would be unwise to ignore completely

the recent public market corrections, which impact private equity exits, portfolio

valuations and overall confidence. EMPEA will continue to monitor these

developments and report our findings to you.

-- Roger Leeds, Chairman, EMPEA

IN THIS ISSUE

..... 16Upcoming Events of Interest

Emerging Markets Private Equity

Quarterly Review is a quarterly

publication of the Emerging

Markets Private Equity Association.

For reprints, contact EMPEA at

+1.202.449.1155

All contents © 2006 Emerging

Markets Private Equity Association.

All rights reserved.

Volume II, Issue 2, Q2 2006

EMPEA Board / Advisory

Board

..... 16

New Charter Members ..... 16

..... 15EMPEA Member News

Guest Article: Fee Structures

Must be Reformed for Better

Alignment of PE Incentives

..... 11

..... 14Emerging Markets Private

Equity Exits & IPOs

Country Feature: China ...... 1

China's private equity market is booming, with US$4.96 billion of private equity

investments completed in the first five months of 2006, compared to US$4.04

billion for all of 2005.1 The venture capital (VC), growth capital and buyout

segments all received tremendous interest. While market observers still feel there is

opportunity in each of these segments, it remains to be seen whether money can be

made over the long term, how well the US VC model adapts to China, and whether

a buyout market will truly take shape.

The dynamics of China's private equity market are also blurring the lines between

the traditional VC and buyout segments. Key to future returns may be how well

traditional players adapt to the particular growth equity opportunities in China, and

how the new generation of Chinese private equity professionals will fare as they

begin to take the reigns of their own private equity funds. China is a land of private

equity opportunity, but the private equity space is evolving rapidly, and

continued on page 2

COUNTRY FEATURE: CHINA, THE NEW WILD EAST

...... 7Secondary Buyers Start

Shopping Emerging Markets

..... 10EM Private Equity Benchmark

Continues Its Ascent

EMERGING MARKETS PRIVATE EQUITY ASSOCIATION


Vol II, Issue 2 - Q2 2006 | EMERGING MARKETS PRIVATE EQUITY

many questions remain about how the asset class will take root

in this new wild East.

The Booming China Private Equity Market

China's private equity boom has been driven by strong returns

and a series of high-profile exits over the past two years. The

Asia Private Equity Review (APER) reports that US$1.86

billion was returned to LPs in 2005 through 48 exits, including

high profile transactions, such as Baidu's listing on NASDAQ,

which gained 354% on its first day of trading, and China

Construction Bank's debut on the Hong Kong Stock Exchange

(HKSE), which raised US$8 billion.

According to APER, almost half of the 2005 exits had IRRs of

more than 200%. Driven by these staggering returns, private

equity investments are expected to surpass US$6 billion in

2006, which may push China past Japan in terms of invested

private equity capital.

The HKSE has proven to be a preferred destination for Chinese

IPOs, with businesses from mainland China now accounting for

half the market value on the exchange. NASDAQ and the NYSE

are also favored IPO destinations, and it is noteworthy that in May

of 2006 the Singapore Exchange listed its 100th Chinese company.

Much of the China opportunity stems from the government's

strong commitment to privatization. Twenty five years ago, 85%

of the Chinese economy was dominated by state-owned

enterprises (SOEs), while today SOEs account for only 40% of

economic activity. The Chinese government's commitment to a

thriving private sector has attracted strong growth in foreign direct

investment by US and European corporates and has also created

space for a viable SME sector. Companies with less than US$40

million of revenue now contribute 55% of Chinese GDP, and

approximately 80% of these companies are reportedly profitable.2

It appears that the roots of private equity are getting stronger in

China, although most funds from the first wave of private

equity moving into China in the 1990s have struggled. A core

theme from that earlier period was the reform of the China SOE

sector, but getting control of a Chinese company proved to be

difficult for many. While interest in the SOE sector remains among

the buyout players attracted to the size of the opportunities, the

current wave of investing is characterized more by growth capital

investing in support of China's growing class of entrepreneurs.

Venture Capital Goes East

China's impact on the venture capital industry will be a key

trend to observe. Venture capital has always been about

investing in the backyard -- smart (or not so smart) investors

working shoulder to shoulder with entrepreneurs they trust and

taking stakes in technology and businesses where there is an

intimate understanding of the risks and possibilities. However,

the China market seems to be luring venture capitalists away

from a traditional local focus, and 2006 appears to be the year

that Silicon Valley goes East.

US, European, and Israeli venture capitalists are setting up their

own China entities, or entering joint ventures with Chinese

funds. Veteran Silicon Valley champions, such as Granite

Global Ventures and Doll Capital Management, have made a

string of China venture bets, often as affiliate investors

represented by local Chinese partners.

This year, Accel Partners teamed up with IDG Technology

Venture Investment for a US$290 million China-dedicated

fund, and Ignition Partners teamed up with Qiming Venture

Partners. Sequoia Capital has announced a new US$200 million

China fund and led a US$30 million investment into a Chinese

start-up called Worksoft.

Many private equity practioners emphasize the need to

understand the particularities of the Chinese venture market.

Hidden Jade Capital recently invested in a Chinese software

company called StarSoftcomm, which provides PC

management services, primarily to Chinese OEMs and

enterprises. Darren Ho, a founding partner of Hidden Jade,

continued on page 3

PE Funds Raised 2005:

PE Investments 2005:

PE Investments 2005: (As % of GDP) # of Exits 2005:

Returns to LPs 2005:

Source: Asia Private Equity Review (APER)

CHINA PRIVATE EQUITY AT A GLANCE

US$2.24 billion

US$4.04 billion

0.18%

48

US$1.86 billion

2003

TOTAL INVESTED CAPITAL FOR CHINA PRIVATE EQUITY PER ANNUM

(US$ billions)

2004 2005


$1.256

$4.039

$1.219

$4.96

2006 / May

Country Feature: China, continued from page 1





previously managed a VC fund that was one of the early

investors in Alibaba and Baidu. He believes that Chinese

companies have an advantage over foreigners in China because

the Chinese market is not comfortable with many US sales and

customer support models.

According to Ho, the US model of selling software license is

not very well accepted in China. "Chinese buyers understand

paying money for a piece of equipment or a service, but they

don't understand buying a software license. That is why

StarSoftcomm's software is provided on a pay as you use

model, which better fits the Chinese commercial culture."

The Importance of Growth Equity

Jean Eric Salata, founder and CEO of Baring Private Equity

Asia, believes that the China market is elevating the category of

growth equity investing to center stage, and this will impact the

portfolios of LPs around the world. Salata stated that "growth

equity investing is very different and requires skill sets that

have traditionally been separated between teams doing early

stage and teams doing buyouts. The China market has validated

this type of investing, but teams will have to be structured right

in order to take advantage of the opportunity."

China is also capturing the attention of the UK private equity

firm 3i. Philip Yea took over the position of CEO at 3i two years

ago, and has led a concerted effort to build key aspects of their

business. According to Yea, "two years ago, 3i's growth capital

business was under-punching its weight. We have made a

concerted effort to build this part of our business, and I am

convinced that we are absolutely suited to where the China

market is today, and where it is heading. China and Asia more

generally are a very big part of what we want to do in the future."

Kathy Xu of Capital Today offers that investors need to also

recognize different dynamics within companies. "In Silicon

Valley, you see three guys working together to build a

technology company, but in China that does not work for some

reason. You need one person who is running the show.

Charisma and power are important characteristics in China, but

often hard to evaluate." The source of entrepreneurship may

also be different. "In Silicon Valley, the founder is usually the

head of technology. In China, he is the head of sales."

Dr. Shangzhi Wu of CDH Investments provides a slightly different

opinion, stating that "We do find diversified ownership, and we

believe that building balanced management is an important way

that we can help a company prepare for an IPO." According to

Wu, 80% of the growth in the CDH portfolio is organic. But, Wu

thinks private equity will change in the coming years. "We are

currently getting two to three times money in two to three years.

Now, the timeframe has to extend, and we should be looking at

how to get three to four times money in four to five years."

The growth equity market segment is so dominant in China

that it is becoming the meeting point for international and

Chinese players from all market segments. VC and traditional

growth equity firms are meeting over companies that may be

early stage, but already have positive revenues. Growth equity

and buyout players are meeting in larger deals where only

minority stakes are available. A key question for the future of

Chinese private equity is whether private equity firms will be

able to keep to deals where they can truly execute their

strategies, or whether they will be drawn too far away into

unknown waters.

Buyout Players Moving to Large Growth Investments

While Chinese private equity is booming, Chinese regulators

remain skittish about foreign control in key sectors, such as

finance and heavy manufacturing. Carlyle's troubled attempt to

take over Xugong Construction Co. is representative of some of

the regulatory challenges that still exist for doing business in

China. Speaking at the May IFC/EMPEA conference in

Washington D.C., David Rubenstein, Co-Founder and

Managing Director of Carlyle, observed that he "had never been

to as many closing dinners for one deal," but he also offered

that investors "have to be patient in China."

The Xugong deal appears to be held up by conflicting interests

at local and national governmental levels. Three other large

buyout deals that have received the most press because they

have either been blocked by the government or are in limbo

due to staled negotiations between counterparties are

Citigroup's Guangdong Development deal, Warburg's Harbin

Pharmaceutical deal and Newbridge Capital's Shenzhen

Development Bank deal. (See table on page 5.)

The challenges related to closing buyout deals in China are also

forcing players like Carlyle to focus equally, if not more so, on

the booming growth capital sector. Carlyle recently announced

the closing of a US$668 million Asia growth fund, which has

already committed over US$50 million to two Chinese firms.

continued on page 4

2003

CAPITAL RAISED FOR CHINA PRIVATE EQUITY FUNDS PER ANNUM

(US$ billions)

2004 2005


$0.21

$2.24

$0.31 $0.44

2006 Q1




Despite the challenges, a buyout market does appear to be

forming. At the end of 2005, Carlyle and Prudential Financial

took a controlling 25% stake in China Pacific Life Insurance for

US$409 million. In January 2006, Pacific Alliance Group took

over Goodbaby Group for US$122 million. In May 2006, CVC

Asia Pacific paid US$623 million for a controlling stake in

Shandong Chenming Paper, one of China's biggest paper

companies, and Warburg Pincus paid US$100 million for

control of Gum, a food additive producer.

Perhaps the most significant threshold was passed in February

2006 when China-based Legend Hony Capital succeeded in

acquiring control of the Chinese glass market executed through

a vehicle called China Glass Holdings in multiple transactions.

Legend Hony reportedly controls 70% of the glass market, a

monumental achievement by a buyout firm.

The lure of the China buyout market coupled with this string of

successes is drawing interest from other international buyout

firms such as Bain Capital and KKR. How the buyout market

will fair in China is an open question, especially given US

concerns over Chinese investment in key national US assets,

but the increasing attention of major buyout players seems to

suggest a bullish market for the coming year.

Between 2004 and 2005, the buyout market in China

represented only 11% of the total value of private equity

transactions, and, like Carlyle, players more closely associated

with buyouts in other global markets have been making large

growth equity deals in China. Financial sectors are dominating

this wave of larger growth equity transactions, and key

investments in the financial sector include Temasek's US$1.5

billion investment in February 2006 in Bank of China and

Goldman Sachs' US$2.6 billion stake in the Industrial and

Commercial Bank of China.


CHINA PE INVESTMENTS

BY SECTOR 2003 - 2005(US$ billions)

$0.686Manufacturing

$1.359Other

$5.034FinancialServices

$2.469IT, Telecoms& Electronics

Source: Price Waterhouse Coopers

Analysts expect that deal flow in the finance sector will migrate

from investment in the big banks to those offering more

specialized financial services such credit guarantees, credit

cards, and retail mortgages.

Trends and Challenges

In early 2005, China's State Administration of Foreign

Exchange (SAFE) made two announcements, known as SAFE

Circulars 11 and 29, which caused concern in the private

equity world. In addition to other aspects, the circulars

restricted Chinese nationals from taking shares in off-shore

entities without prior approval from SAFE, raising questions

about structures favored by most private equity fund

managers. However, this worrisome development was quickly

rectified, and private equity investors took comfort from the

collaborative process that resulted in the issuance of SAFE

Circular 75, which clarified the ruling, and clearly made

space for the private equity asset class in the Chinese

economy.

Dr. Shangzhi Wu of CDH Investments warns that private equity

is still in its early stages in China. According to Wu, "The

whole financial system is not efficient in China, and it will take

three to five years to change. Entrepreneurs still need private

equity as a source of funds, but when financial reform kicks in,

we as investors will have to adjust."

Given China's tremendous market power, Kathy Xu claims that

it is easy to find fast growing companies, but it is not so easy to

determine which companies will have sustainable growth

because "there are many copy cat companies in China, so

market share gets diluted."

For Xu, the size of the growth potential for portfolio companies

is also an enormous challenge: "A US$1 billion company can

now be built in five years, a process that used to take three

generations. How can we manage that sort of growth? The

fundamental tension is whether the building of a company's

infrastructure can keep pace with how fast the market is

growing." The key to meeting that challenge for Xu is focus

within the company's expansion plan. Xu says that "in China,

our entrepreneurs always want to do the next best thing instead

of focusing on one thing, so we make sure to have rights of veto

over expansion plans."

According to Amy Chiang of China Capital Ventures, another

challenge for private equity investors is the allegiances within a

company, as most workers have personal ties to the founder,

and perhaps less of a sense of belonging to the company itself.

Chiang says, "The cultural side of business is very different

from the US."

continued on page 5





continued on page 9

Portfolio Company Name

Guandong Development Bank

Xugong Construction Machinery Co.

Harbin Pharmaceutical Group Holdings

Shenzhen Development Bank

Lead PE Firm

Citigroup

Carlyle Group

Warburg Pincus

Newbridge Capital

Other PE Investors in the Transaction

Carlyle Group

CITIC Capital

ProposedCapital Invested

US$3,000m

US$375m

US$245m

US$170m

ProposedStake

85%

85%

45%

20%

Deal Date

Jan 2006

Oct 2005

Jan 2005

CONTROL DEALS - BLOCKED OR IN LIMBO

Status

May 2006 China Bank Regulatory Commission blocked deal on regulatory grounds. Parties considering restructuring bid.

Jun 2006 Authorities continue to withhold final approval of deal.

Apr 2006 Securities laws altered mid-auction and counterparties back out. Deal appears to be dead.

May 2006 Shenzhen Development Bank announced withdrawal from deal, legal action pending.

Portfolio Company Name

Fangtek Electronics Co.

Gum

Shandong Chenming Paper

Worksoft Creative Software Technology

Toodou.com

China Worldbest Pharmaceutical Co.

Henan Luohe Shuanghui

Oak Pacific Interactives

Bank of China

GOME Electrical Appliances Holdings

Goodbaby Group

Industrial & Commerical Bank of China

China Pacific Life Insurance Co.

Lenovo

Lead PE Firm

Qiming Venture Partners

Warburg Pincus

CVC Asia Pacific

Sequoia Capital

Granite Global Ventures

CDH Investment

Goldman Sachs

General Atlantic

Temasek

Warburg Pincus

Pacific Alliance Group

Goldman Sachs

Carlyle Group

General Atlantic

REPRESENTATIVE CHINA PE AND VC DEALS

Other PE Investors in the Transaction

DFJ ePlanet Ventures, IDG Technology, New Frontier, Kibo Technology

Jafco Asia, IDG Technology

China Resource Enterprise

CDH Investment

Doll Capital Management, Technology Crossover Ventures, Accel Partners,

Legend Capital

Prudential Financial Inc.

LLC, Texas Pacific, Newbridge Capital

Capital Invested

US$12m

US$100m

US$623m

US$30m

US$8.5m

US$341m (est.)

US$250m

US$48m

US$1,550m

US$150m

US$122.5m

US$2,580m

US$409m

US$350m

Stake

takeover

30%

25%

5%

10%

takeover

7%

25%

10%

Deal Date

Jun 2006

May 2006

May 2006

May 2006

May 2006

Apr 2006

Apr 2006

Mar 2006

Feb 2006

Feb 2006

Jan 2006

Jan 2006

Dec 2005

Mar 2005



EMERGING MARKETS PRIVATE EQUITY Vol II, Issue 2 - Q2 2006 |




De Weese says Paul Capital is also considering offering a

dedicated emerging markets secondary vehicle, which would be

a first in the industry.

Frank Morgan, a partner at Coller Capital, says he expects

Coller “to significantly expand” its allocation to emerging

markets. They plan to devote “significant resources in line with

the increased opportunities brought about by the rising number

of primary investments in these markets.” By contrast, Coller’s

first two secondary funds bought no emerging market interests;

Funds III and IV had emerging market exposure in the single

digits.

AIG Capital Partners is another firm looking to expand activity

in what it sees as a growing market. "The center of gravity in

terms of economic growth in the coming years is likely to shift

to emerging markets," said Managing Director Scott Foushee.

"And beyond absolute growth, it would not be surprising to see

private equity investment noticeably increase from a relatively

small percentage of GDP. In this environment, liquidity will

naturally grow, and emerging markets are likely to become an

established segment of the secondaries asset class."

Some of the leading firms take an opposing view. For example,

continued on page 8

The recent growth in fundraising in emerging markets private

equity has begun to attract the attention of some secondary

investors, who buy LP interests in established private equity

funds. Firms such as Coller Capital, AIG Capital Partners,

Alpinvest, and Paul Capital all say they expect to increase the

percentage of their funds going to the acquisition of LP stakes

in emerging markets, and all are building up the expertise

needed to accurately price deals in these markets.1

This development could be a further stimulus to the rapidly

developing emerging markets private equity marketplace,

according to some industry leaders. Scott Myers, a Partner at

the investment bank Cogent Partners, noted that in certain

markets, such as mortgage financing, the development of the

secondary market was the key to exponential growth of the

primary market. "The secondary market increases transparency,

increases understanding of the assets, and raises the level of

confidence of investors that they will be able to see liquidity,"

he says.

David de Weese, a partner at Paul Capital, says he expects that

his firm's next global secondary fund, Paul Capital Partners IX,

will invest 20% of its capital in emerging markets, compared to

low single digits for the firm's 1990s funds, and 10% for the

2004 Paul Capital Partners VIII.

SECONDARY BUYERS START SHOPPING EMERGING MARKETS




This level of interest contrasts sharply with market sentiment in

recent years. David Wilton, Portfolio Manager at the

International Finance Corporation, recalls that there was no

interest from secondary firms in 2000 when the IFC

reorganized its management of funds and looked to sell a swath

of prior commitments. "No glimmer in the eye at all," he said,

"but in the last six months there is a flame in people's eyes

because they have seen that there is a market that is coming."

Three factors help explain this turnaround. The first is an

increasing supply of capital looking for secondary purchases,

now more than US$20 billion in total, according to Myers of

Cogent Partners. Secondary funds have generated strong and

consistent returns over the last several years, which in turn

have attracted more capital, resulting in upward pressure on

pricing. Myers notes that the secondary transactions Cogent

facilitated through its investment banking business in 2005

traded at a slight premium to net asset value, whereas three

years earlier, similar quality funds would have sold for

somewhere in the 70% range.

This increase in competition is leading secondary firms to

consider new strategies, including emerging markets. As Morgan

of Coller Capital explains, "We are constantly seeking to push

the boundaries of the secondary market - in terms of asset type,

continued on page 9

Charles Grant, a partner at Lexington Partners, notes that to

date “the poor track record” of emerging markets funds has

depressed both prices of and interest in emerging markets

secondaries. “We keep hearing its going to be different this

time,” he says, “but I’m not sure.” Landmark also appears not

to have an interest at present in emerging markets, although a

representative said the firm could not comment because of

ongoing fundraising.

In Coller's case, increased attention to emerging markets has

already resulted in one historic deal: the firm's early 2006

acquisition of interests held by several Indian institutions in

India Advantage Fund-I, a US$245 million 2002 vintage-year

fund managed by ICICI Venture, a leading local private equity

player in India. With secondary transactions typically

occurring through sales of multiple funds by large US or

European institutions, this "one-off" purchase from Indian

sellers is noteworthy. It is also significant that Coller appears

to have paid a healthy premium: ICICI Venture CEO Renuka

Ramnath told India's Economic Times that the selling LPs

earned 40% IRR on the transaction.

This transaction "could help remove the impression among

Indian limited partners that private equity is a long term illiquid

product," said Ramnath.

Secondary Buyers, continued from page 7




transaction structure and geographic location. Emerging markets

are an obvious area for us to expand."

The second factor is the growth in volume of emerging markets

private equity funds. De Weese of Paul Capital estimates that

there is US$60 billion in total net asset value across all

emerging markets private equity funds and proprietary

investment pools, a figure that has more than doubled over the

last two years on the back of rapidly increasing fundraising.

Because most LP interests are sold relatively late in the 10-

12 year lifetime of a typical fund, the jump in emerging

markets funds probably won't translate into secondary

transactions for several years, but firms such as Coller, Paul

and AIG appear to be building up capacity for that

anticipated market now.

The third factor is growing maturity of emerging markets

capital markets, which are now beginning to generate the

necessary data and the patterns of stability that secondary

buyers need in order to price transactions. Tjarko Hektor,

partner at Alpinvest and head of Alpinvest's multi-billion dollar

secondaries program, explains: "Secondary investing requires

predicting the future cashflows and ultimate exit of portfolio

companies, and to predict with confidence in emerging markets

we need to understand the patterns of the IPO market, the trade

sale markets, etc. The inflection point we are seeing is that

those markets are now becoming more predictable."

David de Weese of Paul Capital agrees. "In our previous funds,

we didn't need the capability to be forensic about pricing

emerging markets funds," he says. "We are now deploying the

resources for that more line-by-line approach."

An important question is what percentage of the US$60 billion

in emerging markets NAV will turn over in the secondaries

market. A 2003 McKinsey study calculated that 3.2% of US

funds changed hands during their lifetime, and most analysts

believe that percentage has now grown to 5% or more. In

emerging markets, however, less than 1% of funds have

changed hands, according to AIG's Foushee.

This difference can be accounted for in part by the fact that

poor performance among emerging markets funds in the late

'90s, combined with the lack of forensic pricing ability, led

secondary players to offer very steep discounts on emerging

markets funds. "The bid ask spread was pretty wide" says

Foushee.

In addition, a significant percentage of emerging market fund

investments has been held by Development Finance Institutions

(DFIs), such as the International Finance Corporation, the Asian

Development Bank, and country-specific development

Secondary Buyers, continued from page 8


organizations such as The Netherlands Development Finance

Company (FMO), and the Overseas Private Investment

Corporation in the US. These DFIs typically do not encounter

the situations that often prompt mainstream LPs to sell, such as

a need for liquidity or portfolio rebalancing. DFIs also typically

play a role in developing and training emerging markets

managers, and the desire to maintain that relationship can be a

disincentive to sell.

Some secondary funds are hoping to see DFIs sell their LP

interests, and the DFIs have reportedly been receiving offers to

buy their stakes. By selling funds, "the DFIs could really help

develop the asset class and show LPs a path to liquidity," says

Foushee of AIG. Wilton of the IFC notes that the IFC is not

opposed in principle to selling fund holdings, but he believes

going prices in the market are too low to be of interest, given

the significant value of the funds in their portfolio.

Roel Messie, Director of Special Situations at FMO, notes that

his institution is being approached on a "quite regular basis."

No transactions have been completed to date, but FMO is

actively entertaining offers for funds in regions where it is no

longer active.

1 This article focuses on the purchase and sale of existing LP interests in private

equity funds. Other strategies that fall under the term secondary are not covered

here, such as the direct purchase of portfolio companies by secondary buyers.

Pat Dinneen of Siguler Guff believes that China is already

changing the fundamental assumptions that most private equity

investors hold. For Dinneen, "Early stage investing has already

been redefined in China, because young companies quickly get

revenue and profits making growth capital style investing

possible at an earlier stage."

The China market is having an impact on the private equity

world. Some of the western world's leading fund managers are

transforming their organizations, re-evaluating their posture

towards market segments, and rushing to build relationships

with new generations of Chinese talent. Meanwhile, a band of

newly independent Chinese private equity professionals are

leading the way in key areas, perhaps altering the makeup of

what LPs will consider the global top quartile, or conversely

taking investment capital into new rough territory, and giving

LPs exposure to new levels of risk. Whether future returns from

China have a positive or negative effect on global LP returns,

what is clear is that China is increasingly a part of the global LP

investment profile.

1 All data is from the Asia Private Equity Review (APER) unless otherwise noted.2 China Statistics Bureau, China Development and Reform Commission, SME

division.




The latest data from Cambridge Associates’ Emerging Markets

Private Equity Index (see Table 1), shared with EMPEA as part

of a collaboration agreement, shows that emerging markets

private equity returns remain robust. The December 31, 2005

data reveals strong 1- and 3-year returns across all regions, with

Central & Eastern Europe and Russia leading the way.

As shown in Chart 1, median returns have continued to improve

year-on-year over the past three years. The Chart shows the

upward trend for 1-, 3-, and 5-year returns as of year end 2003,

2004 and 2005.

While median returns from emerging markets were poor on

average for most 1990s vintage years, newly released data

shows that top quartile returns from some of these vintage years

beat the median return for US buyout during those same years.

Chart 2 compares the breakpoint for top quartile emerging

market funds versus median returns for US buyout funds, by

vintage year. As the graph illustrates, for many of the years for

which the Cambridge database has sufficient data, an LP would

have done as well or better with a top quartile emerging

markets fund as with a median US buyout fund.

1 Cambridge Associates LLC Proprietary Index; pooled end to end returns, net of

fees, expenses and carried interest.

Sources: Cambridge Associates LLC U.S. Venture Capital Index®, Cambridge

Associates LLC Private Equity Index®, Cambridge, Associates LLC Proprietary

Database, Standard & Poor's, and Morgan Stanley Capital International.

MSCI data provided “as is” without any express or implied warranties.

25

20

15

10

5

0

-55 Year 3 Year 1 Year

Dec-05

IMPROVEMENT IN EMERGING MARKETSVC & PE INDEX, DEC 2003 TO DEC 2005

%

Dec-04

Dec-03

Return Horizon

Chart 1

18

16

14

12

10

8

6

4

2

01996 1997 1998

US PE Median

TOP QUARTILE EMERGINGMARKETS COMPARED WITH MEDIAN

US & WESTERN EUROPE

%

1999 2000

EMPE Top Quartile Break Point

Year

Chart 2

THE EM PRIVATE EQUITY BENCHMARK CONTINUES ITS ASCENT

Dec 31, 2005 Data

EM VC & PE Index

Asian PE Index

CEE Russia PE Index

Lat Am PE Index

US PE Index

US VC Index

W. Eur PE Index

MSCI EM Index

S&P 500

CAMBRIDGE ASSOCIATES EMERGING

MARKETS PE INDEX1

1 Yr

21.87

13.78

50.26

14.71

27.35

7.90

24.70

34.54

4.91

3 Yr

19.24

16.47

30.58

10.95

24.93

7.30

28.42

38.35

14.40

5 Yr

4.95

5.06

15.34

-6.81

10.07

-9.89

19.91

19.44

0.54

10 Yr

4.06

3.67

10.25

-3.62

13.37

39.34

21.13

6.98

9.07

Table 1

EMPEA is Recruiting a Director of Research

EMPEA is looking for a Director of Research to manage its research initiatives. Reporting directly to the Executive Director, s/he will develop a work program that establishes the priorities, outputs and research budget for the organization; work with the ED to develop negotiated agreements with 3rd party service providers to execute research on EMPEA's behalf and manage those relationships; and develop, manage and implement EMPEA's own research efforts, including semi-annual fundraising, investment and exit data for the asset class.

The ideal candidate will have at least 3-5 years of solid work experience (more work experience will be viewed favorably), preferably in research related to private equity or international finance/business. S/he must be a highly motivated self-starter, with the ability to excel in an entrepreneurial environment and mobilize creative solutions for a start-up organization.

Compensation is competitive with non-profit organizations and commensurate with experience. Further details on how to apply are available from EMPEA's website: www.empea.net.



larger fund, with US$10 million in fees per annum (US$50

million in fees over five years), is not being correctly

incentivised to deliver what the LP needs.

Within CDC's own portfolio, we are currently paying US$52

million per year in management fees to large funds compared to

US$12.7 million for smaller funds. As an LP investor devoted

to building a sound reputation for private equity in new

markets, it deeply concerns me to find a situation in which a

manager may be living in great luxury, driving an excessively

expensive car, and renting vast luxurious office space, yet

failing to deliver a single dollar to his investor. This scenario

has the potential to undermine the integrity of our industry and

can sow the seeds of a public backlash against private equity,

particularly in emerging markets, that would be damaging for

all of those who are profiting responsibly from it. For larger

funds, I believe there is merit in a declining fee from 2% to 1%,

or a fee based on a particular proposed cost structure.

Smaller funds face the opposite challenge in that a 2%

management fee is often too constraining for a fund to carry out

continued on page 12

As LPs pour billions of dollars into the private equity asset

class, I am concerned that the industry is blindly following a set

of metrics that is creating a fundamental misalignment of

interests. In large funds, outsized management fees damage our

asset class by creating an image of excess and sowing the seeds

of lethargy that I fear will come back to us in ten years' time in

the form of reduced returns from poorly incentivised teams. On

the other hand, there is a considerable bias against smaller

funds because management fees may simply not be sufficient to

launch a true private equity programme, and the industry is

thereby stifling innovation in an asset class that prides itself as

being cutting edge. As CEO of one of the largest investors in

private equity funds in emerging markets, I believe that LPs and

GPs alike must be true custodians of this important asset class

of private equity, and reform some of our core incentives.

The problem begins with the industry's blind devotion to the 2%

management fee. If the standard 2% is uniformly applied both

to a large fund of US$500 million, requiring a team of some

fifteen to twenty people, and a small fund of US$25 million,

requiring some six to ten people, a potentially unhelpful

situation is created. One could argue that the manager of the


GUEST ARTICLE: FEE STRUCTURES MUST BE REFORMED FOR BETTER ALIGNMENT OF PE INCENTIVESBy Richard Laing, Chief Executive Officer, CDC




Guest Article: Fee Structures, continued from page 11

its mission. This is especially concerning for an industry that is

dependent on innovation and creativity. A recent example of a

smaller fund gave me cause for concern. This first-time fund,

with talented people operating in a particularly tough

investment environment, underperformed because the team

lacked sufficient resources to monitor its investments to the

degree it wanted. With the benefit of hindsight, perhaps a

higher management fee would have helped that team,

positioning it better to raise a follow-on fund and deepening the

private equity asset class in this important market.

Since smaller funds are often first-time players, the industry

norms are actually creating a disincentive for the development

of new teams. I believe the industry should consider higher

management fees of up to 3% for smaller funds as well as lower

hurdle rates to ensure that smaller fund managers are

incentivised to reach for a carried interest. These more

favourable incentives for the GP should perhaps be offset by a

lower carry, possibly in the range of 10%. This structure would

help new funds get off the ground, and even though their

overall upside potential might be capped in the short term, they

would have the opportunity to demonstrate a track record and

position themselves for follow-on activity.

Similarly, the usual ten-year life of a fund should be flexible.

Where lack of liquidity for exits is a feature of the economy in

question, a longer fund life may be considered. In markets

where the opportunity is more quickly realized, GPs would do

well to propose shorter fund life periods. In India, CDC

recently had a sensible proposition for a fund life of five years

with a two-year extension for a PIPE fund, where there is high

liquidity and the investment thesis was short term. CDC would

like to see more of this kind of tailored approach. It

demonstrates quality of thinking on the part of the GP and

encourages LP confidence that the same creative skills will be

applied to the investments within the fund itself.

I believe reform of private equity incentives is crucial, but the

industry must also remain aware of the difficulties GPs face in

raising funds and securing a range of investors. Every GP has

experienced the challenges of corralling a number of investors

with different approaches around a single set of terms. That is

why the responsibility for finding more tailored incentive

packages lies with LPs and GPs alike.

What is the cost of not pursuing change? We risk creating more

and more damaging examples of excess, and at the same time

excluding more and more capable new players from entering

this exciting industry. As private equity is booming in Asia,

Eastern Europe, and South Africa, and is spreading steadily in

sub-Saharan Africa, Latin America and South Asia, I believe

our industry is at the forefront of globalization, and we must

take care to appropriately represent the positive power of

private sector investment. I am completely supportive of

successful GPs generating wealth for themselves when they are

delivering returns for their investors, but it is essential that the

public and private interests involved in the money fuelling

global economic growth are properly guarded.

Richard Laing is the Chief Executive Officer of CDC, the UK Government-owned development finance institution and one of the larger LPs in emerging markets private equity, with a portfolio of $1.6 billion. CDC's mission is to generate wealth, broadly shared, in emerging markets, particularly the poorest countries, by providing capital for investment in sustainable and responsibly managed private sector businesses.



EMERGING MARKETS PRIVATE EQUITY

GLOBAL PRIVATE EQUITY CONFERENCE SELLS OUT AT 600

The IFC 8th Annual Global Private Equity Conference held in association with EMPEA on May 11-12, 2006 in Washington, DC,

attracted 600 emerging markets private equity professionals for two full days of substantive content, intensive discussions, and almost

constant networking.

Co-Founder & Managing Director of The Carlyle Group David Rubenstein gave the audience an overview of the history of emerging markets private equity and an idea of which countries will follow in the footsteps of the BRIC regions.

EMPEA's Executive Director, Sarah Alexander, discusses the conference with sponsors George Siguler and Drew Guff of Siguler Guff.

IFC’s Private Equity and Investment Funds Director, Haydee Celaya, and Director of Corporate Governance, Teresa Barger, meet up with Claudia Koch of Ethos Technology.

Breakout sessions on regions and key issues were led by industry experts, including Sandeep Reddy of iLabs and Renuka Ramnath of ICICI Venture Funds. Topics included the major regions of the world, small and medium enterprises, clean technology, media, and hedge funds.

Vol II, Issue 2 - Q2 2006 |




EMERGING MARKETS PRIVATE EQUITY EXITS & IPOS

This list represents a sample of exits announced in Q2 2006. This list is not meant to be exhaustive, but rather indicative of the exit

trends in emerging markets private equity. Information is compiled from submissions to EMPEA and from a range of publicly

available news sources. We encourage all fund managers to submit information about their exits to EMPEA on a regular basis for

possible inclusion in the newsletter. Please send information to [email protected].

COUNTRY

Brazil

Brazil

China

China

China

China

India

India

India

Macedonia

Moldova

Romania

South Africa

South Africa

South Korea

Thailand

Thailand

PORTFOLIO COMPANY NAME

Grupo Abril

Lupatech S.A.

Bank of China

China Gren Tech (formerly known as Powercom)

China Paradise Electronics Retail Ltd

GST Holdings Ltd.

AirDeccan

Progeon

Sharekhan

On.Net

Commercial Bank "Moldova-Agroindbank" S.A.

Monopoly Media

Dunlop Tyres International

Reclamation Group Limited

Korea Exchange Bank

Central Plaza Hotel Plc.

Distri-Thai Ltd

DATE OF INVESTMENT

Jul-04

2003, 2004

Dec-05

Dec-03

2005

Dec-04

Mar-05

Apr-02

Oct-00

Sep-00

Jun-05

Apr-05

Mar-98

Apr-00

N/A

N/A

Dec-01

CAPITALINVESTED

US$70.7m

US$23m

US$74m

US$12m

US$60m

US$20.5m

US$55m

US$20m

US$10.6m

US$0.4m

US$1.6m

N/A

N/A

N/A

N/A

N/A

US$4.4m

DATE OF EXIT

May-06

May-06

Jun-06

Mar-06

May-06

Apr-06

May-06

May-06

May-06

Mar-06

Mar-06

Apr-06

Apr-06

Feb-06

TBA

May-06

Mar-06

TYPE OF EXIT

Trade sale to South African media group Naspers for US$86 million

IPO on Bovespa; neither firm divesting at IPO

Partial Exit: IPO on HKSE; share price rose 20% above offer price in first week after listing

Partial Exit: IPO on NASDAQ

Partial Exit: MS will sell 10% of holdings

Partial Exit: 3i took GSST public on the HKSE in June 2005, but made no divestment. In April, received US$18.7 million in return for selling half of its shares

IPO on BSE; undersubscribed, share offering price reduced. Neither firm divesting at IPO

Trade sale to Infosys of all holdings for US$115 million

Secondary sale of Carlyle's stake to General Atlantic; other private equity investors did not divest

Trade sale of SAEF's 59.4% ownership to Slovenain Telecom for US$2.4 million

Open auction to foreign financial investors on the Moldova Stock Exchange

Trade sale to media company in Romania

Trade sale by Ethos-led consortium to Apollo Tyres of India

Management buy-out of Brait II holdings; funded through a Eurobond issuance

Trade sale to Kookim Bank of Lone Star's 51% equity stake. The two groups have signed an agreement with a sale price of US$6 billion, but deal is still pending approval of Financial Supervisory Committee

Secondary sale of 16.2 million shares to Lombard's Thailand Equity Fund for US$15 million

Secondary sale of its entire stake for US$12.5 million to Actis

RETURN

N/A

N/A

N/A

4.35x; 92%IRR ($US)

N/A

N/A

N/A

5.7x

N/A

6.4x; 43% IRR

3.7x; 33.6% gross

IRR

1.63x; 63% IRR

N/A

N/A1.76x book value;

20% premium over market price;

N/A

3.41x; 36% IRR

PRIVATE EQUITY FIRMS

Capital International

Natexis Mercosul Fund, GP Investimentos

Asian Development Bank

Actis

Morgan Stanley Private Equity

3i PLC

ICICI Ventures Funds Management & Capital International

Citigroup Venture Capital International (CVCI)

Carlyle Group

Small Enterprise Assistance Funds

Horizon Capital Advisors LLC

Scimitar Global Ventures

Ethos Private Equity

Brait Private Equity

Lone Star

International Finance Corporation (IFC)

Navis Capital Partners

OTHER PE INVESTORS

N/A

BNDES, CRP

Oaktree Capital Management, LLC,

Och-Ziff Capital Management,

Temasek

Standard Chartered Private Equity, JAFCO Asia

Technology Fund

CDH China Fund

N/A

N/A

N/A

General Atlantic LLC; HSBC Private Equity India Fund,

Intel Capital

N/A

EBRD

N/A

Franklin, Ellerine Brothers, Frangos

N/A

N/A

Lombard Investments

Actis




Abraaj Capital of Dubai and BMA Capital of Pakistan are co-sponsoring a $300 million private equity buyout fund in Pakistan. The fund looks to fully close by September 2006, with targeted internal rate of return of 30%. http://www.abraaj.com/

Actis will invest US$9.6 million in India based Phoenix Lamps Ltd via its Actis India Fund 1 LP and Actis Asia Fund 2 LP, giving them a 14% equity stake investment in the firm. http://www.act.is

AIG Capital has acquired a 30% share of the Frigorifico Mercosul meat packing plant for $21.5 million. This is AIG's second investment in Brazil's agricultural sector. http://www.aiggig.com/

CB Richard Ellis, a Los Angeles-headquartered commercial real estate firm, has acquired a 51% stake in Noble Gibbons, a Russian real estate services firm, from Alfa Capital Partners, a Moscow-based private equity and real estate investment firm. No financial terms were disclosed. http://www.alfacp.ru/eng/

The Wall Street Journal reports that The Carlyle Group has agreed to pay about US$1.3B for the majority stake in Taiwan's Eastern Multimedia Co., one of the country's largest cable television operators. Carlyle has reportedly outbid Newbridge Capital and Liberty Global private equity groups in the deal. http://www.thecarlylegroup.com/

ChrysCapital has exited from Gammon India, a construction company by selling its entire stake in the company at around US$95M in the secondary market. Chrys Capital received 4.75 times its original US$20M investment from 15 months ago. http://www.chryscapital.com

Evolvence Capital of Dubai has announced its $150 million Evolvence India Life Sciences Fund, which will invest in pharmaceutical, biotech, research and drug manufacturing companies in India. The firm named Hari Buggana as the fund's managing director. http://www.evolvence.com/

IDFC Private Equity, a Mumbai-based investment management firm, has raised US$430M for its second fund. IDFC Private Equity Fund II focuses on Indian infrastructure. The firm's portfolio includes GMR Energy, Chalet Hotels and Dehli International Airport. http://www.idfc.com/

Vietnam-based Mekong Capital closed its second private equity fund, the Mekong Enterprise Fund II, with capital commitments of $50 million. http://www.mekongcapital.com/

Paul Capital Partners' Royalty Fund, a leading international healthcare fund, has signed a US$27M deal with the U.S. subsidiary of India's Glenmark Pharmaceuticals Ltd. In return for their financing of the development of 16 dermatological products by Glenmark for the U.S. market, Paul Capital will receive an undisclosed royalty on the net sales of these products, which currently have a total market value of about US$1bn. http://www.paulcapital.com/

SHUAA Partners announced the initiation of its second private equity fund - the Frontier Opportunities Fund I LP targeted to be $100 million to invest in Syria, Lebanon and Jordan. http://www.shuaapartners.com/

Siguler Guff, an investment advisory and fund of funds manager based in New York, has closed its US$600M BRIC Opportunities Fund LP. The new fund of funds will invest in local private equity GPs, as well as make direct co-investments in Brazil, Russia, India and China. The fund's original target size was around US$350M and had to be increased to accommodate strong investor demand. http://www.sigulerguff.com/

MEMBER NEWS – Q2 2006

Emerging Markets Private Equity Association

What is EMPEA… EMPEA is a broad-based membership organization formed to serve private equity and venture capital firms and institutional investors in the emerging markets of Asia, Eastern Europe, Africa, Latin America and the Middle East.

EMPEA’s Core Beliefs are… Private equity investing can be a critical driver of economic growth and opportunity in emerging markets and can generate strong returns for investors. Despite significant differences across emerging market regions, private equity firms face important common challenges and opportunities.

EMPEA’s Mission is… To help strengthen the performance of private equity investing in emerging markets by assisting private equity firms and other stakeholders address industry challenges that are pan-emerging-market in nature.

EMPEA’s Vision is… EMPEA implements targeted programs, in coordination with national and regional venture capital associations, that help improve private equity returns and increase investment flows.

To become a member of EMPEA, please visit our website at: www.empea.netOr call EMPEA at +1 202.449.1155



Q4 2006 continued

Asian M&A ForumMid - October, Shanghai, Chinawww.asianfn.com Asian Business Dialogue on Corporate Governance 2006October 26, Beijing, Chinawww.acga-asia.org The Asian Private Equity Investors Conference (co-hosted by SVCA & PEI)October 30, Singaporewww.privateequityinternational.com 6th AVCA ConferenceNovember 5 - 8, Dakar, Senegalwww.avcanet.com Asian Venture Forum's 19th Annual ConferenceNovember 8 - 10, Hong Kongwww.asianfn.com PE Analyst Limited Partners Summit WestNovember 15 - 16, San Francisco, CAevents.dowjones.com PE Limited Partners Europe Conference November 28 - 29, Savoy, Londonevents.dowjones.com Emerging Markets Forum 2006(co-hosted by EMPEA & PEI)November 30 - December 1, Londonwww.privateequityinternational.com AVF - IndiaDecember 4 - 6, Mumbai, Indiawww.asianfn.com Asian Ventures 2006December 5 - 6, San Jose, CAevents.dowjones.com


David BaylisNorton Rose

Michael BleyzerSigmaBleyzer

Christopher Brotchie Baring Asia, India &Vostok Funds(Sr. Advisor)

Michael Calvey Baring Vostok Capital Partners

Patricia ClohertyDelta Private Equity Partners

Yasser El MallawanyEFG-Hermes Private Equity

Cynthia HostetlerOPIC

Richard LaingCDC Group plc

Roger Leeds, ChairmanJohns Hopkins UniversitySAIS

H. Jeffrey LeonardGlobal Environment Fund

Donald RothEMP Global

André RouxEthos Private Equity Ltd.

George SigulerSiguler Guff & Company, LLC

Pote VidetPrivate Equity (Thailand) Co.,Subsidiary of Lombard

Andrew WilliamsSVG Advisers Limited

Teresa BargerInternational Finance Corp

Thomas BarryZephyr Management, L.P.

Michael BarthDarby Overseas Investments

Antonio BonchristianoGP Investimentos

Woodrow CampbellDebevoise & Plimpton

Ashish DhawanChrysCapital

Paul FletcherActis

Mark JenningsAfrican Venture CapitalAssociation

EMERGING MARKETS PRIVATEEQUITY ASSOCIATION

BOARD OF DIRECTORS

BOARD OF ADVISORS

Josh LernerHarvard Business School

Dennis LockhartChairman, SEAF

Thomas ‘Mack’ McLartyKissinger McLarty Associates

Luis MirandaIDFC Private Equity

David RubensteinThe Carlyle Group

Everett SantosFounder, LAVCA

James Seymour, ChairmanCommonfund Capital

Robert StillmanMilbridge Capital Management, LLC

Paul TierneyChairman, Technoserve

EMPEA’s Board of Directors and Board of Advisors would like to

express sincere gratitude to the Charter Members who have

joined EMPEA, thereby providing the necessary resources to

support the growth of this organization.

NEW CHARTER MEMBERSApril 1 - June 12, 2006

UPCOMING EVENTS OF INTERESTEMERGING MARKETS PRIVATE EQUITY 2006

IEP Capital, LLCOmidyar Network

JOIN EMPEA AS A CHARTER MEMBER!To learn more: [email protected] or +1 202.449.1155

For a complete list of EMPEA's Members, visitwww.empea.net

Q3 2006

European Private Equity COOs & CFOs ForumJuly 5 - 6, London, UKwww.privateequityinternational.com The 2006 Private Equity Strategic Financial Management ConferenceJuly 18 - 19, New York, NYwww.privateequityinternational.com First Annual Master Class on Deals in IndiaJuly 27, New York, NYwww.capitalroundtable.com Private Equity Forum China 2006August 31 - September 1, Shanghai, Chinawww.iqpc.com.cn Private Equity World Middle East 2006September 19 - 21, Dubai, UAEwww.altassets.com 13th Annual PE Analyst ConferenceSeptember 26 - 27, New York, NYpeaconference.dowjones.com Q4 2006 Venture Capital Investing in IndiaOctober 10, San Francisco, CAwww.ibfconferences.com EVCA Venture Capital ForumOctober 11 - 13, Barcelona, Spainwww.evca.com LAVCA LP/GP RoundtableOctober 12, Washington, DCwww.lavca.org

Note: The challenges inherent in gathering data for private equity may result in discrepancies. EMPEA strives to gather and report data that is respected in the industry and to the greatest extent possible based upon the best of available research, whether our own or from a reliable third party.

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