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Asia’s Private Equity News Source avcj.com November 20 2012 Volume 25 Number 44

Funds Focus

Under the hammerGPs must adapt to Asian business owners’ attraction to auction sales Page 7

Asian distress angleSSG reaches $400m hard cap on Fund II 3

Green field cuisineVC builds China dining chain from scratch Page 14

Best practice for GP-LP co-investment deals

Page 11

FountainVest in $1.35b quickfire fundraise

Page 12Anacacia attracts $129m for Australia SME fund

Page 12

Focus

Funds

The results of our audience polls

Page 15

Voting opens for the AVCJ India Awards

Page 3

Bain Blackstone, Carlyle, CVC, Highland, IVFA, KKR, NewQuest, OTPP, PEP, Symphony Asia

Page 4

Editor’s ViEwpoint

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AVcJ ForuM

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Number 44 | Volume 25 | November 20 2012 | avcj.com 3

Editor’s [email protected]

Voting has opened for the 2012 aVCJ Indian Private Equity & Venture Capital Awards. The region’s private equity community has until November 26 to pay tribute to the leading fundraising, investments, exits, individuals and firms of the past 12 months.

Votes are cast via the AVCJ Awards website (www.asianfn.com/voteind.asp). No more than 10 votes will be accepted from employees of a single firm. The public has a 50% say in the final result, with a judging panel of industry experts and the AVCJ Editorial Board each accounting for 25%.

Based in part on recommendations submitted by the private equity community, the AVCJ Editorial Board drew up nominee shortlists in consultation with the judging panel. The website includes full details as to why each nominee made the final shortlist.

The winners will be announced at an invitation-only gala dinner in Mumbai on December 6, during the AVCJ India Forum, which runs from December 6-7.

The nominees in each category are as follows:

INDIAN LEGAL ADVISOR OF THE YEAR• ALMT Legal• Amarchand & Mangaldas• AZB & Partners• J. Sagar Associates• Khaitan & Co

INDIAN FINANCIAL ADVISOR OF THE YEAR• Avendus Group• Edelweiss Capital• Ernst & Young• o3 Capital• PricewaterhouseCoopers

INDIAN FUNDRAISING OF THE YEAR• ChrysCapital VI (ChrysCapital Partners)• Helion Venture Partners III (Helion Venture

Partners)• Kalaari Capital Partners II (Kalaari Capital

Advisors)• Nexus India Capital III (Nexus Venture Partners)• Tano India Private Equity Fund II (Tano Capital)

INDIAN PRIVATE EQUITY EXIT OF THE YEAR• Fourcee Infrastructure Equipment (Mayfield)• Genpact (General Atlantic/Oak Hill Capital)• Housing Development Finance Corp (The

Carlyle Group)• Netmagic Solutions (Nexus Venture Partners/

Fidelity Asia Ventures/Nokia Growth Partners/Cisco Systems)

• Parag Milk Foods (Motilal Oswal Private Equity)

INDIAN VENTURE CAPITAL DEAL OF THE YEAR• Au Financiers (Warburg Pincus)• Bigtree Entertainment (Accel Partners)• Capillary Technologies ¬(Norwest Venture

Partners/Sequoia Capital/Qualcomm Ventures)• Fashion And You (Intel Capital/Norwest

Venture Partners)• Flipkart (Accel Partners/Iconiq Capital/Naspers/

Tiger Global)

INDIAN PRIVATE EQUITY DEAL OF THE YEAR• CARE Hospitals (Advent International)• Continuum Wind Energy (Morgan Stanley

Infrastructure Partners)• Fourcee Infrastructure Equipment (General

Atlantic)• Genpact (Bain Capital)• TVS Logistics (KKR/Goldman Sachs)

INDIAN PRIVATE EQUITY PROFESSIONAL OF THE YEAR• Sanjeev Aggarwal (Helion Venture Partners)• Abhay Havaldar (General Atlantic)• Sanjay Nayar (KKR)• Ajay Relan (CX Partners)• Naren Gupta (Nexus Venture Partners)

INDIAN FIRM OF THE YEAR• ChrysCapital Partners• Helion Venture Partners• KKR• Nexus Venture Partners• Warburg Pincus

Tim BurroughsManaging EditorAsian Venture Capital Journal

Please vote in the AVCJ India Awards

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avcj.com | November 20 2012 | Volume 25 | Number 444

AVCJ FORUM

Industry experts predict next 25 years of Asian PEThe future of Asian private equity will see the rapid macro growth fuel the buy-out market while LPs demand more co-investment opportunities, said industry participants at the AVCJ Forum. During a panel discussion on lessons of the past 25 years of Asian private equity, panelists were asked what they expected in the next quarter century. “You will find institutional LPs insisting on more co-investment, and private investors such as family offices will start doing more direct deals and investing less in funds,” predicted Anil Thadani, chairman of Symphony Asia.

Pension plans unsure about VC commitmentsNorth American pension plans have mixed feelings towards venture capital funds – some find GPs that were once refused to take meetings are now opening up to a wider range of investors while others back off from the asset class, blaming limited access to top funds. “Groups that wouldn’t talk to public pension funds a few years ago are now considering us,” said Scott Parrish, private equity portfolio manager for the State of Wisconsin Investment Board.

Cross-border complicates ‘regional v country’ debateAs GPs become more efficient at cross-border deals, industry participants say the regional funds versus country funds debate is becoming less clear cut. “Whether it is better to have a regional fund or a country fund depends on the GP,” said Roy Kuan, managing partner at CVC Capital Partners. “It depends on their expertise and what they are good at.”

China’s entrepreneurs are chasing Silicon ValleyChina’s venture capital industry may not yet rival Silicon Valley, but companies are still exhibiting strong growth and pursuing business models as innovative as those found in the US. “The Chinese entrepreneurs have copied copy the Silicon Valley model but what we have found today is that, at least over the past three years, Chinese entrepreneurs are now using more creative models than those being used in the US,” said Chuan Thor, managing director at Highland Capital Partners.

Investors bullish on Asia healthcare sectorDespite regulatory hurdles and a waning IPO market, the healthcare care sector is an increasingly attractive area of investment for venture capitalists. “Over the past decade China’s GDP has been growing at a rate of 10% a year, while the growth rate in the healthcare sector has been 30%, and I firmly believe it will continue to grow at a similar rate over the next few years,” said Leon Chen of Frontline Bioventures.

GPs must improve IR in tough fundraising climateIt is imperative that GPs build better relationships with end investors if they hope to secure re-

ups in an increasingly challenging fundraising environment, according to industry participants. “GPs should expect a longer and more complicated fundraising process and they will need to be a lot more creative, a lot more flexible and really understand different segments of the LP base,” said Wayne Tsou, head of Carlyle Asia Growth Partners.

LPs wary of raising Asia PE allocations above 10%Institutional investors are generally happy to deploy 10% of their private equity allocation in Asia, but say it is difficult to justify increasing this portion until risk factors ease and local managers build up stable teams and substantive track records. ”The flow of capital to emerging markets is such that it’s pricing out the emerging markets premium,” said Steve Byrom, head of PE at Australia’s Future Fund. “Asia will probably get us the same returns as other emerging markets, which will probably be about the same as the US and slightly better than Europe on an IRR basis.”

GPs see strong deal flow despite macro headwindsAsia’s leading PE investors remain bullish about investment prospects in the region despite a challenging macro environment and a weak public exits market. ”We have completed some large deals in Japan and we also see more transactions coming out of Australia, Southeast Asia and Korea,” said Jim Hildebrandt, managing director at Bain Capital Asia.

China to remain world’s leading emerging marketChina and Asia will remain the preeminent emerging markets destination for private equity despite moderating growth and increased competition for deals, GPs said. ”We are looking at emerging markets but nowhere compares to China and India,” said Wayne Tsou, head of Carlyle Asia Growth Partners. “You might get huge returns from economies like Africa if you get in early but the game changer for the next couple of decades is Asia.”

AUSTRALASIA

PageUp People gets $10m from Accel-KKRAccel-KKR, a Silicon Valley-based PE firm, has invested $10 million for an undisclosed stake in PageUp People, an Australian firm that provides

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Slowdown in IPO exits is boon for trade salesPublic market volatility has cut off IPO exits and investors don’t expect a turnaround in the short term. However, PE firms that target control deals are excited by the prospects for trade sales.“One of challenges that faces our industry now is the exit situation in the public markets over the last two years, the IPO market is difficult,” said Joe Bae, managing partner of KKR Asia.

The options are more limited for GPs with minority investments in countries like China and India and holding periods are lengthening. “If you have a high quality business you will still be able to go public but you may not get an optimal valuation,” Bae added

On the other hand, the challenging IPO market is facilitating investments as growth companies confronted with a scarcity of capital find they have fewer places to go, broadening the opportunities for PE. ”I think the hard truth is that in markets like China we can look back to 2008-2011 and a huge part of the market was pre-IPO, growth stage investments and investments in smaller companies, not necessarily market leaders,” said Michael Chae, senior managing director at The Blackstone Group.


software for tracking worker performance.The investment will fund the further expansion of the PageUp People technology platform into emerging markets.

PEP targets $3.6bn for Fund IVPacific Equity Partners (PEP) is targeting up to A$3.5 billion ($3.6 billion) for its fifth fund, including A$2 billion of core equity and a further $1-1.5 billion earmarked for a co-investment pool. Although smaller than the GP’s previous fund - which closed at A$4 billion in early 2008 - the new vehicle dwarfs anything everything that has come out of Australia since then.

Billabong director explores buyout optionsBillabong shares spiked 17% during Monday morning trading after the Australian surfwear company announced one of its directors was looking at a possible leveraged buyout. TPG Capital and Bain Capital both submitted bids of A$694 million ($709 million) for Billabong but withdrew last month after conducting preliminary due diligence.

Carlyle, Seven Group plan Coates Hire saleThe Carlyle Group and Australia’s Seven Group are planning to sell their stakes in Australian equipment rental company Coates Hire. The news comes after the pair failed to proceed with an A$800 million ($831 million) IPO of the company earlier this year. Carlyle and Seven Group have appointed Goldman Sachs to co-ordinate a strategic review of a possible sale. The review will commence immediately and take several months.

GREATER CHINA

OTPP leads funding round for 360buy.comCanadian pension fund Ontario Teachers’ Pension Plan (OTPP) has led a $300 million round of funding for 360Buy.com, China’s second-largest business-to-consumer e-commerce website by revenue. 360Buy confirmed that OTPP contributed $250 million, with the remainder committed by existing investor Tiger Global. Other market sources have put the round at $400 million, suggesting that Tiger Global’s contribution is $150 million instead of $50 million.

Squadron’s Prasanna joins Morgan Creek in ShanghaiAnand Prasanna, known to many in the industry as Anand RP, will join Morgan Creek Capital Management as a director in their Shanghai office. He left his previous position as an investment director at Squadron Capital, an Asia-focused fund-of-funds, two weeks ago.The addition of Prasanna takes Morgan Creek’s Shanghai team to eight investment professionals.

Gome records $110m loss for first nine monthsBain Capital-backed Gome Electrical Appliances has reported a loss of RMB686.7 million ($110 million) for the first three quarters of 2012.

Revenue was approximately RMB36 billion compared to RMB44 billion for the corresponding period last year, which saw the firm report profits of RMB1.79 billion. Gome warned last month that it expected to report a net loss for the period.

Western valuation criteria cannot be applied to China Valuation standards devised in Western markets cannot be automatically applied to Chinese companies due to the influence of factors such as due diligence, according to a new joint study released by German exchange organization Deutsche Börse and law firm CMS Hasche Sigle.The study was based on interviews conducted with European investors and Chinese managers of private equity and venture capital funds.

SOUTH ASIA

India Value Fund reduces size by 15%India Value Fund Advisors (IVFA) has trimmed its fund size by 15%, returning $100 million of the approximately $700 million corpus to LPs in response to changes in the investment environment. Management fees charged on that $100 million have also been reimbursed to LPs. ”We want to do things right - to serve all the stakeholders underpinning our success today, both LPs and the portfolio companies,” said Vishal Nevatia, managing partner at IVFA.

NewQuest to invest $140m in IndiaSecondaries specialist NewQuest Capital Partners expects to invest about $140 million in India - almost one third of its $400 million NewQuest Asian Fund I. The firm, which focuses on the direct acquisition of portfolio assets from GPs in Asia, intends to capitalize on vast opportunities for secondary deals in the country.

SOUTH EAST ASIA

SingTel Inov8 leads Series D round in VuclipSingTel Inov8, the venture capital arm of Singapore telecom giant SingTel, has led a $13 million round of series D funding in mobile video firm Vuclip. Existing investors NEA and Jafco Ventures also participated. Vuclip is based in India and claims to be the world’s largest independent mobile video and media company.

Northstar set to complete Nera telecom take-privateNorthstar Pacific Partners has agreed to buy a controlling 50.05% stake in Nera Telecommunications from power conversion specialist Eltek and is offering to buy the entire company for S$177.3 million ($145 million). This is the Indonesian GP’s first foray into Singapore.

Northstar - through its newly-incorporated unit Asia Systems - will acquire 181.1 million shares from Eltek at a price of S$0.49 apiece. This represents a discount of 5.8% from NeraTel’s last closing price on Monday, as well as a premium

of 10.6% over its 12-month volume weighted average. The transaction value also implies a 1.84x premium to the company’s net asset value (NAV) per share as of September.The private equity player will extend the same offer for the remaining shares, as required under Singaporean takeovers and mergers legislation.

Headquartered in Singapore, NeraTel offers solutions and services from satellite communications and wireless infrastructure networks to internet protocol, broadcast network infrastructure and payment solutions. It serves customers in Asia, the Middle East and North Africa

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the last time naVis Capital partners bought a company via auction was 11 years ago, when it acquired Malaysia-based diaper manufacturer Drypers in a deal that was worth $22 million. The process was distorted, though, because the PE firm won over senior management at the very beginning. Three years later, Navis exited the asset to Sweden-based hygiene product group SCA for $90 million through a limited process, yielding almost 7x its original cost and an IRR of 103%.

“As a seller, I quite like auctions because they usually provide better prices,” Nick Bloy, Navis’ co-managing partner, tells AVCJ. “But from a buyer’s perspective, we rarely participate in auctions. Our goal is to break an auction, as opposed to struggling over the finish line ahead of multiple other parties. To do this, you need an information advantage or some sort of asymmetry between you and the other buyers, so you can reach a bilateral agreement with the sellers as early as possible.”

Navis is certainly not the only private equity firm that stays away from auctions. Weijian Shan, chairman and CEO of PAG, has yet to emerge victorious from an auction after 14 years in the industry simply because he has never participated in one; CVC sees around 80% of its portfolio companies in Asia come via propriety transactions.

It is not difficult to understand why private equity players don’t like auctions – by definition they imply someone has to outbid others to acquire an asset. These processes inevitably open up the universe of bidders, and it is challenging for financial sponsors to overcome strategic investors that typically have a longer term outlook and a willingness to pay a premium for potential synergies with the target company.

“For auctions that undertake a well-organized marketing process, most of the deals can be completed successfully,” says Chris Laskowski, head of the financial entrepreneurs group and COO of global banking for Citi in the Asia Pacific region. “But if you ask me how many auctions have private equity investors participating, most will just take a look, and only a few of them end up bidding aggressively.”

Due diligence is another concern for private equity investors. Given that most auctions are

run by investment banks and corporate finance houses, the formal process is often conducted rigidly and at the seller’s behest. Even if bidders are allowed to meet the company management several times, building intimate relationships is challenging. The presence of investment bankers, who often write the presentation materials, routinely rehearse the sellers, and then sit in on every meeting, makes the process even more difficult.

Of course, sellers are to some extent in the opposite position. Given emerging Asia’s rapid economic growth, strong interest from foreign investors, and the limited number of large assets that come to market, entrepreneurs are increasingly aware of the merits of leveraging the supply-and-demand gap. And even if they aren’t aware, there are plenty of intermediaries willing to set events in motion and take a fee for the trouble.

Auctions, already prevalent in developed economies such as Australia and Japan, are becoming more common in emerging markets M&A. Private equity investors may not like to look at auctions, but for certain kinds of deals, they must accept that it has become a sellers’ market.

Bidding universeThe proliferation of auctions comes as global buyout firms probe deeper into developing Asia in search of larger-ticket deals. For various reasons, not least entrepreneurs unwilling to give up control or state-owned enterprise officials unable to do so, China and India have yet to become strong buyout markets. Southeast Asia, however, is another matter, and investors are building up a presence in the region.

KKR, The Blackstone Group and General Atlantic have all opened offices in Singapore since the start of the year to serve as bases for

Auctions: The new normalPrivate equity firms love selling assets via auction but hate buying them through such channels. As Asian company owners become more sophisticated, bidding contests for large assets are becoming more frequent

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Suhail Bahwan Group Unigestion U.S. Department of the Treasury Washington State Investment Board Waterfield Advisors

and many more.

Keep it small: limited auctions in asia While a full-scale M&A auction in the US usually involves as many as 10 bidders in a room,

Asian companies usually preferred a limited process. It starts with 5-6 prospective investors, which are subsequently trimmed down to the 2-3 that express the most aggressive interest.

There are numerous reasons why limited auctions are popular in Asia, including the inability to run a big process, a wish to avoid too much publicity, as well as unwillingness to disclose financial data to unfamiliar investors.

“Auctions are more prevalent in the US, Europe and Australia as these markets are more regulatory-driven at this point,” says Stephen Seelbach, managing director and head of Morgan Stanley’s regional financial sponsors division. “But if you are dealing with more developing markets in Asia Pacific, often first or second generation entrepreneurs may not want the publicity an auction generates.”

However, Nick Bloy, co-managing partner at Navis Capital Partners, argues that limited auctions have their merits as drawing the attention of a few potential buyers brings with it a sense of exclusivity.

When the private equity firm hired J.P. Morgan for the sale of King’s Safetywear, the investment bank initially sent out information memoranda to 20 investors. The list was narrowed to three bidders within four months and Honeywell International finally secured the asset for S$430 million ($338 million) last November.

“You don’t throw it to everybody and present the same set of materials 20 times,” Bloy explains. “You are selective about whom you bring in. As a seller, I also feel a little bit more comfortable because if I put the best buyer in a three-horse race, they might think it’s worth it and put in the effort.”


private equity activity in Southeast Asia. The Carlyle Group, TPG Capital and CVC Capital Partners are already well established there, each with 4-9 investment professionals. Regional players such as Affinity Equity Partners and Navis already boast more than one location in Southeast Asia.

If more deals of size are forthcoming, based on recent form, they are likely to come via auction. Private equity suitors can expect to face competition from a growing number of multinationals looking for inorganic means of expanding their footprints in the region.

“The last couple of private equity deals I was involved were all run by some sort of auction. The trend is towards that and it’s all about the value threshold: if the value is significant, I would expect an auction,” says Robert Ogilvy Watson, managing partner of Ashurst in Hong Kong. “One of the reasons you see auctions on the biggest deals is that running the process requires quite a lot of upfront investment, but if you have a good asset and get good attention, you can get a higher price.”

At the same time, investment bank and corporate finance houses – which previously focused on more mature markets – are also running around the region, pitching company founders on the hidden benefits of having a third-party transaction organizer. Apart from providing modern governance and transparency, these entrepreneurs also appreciate that a top-tier investment bank is able to bring an auction a host of international strategic investors that would otherwise be out of reach.

“When you look globally, the country with the most auctions is the US because regulations require them,” says Stephen Seelbach, managing director and head of Morgan Stanley’s regional financial sponsors division. “But as China and other emerging countries develop, I think there is no question that there will be more auctions.”

While entrepreneurs are becoming more sophisticated and the capital markets are more developed, a dual-track process – in which an IPO and a private auction process are pursued simultaneously – is a popular option for sellers wishing to preserve flexibility while maximizing prices. If a public market exit is ruled out and the asset is sold via auction, the competitive pressure of a feasible IPO process can drive bidders to put more money on the table.

“Even if there is just one guy who is serious at the auction, if he knows there is a viable IPO as an alternative, the deal dynamics change,” Citi’s Laskowski says. “When entrepreneurs put their projections together, their net income tends to go up and they genuinely believe in it. I’d say company owners are very optimistic about their future growth and now see value in creating

price tension in order to obtain the best terms in a fairly rapid manner.”

Given these high expectations on price, there is often a significant valuation gap between buyers and sellers – and this is particularly obvious in Indonesia. In August, Blackstone, Bain Capital, KKR and Abraaj Capital were said to have reached the second round of bidding for a significant minority stake in Siloam, Indonesia’s biggest private hospital firm. The seller – the

Riady family-controlled Lippo Group – is looking for a valuation of up to 25x EBITDA, according to market sources. The deal has yet to close.

Last year, Carlyle was the frontrunner for a 25% stake in Indonesian snack and beverages producer GarudaFood. The private equity firm seemed poised to land the asset for around $200 million, having reportedly made a bid of 20x EBITDA that overcame the likes of TPG, Affinity, 3i Group and Japan’s Suntory.

AVCJ’s sources were skeptical, saying that such a high valuation might kill the transaction. In mid-July, Suntory duly announced that it would set up a joint venture with GarudaFood and take a large minority stake in the company’s distribution arm.

“From a buyer perspective, the key is to be disciplined on valuation and not get influenced by the fact that there is an auction going on,” says Ogilvy Watson of Ashurst. “Try not to be affected by the tension that sellers want to introduce because it’s much more likely that you will overpay if you think you are in a competitive process.”

Relationship building Despite formidable challenges in the bidding process for private equity players, some industry participants argue that it is possible to emerge victorious from auctions by following the Navis-Drypers approach: establish personal relations with management before the formal process starts.

Relationships are especially helpful when companies are looking for partners to provide expansion capital instead of selling their entire interest in a business. Given that the first phrase of an auction is mostly non-binding, there is a chance that a level of intimacy with management is worth more than the price on the table.

“In reality, auctions – often time – are a winner’s curse because you have to overpay to win. We only participate very selectively, if we have a distinct angle or relationship” Sigit Prasetya, managing partner at CVC, tells AVCJ. “There are a number of our successful deals from auctions that we were not the highest bidder.”

In March, the private equity firm bid $275 million for a 33.94% stake in LinkNet, Indonesia’s second-largest fixed-line broadband and cable TV operator, with the option of increasing it to the 49% foreign ownership ceiling. According to a source familiar with the transaction, the deal originated from a pre-existing relationship with the seller, the Riady family’s Lippo Group.

A year earlier, the PE firm had sourced a proprietary deal from Lippo – a majority stake in Matahari Department Store for $633 million. CVC acquired a 72.6% holding in the asset, which accounted for the bulk of parent company Matahari Putra Prima’s majority stake. The two parties agreed to enter into a partnership structure, with Lippo Group-controlled Putra Prima placing its entire holding into a joint venture, of which it owns 20% to CVC’s 80%.

“When CVC was trying to do invest in LinkNet, the company thought there was a valuation gap,” says the source. “LinkNet subsequently launched an auction and CVC participated. The private


Formal aucTion process Timeline

➤ preparation • Preparation of carve-out financials• Finalise teaser and information

memorandum (IM)• Build forecasts and valuation model• Finalize potential investor list• Draft process documentation and prepare

confidentiality agreement

➤ phase 1 - leading to indicative offers • Contact investors• Execute non-disclosure agreements• Distribute IM and bidding instructions• Receive non-binding indicative offers

➤ phase 2 - leading to binding offers • Finalize and hold management

presentation• Draft sale and purchase agreement (SPA)

for inclusion in data room• Evaluate bidder offers and select preferred

bidders• Second round bidding instructions issued

and data room opens• Invite short-listed bidders to view data

room and answer Q&A

➤ phase 3 - negotiation and closing • Receive final binding offers• Review final binding offers and decide

negotiation strategy and tactics • Negotiations on SPAs• Signing subject to closing conditions

Source: Ashurst


equity firm was the third highest bidder but the relationship with the Riady family finally won them the bid.”

Deal certaintyWhile strategic investors may hold the advantage in terms of cost of capital, they are generally slower to close transactions because of long and complicated internal decision making processes. In some cases, corporate investors also demand that additional conditions be attached to the deal, ranging from corporate governance requirements to social responsibility licenses.

As such, deliverability – minimizing conditions and time to closing – is often a critical factor in private equity investors winning auctions. This is particularly the case during transactions when a company is seeking urgent debt refinancing or restructuring.

Bain’s A$1.3 billion ($1.3 billion) acquisition of Australian business software firm MYOB represents an interesting case study in the importance of deal certainty. UK software manufacturer Sage had emerged as a late frontrunner for the asset, which was put on the block by Archer Capital and HarbourVest Partners.

The strategic buyer was said to be willing to pay as much as A$1.4 billion, beyond the comfort zone of Bain or rival KKR and well above the original asking price of around A$1 billion.

However, Sage then ran afoul of the global markets. Its share price dropped 11.5% in

between the initial bid and confirmation of the potential acquisition, while foreign exchange rates turned against the pound. This meant the acquisition could amount to more than 25% of Sage’s market value, requiring a shareholder vote for it to go through. The company abandoned its bid.

Another threat to deliverability comes in the form of regulatory requirements that might be attached to a transaction.

This was the reason a group led by Primus Financial Holdings and China Strategic Holdings failed to secure AIG’s Nan Shan Life Insurance unit last year despite its $2.15 billion bid being accepted. The Taiwan authorities vetoed the deal, citing concerns over the buyers’ financial capability and long-term commitment.

Ruentex Gorup, a Taiwanese family conglomerate eventually picked up the asset for the marginally higher price of $2.156 billion after receiving guarantees

from the regulators.“Sellers often have a fair value in mind,” says

Navis’ Bloy. “If someone overpays it, it is bonus, but ultimately if you can get fair value, you would want the sale to be done in a way that is quick and clean.”

AssociAte your brAnd with excellence: If you would like to be associated with recognising and rewarding excellence in Indian private equity industry, award sponsorship opportunities are available. Please contact samuel lau on +852 3411 4963 or [email protected]

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PrivateEquityDealoftheYearVentureCapitalDealoftheYearFundraisingoftheYearExitoftheYear

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AVcJ indian Private equity & Venture capital Awards 2012Recognising excellence in inDiAn PRivAte equity Voting is now open!

Top 10 Asia Pacific M&A financial advisors by value, 2012 YTD

financial advisor

ranking value

(Us$m)

market share

(%)no. of deals

Morgan Stanley 111.8 18.1 152

Goldman Sachs & Co 110.1 17.8 105

Citi 95.4 15.5 71

UBS 87.3 14.2 56

JP Morgan 78.6 12.7 58

Credit Suisse 68.0 11.0 57

Mizuho Financial Group 64.1 10.4 119

Nomura 58.9 9.5 136

Deutsche Bank 54.1 8.8 56

Bank of America Merrill Lynch 52.9 8.6 33

Note: Ranking value includes net debt of targetSource: Thomson Reuters

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asK any gp aboUt their past experiences of co-investment and you are not necessarily going to get the same answer from all. Such transactions are by no means new to the asset class but the understanding of what they involve and what investors expect from them is changing.

“When I was asked to participate in a co-investment panel, intuitively it implied to me investing alongside other GPs,” said George Raffini, chairman of Headland Capital Partners, speaking on a panel at the AVCJ Forum. “If you look at our history about 30-40% of all deals have been co-investments but only about 5% of those have been with LPs in our funds.”

Yet, in the last few years there has been a rise in the number of GP-LP co-investments. This is in part a response to the post-global financial crisis fundraising environment.

Institutional investors are looking to consolidate their fund manager relationships, which means GPs must offer more to secure a re-up. Co-investment is a classic sweetener, offering LPs the opportunity to reduce fees and generate higher returns, and also to develop closer relationships with GPs.

According to Preqin, funds-of-funds are the LPs with the biggest appetite for these kinds of deals, accounting for 23% of co-investors globally. Public pension funds make up 10% with asset managers, private sector pension funds, insurance companies and banks accounting for 7%. By region, 25% of LPs that co-invest are in Asia, 44% are in the US and 31% are in Europe.

AVCJ research meanwhile reveals a broader trend in Asia favoring co-investment deals in general: the number of transactions between 2009 and 2011 rose by more than 50% to 535.

Helpful partners?It is, however, not a zero-sum game: GPs may need extra capacity to target certain transactions. “The most obvious reason to seek co-investors is when a deal is too large.” said K.Y. Tang, chairman and managing partner of Affinity Equity Partners, and another panelist. “In the early days we always went to other GPs but once we changed our minds, our first preference became LPs.”

According to Tang, when Affinity was raising its first fund, LPs on the whole were unfamiliar with co-investment deals and only four parties

showed any interest. When the GP was raising its most recent fund in 2006, however, as many as 45 LPs expressed a desire to co-invest.

“One of the nice things about Asia, in many respects, is that it’s really well set up for co-investment,” says Doug Coulter, a partner with LGT Capital Partners. “Track records are still being established, brands are still being built, even by some of the bigger GPs. If you have some strong LPs, why not build the relationship? If it is such a good deal you might not want to show it to a competing GP.”

The decision to co-invest with another GP may be born out of a need for the expertise that a particular manager can bring to a deal, such as an understanding of the regulatory environment in a specific industry or country, or because they have access to a certain market. Headland’s

Raffini argues that co-investment with LPs should be motivated by similar considerations.

“There is no template, but that should be the driver of co-investments rather than fee reduction from a LP point of view or getting to know a LP because of upcoming fundraising, and I largely think that has been the case,” he said.

Furthermore, not all LPs are suited to co-investment. One Asian GP, whose firm recently made its first co-investment, noted that only larger, more experienced LPs are able to make decisions quickly.

“When we offer a co-investment opportunity to our LPs they are under a very specific time frame to respond; if they don’t respond in time

then the chance is gone,” the GP says. “Many LPs are used to taking their time. You can email one and not get a response for two weeks, which on a deal timetable is forever. They are supposed to get back to you in two hours not two weeks.”

Big pictureNevertheless, a need to encourage quality LPs to re-up means GPs are still willing to extend co-investment invitations and becoming more aware of institutional sophistication in area.

Pacific Equity Partners announced this week that it would seek to raise A$3.5 billion ($3.6 billion) for its fourth fund, with A$2 billion of core equity plus a further A$1-1.5 billion earmarked for a discretionary co-investment pool. The GP’s previous vehicle featured A$2.7 billion of core equity plus A$1.3 billion in co-investment

capital, structured on a discretionary basis – the co-investment was packaged into the fund and there was a single decision-making entity.

The idea is that the more modest fund size will pursue the same kind of deals but over a shorter deployment period.

LGT’s Coulter points to a broader trend: even the more successful GPs are struggling to raise capital, either by choice or by design because that is what the market. “On the other hand Asian economies are growing and the average check size is increasing,” he adds. “One would expect more co-investment opportunities with smaller funds and larger equity checks. In general, it is a good time for co-investment.”

Friends with benefitsCo-investment deals have been on the rise in recent years, enabling GPs to take on bigger deals and offer LPs fee-less returns. What is driving this trend and are such deals always a good idea?

Co-investment deals in Asia

Source: AVCJ Research

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

600

500

400

300

US$

mill

ion

Dea

ls

No of deals

2009 2010 2011 2012

Total transaction value (US$ million)


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foUntainVest partners reaChed a final close on its second fund at $1.35 billion last week, but the process was more or less completed in July when the China-focused GP announced a first close of $1 billion, about four months after launch.

The vast majority of investors in Fund I, which attracted commitments of $950 million in 2008, re-upped for the new vehicle. This included anchor LPs Ontario Teachers’ Pension Plan (OTPP), Canada Pension Plan Investment Board (CPPIB) and Temasek Holdings. Washington State Investment Board was another substantial contributor, committing $150 million.

Overall, North American and European institutional investors contributed the majority of the funding, while pension funds remain the largest investor type. Even though FountainVest China Growth Capital Fund II exceeded its $1.25 billion target and reached the hard cap, Frank Tang, the PE firm’s CEO, says that fundraising was more challenging than for the previous vehicle.

“I found the current fundraising environment to be tougher with investor due diligence

requirements more demanding than five years ago,” he tells AVCJ. “There are also many terms in the limited partnership agreement (LPA) that moved significantly to become more LP friendly. We actually made some meaningful changes.”

The fund strategy, however, remains largely the same. FountainVest has more capital at its disposal so the $50-75 million typical ticket size may increase, but the targets are still private enterprises entering high growth stages. The major investment themes are also unchanged: the rise of the middle class and domestic consumption, urbanization and industrialization, and sustainable development.

Tang notes that backing companies entering high-growth stages means bolt-on acquisitions are common. Indeed, three of FountainVest’s investments were in part driven by the targets needing capital and support for acquisitions.

At year-end 2011, FountainVest’s portfolio was marked at 1.5x, with two exits – one full and one

partial – over the 12-month period generating an approximate gross IRR of 80%. There were 10 companies in the portfolio in May. The PE firm has since become involved in two management buyouts of US-listed Chinese companies: a $3.5

billion bid for advertising firm Focus Media alongside four other GPs; and a $63.3 million bid for jewelry retailer and wholesaler LJ International.

“Everybody has been looking at these types of opportunities,” Tang says. “The challenge of the last couple of years is the psychological hurdle the

entrepreneurs have to get over to accept a privatization. They like to be listed and are not happy about the idea of de-listing, but now more high profile companies are doing it, it seems to be the right thing.”

FountainVest was set up in 2007 by Tang, George Chuang, Chenning Zhao and Terry Hu, all of whom were previously members of Temasek’s China investment team.

With the established partiCipants in Australia’s lower mid-market having graduated to fund sizes of A$250 million or more as they progressed through the cycles, and many smaller players struggling to raise money, Anacacia Capital finds itself in less populated space.

“We find very limited competition in Australia – it’s the larger buyout space that has become crowded. We had exclusivity for every deal we did in our first fund,” says Jeremy Samuel, managing director at the private equity firm. “But the heart of the Australian economy is still small business; there are more than two million of them.”

Anacacia arrived at a second close of A$125 million ($129 million) for its second fund. The private equity firm has already exceeded its target of A$100 million and is on course to reach the hard cap of A$150 million. The completion deadline is September 2013 – about 17 months after launch – but the A$25 million in available

capacity is expected to be covered early in the year, predominantly by international LPs.

The private equity firm raised A$50 million for its 2007 vintage debut fund, almost exclusively from domestic investors. Every investor with capital available for private equity re-upped for Fund II. Australian superannuation and pension

funds are prominent backers with Anacacia taking up part of the small buyout allocation of their global PE strategies.

International LPs account for a significant minority of the corpus, principally fund-of-funds, endowments and family offices. According to industry sources, two of the

participants in the second close are institutional investors, each with more than $20 billion under management, that only maintain 2-3 relationships with local GPs.

Fund I has invested in eight management buyouts and completed five follow-on acquisitions. As of July, it had delivered a gross

IRR of more than 50%. There have been two full exits – including the sale of Lomb Scientific to US-listed Thermo Fisher Scientific in 2010 after a two year holding period, which generated an IRR of 80% – and several partial exits through dividend payments.

Half the returns from Fund I come from portfolio company dividends, with the likes of baby food producer Rafferty’s Garden, Integrated Appliance Group and language technology provider Appen Holdings all performing well.

The new fund will follow a similar strategy to its predecessor – targeting Australia-based small- and medium-sized enterprises (SMEs) with revenues of A$20-100 million and positive earnings – although the larger corpus should allow for more deals in total. The plan is to make 12 investments over the 10-year life of the fund.

“There is a baby boomer generation that is dealing with succession issues and they are looking for exclusive relationships with private equity investors who can serve as partners, helping them manage the succession and keep some equity in the business,” Samuel says.

FountainVest in rapid fundraise

Anacacia seeks Aussie SME buyouts

FountainVest CEO: Frank Tang

SMEs drive Australia’s economy

international inVestors are CUrrently gun-shy on India, with capital is leaving the country with alacrity, across all asset classes. For Asia-focused distressed investor SSG Capital Partners, India has become an attractive target market.

“We tend to be contrarian – when the economy is down and funding is tight in the market it translates to robust deal flows” says Edwin Wong, managing partner and chief investment officer at SSG. “The economic slowdown plus inherent issues in India mean there are more special situations opportunities.”

Wong adds that there is a lot less competition for deals in India compared to SSG’s other major target markets of China and Indonesia. There are few special situations professionals on the ground, although a growing number of traditional private equity players are shifting down the capital structure and pitching credit strategies.

The SSG team has been operating in the special situations space since 1997, having originally run Lehman Brothers’ Asia special

situations group. The GP recently closed its second fund at the hard cap of $400 million, well above the $300 million originally targeted. Fundraising took about eight months. A first close of $85 million was reached in March 2012 as existing investors re-upped and then the team went out into the market with placement agent Mercury Capital Advisors.

“We didn’t know what to expect, we were prepared for a much tougher ride,” says Wong. “Most investors need to be educated about what special situations means in Asia.”

The process stands in stark contrast to SSG Partners I, which had no formal institutional rollout and came at a time – September 2009 – when many LPs were busy recalibrating their portfolios in the wake of the global financial crisis. The fund closed below target at slightly over $100 million in December the following year, although there was a considerable amount of co-investment by LPs so the GP ended up deploying about $300 million in equity.

This time around the LP base is more balanced, with a mixture of large family offices,

state pension funds and insurance companies, among others, from Europe and the US. They will still have opportunities for co-investment but not to the same magnitude as the previous vehicle.

SSG focuses on proprietary transactions, determining complex capital solutions and driving the turnaround process. SSG typically attacks the balance sheet of the company with a view to control the capital structure and work with management to execute a restructuring. They have also done deals involving shareholder disputes where a fundamentally strong underlying business is being held back by disagreements at ownership level. SSG would partner with one shareholder and take out the rest. It also takes positions on a secondary basis from other managers when assets aren’t performing as expected.

“It is more than just capital – it is ideas, solutions to restructuring,” says Wong. “There is a certain value-add that we bring to the table that resolves conflicts. We are a credit fund in nature and we look to take credit risk but with a pretty major equity upside along with it.”

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SSG raises $400m Asia distress fund

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Chinese smart phone manUfaCtUrer Xiaomi sources its handsets from Hon Hai Precision Industry, the company responsible for assembling the iPhone. Vancl, the country’s largest online clothing retailer, sources apparel from workshops also used by Zara.

Both companies are heavily focused on design and user experience and they have featured in Qiming Venture Partners’ portfolio since their early days. Now Hans Tung, the VC firm’s Beijing managing partner, is looking to replicate this disruptive model offline in the food and beverage industry. The test case is YPX Cayman Holdings, owner and operator of Cloud 9, the mainland China licensee of a Taiwan casual dining chain.

“They don’t have central kitchens – food preparation is done by high-quality outside vendors, using menus from Taiwan that the team has since tailored for China, and then delivered to the stores. YPX focuses on data analytics, customer service, food ingredient mix, and staff management” says Tung. “If you dig deep, it is a similar approach to what Xiaomi and Vancl have done for smart phones and apparel.”

The approach is rooted in logic. By opting for a systematic outsourcing model underpinned by strong IT systems and logistics instead of central kitchens, YPX can expand rapidly at low cost. The company opened its first restaurant in 2010 and is on course to have 30 outlets by the end of the year. It wants to expand to 90 outlets within two years, with a particular focus on northeast China. Four in five restaurants will be located in shopping malls.

“Once YPX finds a location it can get operational in about two months, compared to 4-6 months for larger restaurants that need to bring in a lot of expertise and chefs from different areas,” says Daniel Tseung, managing director of LionRock Capital.

Institutional investmentLionRock last week led an $11.5 million Series C round of funding for YPX, with existing investors Qiming and Ignition Capital also participating. The company received a further $4 million from investors in the Series B round last year who exercised warrants and then $2.5 million in debt financing from Silicon Valley-based lender Western Technology Investment.

The $15 million Series B round was led by Taiwan’s Hotung International, with institutional commitments from Qiming and Mitsui Global Capital, as well as personal contributions from high net worth individuals.

For Qiming, the journey started before the company’s China operations even existed. It was the sole participant in the Series A round, providing $5 million in green field investment. This came after the venture capital firm identified a restaurant chain that could be established in China and an entrepreneur to come in and run it.

“There are 50-plus listed dining chains in the US and 16 in Japan,” says Tung. “There were about five in China and three of them have been bought out by other players. There are lots of restaurants around but why are none of them listed and scaling well?”

He concluded that most restaurant chains – typically small, family-run operations – made money because they weren’t being run in a transparent fashion. If these chains met all of their tax and social security obligations in full, profit

margins would be decimated unless rising costs were counterbalanced by improved efficiency.

Qiming targeted the casual dining market where the quality is lower but the prices are affordable and consumers are willing to pay a small premium for food safety, consistency and a pleasant restaurant environment. Other PE and VC investors have done the same.

Casual dining chains also fit well with the preferences of China’s emerging middle class: there is a desire for out-of-home dining but a certain level of frugality remains.

Next came the CEO. Tung chose Chris Tay, a Singaporean former tech entrepreneur who previously ran IT systems for the group that licensed Dairy Queen and Yoshinoya in China, before being hired by Taiwan food conglomerate

Tingyi Holdings to run its China casual dining business, and finally moving to Yili Group, which wanted to start an ice cream parlor chain.

“Chris has worked for a Hong Kong family, a Taiwan family and a state-owned enterprise, restructuring portfolios and taking them to the next level,” says Tung. “He has a scientific, data-driven approach to the fast casual restaurant business.”

As for the restaurant chain, Tung and Tay spent six months scouting for possibilities before identifying Cloud 9, which has 67 franchised stores in Taiwan and claims to be the island’s third-largest Wonton restaurant brand. The China operation has a separate ownership structure to its Taiwan affiliate.

Outside expertiseLionRock, which exclusively targets consumer-related assets, got involved largely because Tseung is a board member of Gourmet Master, a Taiwan-listed company that owns coffee shop and bakery chain 85°C. He supported the

company’s successful rollout in mainland China. “Chris Tay asked me if I could help in a similar

way on YPX,” says Tseung. “There are similarities between the two. The 85°C offerings are not revolutionary – it is bread, cakes and teas but the strategy is executed very well, offering quality food at affordable prices for mass market Chinese consumers.”

As for the VC investors’ ultimate exit channel, an IPO as the obvious option but Tung also sees logic in a trade sale. And it all comes back to those 66 listed dining chains in the US and Japan. “China will be the biggest growth market for food and beverage over the next 10 years,” he says. “If you have a company in China that has good corporate governance and does everything by the book, it would be an ideal partner.”

Fast food, quicker expansionQiming Venture Partners decided to create a China casual dining chain from scratch in order to replicate an outsourcing model that has worked in other industries. Cloud 9 is now aggressively building out its network

“Once YPX finds a location it can get operational in about two months, compared to 4-6 months for larger restaurants that need to bring in a lot of expertise and chefs from different areas” – Daniel Tseung


State of the industry: AVCJ Forum audience pollsThe 2012 AVCJ Private Equity and Venture Capital Forum, which took place in Hong Kong last week, saw delegates invited to participate in a series of polls intended to gauge opinion on a series of key issues facing the indsutry. LPs, GPs and service providers from around the world shared their views

AVcJ [email protected]

is operational and industry expertise important for private equity funds?

Yes 95%

no 5%

can chinese pe funds compete on a regional/global level?

Yes 46%

regional only 46%

Global only 0%

no 8%

Where do you think the majority of new lp commitments for asian funds will come from?

asia 28%

europe 6%

middle east 11%

usa 56%

Which lps are the best co-investors?

Gate keepers 33%

Fund of funds 44%

sovereign wealth funds 22%

pension funds 0%

Will there be a shakeout in the indian private equity market?

never 22%

next 12 months 44%

next 24 months 33%

When will the size of the asian private equity industry surpass that of the us?

never 5%

5 years 5%

10 years 37%

longer 53%

Which market in southeast asia has the most potential in the next 12 months?

indonesia 77%

Thailand 0%

malaysia 18%

philippines 5%

Will carried interest continue to be treated, in the us, as capital gains?

Yes - for the foreseeable future 67%

no 11%

no comment 22%


Private Equity & Venture Forum

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Australasian PE: Investment sanctuary in times of uncertainty

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