AVCJ Private Equity & Venture Forum 2009

AVCJ Private Equity & Venture Forum 2009

India

2-4 December 2009

Hong Kong

11-13 November 2009

ASIAN VENTURE CAPITAL JOURNAL Asia’s Private Equity News Source

avcj.com November 5 2009 Volume 22 Number 41

Venture Capital

Asia’s venture ecosystem builds through the crisis

PRIVATE EQUITY ASIA

VCs bank on Asia’s transition to innovation Page 38

M&A ASIA

DISTRESS

Distressed investors feel no distress Financial crisis creates opportunities for special situations funds Page 41

The changing face of private equity The private equity world’s most influential professionals converge in Hong Kong for AVCJ’s Asian Private Equity & Venture Forum 2009 comment

The Asia landscape from an investment perspective Marsha Vande-Berg, Chief Executive Officer of the Pacific Pension Institute, gives her view of the institutional investor perspective on private equity investing in Asia Pacific Page 46

conference special issue

comment

Global private equity and venture: Is the bad dream over?

Dan Schwartz, Chairman Emeritus of AVCJ Group, delivers his analysis on the state of the markets post the recent crisis Page 11

Private equity and private infrastructure funds – evolution or revolution? John Campbell, Senior Partner at Campbell Lutyens & Co., gives his view on the state of development of private equity and infrastructure funds Page 52

AVCJ private equity and venture Capital forum Hong Kong 2009

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publisher's letter [email protected]

ASIAN VENTURE CAPITAL JOURNAL

A new AVCJ for the times It’s been nearly 22 years since the Asian Venture Capital Journal was first published here in Hong Kong. Over the last two decades, AVCJ has gone through a number of changes and has evolved from a small newsletter to the leading publication focused on the Asian industry. AVCJ was one of the first print publications to embrace the power of the Internet, transforming into an online publication in 1999. We’ve braved many storms, from the Asian crisis in 1997 to SARS in 2003 and the current economic crisis. Now, from this issue, AVCJ will once again embark on a new journey of change. For those of you with exposure to media, you will know that the publishing industry is undergoing a number of structural changes in distribution and business models. This, coincided with the current economic downturn, heightening the pressure on media companies to evolve. Existing business models have been put to the test by the Internet, where news and data are available via a quick search. Publications that have built franchises on straightforward reporting will now have to up their game through analysis and commentary. As the industry publication of Asia’s most innovative financial sector, AVCJ has always been ahead of the curve, and we intend fully to maintain that position. We are now moving to embrace the latest state of development in presentation and distribution of magazines and publications. With help from our parents, Incisive Media, AVCJ will adopt a new content management system (CMS) platform, to power its new generation of news and information websites, newsletters, blogs, RSS feeds, Tweets, and mobile information delivery systems. Number 41 | Volume 22 | November 5 2009 | avcj.com

Starting early next year, AVCJ will offer a whole suite of Internet content and data services and products, centered on a truly state-of-the-art website that will transform the look and usability of avcj.com. First, you will notice this new and smarter-looking AVCJ layout and the improved content inside. This new format will reflect many of the changes that are still to come. – providing readers with the best information possible on Asian private equity. The new AVCJ will prioritize the quality of insight, depth of analysis, unique viewpoints – all aspects that lift it above just covering the news. AVCJ’s new website has been designed to continue delivering this analytical value-add, and to enable ever deeper market insights, as well as real-time news updates and fast-track reporting. Hopefully, you will find the new site’s search engines, story tracking, archiving, data monitoring and tailored newsletter/bulletin services invaluable tools for building your business in Asia. Finally, in what’s always been a people industry, AVCJ will make people the star of the show, with our introduction of AVCJtv, our new online video offering – as well as Q&As and other interviews and live commentaries to put the personalities who make the news and shape the industry in front of our audience, delivering direct comments as never before. Thank you for your support, and we look forward to continuing to provide you with the best coverage of Asia Pacific private equity.

Managing Editor Paul Mackintosh (852) 3411 4909 International Editor PRIVATE EQUITY ASIA Rebecca Fannin (1) 212 457 7754 Senior Editor Brian McLeod (1) 604 215 1416 Deputy Editor Yvonne Chan (852) 3411 4907 Associate Editors M&A ASIA Maya Ando (852) 3411 4908 Christina Kautzky (852) 3411 4906 Creative Director Dicky Tang Designers Mansfield Hor, ManYee Mak, Virginia Ho Chief Representative, Beijing Ying Jiang (86)10 5869 1196 Beijing, PRC Office: Acting Editor in Chief Tao Shen (86) 10 5869 6205 ext.805 Research Manager Helen Lee Research Associates Alfred Lam, Tweety Lau, Teddy Wong, Kenny Hung Circulation Manager Sally Yip Senior Account Manager Gareth Wilde Sales Coordinator Debbie Koo Senior Manager, Delegate Sales Anil Nathani Marketing Manager Georgina Sam Marketing Communications Manager Joann Yip Director, Business Development Darryl Mag Conference Managers Emily Mak, Matthew Swainson, Doris Chan Conference Administrator Amelie Poon Conference Coordinator Fiona Keung, Belinda Kwong Publisher & General Manager Allen Lee Managing Director Jonathon Whiteley Vice President, Administration Harmony Heung Chairman Emeritus Dan Schwartz Incisive Media 20th Floor, Tower 2, Admiralty Centre 18 Harcourt Road, Admiralty, Hong Kong T. (852) 3411-4900 F. (852) 3411-4999 E. [email protected] URL. avcj.com Beijing Representative Office Room 1805, Building 10, Jianwai SOHO, 39 East 3rd-Ring Road, Chaoyang District, Beijing 100 022, China T. (86) 10-5869-6205 F. (86) 10-5869-7461 E. [email protected] The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of AVCJ Group Limited. AVCJ Weekly is delivered in QuVu format, which is licensed from and used by permission of Qiosk.com, INC. ISSN 1817-1648 Copyright © 2009

Sincerely, Allen Lee Publisher Asian Venture Capital Journal 

Contents

Publisher’s letter 3

Special Feature 16 CONTROL

A new AVCJ for the times

The essence of control

News

24 PORTFOLIO

MANAGEMENT

6 Page 6

Comment 11 Global private equity and

venture: Is the bad dream over?

46 The Asia landscape from an investment perspective 

52 Private equity and private Page 11

infrastructure funds – evolution or revolution?

30 CLOSING OFFICES

Page 30

Change is in the wind

34 LEGAL MATTERS

Reading the fine print

38 VENTURE CAPITAL

Asia’s venture ecosystem builds through the crisis

41 DISTRESS

Distressed investors feel no distress

Case Study 20 affinity

Page 41

Poll of the Year

Affinity clinches rare China buyout with Beijing Leader & Harvest

Investment Map

Investee management across Asia: The business challenge

Page 20

22 Asia pacific

Interview

14 Part 1 36 Part 2 45 Part 3

Fundraising Report 50

35 Industry Q&A: Miranda Tang 40 Mezzanine Q&A: Joseph W. Ferrigno III 54 Industry Q&A: Suyi Kim

Fund ups and downs in Asia Pacific

Page 50 

avcj.com | November 5 2009 | Volume 22 | Number 41

In the Year of the Secondary, the Secondary Manager of the Year. Institutional Investor’s Money Management Letter recently named Lexington Partners “Private Equity Manager of the Year.” Private Equity International has named us the “Best Secondaries Firm in North America.” And European Venture Capital & Private Equity Journal has named us “Secondary House of the Year.” Grateful as we are for these three honors in one year, what’s behind them are many years of experience and lots of hard work. We were cited for basic strengths, like the clarity of our analysis, the breadth of our knowledge and the depth of our professional relationships. To learn more about Lexington Partners and the secondary market, please call us or send an email to [email protected].

News Aditya Birla above target for maiden vehicle Aditya Birla, the Indian business and financial services group, has had a first close on its debut private equity fund, Aditya Birla Private Equity, at $120 million, 20% above its target at this stage. The fund, which aims to invest some $20 million each in around 10-15 companies in such popular Indian investment sectors as infrastructure, logistics, education, healthcare and consumer, reportedly plans a further close of some $100 million by end 2009. Aditya Birla group claims a market cap of some $31.5 billion, putting it into the Fortune 500 league of international companies. “Aditya Birla Private Equity is not just another fund: it is operated like a business,” Bharat Banka, MD and CEO of Aditya Birla Private Equity, said at the fund’s launch.

An excavating shovel at SouthGobi's facilities in Mongolia

CIC moves on SouthGobi coal PRC SWF the China Investment Corporation (CIC) has announced an investment of $500 million into SouthGobi Energy Resources, a division of Canadian mining group Ivanhoe Mines which manages the group’s Mongolian coal mining interests, particularly the Ovoot Tolgoi mine in the south Gobi desert. CIC’s investments in energy and mining firms represent partly a strategic national policy to secure resources for growth, and partly a diversification play to move its holdings out of US dollars.The investment is structured as a 30-year secured debenture, convertible into SouthGobi common stock. Ivanhoe is also operating a major copper mining JV with Rio Tinto in the same region. Citigroup Financial Markets Asia advised CIC on the deal.

Unison is under investigation

Baring gets sweet Baring seeks Courts deal with Hsu Fu Chi Mammoth sale

A former partner of Japanese buyout firm Unison Capital was charged by the Japanese authorities for alleged insider trading. The suspected former partner was dismissed by Unison on October 27 when Securities and Exchange Surveillance Commission (SESC) searched the firm’s Tokyo offices in related matters. Unison did not disclose the deals of the person involved, nor did they confirm the individual’s identity. The case might possibly be dismissed by SESC because the co-founder died the day following investigation. Unison has formed a committee of three lawyers to investigate into the matter, as well as, examines the firm's standards of governance. Unison has six partners led by co-founders John Ehara, Tatsuya Hayashi and Tatsuo Kawasaki. The others are Osamu Yamamoto, Kenichi Kiso and Kiyoto Matsuda. Kenichi Kiso’s name is missing from the list of partners on the Unison Capital website at the time of this article.

Baring Private Equity Asia has taken a 16.5% stake in Singaporelisted Dongguan-headquartered confectionary maker Hsu Fu Chi International Ltd., for some $135 million. The deal is the latest private equity transaction concerning a SGX-listed China entity, which are becoming increasingly favored targets as GPs seek to capitalize on Singapore’s shortcomings as a venue for China-related listings. With the deal, Baring PEA MD Gordon Shaw joins the board of Hsu Fu Chi, which listed on the SGX in December 2006. Founded in 1992 by Taiwanese entrepreneurs, Hsu Fu Chi retails its own brands and others such as DoDo, Chaobii, Mo Bao and Mao Qiao Bo, chiefly through PRC supermarkets.



Hsu Chi Fu DoDo candies

In further Baring Private Equity Asia news, the firm is reportedly proceeding with the sale process for Courts Mammoth, its Malaysian retail portfolio company, retaining UBS to secure a buyer. The search has apparently continued for some months, with UBS facing challenges in finding bidders to match the expected sale price of around $300 million. Baring and Topaz Investment Worldwide privatized Courts, hitherto listed in Kuala Lumpur, in 2007, for around $84 million. Courts is Malaysia’s largest furniture and electronics retailer, with branches in Indonesia, Singapore and Thailand.

Bellsystem24 auction locks in Bain Bain Capital has reportedly won a week’s exclusivity period in the final round of negotiations for the purchase of Citigroup-owned Japan

call center player Bellsystem24. CVC Asia Pacific and Permira also reportedly reached the final round in the auction. Kohlberg Kravis Roberts & Co., which partnered with Itochu Corp. on a bid, dropped out earlier from the sale, which could raise up to $1 billion. Goldman Sachs and Nikko Citigroup are financial advisors on the auction which was delayed since last year while the global downturn depressed acquisition appetites and funding availability. Citi originally acquired the asset as a legacy holding of the principal investment arm of its acquisition Nikko Cordial. Bessemer, CVCI, Sequoia invest Ind-Barath Bessemer Venture Partners, CVC International and Sequoia Capital India have jointly invested some $100 million in Hyderabad-based power generation player Ind-Barath Power Infra Ltd., acquiring an 18% stake, in a deal that demonstrates the Valley-originated venture firms’ progression away from their VC roots in India. CVCI invested alongside UTI Ventures in a first round of funding for the company in 2007. Ind-Barath has a new plant in Karnataka opening in 2010 to join its existing five plants, and plans to expand its existing 375MW of generating capacity to 3000MW. The investors now own some 35% of Ind-Barath, in what counts as India’s largest investment in the power sector this year.

Blackstone launches Shanghai management firm The Blackstone Group has publicly launched its new PRC fund management company in Shanghai’s Pudong New District, with Antony Leung, chairman of Blackstone in China, present at the ceremony. This follows the MOU signed August between Blackstone and the Pudong New District government. The new company will manage Blackstone’s planned Blackstone Zhonghua

avcj.com | November 5 2009 | Volume 22 | Number 41

News Development Investment Fund, which plans to raise up to RMB5 billion ($732 million) and which also secured its first investor, government-backed Lujiazui Financial Development Co., for an undisclosed commitment. Stephen Schwarzman, Blackstone chairman, said publicly that his group sees the Shanghai office opening as only part of a broader expansion in China.

Blackstone, KKR, Temasek may bid for Taikang Life The Blackstone Group, Kohlberg Kravis Roberts & Co. and Temasek Holdings are reportedly among the probable bidders in the auction of a 15.6% stake in PRC insurer Taikang Life Insurance, which is being offloaded by French insurance giant AXA, and may have a price tag of up to $1billion. Taikang Life has a total asset value of $28.12 billion and a roughly 8% share of China’s insurance market, making it the country’s fourth largest insurer, with 120 branches nationwide, according to reports. AXA’s disposal is apparently dictated by regulatory problems over its other PRC insurance holdings rather than financial stresses. Morgan Stanley is managing the auction process.

ChiNext sees volatile opening China’s new growth market, ChiNext, based in Shenzhen, saw a volatile opening with its 28 debut listings rising between 76% and 210% on the first day, before falling by the maximum 10% daily drop on the exchange’s second day of operation. Concerns remain over the potential instability of the new board, with an average trailing P/E ratio of over 70, but all stocks remained well above their listing price, despite the sharp falls. ChiNext has already been cited

Myer IPO returns $1.27 billion

The IPO of TPG Capital and Blum Capital investee Myer in Australia valued the department store chain at A$2.4 billion ($2.2 billion) while giving the investors a roughly 6x return on their $300 million 2006 investment. Although the IPO priced at A$4.1 ($3.7) per share, well below the sponsors’ initial A$4.9 ($4.4) top target, the lower sale price may have helped a listing attended by commentator skepticism about highly priced private exits, and appears justified by the company’s debut performance. Myer closed 5% down on its offer price on its ASX debut, dragged Myer's iconic premises at down by overall depressed market Lonsdale Street in Melbourne sentiment, with a trading price of 13x forward earnings. TPG and Blum reportedly sold their entire 84.2 % stake, netting A$1.4 billion ($1.3 billion) in Australia’s biggest flotation since 2007, managed by Credit Suisse, Goldman Sachs JBWere and Macquarie Group.

by domestic and international private equity firms as a promising exit venue, not least for investees backed by locally-raised RMB funds.

Clearstone, Granite Hill in Elbee third round Indian investors Clearstone Venture Partners and Granite Hill are investing in a third capital raising round for Elbee Express, a courier and logistics company based in Mumbai. The two firms will reportedly commit $1.7 million and $0.8 million respectively to privately-held Elbee, bringing their combined stake up to 58.2%, with 25.5% in straight equity and 16.3% in preference shares, and valuing the whole company at around $33 million. Fellow investor Kotak Mahindra Investments will apparently not join in this round. Elbee, which focuses on nextday delivery of sensitive goods such as bank- related items, reportedly has an ambitious $50 million expansion plan focusing on infrastructure and technology improvements.

Number 41 | Volume 22 | November 5 2009 | avcj.com

Founder plans private equity fund Founder Group, a leading PRC PC manufacturer, is reportedly planning its first private equity fund targeting TMT investments, targeting a RMB2 billion ($293 million) vehicle. The fund would be RMB-denominated to attract domestic investors, including affiliated corporates, and would include an anchor commitment from Founder. Legend Holdings, Founder’s chief domestic competitor, already established Legend Capital and backed Hony Capital some time ago. Founder Group, set up and invested by Beijing University in 1986, now has sales revenues of some $6.5 billion and five listed entities in Shanghai, Shenzhen, Hong Kong and Malaysia. The group is also active in the healthcare and pharma sector, and has other interests including real estate and securities trading.

Henderson invests Genesis Colors Henderson Equity Partners has made a $17 million investment in Indian high-end fashion retailer

Genesis Colors Pvt. Ltd. for a 13% stake, joining existing private equity investors Sequoia Capital India, Mayfield Fund and Silicon Valley Bank. Genesis has Indian distribution rights to several major international brands, including Bottega Veneta, Canali and Paul Smith, and also retails its own brands. The investment will help grow the retail chain and position the company for a listing in two to three years time. According to Vishal Marwaha, Partner of Henderson Equity Partners’ Asia private equity team, the founders of Genesis Colors are “one of very few promoter teams to have the vision and execution skills to institutionalise the fashion industry in India. This, coupled with the extremely strong management and design teams that they have built, provides a strong platform to execute on their vision.”

Infosys’ Murthy plans to launch Catamaran Iconic Indian IT entrepreneur N R Narayana Murthy, chairman of Infosys Technologies, has dubbed his debut VC fund the Catamaran Venture Fund, after the namesake two-hulled boat which originated

Narayana Murthy

in Tamil Nadu. According to Murthy, the fund consists entirely of some $370 million he raised by selling his own shares in Infosys, equal to around 0.1% of the company, and he will manage the vehicle himself, while potentially building out a management team at a later date.



News The new vehicle will target angel to early stage opportunities. Murthy also said he will look across sectors rather than limiting himself to specific focus areas. Murthy was one of the seven founders of Infosys, and served as CEO for 21 years.

KDB splits

The Korea Development Bank is being split up into two new entities: a commercially-oriented investment banking conglomerate, KDB Financial Group; and a policy lender, Korea Finance Corp. KDB Financial’s assets include the Korea Development Bank, Daewoo Securities, and thre other financial entities. As part of the plan, KDB Financial will seek a listing in Seoul on 2011 and an overseas listing in 2012, and will look to acquire assets prior to the listing, including a local or Asian lender. KDB Financial chairman Min Euoo Sung said that the group was looking at potential targets in two or three Asian countries. The Korean government plans to exit its entire 100% stake in KDB Financial by 2014.

Lightspeed buys ads in Shanghai Lightspeed Venture Partners has reportedly invested in the first round of capital raising for Jusheng Wanhe Co., Ltd., a Shanghai-based internet marketing solutions provider. Jusheng Wanghe aims to launch an intelligent digital marketing platform for the Chinese internet market, optimized for mining user behavior data and advertising effect assessment. The investment amount and stake was not disclosed. Lightspeed manages some $2 billion in assets, with offices in Silicon Valley, China, India and Israel.

Matrix takes a Siesta in India Matrix Partners India has committed $10 million as sole investor in a Series A round of fundraising for Indian hospitality

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Qatar Holding plans China office Qatar Holding, the direct investment unit of $70 billion SWF the Qatar Investment Authority (QIA), will reportedly soon open a China office to support investments into the PRC and Asia Pacific. Qatar Holding is expected to continue to diversify out of developed markets and away from exposure ot the oil and gas sectors. Qatar Holding already has major investments in Western assets such as UK real estate player Songbird Estates, owner of Canary Wharf, as well as Barclays and Credit Suisse. Qatar Holding and the QIA have already made investments in China, Indonesia and Malaysia. Ahmad al-Sayed, Qatar Holding CEO, said publicly that the institution will focus on Asia and other emerging markets alongside traditional Western investment venues, with some commentators speculating that a Chinese bank may be on its target list. QIC building visible on the skyline in Doha

player Siesta Hospitality Services Ltd., which focuses on transit apartments for corporate clients. Siesta currently manages over 500 rooms in more than 14 cities, with a blue-chip domestic client list. Rishi Navani, Matrix India Co–founder and MD, will join Siesta’s board with the investment, and Matrix has also engaged Anup Gupta, previously MD at Unilever International, as a new board member. "Siesta Hospitality has an innovative business model to address the hospitality needs of corporations. We have been impressed by the passion and ambition to build a large business demonstrated by Ashok Chattaraj,” said Navani.

of nutraceuticals addressing specific life-style problems and will also explore export opportunities.” Sandeep Singhal, MD at Nexus, will join the Deccan Healthcare board. Deccan Healthcare produces primarily a series of Sandeep Singhal products for cardiac care, bone health, diabetes prevention, and anti carcinogenic and anti-inflammatory treatments, based on the flaxseed vegetarian nutritional supplement Omega-3.

NZ Super considers Nexus backs Deccan VC commitments Healthcare The New Zealand Superannuation Nexus Venture Partners has committed some $31 million to Hyderabad-based wellness, nutritional and pharmaceutical player Deccan Healthcare. Nexus reportedly is seeking to capitalize on up to 30-40% annual growth in Deccan Healthcare’s business space. Minto Gupta, Founder & CEO, Deccan Healthcare said, “the funding will help us enhance our R&D efforts and our expansion plans. Deccan is launching a variety

Fund has issued requests for proposal for a planned Nz$30-60 million ($22-44 million) allocation to venture and growth capital funds, with particular focus on early stage and tech investing. NZ Super has around NZ$15 billion ($8.6 billion) under management, and aims to raise the current level of private equity investments from 1.1% of this to 5%. Most of the allocation is likely to go to foreign managers, with local managers

likely to receive only some 5-10% of the total. Established in 2003, NZ Super invests NZ government superannuation contributions.

Prudential expands in Vietnam Prudential Vietnam Fund Management Company (PVFMC) is appointing Alan Morton as a Director in its private equity team, to be based in Ho Chi Minh City and cover all aspects of Prudential’s private equity investments in Vietnam. Morton was previously with Silverfleet Capital Partners, formerly the private equity arm of Prudential plc as PPM Capital, in London, and worked with PPM Ventures Asia in 200-03. According to its materials, PVFMC has invested in 25 companies and had 6 profitable exits over the past 5 years, and manages some $400 million in private equity and real estate assets. “I am excited to be returning to the private equity field in Asia, particularly with such a leading player,” Morton said. “The Vietnam economy is one of the region’s most dynamic.”

VinaCapital makes staffing changes Prominent Vietnam investor and asset management group VinaCapital has made some staffing changes, with the departure of former MD William Lean. The firm has recruited Tony Hsun, formerly a senior VP of business development with Orix Corp. in Tokyo tasked with evaluating China and Southeast Asia infrastructure opportunities, as a MD for its London AIM-listed fund, Vietnam Infrastructure Ltd., which completed fundraising in 2007 with a total capital of $402 million. Vina’s other investment entities include its private equity Vietnam Opportunity Fund, real estate-focused fund VinaLand, and a tech-focused JV, the DFJ VinaCapital Technology Fund. Lean’s future plans are unknown.

avcj.com | November 5 2009 | Volume 22 | Number 41

Comment

Global private equity and venture: Is the bad dream over? Dan Schwartz, Chairman Emeritus of AVCJ Group, delivers his analysis on the state of the markets post the recent crisis In one of the Bible’s better known stories, Pharaoh had some bad dreams: seven lean cows spring out of the Nile and devour seven fat cows; and then, seven withered stalks of corn consume seven healthy ones. None of the king’s advisers can explain the dreams. Fortunately, the chief butler is at hand to suggest that the ruler speak to Joseph. He is brought before the throne, where he gives Pharaoh the good – and bad news. Joseph is promoted, does the needful, and saves Egypt.

Feast and famine The Golden Age of Private Equity was, indeed, seven years of plenty. Fund managers got all the cash (and more) they wanted from the banks; limited partners lined up to write mega-million dollar checks; and, the public equity markets accommodated all comers who wanted to exit. Fees were lavish, and several good (and bad)

Joncarlo Mark

Number 41 | Volume 22 | November 5 2009 | avcj.com

private equity partners made the Forbes billion dollar list. Similarly, venture capital enjoyed its time in the sun as well. From 1995-2001, no idea was too bad to attract funding from the investment community. The venture market crashed in 2001, and the private equity market closed down in 2008. Business has been slow to revive in 2009. The big US firms aren’t closing any big deals, though there have been a couple of transactions in the $3-4 billion range. Remember TXU at $43.8 billion or Equity Office Properties at $38.9 billion? According to the Center for Management BuyOut and Private Equity Research in the UK, the British buyout market fell to its lowest level in 25 years in the third quarter 2009. In Asia, again, there have been a handful of larger billion-dollar deals, but firms have mostly continued to pick off small equity stakes. Globally, bank credit has been virtually nil for acquisition financing, with multiple banks lending small amounts for the few deals that qualified for loans. The number of bankruptcies and distressed sales, however, has picked up. Simmons Mattress, Chrysler, and Capmark (GMAC) are among the many private equity deals that have or are expected to file Chapter 11 in the US. Europe has been similarly hard hit. With the rise in the stock market, IPO activity has picked up modestly since September. KKR and Blackstone have announced a few listings. TPG has completed or announced IPOs for Myer Holdings in Australia and Shenzhen Development Bank in China. Fundraising has been hard hit. Very few funds have even tried to raise capital this year. Among those that have, Blackstone closed on less than half of a targeted $20 billion fund. Colony Capital halved the value of its Colony Financial REIT IPO

to $250 million. Hellman & Friedman, however closed its Fund VII at $8.8 billion, the largest in its history. Asian funds have fared better. Carlyle Asia Growth Partners IV raised $1.04 billion, Keytone Ventures in China closed its first fund at $200 million, and MBK Partners in Korea closed on $1.6 billion for its second Asian fund in July 2009.

Venture capital: famine in the land In the third quarter, according to the NVCA, only 17 venture firms raised $1.6 billion, the lowest amount since the dotcom crash in 2003. Of that, $1.1 billion was by Khosla Ventures alone. Venture investments have continued, though at a smaller pace and at lower amounts. Twitter, however, despite no earnings, took in $50 million in a deal that values the company at $1 billion. Many good ideas are looking for capital. Cleantech, alternative energy, and the ongoing Internet build-out are just a few promising areas. In a New York Times interview, Vinod Khosla says that one of his new green tech funds is “really geared toward science experiments. The goal there is very much to take risks that nobody else will take.” That’s an admirable stance, but is that

The Golden Age of Private Equity was, indeed, seven years of plenty. a business? And is it a business that will attract major backers other than CalPERS (who invested $60 million)? LPs are smarting as well: portfolio values are off 25-30%, with little in the way of distributions from general partners to ease the hurt. In the US, both Stanford and Harvard have announced plans to dispose of $1 billion or more in private equity assets. Yale announced a 25% plunge in the value of its portfolio for the year ended June 30, 2009. Family endowments are also off in the 20%-30% range. The public equity markets have rallied nicely, but the impact on private equity and venture has been hard to discern.

Impact on Asia In a recent statement, Fed Chairman Ben Bernacke said that, “Asia appears to be leading the global economic recovery.” Is Asia “leading” a recovery or just the only region that is prospering? I have suggested a “decoupling” between Asian and the Western economies before. May be there is something to it. While

11

Comment Wall Street banks continue to report trading profits, there’s been little growth in lending activities, and bad loans continue to depress financial institution balance sheets. A few companies such as Google and Apple have done well on the revenue line, while others have cuts costs (jobs) to stay profitable. But for most, including portfolio companies, cash is king as the depression has continued to bite. That doesn’t seem likely to change any time soon. In fact, many economists think it may get worse before it gets better. For Asia, the good news is that the economies have not been as badly impacted as elsewhere. The reasons are pretty clear. For starters, there was no financial crisis in the region. Asian banks did not sign up for the toxic securities and bad loans that their counterparts in the US and Europe put on their books. Another reason is that Asian economies are supported by real earnings and growth, not second mortgages and consumer loans. Demand is real as these economies continue to expand. Finally, Asian private equity deals were never highly levered. For all the risk that certain LPs ascribed to Asia, Asian GPs proved the prudent ones. Still, Asia has not gone unaffected. The problem hasn’t been lack of deal flow but the combination of limited credit and pricing. Asian banks have pulled back along with their overseas counterparts, probably more out of fear than necessity. And, sellers are demanding yesterday’s prices, while buyers want today’s prices. The net result has been a dearth of control deals while more (affordable) minority stakes are on the rise.

Looking ahead Would that we could predict the future with the same certainty as Joseph? NEA general

David Rubenstein

partner and cofounder, Dick Kramlich thinks that it will require “a ‘Netscape moment’ to get out of the morass: an emerging company with a technology that is so arresting, that has been proven, and is in an early phase of growth. And then an underwriter who says, ‘This will be a big company.’” David Rubenstein says he sees private equity coming back “stronger than it was.” At some point, both will undoubtedly prove correct. The question is, when? Aside from the problems above, the industry faces multiple challenges on different fronts: in the US, government regulation and more taxes. There are issues of succession, public image, and globalization. The mega-firms also face massive debt maturities from 2012-2014. According to one source, approximately $430 billion in deal financing will come due in those years. That’s a staggering amount for an industry that is leveraged 3:1 or 4:1.

“The goal there is very much to take risks that nobody else will take.” – Vinod Khosla  Will private equity evolve into high-end hedge funds? Joncarlo Mark, senior portfolio manager, CalPERS, thinks it’s possible. He says, “if the buying market doesn’t get better, GPs may have to either cut their fund size back or broaden their investment horizon. You may see private equity players become pure opportunistic players. That may mean doing PIPES or debt deals, for example. But that will require the LPs to get comfortable with this strategy. Private

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equity may well do the types of deals the hedge funds used to do – this time with more long-term capital.” Certainly, distressed funds, secondary funds, and growth capital structures will become more prevalent. If bank financing does open up, there will be more activity in the middle market, where deal sizes are more reasonable and leverage less. For venture capital, the challenge seems straightforward: can the industry survive a market where the deal profile has changed and target industries are not those in which venture has much experience? Deals will require more cash to reach profitability, lead times will be longer, and government partnerships (at least in the alternative energy area) will become desirable if not mandatory. Exits remain a huge problem for the industry. The NVCA has published its Four Pillars Program, which cites a number of “to-do’s” for the industry. But, will these solutions make a difference? For example, one pillar encourages investors to become familiar with a potential IPO years ahead of the offering. But, the public got taken to the woodshed in the 2000-01 crash, and they were not invited into the only deal that has worked out since (Google). A decade later, they haven’t forgotten. Asia seems to have been dealt a fair hand. China and India have growing economies. The competition level in both is steep, but governments have the means to help. In China, for example, government funds have been big investors in renminbi funds. Japan has a new government (for now), and Korea is a far different economy than it was during the 1997 financial crisis. Hong Kong and Singapore are also growing and remain viable. Taiwan is a center of the semiconductor business, and more. It even announced a private equity deal: the recent $2.1 billion purchase of Nan Shan Life Insurance Company by Primus Holding’s and China Strategic. This was the country’s largest ever financial sector deal. Australia was never hurt as badly as the West, and its IPO market has rebounded. And Southeast Asia, including Malaysia, Thailand and Vietnam, is also seeing increased deal activity. Private equity and venture capital are enormously talented industries. In the past few months, firms have begun to regroup. But for many, it seems the bad dream isn’t quite over yet. [Dan Schwartz’s book The Future of Finance: How Private Equity and Venture Capital Will Shape the Global Economy, will be released by John Wiley & Sons in early 2010.]

avcj.com | November 5 2009 | Volume 22 | Number 41

It is essential that outsourced fund administration provides the right benefits to suit your organisation. With many of the world’s leading private equity firms as our clients and over US$170 billion of funds administered from our offices around the world, we are ideally positioned to service your funds from the jurisdiction of your choice. Whether you are a new fund manager or an established player, Mourant’s award-winning fund administration service can integrate seamlessly with your team and provide the perfect solution to enhance your operations. Our awards: European Offshore Fund Administrator of the Year ICFA Global Awards 2009 Private Equity Fund Administrator of the Year ICFA European Awards 2008 Fund Administrator of the Year, Channel Islands ICFA European Awards 2008 European Fund Administrator of the Year Private Equity News 2007 And shortlisted for: Fund Administrator of the Year: Asia & Pacific ICFA Global Awards 2009 For more information about our fund administration services in Hong Kong and Singapore, please contact: Tim Mann Head of Asia Fund Administration T +852 3153 1001 [email protected] James Vella Bamber Managing Director, Singapore T +65 6505 9413 [email protected] www.mourant.com

Cayman | Dublin | Guernsey | Hong Kong | Jersey | London | Luxembourg | New York | Singapore In Cayman, Mourant International Finance Administration operates through Mourant Cayman Limited which is regulated by the Cayman Islands Monetary Authority in the conduct of trust company business; Registered office: Harbour Centre, 42 North Church Street, PO Box 1348, Grand Cayman KY1-1108, Cayman Islands. In Guernsey, it operates through Mourant Guernsey Limited and its affiliated companies which are regulated by the Guernsey Financial Services Commission in the conduct of investment business and in the conduct of trust and company business; Registered office: First Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 6HJ. Registered number 36571. In Hong Kong, it operates through Mourant Fund Services (Hong Kong) Limited; Company Registration number 1152147; Registered office: Level 39, One Exchange Square, 8 Connaught Place, Central Hong Kong, China. In Jersey, it operates through Mourant & Co. Limited and its affiliated companies which are regulated by the Jersey Financial Services Commission in the conduct of trust company business under the Financial Services (Jersey) Law 1998; Registered office: PO Box 87, 22 Grenville Street, St Helier, Jersey, JE4 8PX, Channel Islands. In London, it operates through Mourant Fund Services (UK) Limited; Firm number 448301, which is authorised and regulated by the Financial Services Authority; Registered office: 1st Floor, Phoenix House, 18 King William Street, London, EC4N 7BP. In Luxembourg, it operates through Mourant Luxembourg S.A. which is regulated by the CSSF to provide Domiciliation, Registration and Transfer Agency Services; Registered office: 6 rue Philippe II, L-2340 Luxembourg;R.C. Luxembourg B No 88409. In Singapore, it operates through Mourant Fund Services (Singapore) Pte. Limited; Company Registration number 200712750Z; Registered office: 50 Raffles Place, #31 - 03/04, Singapore Land Tower, Singapore 048623.

Poll of the Year | Part 1

We saw the kind of unique opportunities that arise only after a large downturn, and which reward those who are looking early – Jim Hildebrandt, Managing Director, Bain Capital

The downturn has had relatively less effect on China than on many other countries. In most countries, basically everyone suffered. In China, you have winners and losers – Xiaoyang Yu, Founding Partner, China New Enterprise Investment

The crisis in India pretty much never happened. Valuations went down for a very short period of time, and they came back roaring – Gulpreet Kohli, Managing Director, ChrysCapital

Positive conversations were increasing during 3Q09, and now this has turned to activity, with a number of new finds launching and raising capital – Tim Mann, Head of Asia Fund Administration, Mourant

What impact has the downturn of 2008-09 had on your business area within private equity? On the GP side, most directly, the downturn highlighted which portfolio companies had capital structures and managements able to withstand a severe economic shock – Mark Chiba, Group Chairman & Partner, The Longreach Group

14

A number of large business were presented for sale where the business model had required large amounts of low-cost debt funding; effectively, none of these were viable – Paul Shaw, Director, Pacific Equity Partners

The downturn has created a lot of interest in secondaries, both from potential investors and from would-be sellers – Jeremy Coller, CEO, Coller Capital

Competitively, we have seen the departure of hedge funds and proprietary trading desks at investment banks. However, there is still plenty of competition in Indian private equity – Steven J. Wisch, Co-Founder & Managing Partner, India Equity Partners

avcj.com | November 5 2009 | Volume 22 | Number 41

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special feature | Control [email protected]

Whatever the stake, control has very different but equally important connotations for investors

The essence of control

The MErriam-Webster Dictionary defines control as: “verb: a- to exercise restraining or directing influence over; b- to have power over.” Succinct and clear. Yet, in the context of private equity, the walking in with the keys to the nuances are myriad. For firms on kingdom. varying points along the spectrum One of the main points from venture to buyout, the that makes minority investing definition of control and the list of – or anything less than a majority priorities when considering a deal investment – quite unique is that, as vary considerably. Mark Thornton, Partner, 3i, explains, The topic becomes particularly “The most important thing to have apropos as buyout firms are is an alignment of interests. It’s a increasingly looking at entering non-legal point, but it is also one of minority investments, arguing that the biggest reasons why we don’t the transactions can be structured end up completing transactions.” similarly and that the two are in fact Whilst buyout firms can shape not that different. In a company from fact, that claim is both every angle, minority an oversimplification investors have to test of the skills that the management team successful minority and their vision for investment firms the target before they have honed over commit. the years, as well as “In Asia, there are a naïve judgment a lot of opportunities,” call on the part of Thornton says, “but teams accustomed to Mark Thornton the end game for

16

[the management team] may not always be maximizing shareholder value. We are actively seeking management teams and companies that are 100% clear about what they want to do with the business, with our capital, and why they are working so hard.” That is about more than just one meeting or reviewing numbers, he explains. “You have to keep testing that over months of due diligence for a real alignment of interests.” The foundation on which investment decisions are based sets the tone for a successful working relationship, but to effectively avoid misunderstandings down the line, seasoned industry experts urge firms and the target company to have a clear picture of what is implicitly and explicitly stated – and to what extent that is a viable plan.

The power to influence “Control is a very lucid term,” says Chris Chia, Managing Partner at Kendall Court Capital Partners, “and it can refer to both positive reinforcement and negative reinforcement.” Just how much of each is required, and how much

percentage ownership. For us, control means [having power over] two main issues - the ability to change management if necessary, and the ability to control our own exit.” Others, like Navis Capital, choose “unambiguous control” because, as Nicholas Bloy, CoFounder and MD of the firm, says, “It cuts through the debate about whether certain shareholder rights or understandings confer effective control of a company.” In Asia, where the legal and regulatory environments of various jurisdictions do not necessarily provide an ideal platform to exercise shareholder rights, fleshing out a transparent agreement prior to signing a deal – and particularly prior to handing over the money – is arguably more important here than in other parts of the world. In a different context, the question becomes how – without taking a supermajority stake – a minority stakeholder ensures that the components of the business it wants to influence or change are in fact in their power to influence or change. Josephine Price, CoFounder and MD at Chepstow

“If you think you can drive the company, then there shouldn’t be – Chris Chia any compromise.” muscle needs to be flexed is a matter of relationships, dialogue, and also contractual agreements. Even in a buyout context, Andrew Liu, Managing Partner & CEO Asia, Unitas Capital explains, “For us, having control means more than a

Capital, “As a typically minority investor, it’s not necessarily about control by one party or the other; you agree to a plan and within the confines of that plan, as long as everyone stays to it, then there are no issues.” However, “Our ability

avcj.com | November 5 2009 | Volume 22 | Number 41

Celebrating 15 Successful Years In Emerging Asia

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An established independent Asian private equity firm focused on mid-market growth opportunities Suite 3401, Jardine House, 1 Connaught Place Central, Hong Kong +852 2912 7888 [email protected] www.aifcapital .com

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special feature | Control [email protected]

to influence occurs when you go outside those lines – then we want consent and the ability to veto.” But precisely what this list should look like is dependent in part on the firm itself and what it feels it can do for the company. Chia elaborates, saying, “If you are a team that has executed a large number of deals, and brings a wealth of depth and breadth of experience to a given deal or a function within a company, and you think you can drive the company in this regard, then there shouldn’t be any compromise on the level of control you seek.” Equally, “If you are not coming in to add operational value,” [Kendall Court is a mezzanine debt fund] he

calls “economic control, which is equity ownership; and hard control, which gives you a legal defense toward control.” He defines undocumented agreements as, “soft control, which is a moral obligation on the management of the Appointing the Chairman of the Board can promoter to do certain finesse difficult situations things or to protect you – it’s a handshake that is not legally deals, firms being sold a lemon, defensible.” He also refers to it as and criminal legal action against highly sub-optimal. management tell the story of Raghavan, who led the second worst case scenarios. “You can say largest buyout in India – a $230 whatever you want until you sign the million transaction for Goldman agreement,” says Chia, talking about Sachs targeting Sigma Electric – the worst case scenario, “but if as a says that even in a buyout situation, firm I don’t exercise my feelings prior to the deal, it won’t get done later.” “Once we are in [and have signed on the deal] we won’t say no to what we’ve agreed upon, but if you want to go outside that you start needing our consent,” says Price. “And the consequences if we don’t agree… they will bite, and as a firm you don’t apologize for that.” – Josephine Price Appointing a Chairman of the Board can help to finesse situations in which conflicts of “investors typically look at all three interest might arise. Explains elements to mix and match for a Thornton, “That person can act as combination. You can’t just simplify a conduit between management the point of any one of the three.” and investors.” A very skilled role, Still, in recent times, investors particularly in a part of the world entering India have taken a where the loss of face in a board more benign approach to these meeting can lead to resentment discussions, “back-ending them and clashes, “a Chairman can take instead of front-ending them the temperature before a meeting, – and most times have been see which way it’s going during a disappointed.” Worldwide red-hot interest in India is clearly the driver, leading firms to cut corners, many times with problems to follow. Default, lawsuits and the like are clearly last resort moves. Before the situation gets to that point, “as soon as there is a problem, you admit it,” says Price. “You bring it into the daylight and try to engage people. You may have to have some very unpleasant conversations,” but extremes like defaulting are the last option when a firm has exhausted absolutely every other avenue. Anecdotally, reports of botched Nicholas Bloy

“Consequences if we don't agree will bite, and as a firm you don't apologize for that.”  says, “you need to know what you want exact control over. For us that means cash flow and accounting. I want to see it and execute the mechanisms that allow me to see what is going on underneath; to monitor as opposed to sell to the sponsor that you know his business better than he does.”

Lessons of trust, power and direction No firm actively ignores the complex tapestry that weaves together the promoter, the fund, an understanding of where the company needs to grow, the rights to decision-making and financial powers, and protection clauses in case things do go wrong. But experienced dealmakers argue the importance cannot be overstated,. Those aspects of a deal which provide a hard and fast definition of control, Harsha Raghavan, former Head of India for Candover, and prior to that Goldman Sachs,

18

meeting, and can work behind the scenes to keep people aligned.” With the best will in the world, that doesn’t always right the situation. “If we feel we have to act decisively to solve a problem situation, we can and we will,” says Bloy. “As a result, we have been able to turn around situations that had we been a minority shareholder, would have resulted in total loss outcomes.” Another aspect of this is market conditions. In bull market days it was much easier to give management the benefit of the doubt, but as many have not weathered the storm through economic difficulties, “in down times, investors are less forgiving,” Thornton says.

Control rights, now what? To rely solely on the hard aspects of control is potentially foolhardy, says Bloy, “inviting a breakdown between the controlling shareholder and management, who may also be minority shareholders.” Similarly, often times for minority investors the CEO is the majority shareholder, which means swaying opinion can be even more difficult if a breakdown in the relationship occurs. Both situations get back to Thornton’s point of an alignment of interests: establishing that the management team is one the investor is happy to back and comfortable with a strategy, with the personalities of management, and with the notion that there is a genuine exit down the line. Having the power to enforce legal control over decisions does not necessarily preclude unforeseen complications – a currency collapse or a political coup for instance – nor does it mean that there will necessarily be a straight line from due diligence to exit strategy in three to five years. But, “If you have a good relationship with the company, you can usually find a way to resolve any issues,” says Price. “Not every deal is easy, but with open and clear dialogue there is generally a resolution.”

avcj.com | November 5 2009 | Volume 22 | Number 41

C y p r u s    G u e r n s e y    H o n g  K o n g    H u n g a r y    J e r s e y    L u x e m b o u r g    T h e  N e th e r l a n d s    N e w  Y o r k

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case Study | affinity [email protected]

Affinity clinches rare China buyout with Beijing Leader & Harvest Majority position in energy efficiency play Cleantech and green the speed of AC electric motors by investing are not exclusively the adjusting the frequency of the input province of venture capital firms: electrical power driving the motor. even tried-and-tested buyout MV VFD technology can reduce groups can turn to environmentally- electric motors’ power consumption focused propositions when the by 20-60%, according to company economics are right. One case information. MV VFDs are most in point is the recent control commonly used in industrial investment by Affinity Equity applications, such as pumps and Partners in Beijing Leader & compressors in the energy sector, Harvest Electric Technologies Co. and fans in mining or metals Ltd. (Leader & Harvest), a power production, where power savings electronics company producing are potentially very large and the Medium Voltage Variable Frequency payback period for installing a Drives (MV VFD), an energy-saving VFD can be as short as one year device with great growth potential for the customer. China’s National in China. Development The deal was and Reform interesting for more Commission reasons than just taking (NDRC) has a noted buyout firm into already cited MV a new sector usually VFD as one of associated with VC. As 50 technologies part of the transaction – recommended which sources priced at Beijing Leader & Harvest to achieve the around $200 million or a headquarters in Beijing national energy PE of 10x the company’s savings target. 2009 forecast earnings – Affinity The company has also recently has acquired 94% of Leader & moved into wind turbine inverters, Harvest’s shares, making this one of which are installed in all wind the highest-profile control buyouts turbines to convert the variable in Chinese private equity. Indeed, power generated into a stable AC Affinity may now have pulled off supply for distribution over a power China’s largest ever buyout by a grid. According to some sources, single foreign private equity firm. the PRC will have around 20GW of installed wind power capacity by China’s energy efficiency needs 2010, but China’s National Energy Leader & Harvest already has a Administration is talking about significant market share in China’s a 150GW target by 2020, or 18% MV VFD market. MV VFD controls annual growth.

20

At the end of the day, the key investment driver remains the industry growth prospects and the quality of the company’s business and management. While agreeing that Leader & Harvest’s business area has “huge growth prospects in China,” Kok Yew Tang, Chairman and Managing Partner at Affinity Equity Partners, emphasized that “Affinity does not invest on the basis of current investment fashion or macro trends only. We made the investment because we believe in the industry’s growth potential; that the company has sustainable competitive advantages which would allow it to maintain its market leadership position. Leader Harvest has a sterling market reputation, strong R&D capabilities and the largest direct sales force and after sales service team in China – both of which are critical success factors to the industry in which the company operate. We have also been impressed with the quality of the management team and the low-cost innovation capabilities of the technical teams.”

Affinity’s acquisition process The Leader & Harvest deal, apparently sourced privately, also had fundamental attractions due to the company’s structure, which allowed a control investment into an offshore vehicle without triggering lengthy regulatory approval processes in China. From SPA signing to deal completion, it took only 20 days. “The difficulty is finding these types of structures or opportunities,” Terence Foo, Partner at Clifford Chance and legal counsel to Affinity on the deal, remarked. “These types of opportunities only exist for companies which were restructured before September 2006.” Opportunities for a follow-on deal on exactly the same pattern are becoming more limited. However, Foo emphasized Affinity’s achievement in overcoming the execution hurdles that face even deals with an offshore structure

in China – not least in securing genuine control through an overwhelming majority stake, rather than the type of nominal majority, seen in some other past transactions across Asia. Furthermore, according to AVCJ

KY Tang

sources, the deal was an equity-only leverage-free transaction, where the company’s strong growth prospects are expected to drive investment returns.

Control in a strong sector Affinity, hitherto associated with major control transactions in other markets such as Korea, Australia and Southeast Asia, now has a significant footprint in the emerging China buyout space. In conclusion, Tang paid tribute to the nimble and innovative capabilities of Chinese manufacturers typified by Leader & Harvest. “The local manufacturers are not only making these things much more cheaply,” he told AVCJ. “They’re also able to quickly innovate and come up to a level of quality that comes close to what the foreigners do but at a much lower price. In the MV VFD space where customers value product reliability and quality more than price, Leader Harvest has proven itself to be a quality manufacturer with products that rival those of the international giants.”

avcj.com | November 5 2009 | Volume 22 | Number 41

© 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Volatile market conditions

Greater scrutiny of deals

Portfolios to manage

Emerging from a period of economic volatility, you don’t need us to tell you how competitive private equity has become. But you do need to work with people who understand your business and can keep you ahead of the game. That’s why KPMG has a dedicated Private Equity Group in Asia Pacific, organised with your needs in mind.

For more information contact:

Japan Masami Hashimoto +81 (3) 5218 6704 [email protected]

Taiwan Jay Cheng +886 (2) 8758 9981 [email protected]

Korea Chris Shin +82 (2) 2112 0788 [email protected]

Thailand Bob Ellis +66 (2) 677 2118 [email protected]

Malaysia Chan Siew Mei +60 (3) 7721 7063 [email protected]

Vietnam Warrick Cleine +84 (8) 3821 9266 ext 8200 [email protected]

New Zealand Ian Thursfield +64 (9) 367 5858 [email protected]

kpmg.com

Just like you, we do more than deals. With skills across Audit, Tax and Advisory, and a network covering our member firms in Asia Pacific and around the world, we can tailor our services to suit you from effective tax structuring and strategic corporate intelligence right through to due diligence and cost optimisation – for value improvement after the transaction. KPMG. Dedicated to Private Equity. Dedicated to your success.

Asia Pacific PE Group Leadership Honson To +86 (21) 2212 2708 [email protected] Robert Stoneley +852 3121 9850 [email protected] Australia Andrew Thompson +61 (2) 9335 7643 [email protected] China Honson To +86 (21) 2212 2708 [email protected] India Vikram Utamsingh +91 (22) 3983 5302 [email protected] Indonesia David East +62 (21) 574 0877 [email protected]

Philippines Vicente J. Sarza +63 (2) 885 7000 ext. 220 [email protected] Singapore Diana Koh +65 6213 2519 [email protected]

Now, how do you enhance value?

investment map | Asia Pacific

China Capital under management 1H09: US$41.9 billion Number of PE firms 1H09: 502 Investments made 1H09: US$7.3 billion Characteristics: Major developing economy, currency convertibility controlled, state sector predominant, control investments and leverage difficult for offshore investors Key sectors: Financial services, consumer products/services, retail/wholesale, transportation/ distribution. Highlights 2008-09: Fast recovery in 2009 through government stimulus, upsurge in RMB fund formation Market viewpoint: “Even during this crisis, we could find companies that were growing very well, both in terms of revenue and profit. You would have had a problem to identify such companies in a developed market” – Xiaoyang Yu, Founding Partner, China New Enterprise Investment

India Capital under management 1H09: US$28.4 billion Number of PE firms 1H09: 202 Investments made 1H09: US$2.1 billion Characteristics: Continental developing economy, strong domestic focus, uneven development, infrastructure and logistical challenges, English legal system, primarily growth capital Key sectors: Financial services, infrastructure, consumer products/services, transportation/ distribution. Highlights 2008-09: Sharp equities rebound after March 2009, consequent investment pricing issues Market viewpoint: “The valuation gap between what we feel is a fair price for a company and what the owner or entrepreneur expects has widened” – Raja Parathasarathy, Managing Director, IDFC Private Equity

Australia Capital under management 1H09: US$20.3 billion Number of PE firms 1H09: 230 Investments made 1H09: US$5.9 billion Characteristics: Mature economy with sustained growth, exposure to Asian development through mining and resources, robust banking system, many overleveraged companies Key sectors: Mining and metals, infrastructure, transportation/distribution, utilities. Highlights 2008-09: CPP IB MCIG investment, Myer IPO Market viewpoint: “The economy in Australia did slow, but we avoided a recession, and it has been the G20 leading country” – David Jones, Managing Director, CHAMP Private Equity

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avcj.com | November 5 2009 | Volume 22 | Number 41

South Korea Capital under management 1H09: US$16.9 billion Number of PE firms 1H09: 220 Investments made 1H09: US$2.36 billion Characteristics: Mature economy, robust corporates, control buyouts available, stressed local and global sellers Key sectors: Consumer products/services, transportation/distribution, travel/hospitality. Highlights 2008-09: Strong recovery from global downturn, Oriental Brewery deal, restructurings of some chaebol pending Market viewpoint: “Although Korean corporations experienced difficulties, they came out of the crisis in relatively better shape than during the Asian Financial Crisis” – Jae Woo Lee, Founding Partner, Vogo Fund

Japan Capital under management 1H09: US$39.4 billion Number of PE firms 1H09: 404 Investments made 1H09: US$2.5 billion Characteristics: Mature and contracting economy, strong legal system, cross-shareholdings make control deals problematic, PE very underpenetrated Key sectors: manufacturing – light, TMT, transportation/distribution, travel/hospitality. Highlights 2008-09: Some global firms withdrawing from Japan, DPJ election win in Aug 2009, end to post-war ‘Iron Triangle’ system Market viewpoint: “For the first time in a decade, conditions in Japan are aligning to create value opportunities for private equity firms with scale local teams. These opportunities are being driven by sharply lower equity prices, a need for restructuring, and a willingness to change” – James Hilderbrandt, Managing Director, Bain Capital

Number 41 | Volume 22 | November 5 2009 | avcj.com

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special feature | portfolio Management [email protected]

Investee management across Asia: The business challenge How GPs supported and grew their companies Asked about investments in Asia Pacific, investment professionals at firms across the region give two different answers: one is to go for new deals, and the other is to stay focused on managing portfolio companies. When GPs make investments, media and commentators often give only basic details of the investor’s business plan for developing the investee, alongside the stake size, investment amount, and other financial details. In this article, some leading equity firms from India, Korea, Japan and New Zealand tell just little bit more about how they made their acquisitions and how they manage their portfolio companies.

EFMC's water facilities

Korea In July 2009, Standard Chartered Private Equity Limited (SCPEL) invested $40 million in Environmental Facilities Management Corporation (“EFMC”), a privately held environmental service company which specialises in waste water facility management. The firm acquired a 40% stake from the South Korean conglomerate, Kolon Group, which had fully owned EFMC and injected expansion capital for an additional 5.5% stake. EFMC is the largest privately-held operator in the waste water business in Korea. Asked why SCPEL chose to

24

invest in the water space, Charles Huh, Director at SCPEL, said, “First, our firm is keen on investing in the environmental / water industry because we believe in the growth potential, particularly in Korea, where water is scarce and environmental awareness for clean water has peaked recently." Since SCPEL’s investment five months ago, EFMC has acquired two related businesses. In August, EFMC made an $8 million investment into in a large waste water operation in the Southwest region, followed by a recent acquisition of a water-related system integration company for an undisclosed amount. “Prior to our investment, we had spent seven months on due diligence, trying to understand EFMC’s strengths, weaknesses and potential areas for expansion. We also worked with the management to put together a business plan for the Company for the next five years. The two acquisitions embody our strategy to add value through expansion of scale and scope in the water sector,” Huh said. Huh also shared that they plan to list EFMC between 2012 and 2013. In the meantime, Huh, who is one of the two SCPEL nominated board members of EFMC, is actively helping the company to optimise its balance sheet and recommending strategic acquisitions, thereby balancing returns on investment and growth for EFMC. An example of such a strategic advice would be recommendations on divestment plans for the non-core assets that the company holds.

As the representative of EFMC’s second largest shareholder, Huh communicates at least two to three times a week with the management team and its the other major shareholder on business plans and growth directions.

because we are confident that the water business – an area which is almost recession proof – is one that will continue to grow. Additionally, EFMC is debt-free and highly liquid, with 20% of the enterprise value held in cash,” Huh concluded.

“Alignment of interests with shareholders, management and – Charles Huh employees is critical.” “Alignment of interests with shareholders, management and employees is critical. Understandably, management often do not wish to sell off assets even if they may not provide good returns. The fondness for owning assets is culturally-linked, which is precisely where our role as a strategic management advisor comes into play,” Huh said. “We started looking into this investment in November last year, amidst the economic crisis, and went ahead with it this year

New Zealand The New Zealand market in itself is very small, but it has businesses that are well-connected to both the European and the Asian markets. Moreover, there are plenty of deals on offer in the country, as up to 70% of local companies are looking for new owners or investors as existing founders reach retirement age, according to Pencarrow Private Equity. Here is an example of investment made by Endeavour Capital, a local private equity firm

China farm of Luo Han Guo

avcj.com | November 5 2009 | Volume 22 | Number 41

Affinity Equity Partners is an independently owned private equity fund manager and currently advises and

Oriental Brewery Co Ltd

United Test and Assembly Center Ltd

manages over US$4 billlion of funds and assets, making it one of the largest independent financial sponsors in this region. The Affinity team has executed transactions for values aggregating over US$8 billion.

Joint Lead Investor

Joint Lead Investor

Leveraged buyout of the second largest brewery in South Korea

Leveraged buyout of a leading independent semi-conductor test and assembly service provider listed on the Singapore Exchange

July 2009

November 2007

Korea Digital Satellite Broadcasting

Korea Digital Satellite Broadcasting

Bojie Media Holdings Limited

Colorado

The FaceShop Korea

Sole Investor

Sole Investor

Sole Investor

Sole Investor

Investment in Korea s only digital satellite TV broadcaster

Investment in one of the largest advertising agents in China

Leveraged buyout of a leading branded footwear and apparel retailer in Australia

Leveraged buyout of a leading cosmetics company in Korea

August 2007

January 2008

October 2006

October 2005

Loscam Limited

Jaya Holdings Limited

Himart Co Ltd

RT Sourcing Asia Limited and RT Sourcing USA, Inc

Sole Investor

Sole Investor

Lead Investor

Sole Investor

Leveraged buyout of a leading returnable packaging hire company in Australia

Management buyout of a leading integrated oil and gas services company listed on the Singapore Exchange

Leveraged buyout of Korea s largest consumer electronics retailer

Leveraged buyout of an international sourcing, product design and development company in Hong Kong

August 2005

January 2007

April 2005

February 2005

IPAC Securities Ltd

Sime Diamond Leasing (Singapore) Pte Ltd

Wong’s Circuits (HK) Limited

Joint Lead Investor

Sole Investor

Sole Investor

Lead Investor

Leveraged buyout of the second largest confectionery company in Korea

Buyout of the leading independent financial planning/wealth management company in Australia

September 2001

June 2001

NS Electronics Bangkok Ltd

Mando Corporation

Mando Climate Control Corp

MK Electron Co Ltd

Sole Investor

Co-Investor

Lead Investor

Sole Investor

Largest financial restructuring and recapitalisation buyout in Thailand by a financial sponsor

Leveraged buyout of Korea s dominant auto parts company

First leveraged buyout in Korea by financial sponsors

First buyout of a Korean non-financial institution by an international financial sponsor

February 2000

December 1999

October 1999

May 1999

Haitai Confectionery & Foods Co Ltd, Korea

First buyout cum leveraged recapitalisation of a financial institution in Singapore by a financial sponsor

March 2001

First leveraged buyout in the Hong Kong debt market by financial sponsors

August 2000

www. affinityequity.com

special feature | portfolio Management [email protected]

focused on SMEs. In 2004 the firm made a $3.85 million investment for a 33% stake in BioVittoria, a Hamilton-based non-calorific fruit concentrate sweetener producer founded by scientist Dr. Garth Smith, American nutraceuticals marketer Stephen LeFebvre and Chinese Luo Han expert, Lan Fusheng. BioVittoria uses a Chinese fruit Luo Han Guo make the non-calorific 100% fruit concentrate sweetener called PureLo. The company expects to process 3,000 tonnes of fruit per annum from ethnic Miao and Yao hill tribe growers in mountainous areas of Guangxi province in southern China. The original idea of using Luo Han Guo to a make a sweetener was introduced by co-founder Smith at an agriculture conference in Beijing. Later the idea was developed and brought to the investment firm founded by entrepreneur Neville Jordan. Jordan told AVCJ that the investment was a great success, with a 66% compounded annual return. BioVittoria is planning an IPO on December 2 this year. Stuart McKenzie, general partner at Endeavour, said, “At first glance, we saw rapid growth and high barriers to entry for competitors, plus the ability to expand to address global markets.” As it supports the agricultural business in China, the Agricultural Bank of China provided debt finance to BioVittoria. Endeavour provided follow-on capital, as well as underwriting a substantial bank credit line to BioVittoria. Apart from financial support, the firm assisted with corporate governance, marketing strategy and alignment of shareholder interests. The firm also appointed a new CEO, a business consultant with experience in growing agritech and biotech businesses, to assist the company’s founders, who are entrepreneurs and scientists, in managing the business and its development.

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LilliPut shop

McKenzie said that important factors in working with investees include agreement on strategy, exit options and separation of shareholder and management responsibilities.

India India, the world's second most populous country after China, is experiencing real GDP growth in excess of 6% per annum and has an expanding middle class who demand more products and services as well as a better quality of life. Everstone Capital, an India focused private equity and real estate investing firm capitalized on this theme. Everstone's flagship private equity fund, Indivision, is a $425 million fund which focuses on domestic consumption and enablers of infrastructure. Atul Kapur, Co-Founder and Managing Partner of Everstone Capital, told AVCJ, "Our research team did a lot of analysis on various aspects of consumer spend which were likely to grow significantly. Amongst many themes which emerged, women's discretionary spend, especially on their children, became a focus for us." In November 2006, the firm duly invested $10 million in Lilliput, a children's clothing company owned by Sanjeev Narula and his family members. In 1991, Narula, then a young graduate, set up a small unit with 25 sewing machines in Delhi with four staffs and hired contract tailors to do fabrication work

for exporters. The company gradually expanded into retail distribution and broadened its reach, selling children's wear in India as well as Bahrain, China, Egypt, Nepal, Kuwait, Saudi Arabia, Ukraine, Oman and Yemen. The Indivision fund made additional follow-on investments in Lilliput in January 2008 and June 2009, increasing its total stake to 32%, for a total commitment of $27 million. Kapur said that now the company is ready to file for an IPO and Lilliput is expected to list on a local stock exchange in 2010. Since Indivision invested in Lilliput, its domestic revenue has increased by four-fold. Even in 2009, a tough year for companies worldwide, Lilliput's domestic revenue surged by 50%, and 13% for total revenue including overseas sales. Lilliput has gone from 46 stores to over 250 stores within three years and, including its concessions

and operational style of investing, we worked very closely with him on various business functions such as manufacturing, supply chain, distribution, marketing and organizational design." Investing in family-run businesses often leads to disagreements on development plans between owners and investors; however Kapur said that the CEO of the company was very excited when Indivision offered an investment and growth plan with a five year perspective. For the next six months, the PE firm will send experts to the company to re-focus its marketing as Lilliput evolves from being a children's clothing retailer to adding other categories such as furniture, toys and accessories for children. Kapur continued, "Young companies in India often have a strong growth characteristics, but the important thing is to execute to the fullest potential of the opportunity and thereby become a highly competitive, scalable and valued business. This only happens when the entrepreneur views you as a business partner and not just an investor. It is also important to take a long term

“Young companies in India often have a strong growth characteristics, but the important thing is to execute to the fullest potential of – Atul Kapur the opportunity.” and multi-brand outlets, has over 750 points of presence in the country. It is by far India's largest player in the children's clothing category. Kapur attributes this to the right combination of vision and execution. "In an entrepreneur such as Sanjeev Narula, we had great vision and ambition. Our job was to provide the capital and surround him with execution capabilities. Given our highly active

thematic perspective rather than be opportunistic. " With Lilliput distributing not only domestically but internationally, the company expects to grow its total revenue by 30% in 2010. Overall, what is critical for private equity players to become a part of a company’s business is to have great communications with investees and understand their ideas on business growth.

avcj.com | November 5 2009 | Volume 22 | Number 41

The Future of FROM THE BOOK— “The IPO market as we know and love it will not come back.” Len Baker, Managing Director, Sutter Hill Ventures “Management fees and transaction fees are very much a hot button. Most LPs will believe that this whole area was significantly abused in the past couple of years.” Martin Day, Managing Director, OMERS Private Equity “As Warren Buffett said, ‘When the tide goes out, we find out who has been swimming without a bathing suit.’ A small percentage of alternative investment managers will cheer. The rest are likely to have a tougher time raising funds.” Howard Marks, Chairman, Oaktree Capital Management “Instead of operating on the traditional basis of ‘risk-adjusted returns,’ many lenders were operating on the basis of ‘risk-ignored returns.’ Historic modeling implicitly assumed that tomorrow would look a lot like yesterday. But the truth is that major credit crises come about when tomorrow turns out very different from yesterday.” Wilbur Ross, Chairman, W L Ross & Co “The bankers will come back in part because of the potential profitability. Remember, banks will lend because that’s their basic business.” David Rubenstein, Cofounder and Managing Director, The Carlyle Group “My personal concern is really on the longer-term structural changes that China has to make. On the one hand, the premier is very confident and upbeat that the country will be able to face this challenge. At the same time, he is realistic. He is constantly emphasizing that to make these long-term adjustments, we need to carry on and continue the reforms.” Yichen Zhang, CEO, CITIC Capital Holdings

Available in Feb 2010

About the book The global economic crisis has cut across all sectors, but in its aftermath, private equity and venture may well emerge as leaders in the financial world. Equally important, the corporate model they espouse could well herald fundamental change for the way companies are run. Author Dan Schwartz spent 17 eventful years as Chairman and CEO of the Asian Venture Capital Journal in Hong Kong. He examines the state of the industry today, the challenges it faces, and offers valuable insights into what its own future and the financial world may hold. The book also contains a “private equity primer” for those new to the subject.

ISBN: 978-0-470-82511-2 • Hardcover • 232 pages • US$ 49.95

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10/30/09 2:22 PM

special feature | portfolio Management [email protected]

Japan M&A advisors, lawyers, and private equity players often say that it is just as difficult to persuade a company’s shareholders and founders to decide to sell a partial stake, or the entire company, especially in Asia. Japan is like Korea and Taiwan, all of them surrounded by large masses of water, and local cultures have a bias towards protection against outsiders. However, now management styles of many business operations have to change to accept greater flexibility. This is a case study of smooth collaboration between an investor and existing founders to facilitate further growth for the company. Tokihiko Mori, partner at Riverside Partners, an advisory arm of Boston-based buyout firm Riverside Company, explained the operations of its parent’s Japanese portfolio businesses, MAOS Co., Ltd. and Sinsouki Co., Ltd., both coinoperated parking companies. In January 2008, the US firm made first

its buyout deal in Sinsouki in Niigata prefecture, north east of Honshu, in an MBO, and a year later in March, it invested in MAOS, an industry peer located in Tokyo. Mori said, “When we invested in Sinsouki, the owner was keen on developing the company, and welcomed changes. When we heard about MAOS, we believed we could find synergy effects between the companies.” Mori said that MAOS’s CEO also took the same position at Sinsouki, and the founder of Sinsoki became chairman, an arrangement that has worked very well. If fact, both investees became even more energetic in pursuing further growth. A combined total of 600 parking lots are operated by Sinsouki and MAOS across Japan. “Numerous companies started parking businesses back in 1992, when an illegal parking penalty rule was implemented. However, most players do not observe market changes that may dictate

some business changes, such as facilities and parking costs, but still maintain the same operation that they started their business with. But Sinsouki and MAOS have cautiously monitored all their parking spaces to adjust the operations into what the current market needs,” Mori pointed out. By 2005, coin-op parking in Japan was enjoying double-digit

J.Park in Tokyo

growth. However, some of the players which did not see a need to change their operation are now in a slump, leading to forced sales and closures. This is particularly true for those firms that own the land. Riverside believes that now is the time to make further growth in the business area through M&A. While eyeing acquisition opportunities, the management teams at Shinsouki and MAOS have been, at the other time, restructuring extensively, including closing down non-profitable parking lots, renegotiating rent for lands, and introducing new machines at parking lots to simplify operations and reduce costs. Many buyout deals elsewhere in the world have unhappy results for company employees, including management, but Mori said when Shinsouki and MAOS announced their business restructuring, the CEOs told all staff that the companies will not make any redundancies

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special feature | Closing Offices [email protected]

Change is in the wind The process behind decisions to shutter an office may be deeper than you think After a year of hard work and a fair number of disappointments, the lessons of the downturn are not necessarily all about excess, greed and that fourletter word, leverage. There are also lessons learned about how firms make difficult choices to cut staff, wind down arms of the business, shut down offices or consolidate regional teams. While it is easy to relegate all of these to the hold-all ‘effects of the economic downturn’ category, that may be deceptively misleading, and miss the point. There are nuances and more fundamental points to be examined in the way that expansion and presence-building takes place, as well as the difficult but at times necessary Anna Cheung decision to have to forsake several constituent parts to save the whole.

Consolidation and focus Earlier this year 3i consolidated its Hong Kong and Shanghai teams into its Beijing office. Cost-cutting was certainly one of the key drivers, but there is a greater theme at play. The realignment, says Anna Cheung, Partner and Co-Head of China for 3i, “allowed our China team to be located together to enhance 3i’s focus on doing deals in a coordinated way across China… Being in one office has made it easier for us to share our knowledge, best practices and experiences and further encourage teamwork.” Since then, “Our focus has been to position 3i China and its portfolio

30

well for the upturn, assisting 3i’s China portfolio through challenging markets.” As3i as a group has been working to lift debt from its balance sheet, it has remained focused on the areas where it believes future opportunities lie, and critically, she says, that includes Asia. The region “is an area of great opportunity for 3i and the wider private equity industry given its strong relative growth. We believe that in the next 10 years, Asia private equity assets under management could grow to equal as the whole of the US and Europe combined.” Overall, says Cheung, “having a centralized 3i China team in our Beijing base led by myself and Albert Xu, close to the administrative centre of the country has been greatly beneficial to 3i.” While several industry insiders have said that 3i’s decision may have been premature, and expect to see them back in Hong Kong sooner rather than later, the move was smart, decisive, and in line with where the group is going for the long term.

Saving the heart of the organization For other firms, the issue becomes about returning to the core approach of the fund; returning to where it has been most successful – either geographically or by sector. Shortly after Candover established

a presence in Asia, hiring Jamie Paton and Harsha Raghavan to run Hong Kong and India offices respectively, it became clear that the firm could not support deals in the region. Since this news was released, Candover has been remarkably candid about its position and the reasons for its actions. Chairman Gerry Grimstone said back in March, “The prospects for the private equity industry have altered considerably over the last six months. Our priority now is to reinforce the financial Jamie Paton position of the firm.” That meant closing up shop in Asia. Paton explains that internally, it was not a case of hard and fast decisions from the start; in fact, quite the opposite. “There was always the possibility, that as the process developed, [Candover] might [have been] able to be a cornerstone investor if we did the fundraising out here on our own. And while everyone has their own personal choices to make, at the time we thought ‘we have a great team and we want to work together’ so I encouraged us all to see if there was a way to make the original plan work.” He added that that while the desire to branch out geographically was – and longterm probably still is – part of the plan for Candover, for a firm with a successful history dating to 1984, it’s about “getting back to your roots and managing with what you have today” in preparation for rebuilding an expansion plan later. The push to be in Asia remains a strong driver for firms coming into the region, but being careful, calculated and diligent about

the reasons for which they are expanding and the costs associated with developing a team, building a presence and being able to finance deals is essential for real growth. And if in fact that becomes too difficult, having enough selfawareness to make the inevitably tough decisions required to save the organization is crucial to the longevity of the firm.

The next chapter The most significant take-away from the former team is that none have any hard feelings about the turn of events. Paton says good-naturedly, "These things happen. Over the period [we were all with Candover], we made some new relationships back in Europe and increased our friends and contacts out in Asia - and, have moved on." Paton is currently consulting with a firm in Hong Kong, several of the other members of the team are doing similar work, others are mulling opportunities, and one is currently working a secondment with an LP in China. As with many teams, the group is still interested in finding a way of working together, and Paton says that while the future is not set in stone for any of them, there is a desire to “get back to working with friends.” For a group like 3i which has not shed staff, but instead refocused its efforts more keenly, looking at Hong Kong or Shanghai down the line is certainly not out of the question. “As markets improve, should it become feasible for us to expand our Asian presence further in the future in China or elsewhere, we would, of course, consider it,” says Cheung. Both Paton and Cheung share a similar view of the future, and one which is unfortunately largely ignored by short-sided bystanders: the industry does move on and opportunities are consistently on the horizon. Whilst one office closing is certainly an unwanted turn of events, private equity is a 3-5 year play. Perhaps we should check back in then.

avcj.com | November 5 2009 | Volume 22 | Number 41

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special feature | LEGAL matters [email protected]

Reading the fine print What Article 50 reveals about China’s judicial system development When regulatory bodies in China issue new rules, and as the judicial system in the PRC addresses more sophisticated issues of competition and anti-monopoly, a wave of panic hits foreign investors, worried that the eventual outcome may prove harmful to their business or their position. However, with the recent testing of Article 50 in the courts, and the first judgment out, moves like this should play a wider role in making investors feel more secure about China’s desire to establish a legal system capable of protecting competition. Under the new AML regulations, Article 50 aims to address monopolistic behavior, and until recently has not been tested. Cases against Baidu, China Mobile, Sinopec, and others have been filed in an attempt to prove the way in which these conglomerates have in some way, shape or form wronged a smaller party. But, with the dismissal of a lawsuit against Shanda, an online gaming company, the Chinese courts have ruled that the plaintiff did not provide enough evidence to show that Shanda had a dominant position in the relevant market. Says Thomas Chou, Partner, Morrison

Foerster, “The fact that the first ruling that came out was rejected because of lack of evidence does give us some insight that the courts will be scrutinized for adjudication, and will try to be deliberate about these cases.” Says Ninette Dodoo, Counsel, Clifford Chance, going forward, "It's not so much the number of cases that are brought before the courts that matters most. What will be more important to watch are the number of successful claims in the courts and the number of cases that are settled.." For private equity firms, Chou doesn’t believe Article 50 itself will have an impact. “At the outset, due diligence is needed to understand

if a claim has been filed, and if so they will need indemnification provisions.” However, the amount for damages has in the cases filed been far less than it would be in somewhere like the US, which means “those damages wouldn’t radically alter a private equity investor’s decision.” Although Dodoo says that companies are increasingly gearing up to become AML compliant generally, "the question on Article 50 and other regulations to be tested in the future is 'when will the enforcement agencies and the courts exercise their powers under

“The environment is evolving. It may not be as advanced as in other places, but it is becoming more sophisticated at a more – Thomas Chou rapid pace.”

the AML and which companies will they pursue?'" Looking at the broader picture, both lawyers are positive about the development of the Chinese legal system in relation to competition matters. "The environment is evolving," says Chou. "It may not be as advanced as in other places, but it is becoming more sophisticated at a more rapid pace." Adds Dodoo, "MOFCOM in particular - arguably the most active of the enforcement agencies under the AML - is rapidly catching up with its counterparts around the world and is quickly establishing itself as an important antitrust agency.

Asian Private Equity Online Directory Access to 3,100 private equity firms is only a mouse click away The Asian Private Equity Online Directory is the absolute exhaustive directory of the private equity and venture capital industry in Asia. Easy to navigate through, you can access this up-to-the-minute listing of more than 3,100 industry firms and 8,100+ professionals at the simple click of a mouse. All subscriptions include a complimentary copy of the Asian Private Equity 300.

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interview

[email protected]

Industry Q&A: Miranda Tang

definitely gone through this before with the 1997-98 Asian financial crisis, and in 2003 with SARS. As a fund, a prudent investment thesis and disciplined investment approach become more evident. Good risk management is also crucial.

Christina Kautzky talks to Miranda Tang, Managing Director at CLSA Capital Partners, where she has been since 1995. She speaks to AVCJ about how the financial crisis has impacted the industry and whether it has altered CLSA's investment strategy going forward Q: Is any one aspect of the business more time-consuming for you at the moment? A: Relatively, we have been spending slightly more time towards 4Q2008 and 1H2009 in post-investment monitoring (portfolio management) and in communicating with our LPs. Firstly, not all portfolio companies are weathering this financial crisis with the same capabilities – for some investees, more handholding is required in coping with [a]

longer work capital cycle, cash management, refinancing and counterparties’ risks. Secondly, some portfolio companies also see this as the opportune time to make acquisitions; hence, we are working with them in identifying possible targets. Lastly, as overall valuation [comes down], more communication is required to ensure our LPs [that our] portfolio companies are fundamentally sound and performing. The present downward adjustment of valuation is cyclical in nature. Q: How are you communicating with LPs differently from before? Do they expect more transparency and communication from your end? A: Aside from the normal quarterly reporting on the portfolio, [there is] definitely more ‘filling in the gaps’ on a biweekly or monthly basis, with updates on the macro picture for Asia in particular. CLSA Research products help a lot in this regard. We have proactively volunteered more financial and operation details of our portfolio since 2H2008. LPs also tend to ask more questions about liquidity and the fundamentals of portfolio companies, as well as timing of expected capital drawdown.

Miranda Tang

Number 41 | Volume 22 | November 5 2009 | avcj.com

Q: How has the global economic situation changed the way that you operate as a firm? A: Aside from some cost-cutting measures, our firm operates in a fairly stable manner. We have

Q: For a while, most funds have been in a ‘wait and see’ holding pattern; have valuations dropped enough and is there enough certainty in the market to begin investing? A: It is always difficult to ‘time’ the market. How low is low and how high is high? We still believe that, at the end of the day, sound business, good fundamentals and nimble management are keys to a successful investment. Q: What types of opportunities are you most bullish on at present? A: In terms of geography, we like China, India, Taiwan, and any cross-border or intra-Asia trades. Domestic demand and pan-Asian demand will continue to be a strong driving [economic] force. We also see opportunities in beneficiaries of the stimulus packages – infrastructure and related sectors, and renewable energy, among others. Q: What do you feel has changed the most in the private equity industry in Asia since you began your career? A: Deal sizes certainly have gotten bigger as the market continues to grow and mature; there’s more visibility of buyout funds. There are definitely more private equity players, [whether they are] international names or locally formed funds. And, there have been more fund of funds establish[ed] in Hong Kong and Singapore. Q: Which aspects of private equity have you seen as most affected by the recent economic downturn? A: There was an [increase in] LP capital call defaults. We saw more secondaries providing liquidity to funds and LPs alike, and fewer deals were actually completed. Q: You ended up flying to the Sichuan province during the 2008 earthquake to get to a client meeting; are you still braving natural disasters in the interests of business? A: I’m still flying....amidst all this H1N1 scare! [This interview originally appeared in a previous issue of AVCJ.]

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Poll of the Year | Part 2

We’ve seen first-hand the While deal activity slowed in region's metamorphosis Asia Pacific, the situation was from an emerging market to much worse elsewhere. This a destination where global could have been a function firms need to participate with of Asian deals not relying as ‘boots on the ground’ – Ray much on leverage – Honson Haarstick, CEO and founder, To, Partner, KPMG Relevant Equity Systems

Asia will represent a larger share within the global pool of new private equity commitments in the future vs. pre-crisis – Daniel Mintz, Founding Managing Director, Olympus Capital Holdings Asia

What effect do you feel the 2008-09 crisis and downturn has had on Asia Pacific's position within global private equity, compared to other markets? Asia has actually fared a lot better than the other parts of the world … The crisis only really hit Asian companies post-Lehman – Andrew Liu, Managing Partner & CEO, Unitas Capital

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We are witnessing an unprecedented event of several billion people playing economic catch-up. So the argument that at some point private equity in Asia will one day rival that in Western Europe or the US seems like a foregone conclusion – Matthew Arkinstall, Investment Director, Greenpark Capital

All regions suffered in 2008, but the generally lower use of leverage in Asia meant that the pain was proportionately less – Howard Marks, Chairman, Oaktree

avcj.com | November 5 2009 | Volume 22 | Number 41

www.avcjindia.com

India 2009 avcj Private Equity & venture Forum

2 – 4 December 2009

Global perspective, local opportunities

The changing face of PE in India Grand Hyatt, Mumbai

confirmed speakers include: KEynOtE Shubhashis Gangopadhyay Managing trustee & research Director inDia DEvElOPMEnt FOunDatiOn

KEynOtE Promod haque Managing Partner nOrWESt vEnturE PartnErS

KEynOtE vikram Sood vice President, centre for international relations OBSErvEr rESEarch FOunDatiOn

Markus ableitinger head asian investment Management caPital DynaMicS

anil ahuja Managing Director & head of asia 3i

ian carew vice President nOrthlEaF caPital PartnErS

Doug coulter head of Private Equity, asia-Pacific lGt caPital PartnErS

ashish Dhawan Sr. Managing Director chryScaPital

archana hingorani cEO & Executive Director il&FS invEStMEnt ManaGErS

Sid Khanna chairman, india inDia EQuity PartnErS

S. Khasnobis Managing Director & cEO, aSSEt rEcOnStructiOn cOMPany (inDia) ltD

chihtsung lam Managing Director axiOM aSia PrivatE caPital

ranjeet nabha Managing Director & cEO Wl rOSS inDia

Shankar narayanan Managing Director thE carlylE GrOuP

Sanjay nayar cEO KKr india

Olivia Ouyang investment Officer intErnatiOnal FinancE cOrPOratiOn

raja Parthasarathy Managing Director iDFc PrivatE EQuity

Bruno raschle cEO aDvEQ ManaGEMEnt aG

Maninder Saluja co-head, Emerging Markets PE QuilvESt GrOuP

anubha Shrivastava Managing Director, asia cDc Group

Sebastiaan van den Berg vice President harBOurvESt PartnErS (aSia) liMitED

rebecca xu co-founder & Managing Director altErnativES ManaGEMEnt llc

aazar Zafar Portfolio Manager, Private Equity alBErta invEStMEnt ManaGEMEnt cOrPOratiOn

Shobhit agarwal Director PrOtiviti cOnSultinG PrivatE liMitED

Dimple Sanghi Managing Director & head of the investment team EvErStOnE caPital

anand Sunderji Director GuGGEnhEiM caPital ManaGEMEnt (aSia) PrivatE ltD

Asia series sponsor

Co-sponsors

Gala cocktail reception sponsor

Public relations partner

Supporting organisation

Gala dinner sponsor

Official newspaper

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Knowledge partner

Contact Anil Nathani \ T: +(852) 3411 4938 \ E: [email protected]

Convened by

Special Feature | Venture Capital [email protected]

Asia’s venture ecosystem builds through the crisis VCs bank on Asia’s transition to innovation Venture capitalists have faced Herculean struggles over the past year to prop up portfolio companies, boost investment returns and raise new funds. But, for partners focused on emerging technologies in Asia, hopes still are pinned on discovering the next big tech breakthrough on the scale of Twitter, Google, the iPhone or something truly life-changing. Switched-on entrepreneurs from Beijing to Bangalore to Hanoi and Seoul are pumping out sites and software for online gaming, social media, search and e-commerce, not to mention the new, red-hot investment

economies, according to Stanford University tech futurist Paul Saffo.

Asia’s transition to innovation Emerging Asian nations that once relied on low-cost manufacturing as the platform for global competitive advantage are increasingly turning to technology entrepreneurship of all kinds – from software outsourcing to solar energy – to fuel growth. Accelerating the trend is a long-term upward spiral of venture capital investment in startups from these new tech hotspots. While deal-making stalled during the recent global economic downturn, over 2005-08, Asian venture capital

“To date, few of the local RMB fund players are sophisticated value-added investors, but we expect that to change over – Gary Rieschel time.” sectors cleantech and healthcare – building off Asian markets’ large populations, big Internet and mobile communications audiences, governmental support, modernized infrastructure and high-growth

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investment jumped nearly threefold to $23 billion and fundraising nearly doubled to $22 billion, according to AVCJ Research figures. The Asian tech entrepreneurship wave is rapidly evolving and taking

on new shape. Gone are the days when pioneering Valley dealmakers bet on versions of eBay, PayPal, Yahoo, Monster.com, Google and Expedia, many of them founded by Western-educated and trained returnees to their homelands. Gone too are the handsome investment returns of 2004-08, when venture capitalists in China scored with 14 initial public offerings worth more than $1 billion, and India saw solid IPOs for job site Naukri and Roger Li mobile operator Idea Cellular. Now, as the decade nears a close, venturing and bootstrapping in these markets is becoming more localized, taking fewer cues from the Silicon Valley innovation culture. “It’s tilting more to domestic entrepreneurs and domestic venture capitalists,” says Ash Lilani, president of India and China for SVB Financial Group.

Evolution of local venture Venture firms that once flew partners in once a quarter from the West Coast to do deals now have set up in-country offices staffed with well-connected partners who are familiar with the culture. Entrepreneurs too are becoming more experienced, coming up with fewer copycat ideas and more creative products and services suited for their own marketplace. While gravitating to a more localized model, the more successful investments will be in enterprises that also have a global outlook, says Roger Li, general partner at Infotech Pacific Ventures. “Most companies we help to build do have the global perspective in their DNA,” he notes, while adding that early stage businesses, contrasted with those at a later cycle of development, “tend to be very much a local game.” Points out Li, “The current market conditions

are forcing companies to become more agile and creative. The next tech waves will be driven closer to the markets.” In China, this localization trend has been spurred on by the increasingly common RMB funds, which today far outnumber international funds, according to some sources. Even so, competition for international funds from the local groups is still in its “formative stage,” says Gary Rieschel, founder and managing director at Qiming Venture Partners. “To date, few of the local RMB fund players are sophisticated value-added investors, but we expect that to change over time.” China’s new NASDAQ-style board ChiNext, which arrived late October after a nine-year wait and saw 28 companies list in a soaring start, could spark more RMB funds to form. But while offering a new path for entrepreneurs to pursue domestic China markets with its high price-earnings multiples, the new exchange may not be a godsend. “It’s very, very early to tell,” says managing director Richard Lim at GSR Ventures, who points to the historical volatility of China’s stock markets.

China’s burgeoning VC sector While dealmaking and fundraising have been relatively dormant throughout Asia, in China, there’s clearly growing confidence and encouragement, partly due to the success of the Chinese government’s economic stimulus program, which has led to a comparatively early recovery from the slump. New governmental initiatives, such as a master plan to increase spending on scientific research and development to $110 billion by 2020, also are boosting optimism about the tech economy that is forming in China.

avcj.com | November 5 2009 | Volume 22 | Number 41

From China’s key urban venture market has begun to heat tech zones of Pudong and up. Several new funds are in the Zhongguancun, new clusters offing, and valuations for deals are have sprung in new locations that seeing modest increases, he says, champion their tech specialization though he adds that the recent expertise. Nanjing is vying to stock market surge has caused become a biotech center, while many entrepreneurs to hold off on Dalian and Hangzhou are maturing fundraising until possibly next year. as hubs for outsourcing that can compete with Bangalore. The India, Vietnam and other new impressive, modern facilities at markets China’s software parks are a key While China, which accounted for element in China’s massive push 41% of regional VC investments to transform to a tech-based last year, has continued to grab economy. a lot of the venture headlines, So is the venture capital deal-making in India (at 38% of the support of early stage businesses total) has largely been mirroring in China from partners who have the key themes of the Mainland: not lost sight of their original focus localization, and a move away from on creating the next, new thing the original copycat technologies. – rather than the most recent fad, India’s $3,000 priced Tata Nano investing in fast-start consumer car and its $100 trimmed-down businesses or later-stage deals that netbook computer are examples of look sure to go public soon. this new localization trend, and so At Keytone Ventures, founder are a number of online education and managing partner Joe Zhou startups such as Learning Mate that – fresh from beating the odds and have sprung up recently – ideal raising a $200 million fund this year for India’s villages, where schools – has his growing team focused are lacking. On the venture front, on well-defined investment the recent withdrawal of Battery themes: cleantech, digital media, Ventures from India is the clearest IT and logistics. In identifying indication that deal-making cannot companies within each sector to be done at arm’s length. invest in, Zhou says, “We’re looking On the horizon as a budding at high-growth, asset-light deals.” tech and entrepreneurial hub is Three new deals this quarter in Vietnam. The relatively few venture these broad categories are in the firms here, including IDG Ventures pipeline: mobile services, online Vietnam and Softbank China & travel and advertising media, plus a India Holdings, are selecting deals logistics deal that Keytone recently from Vietnamese entrepreneurs inked. who excel in youthful energy, Qiming Venture Partners has scrappiness and talent, says similarly pinpointed areas of Kabir Misra, president, Softbank investment – cleantech, healthcare, C&I. As examples, he points to Internet and information technology – and is hard at work doing deals, including a new environmentalfocused business about to be funded. Rieschel says it’s still unclear if conditions for 2010 will be better, but he does point to early signs that the Zhongguancun in Beijing, a key PRC urban tech zone

Number 41 | Volume 22 | November 5 2009 | avcj.com

venture-backed, fast-growing sites that have started up in recent years: search engine Socbay, ecommerce site Peacesoft Solutions,

Samsung and Hyundai, but South Korea is trying hard to attract more international venture investors. Encouraged by the April 2009,

“We’re looking at high-growth, asset-light deals.”  – Joe Zhou social networking portal Cyvee. com, and mobile game Punch Entertainment.

Veteran tech strongholds: Taiwan, Korea Meanwhile, the established tech manufacturing hubs of South Korea and Taiwan are racing to get on the innovation highway, to drive their economies forward. Taiwan, the world’s leading chipmaker, is making a run to be more entrepreneurial, promoting its Southern Taiwan Science Park as a base for cleantech startups and relying on government initiatives to spark more innovations in biotech, particularly medical devices. “What we are aiming to do is to make Taiwan a tech pioneer with a focus on value creation and frontier tech research,” said Johnsee Lee, president of the Industrial Technology Research Institute, which works with universities and research outfits on developing the next-generation industry for Taiwan. South Korea, known for its highly advanced wireless communications market, is setting new standards in digital media, with such efforts as citizen-produced OhMyNews as well as mobile games, where social networking site Cyworld kick-started the online gaming revolution and led to numerous look-alike sites in China and India. Much of the funding for the new social media, gaming and video sites comes from the huge conglomerates such as

$1.2 billion sale of a 67% stake in e-commerce site Gmarket to eBay in April 2009 – a homerun return for Oak Investment Partners – they’ve begun to arrive with checkbooks. Seoul was recently the site for a foreign investor forum, where a number of Valley venture capitalists checked out innovative startups for funding. “South Korean technology is really leading edge, but not too many people recognize that,” says Young Woong Kim, managing director of the Korea Trade Investment Promotion Agency in Silicon Valley. Indeed, South Korea now ranks fourth in the world for new patents, and has the fastest growth globally for applications, according to the World Intellectual Property Organization. Asia’s newly emerging innovation hubs are on the radar of global venture capitalists, who need to improve weakened US investment returns of 14.3% for the 10-year period ending June 2009. Asian markets have looked to the success of the US venture capital model as their benchmark. Now a power shift to the East is under way, and a new Asian innovation ecosystem holds promise as the next Silicon Valley.

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interview [email protected]

Mezzanine Q&A: Joseph W. Ferrigno III Joseph W. Ferrigno III, Managing Partner of Asia Mezzanine Capital Group, shares some personal reflections on the history and current state of mezzanine in Asia Pacific Q: How do you characterize mezzanine as an asset class? What are some of its distinguishing features? A: For investors, the relative degrees of effective downside protections and optionality for the sharing of equity returns upside, and the likely achievement of superior of risk-adjusted returns, are the most distinguishing features. To elaborate, a little of the history of mezzanine in finance and investment. According to Merriam-Webster, ‘mezzanine’ is traced back to the French who borrowed it from the Italians, ‘mezzano,’ – based on a Latin word, ‘medianus,’ meaning ‘middle’ or ‘median.’ Its use in English probably began around the early 1700s when it was applied to an intermediate story Joseph Ferrigno of a building. On the Continent, ‘mezzano’ may have been used much earlier to describe a financing method used for the Fourth Crusade by the Venetians during the early 13th century. European financiers also employed mezzanine capital agreements to obtain shares of explorer takings during the beginning of the first era of globalization – the 15th-17th centuries – when captains and crews of the ‘Black Ships’ from Spain and Italy risked extraordinary perils to bring back riches from the Orient. In modern finance and investment, ‘mezzanine’ is rather loosely used to refer to any of a nearly infinite number of ways that debt and equity elements of a financing/ investment can be combined to satisfy needs for public and private companies and sovereigns and for investors/lenders. A variety of profiles of perceived risk/expected returns are possible. Mezzanine is in the eyes of the beholder.

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Q: How do you see the current environment for mezzanine investing in Asia Pacific? How has this been affected by the global crisis? A: The demand, globally and in Asia, for mezzanine capital investments of all types is directly affected by the general availability of debt in the banking and non-banking systems – and of equity in the relevant equity capital markets. During the credit boom, commercial and investment banks,and hedge fund,s were highly active in providing mostly shorter-term mezzanine-type loans, usually without equity participations, to a variety of good and bad borrowers in Asia. Most mezzanine fund investors, wisely, did not compete with these players, even though they lost many opportunities as a result. Since the credit bust, those shorter-term, higher-risk players have been less active. It’s the local equity markets that have limited opportunities for the longer-term more cautious mezzanine investors this year. I believe that a sea change may be occurring with the developed-world economies beginning to come out of recession, as central bankers are able to gradually withdraw the extraordinary level of liquidity which they pumped into their systems. If history is an indicator, they will probably again get things wrong and withdraw liquidity and increase interest rates prematurely. This will drive good companies to

Venice, home of some of the earliest mezzanine investors

seek alternative financings sources, which will be the opportunity which people like us have been waiting for now for some time. Q: How does mezzanine operate in the Asian investment environment? How does it function in relation to regional corporates, and private equity firms? A: Compared to the developed world financial markets, there are significant differences in the Asian investment environment. Not surprisingly, due to the complexity of mezzanine, and the relatively limited knowledge of mezzanine methods by Asian company managements, and, in some cases, even their advisers, and private equity firms, mezzanine fund GPs and other providers have to educate. What we have found is that once our type of longer-term strategic mezzanine capital is explained, it is interesting to many companies and PE firms because it minimizes equity dilution, leverages returns and is longer-term in nature. As you know, most Asian company owners and PE firms would rather have debt than equity, to preserve their equity ownership levels. Another difference is that in Asia, there are no standard mezzanine loan agreement conventions and customary provisions. Each situation is unique and requires time to negotiate and close. The function of mezzanine capital for regional corporate and private equity firms is similar to that in the developed markets, i.e: a substitute or complement to senior debt and/or public or private equity. Q: What are some of your personal reflections as a veteran Asian mezzanine investor on the development of the discipline in the region? What point has it reached? A: Mezzanine investing certainly does require discipline in order to achieve the superior riskadjusted returns which are the basic rationale for investors to make mezzanine-type investments. In my experience, not just in Asia, but globally, sound credit principles and practices were abandoned in all types of lending. We know what happened as a result. Q: What do you see as the prospects for mezzanine investment in the medium to long term in Asia? A: I think the opportunities are likely to be good to very good over the medium to long term, as the credit and equity markets normalize. Huge government borrowing will cause inflation and interest rates will have to be increased, and excessive levels of liquidity signii That will be good for the mezzanine investors which can demand higher returns from better-quality borrowers.

avcj.com | November 5 2009 | Volume 22 | Number 41

Distress | special feature

[email protected]

Distressed investors feel no distress Financial crisis creates opportunities for special situations funds The debt side of the capital structure offers a handy alternative to the equity side traditionally targeted by mainstream private equity firms, as an investment destination. Internationally, many commentators are talking of a new age of distressed/special situations investing, where leading firms in the space step forward to assume the mantle hitherto worn by the top buyout firms. Even in Asia Pacific, where overall economies have suffered least from the global crisis, market opportunity remains strong, proponents argue. Whether

Benjamin Fanger

NPLs, single credits, distressed real estate, financial restructurings or other approaches, the portfolio of distressed products presents interesting and thought-provoking comparisons – and challenges – to private equity.

Distress approaches As indicated above, not all distress players invest in the same spaces. There is a spread of asset types comparable to the growth capital and control approaches seen in private equity, with corresponding skill sets for each. Furthermore,

these perform differently to both public equities and private equity-related approaches, and can usefully offset both. Howard Marks, Chairman of leading distress firm Oaktree Capital Partners, indicates the range, and potential, of his firm’s investment choices. “The opportunity in the areas we’re interested in – distressed debt, distress for control, and other forms of unlevered value investing – has been attractively anti-cyclical over the last several years.” Benjamin Fanger, Co-Founder & Managing Director at Shoreline Capital Management, enumerates his firm’s own strategies. “We specialize in Chinese NPLs, distressed real estate, restructuring of single credits, and special situations financing.” However, Asia Pacific distress tends to lean towards the bank loan market, as most corporate and other debt in Asia is still originated by banks. Senior secured bank loans are therefore frequently the base currency of Asian debt investing, with public bonds also strongly favored, though Asia’s public bond market is also still maturing, with high-yield debt comprising roughly 10-15% of its total size. Real estate and other hard assets tied to debt also often come into the Asian debt investor’s focus. Other more sophisticated debt investment classes, such as structured credit products, have yet to make significant inroads in Asia. Jean-Louis Lelogeais, Partner at Strategic Value Partners, illustrates one strategy, known in some cases as ‘loan to own’ or ‘distressed for control’: “One of our private equity pools of capital is focused on distressed for control. One of the primary avenue to take control of companies is by accumulating enough debt (51% or more or at least 33% which is veto control)

Number 41 | Volume 22 | November 5 2009 | avcj.com

and through a debt for equity restructuring own the company and not only create value in the financial restructuring but also drive the operational turnaround.” In other jurisdictions, this approach has resulted in distressed

permitted substantial fundraising in 2007, and when the distress arrived in late 2008, investment opportunities approached once-ina-lifetime levels,” he affirms. “This has been a great time for a contrarian discipline.”

“This has been a great time for a contrarian – Howard Marks discipline.” investors becoming owners and managers of assets as diverse as any seen in private equity or infrastructure investment, as when Bluebay Value Recovery Fund became part-owner of the UK’s Eggborough Power Station earlier this year, or when Octavian Advisors moved into sporting goods manufacturer Head NV. However, applications of this strategy have been fewer in Asia, at least to date.

Prospects and competitive dynamics

Some distressed investors of the pre-crisis era, notably certain types of hedge fund, found their own business models under pressure during 2008, and in some cases had to retrench. Rob Petty, Managing Partner at Clearwater Capital Partners, foresees: “consolidation of investors or simply the decline in investment teams and dollars dedicated to the business. Specifically, those firms funded on balance sheets or through shorterterm structures that migrated into

The distressed investment universe remains a substantial pool for potential players. “We estimate there’s about $3.7 trillion of outstanding leveraged loans and junk bonds primarily between the US and Europe” says Lelogeais. And some more committed debt investors have been able to benefit from growing LP interest, better competitive dynamics, and an expanding target asset base. As awareness of distress began to sink into the financial community, fundraising began in advance of the supply of new distressed assets, according to Marks, coordinating nicely with the economic cycle. “The imminence of distress

Not every distressed transaction is handled through the courts, but the legal environment is very important.

41

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Senior industry professionals Warren D. Allderige, Managing Director, PACIFIC HARBOR GROUP Peter Amour, CEO, AIF CAPITAL Niklas K Amundsson, Partner, MVISION Paul Asel, Partner, NOKIA GROWTH PARTNERS John Ball, Founder & Managing Director, STEAMBOAT VENTURES Nicholas Bloy, Co Founder & Managing Partner, NAVIS CAPITAL PARTNERS James H. Boettcher, General Partner, FOCUS VENTURES Boris Bong, Managing Director, SQUADRON CAPITAL Eric I. Chan, Managing Director, Private Equity Group, JP MORGAN ASSET MANAGEMENT York Chen, President & Managing General Partner, ID TECHVENTURES INC. Jeffrey Chi, Managing Director & Partner, VICKERS VENTURE PARTNERS Mark Chiba, Group Chairman & Partner, THE LONGREACH GROUP Ashish Dhawan, Sr. Managing Director, CHRYSCAPITAL David Edwards, Regional Director, Fund President, Asia Property Fund, LASALLE INVESTMENT MANAGEMENT, ASIA PACIFIC Benjamin Fanger, Co-Founder & Managing Director, SHORELINE CAPITAL MANAGEMENT Joseph W. Ferrigno III, Managing Partner, ASIA MEZZANINE CAPITAL GROUP Ralph Günther, Head of Private Equity Advisory & Fund-of-Funds, bmp AG Stefan Hepp, Founder & CEO, SCM STRATEGIC CAPITAL MANAGEMENT AG Benjamin Jenkins, Sr. Managing Director & Co-Head of Asian Corporate Private Equity, THE BLACKSTONE GROUP David Jones, Managing Director, CHAMP PRIVATE EQUITY Dominic Jones, Managing Director, ALTER DOMUS Kanak Kapur, Managing Director, PACIFIC ALLIANCE GROUP Grant Kelley, Founder & CEO, HOLDFAST CAPITAL Edgare Kerkwijk, Managing Director and Co-founder, ASIA GREEN CAPITAL Bonyong Koo, Sr. Managing Director, KTB PRIVATE EQUITY Chih Tsung Lam, Managing Director, AXIOM ASIA PRIVATE CAPITAL David Lam, Managing Director, WI HARPER Suen-Yan Leung, Alternative Funds Advisory, Director, UBS Roger Li, General Partner, INFOTECH PACIFIC VENTURES Andrew Liu, Managing Partners & CEO, Asia, UNITAS CAPITAL David H. Liu, Partner & Head of Greater China, KKR Erhai Liu, Managing Director, LEGEND CAPITAL Ron Mahabir, Managing Director, ASIA CLEANTECH CAPITAL Tim Mann, Head of Asia Fund Administration, MOURANT

Liang Meng, CEO, Greater China Private Equity, D.E. SHAW Daniel R. Mintz, Founding Managing Director, OLYMPUS CAPITAL HOLDINGS ASIA Kabir Misra, President, SOFTBANK CHINA AND INDIA HOLDINGS C. Ashton Newhall, General Partner, MONTAGU NEWHALL ASSOCIATES William Owens, Managing Director, AEA INVESTORS (ASIA) LTD Nicholas Parker, Executive Chairman, CLEANTECH GROUP Raja Parthasarathy, Managing Director, IDFC PRIVATE EQUITY Robert Petty, Managing Partner, CLEARWATER CAPITAL PARTNERS Simon Pillar, Managing Director, PACIFIC EQUITY PARTNERS Mark Qiu, CEO & Managing Director, CHINA RENAISSANCE CAPITAL INVESTMENT INC Timothy Recker, Managing Director - Private Equity, UNIVERSITY OF CALIFORNIA REGENTS David Roberts, Head of Greater China Infrastructure Team, MACQUARIE CAPITAL ADVSIORS Maarten Ruijs, Managing Partner & CIO, CVC ASIA PACIFIC Scott Sandell, General Partner, NEA Dominic Scriven, Co-Founder & Director, DRAGON CAPITAL Yossi Sela, Managing Partner, GEMINI ISRAEL FUNDS Johannes Schoeter, Founding Partner, CHINA NEW ENTERPRISE INVESTMENT Jason Shin, Founding Partner, VOGO FUND Hugo Shong, Founding General Partner, IDG CAPITAL PARTNERS Ronil Sujan, Managing Director, RABOBANK INTERNATIONAL K.Y. Tang, Chairman & Managing Partner, AFFINITY EQUITY PARTNERS Marsha Vande-Berg, CEO, PACIFIC PENSION INSTITUTE Junfeng Wang, Executive Director, LEGEND CAPITAL Stephen Whatmore, Investment Manager, Global Private Equity, QIC Peter Wiggs, Managing Partner, ARCHER CAPITAL Steven Wisch, Founder & Managing Partner, INDIA EQUITY PARTNERS / IREO Hermann-Josef Woltery, Partner, STRATEGIC VALUE PARTNERS, LLC Darren Wong, Managing Director, ADVEQ BEIJING Calvin Xu, Sr. Industrial Specialist – Energy & Climate Change, Global Financial Markets Dept., IFC Kathy Xu, Founder & Managing Partner, CAPITAL TODAY Kenneth Yeo, Investment Director, Singapore, ALLIANZ PRIVATE EQUITY PARTNERS Xiaoyang Yu, Founding Partner, CHINA NEW ENTERPRISE INVESTMENT Aazar Zafar, Portfolio Manager, Private Equity, ALBERTA INVESTMENT MANAGEMENT CORP Joe Zhou, Founder & Managing Partner, KEYTONE VENTURES Jonathan Zhu, Managing Director, BAIN CAPITAL ASIA, LLC

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all dimensions of the private equity business have left.” Lelogeais also sees the competitive environment shifting substantially in favor of the more durable and committed distressed investors. “A number of players who you would have expected to have been able to deploy capital in distressed are either no longer in business or in the penalty box,” he notes. “The global financial crisis has really pummeled a number of the players.” As markets corrected during the evolving crisis, so more and more cheap distressed debt became available. Lelogeais reports “pricing of distressed debt drifting down and going off the cliff post Lehman.” In his view, “all this sets the stage for a pretty extraordinary opportunity for distress.” And he sees the aftermath of leveraged buyout transactions as one especially fertile hunting ground for prospective debt investors. “You’ve got close to 30-40% cumulative default rates across the whole universe of

deals, in Asia. “All regions suffered in 2008, but the generally lower use of leverage in Asia meant that the pain was proportionately less,” Marks says. Legal norms are one of the principal components in this preference, coupled with reasonably-sized target asset pools. Some Western-standard jurisdictions, such as Singapore and Hong Kong, can offer the first, but not the second. As a result, “when you look at Asia from a distressed investor perspective, there are really only two countries that we are comfortable doing business which are Japan and Australia,” Lelogeais affirms. Legal and enforcement regimes impact most distressed strategies far more directly than private equity investment approaches. Although both investment disciplines are affected by legal regimes, in distressed investing, the courts and the judicial procedure can be an actual part of the investment process.

“You’re looking in distress at the opportunity of a lifetime.”  – Jean-Louis Lelogeais

buyouts that were done over the past couple of years.”

Asia in the distressed perspective As befits a region where most economies are anything but stressed or distressed, Asia Pacific has hitherto ranked fairly low on the target list of distressed investors – for various reasons, from macro to regulatory. Not least among the factors is the overall lower level of corporate indebtedness, and of private equity-related leveraged

44

“If you bought the debt, and you’re senior in the capital structure, you want to have the law in place to protect your creditor rights,” Lelogeais notes. “If you start to look at Indonesia or Thailand, it’s a very different place to do business.” This summer’s outcome with FerroChina Ltd, following the refusal of the indebted PRC steelmaker to repay its loans, has apparently given distressed investors some new-found comfort in China’s 2007 bankruptcy law, at least.

Creditors, including Citi, Credit Suisse Group, private equity firm CLSA Capital Partners and Citadel Investment Group, were able to recover up to 60% of their initial loans and investments after a $468.5 million sale of assets to China Minmetals Corp. Here, foreign investors received equal treatment with domestic investors, at least in secured classes of credit. Significantly, Asia Aluminum Holdings, a far less positive outcome for debt investors, was wound up in a Hong Kong court, not a PRC jurisdiction. China deal flow may have choked off somewhat thanks to the PRC government’s stimulus packages, but the actual drivers of disposals in the first place may have altered the availability of NPLs, believes Fanger. “NPLs in China are sold in large part as a result of pressure from the government to clean up the banks’ balance sheets. As the government’s policies have shifted towards pumping more money into the economy and originating a lot of new loans, their focus has shifted.” Fanger also sees potential for company financing in China. “There are SMEs and some property developers that have a strong base of assets and are otherwise good companies. It’s just that for refinancings or other cash needs, they need some near-term cash that banks are not providing to their space. In those situations, firms with experience structuring and collecting debt in China have opportunities for originating or restructuring high-yield financings.” Ultimately, however, Asian distressed debt investing does impose stiff requirements on firms who wish to prosecute it seriously. These include a good sourcing and origination network, investment analysis capabilities, and relevant – and Asia-specific – accounting and legal skills. The last two items underline one factor that will allow Asian distressed investors to keep their market lead for many years to come – there are simply too

Rob Petty

few experienced professionals in the space to date to allow fast expansion of the discipline.

Conclusions Although the above analysis is not wholly favorable to Asia, some seasoned debt investors do insist on the importance of the region’s debt market as a fundamental platform for its strong economic growth – and a solid source of distressed/ special situations opportunities in the longer term. These investors have emphasized that in Asia, as elsewhere, the crisis will create debt investing opportunities – not to the same degree as in current Western markets, perhaps, but with the added attraction of benefiting from the region’s macroeconomic growth, as markets and valuations recover. “You’re looking in distress at the opportunity of a lifetime,” Lelogeais believes. “When you look at all the numbers together, it really makes things look much bigger than the distressed opportunity in the last cycle, which is the blowout of the tech bubble in 2002.” “The opportunity set has changed, and in the distressed space this is particularly true; as cycles run their course, there may be one opportunity set one year and another the next,” adds Fanger. “In inefficient markets, there is always something to be doing, though the particular type of asset or investment might change each year.”

avcj.com | November 5 2009 | Volume 22 | Number 41

Part 3 | Poll of the Year

Even though the Historically the period market is v-shaped, coming out of a Vietnam is poised for the economy is not downturn has been a dynamic opportunities, v-shaped. The fiscal and good time to buy assets, as competition hardly monetary stimuli have so we see no reason exists within key sectors, been unprecedented why this should be and the domestic globally, but you can’t any different – David economy continues use that medicine Jones, Managing to motor – Andrew forever – Jean-Louis Director, CHAMP Private Legge, Director, Dragon Lelogeais, Partner, Equity Capital Group Strategic Value Partners

We think the long-term supply and demand characteristics for infrastructure and related companies in India have a lot of potential – Raja Parthasarathy, Managing Director, IDFC Private Equity

What do you see as the prospects for the industry going forward into 2009-10, both within your discipline and more broadly? Global trends point to cleaner, more transparent operations with more defendable valuations – Ray Haarstick, CEO and founder, Relevant Equity Systems

Asian companies have tremendous The 2010 returns from private equity opportunities ahead as the region Asian have potential to match leads the world out of the global those from the early 1990s in the US, and recession, and they will benefit late 1990s/early from the global industry expertise the 2000s in Asia. The driver and long-term perspective that is the phenomenal value available due to private equity can provide them distressed pricing – – Johnathan Nelson, CEO, Grant Kelley, Founder Providence Equity Partners & CEO, Holdfast Capital

Number 41 | Volume 22 | November 5 2009 | avcj.com

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Comment

The Asia landscape from an investment perspective Marsha Vande-Berg, Chief Executive Officer of the Pacific Pension Institute, gives her view of the institutional investor perspective on private equity investing in Asia Pacific From a singularly beautiful vantage point in San Francisco, I can watch the multicolored container ships glide in under the Golden Gate Bridge and head across the bay for Oakland’s harbor. The sight of their angular silhouettes taking shape against the horizon is even more compelling these days, as fewer and fewer seem to sail our way. They also are sitting higher on the water, their holds apparently no longer filled to capacity. A year ago, they carried tons of heavy cargo to feed American consumers’ voracious appetite for cheap goods made abroad. In a similar vein, albeit 25 years ago, these ships, flying a variety of Asian flags, docked on San Francisco's side of the bay. Oakland had yet to develop its highly competitive port industry.

A container ship passes under the Golden Gate bridge

46

Changes in the Pacific landscape One way to think of San Francisco’s demise as a harbor destination together with the precipitous and recent fall-off in the go-go era of US consumption is through the prism of capitalism’s creative destruction. While it wasn’t apparent a quarter century ago, the City-bythe-Bay’s economic model was morphing into a more lucrative service-dependent economy with skyscrapers filling in the skyline, one after another. In the aftermath of the 2008 financial crisis, the global economy’s landscape has yet to take clear shape. In fact, it’s too early to know with any precision what can and will be the next sustainable driver of demand that can pick up where the US consumer of the last ten

years left off. What we do know is that past economic cataclysms have produced dramatic change in international financial systems. The Great Depression resulted in world economies dropping the gold standard. And upheaval in the 1960s and 1970s produced the collapse of the Bretton Woods foreign exchange agreement.

Questions about Asia Today, some point to Asia as the future economic powerhouse. Still, questions abound. Can Asia’s exportdependent economies reinvent themselves with the speed that will be necessary to meet even current capacities for productivity? Will an Asian consumer class Stephen Roach emerge, with China as the locomotive? Do current levels of investment into and within Asia support these outcomes? And what happens as we wait for the new landscape to fill in? How will global imbalances continue to unwind? What is the optimum equilibrium? Will we see regional and national protectionism – and therefore perhaps even fewer container ships gliding into San Francisco Bay? Fortunately – and remarkably, there are no threatening signs of protectionism such as those that gave rise to Smoot Hawley tariffs in the 1930s. Indeed, says Marc Levinson, the Council of Foreign Relations senior fellow for international business, “I can’t remember a time when trade was lower on Washington’s agenda.” That means, on a positive note, that politicians and the American public are not blaming trade for the economic downturn. Still, markers are going down – and many point toward China. Stephen Roach, chairman of Morgan Stanley Asia and author of a new book, The Next Asia: Opportunities and Challenges for a New Globalization, in a recent interview with the McKinsey Quarterly talked about “building blocks” for greater integration and cooperation within Asia falling into place around a Chinacentric supply chain. The large economies in the region, including Japan, Korea and Taiwan, are increasingly more dependent on exports to China than they are on their other trading partners, notably the United States as well as Europe. Still, the “. . . real challenge for a pan-regional economic integration would be to shift the structure increasingly away from one that’s

avcj.com | November 5 2009 | Volume 22 | Number 41

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Greater China: Changing the landscape of global and local M&A Hyatt on the Bund, Shanghai Confirmed speakers include: KEYNOTE Pierre E. Cohade President, Asia Pacific Region THE GOODYEAR TIRE & RUBBER COMPANY

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KEYNOTE Andrew Y. Wu GROUP DIRECTOR LVMH CHINA

Jonathan Zhu Managing Director BAIN CAPITAL ASIA, LLC

Elizabeth Knup President PEARSON EDUCATION LIMITED (CHINA)

Rock Shi Executive Director BOHAI INDUSTRIAL INVESTMENT FUND MANAGEMENT

Fernando Bensuaski Managing Director GOSHAWK CORPORATE OPPORTUNITIES, LTD.

Erik Bethel Founding Partner & CEO SINO LATIN CAPITAL

Fei Guoping Vice Chairman CHINA MERGERS & ACQUISITIONS ASSOCIATION

Alex Koi General Manager COOPER TIRE CHINA

James Mi Managing Director LIGHTSPEED VENTURE PARNTERS

Cher-Teck Quek Managing Director NEW HORIZON CAPITAL

Terence Yap Vice Chairman & CFO, CHINA SECURITY & SURVEILLANCE TECHNOLOGY (PRC), INC.

Yan Xiong Chairman CHINA BEIJING EQUITY EXCHANGE

Forrest X. N. Zhang Vice Chairman & Secretary-General CIFC

Ken Chen Partner L.E.K. CONSULTING

Kei W. Chua Partner & Head of Greater China UNITAS CAPITAL

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Comment externally led to one that’s internally led. When the Asian consumer starts to rise and is sourced increasingly by the Asian producer, that’ll be the real, powerful synergy that I think can take this region to the next place,” Roach said.

Asia’s challenge Can China manage that? Liaquat Ahamed, an investment manager and author of Lords of Finance: The Bankers Who Broke the World, chronicling the events leading up to the Great Depression, has questions. Writing in the New York Times, Ahamed said the spotlight clearly is on Asia with China as a key player. In the wake of the 1997-98 Asian crisis, Asian economies bulked up their treasuries as insurance against future runs on domestic banks and downturns in the global economy. China, meanwhile, buoyed by its collective vision to restore the Middle Kingdom's economic prowess, undertook a concentrated program of export-led growth. Fast forward a decade plus one year, China's stunning third quarter growth of nearly 9% just might conceal dangers. “One is that China finds it too difficult or politically costly to restructure its economy and despite changes in the global market, keeps its foot on the export accelerator. Since American consumers cannot afford to keep buying, this would set off a cycle of trade wars among Asian countries competing for ever smaller markets,” wrote Ahamed. Still on the subject of China, Peter Bottelier, professor at Johns Hopkins University, and author of "China and the International Financial Crisis," a

chapter in a prescient book, Economic Meltdown and Geopolitical Stability, just published by The National Bureau of Asian Research (NBR), takes the point of view that China has weathered the recent storm well and is emerging from the crisis sooner than any other large economy. The size of the stimulus package put in place alone

“Much is still left to happen before the new landscape takes a definite shape.”  – Marsha Vande-Berg demonstrates China’s strong fiscal position going into the crisis. Echoing Roach's commentary, Bottelier underscores that the Chinese leadership has a “strong awareness” of the need to re-balance its economy away from its dependence for growth on manufacturing investment and exports. In parallel, the Chinese intend to promote international use of the RMB as a settlement currency and to promote South-South trade as a way of reducing their dependence on the consumer markets in the West as well as securing access to natural resources. "China's economy is now so big and so open that domestic economic recovery in China has the capacity to pull the rest of developing Asia out of the crisis and make a significant difference globally," Bottelier concludes.

Institutional investors’ views

Liaquat Ahamed

48

increase from ten to 15 percent in their allocation to Asia. In August, Beijing’s State Council defined new forms of partnerships, and the National Development and Reform Commission drafted a legal platform for equity investment enterprises. China also has permitted a dramatic

All this is encouraging grist for institutional investors scouring markets for investments that can help restore what they have lost in asset value. OECD estimates suggest that at the end of 2008, global pension assets had declined by 20%. At the same time, a McKinsey study estimated that global money managers’ assets under management declined 19% in 2008 and 21% in North America. And according to Callan Investments, those money managers should expect fee revenue to be down 10-20% this year on top of a 9% drop last year. T&I Asia Watch, a Bangkok-based newsletter, speculates that deal flow in Asia is improving. Still missing are the mega deals of the pre-crisis era. But deals are being announced. Executives with AlpInvest, one of the world’s largest pension managers, for example, are quoted as saying that they intend to commit $4 billion yearly to alternatives. Part of that will include an

expansion of RMB funds and opened a second stock exchange, the ChiNext, allowing small firms to exit investments in China. Just as importantly, the move signals an effort to bring funding to entrepreneurs in contrast to state-owned enterprises which rely on banks for cheap credit. Still, the question persists as to whether this considerable activity will happen quickly enough to deepen the Chinese capital markets, put people to work and replace stimulus-driven growth with economic-enhancing productivity. The outlook for the global economy may depend on it happening at even a faster pace than the Chinese plan. Consider the outlook for world trade, according to the Economist Intelligence Unit’s October forecasts. This year, trade will shrink precipitously by 9.4%. It will remain weak in 2010, growing by just 3.5% and then a little faster than 5% between 2011 and 2014. The driver: the developing world. The locomotive: China. Clearly, much still is left to happen before the new landscape takes a definite shape. In the meantime, the number of container ships sailing in and out of San Francisco harbor may very well continue to decline.

avcj.com | November 5 2009 | Volume 22 | Number 41

AVCJ Asian Private Equity & Venture Capital Awards 2009 Nominees Buyout of the year Consolidated Pastoral Company Pte. Ltd. (Terra Firma) Macquarie Communications Infrastructure Group (Canada Pension Plan Investment Board) MYOB Ltd. (Archer Capital, HarbourVest Partners) Oriental Brewery Co. Ltd. (Affinity Equity Partners, Kohlberg Kravis Roberts & Co.) Universal Studios Japan (Goldman Sachs Japan, MBK Partners) Exit of the year Avago Technologies Ltd. (GIC Special Investments, Kohlberg Kravis Roberts & Co., Silver Lake Asia, Temasek Holdings) China Shanshui Cement Group Ltd. (CDH Investments , Morgan Stanley Private Equity) GREE Inc. (Globis Capital Partners) Shenzhen Development Bank Co. Ltd. (TPG Capital) Shriram Transport Finance Co. Ltd. (ChrysCapital)

Recognising Excellence in Asian Private Equity

Firm of the year Baring Private Equity Asia Group CDH Investments CITIC Capital Partners Kohlberg Kravis Roberts & Co. India Value Fund Advisors Private Equity Professional of the year John Ehara, Unison Capital Fang Fenglei, Hopu Investment Management Michael Kim, MBK Partners Jean Eric Salata, Baring Private Equity Asia Jonathan Zhu, Bain Capital Asia Entrepreneur of the year Gautam Adani, Adani Group Zhang Lan, South Beauty Group Alvin Liu, A8 Digital Music Changqing Lu, Liaoning Zhongwang Group Yoshikazu Tanaka, GREE Fundraising of the year Carlyle Asia Growth Partners IV, L.P India Value Fund IV Keytone Ventures LP MBK Partners II, LP Unison Capital Partners III, LP Venture Capital Professional of the year Ashish Gupta, Helion Venture Partners Chauncey Shey, SB China Venture Capital Andy Yan, Softbank Asia Infrastructure Fund Young Guo, IDGVC Partners Joe Zhou, Keytone Ventures Lifetime Achievement Award Philip Bilden Dan Carroll George Raffini Dan Schwartz Tim Sims Sponsors

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Fund ups and downs in Asia Pacific

polled by AVCJ is that these need to be considered in context. It bears remembering, for instance, that only 5 years ago GPs were only seeking $8 billion regionwide. So Asian private equity history is short. In fact, it was only a cottage industry until the Asian currency crisis of 1997-98 prised open the chest of major opportunities. Also, in the aftermath of the recent global economic crisis and credit crunch, international investors in the main were in a state of shock in 1H09, re-assessing their situations rather than re-investing. Comments international law firm Clifford Chance partner Simon Cooke: “Relatively few funds have closed in 2009 because the denominator effect reduced the amount of institutional funds available for Administering capital once gathered can be as important, and challenging, alternative investment strategies. as raising it “Most of those that closed did so with lower capital commitments There can be little funds raised was precipitous: $141 than originally expected, and on an argument with the view that million in 3 funds were raised in extended fund raising timeline,” he fundraising nearly everywhere in 1H09 compared to $1.5 billion in told AVCJ. “However the relative lack the Asia-Pacific region – like most 11 funds during the same period of international funding together places in the world – both in terms last year. with encouraging reforms in China of amounts raised and the number China’s plunge was just about as has focused many sponsors on the of new funds listed, fell off a cliff in steep: in the first half of 2008, $11.5 possibility of raising RMB funds, the first half of this year. billion was raised with a boisterous either on a stand-alone basis or to As well, private equity exits 47 funds, whereas in the first co-invest in China with offshore – China being something of an half of 2009 that subsided to funds.” exception – likewise dropped $2.3 billion in 10 funds. His confrere Thomas sharply, as did overall private equity The same trend was Chou, a partner with law investment, according to AVCJ evident in Idia, where $1.8 firm Morrison & Foerster Research data. billion was raised in 1H09 (MoFo) agrees: On the other hand, the vs $5.2 billion in 1H08; “At the outset of aggregate totals of private equity Japan, with $432 the financial crisis, funds under management kept million compared many alternative apace, and in some cases actually with $2.3 billion a investors suddenly appreciated, relative to the same year earlier; and South Simon Cooke found their portfolios period in 2008, due in no small Korea, with zero in over-allocated part to the sudden, strong market 1H09 compared to $1 billion in to private equity due to the recovery fuelled in large part by 1H08. Singapore, on the other hand, denominator effect; meaning large stimulus packages. actually rose to $654.2 million from private equity investors were $337 million in the first six months suspending new investments as By the numbers of 2008 – though its overall total for hedge managers scrambled to In Australia, despite the Lucky last year was pegged at $1.7 billion. satisfy redemption demands from Country’s economy being fairly their LPs. At the time, one could insulated from the bigger GFC A bit of perspective hardly walk across Central without shocks as a result of ongoing This raised understandable hearing investors whispering demand for commodities and concerns. But the consensus among to each other about potential natural resources, the decline in a number of seasoned professionals secondary dispositions.”

Strong indicators of a turnaround over the medium term

50

Fortunately, this bomb shelter mentality was relieved, albeit after waves of LP redemption demand hits, by the adoption of unprecedented economic stimulus packages by the US and China, which led to the rapid rebound of the HKSE and domestic A-share market. So with the dust now clearing, stability seems to have returned to the post-Lehman world. And as a consequence, Chou sees LP allocations to the region as being on the rise again, as well as a growing risk appetite among private equity investors – though this time contigent on it complementing several policy objectives of the Chinese government.

A marked evolution in structures Deal flow is on the rise, Chou notes. But while there hasn’t been much change in where the opportunities are, “…we are witnessing a marked evolution in fund structures, players and deal dynamics,” he observes. For instance, onshore RMB funds have gained significant traction, with global names like Blackstone and Macquarie announcing intentions to establish large RMBdenominated funds. “Despite the State Council’s adoption-in-principle of the implementing regulations for the Foreign Invested Partnership Law of August 2009, the real prospects of transparent implementation remain clouded as MOFCOM and NDRC work at resolving the differences regarding their roles in regulating this young industry,” Chou explains. “But, despite these implementation uncertainties with respect to regulator, tax and forex issues, plus potential conflicts with LPs in parallel offshore funds, leading private equity houses are actively exploring onshore funds with ever-increasing funds under management in this vital market.” Thus, onshore RMB funds will certainly be an important tool for global private equity players in future.

avcj.com | November 5 2009 | Volume 22 | Number 41

Fund administration trends

Many GPs have also renewed their interest in streamlining and monitoring their internal operations, he adds. “Giving your staff better tools to get more work done is often cheaper than adding to headcount,” Haarstick observes. Global trends suggest more transparent operations (with more dependable valuations) will be familiar features in future. And Relevant Equity Systems anticipates that regional firms will simply access the pool of best ideas and find their own uniquely Asia-Pacific way to comply with world standards, with the result that the global investment community will get comfortable investing in Asia. “Asia Pacific was clearly increasing in significance prior to the start of the financial crisis, and that was why Mourant wanted to commit to a serious presence in the region,” Mann remarks. “It seems likely that the trend will continue, and Asia will become an increasingly important portion of the global industry.”

Management and administration of funds has also shifted focus through the crisis, with some significant issues coming to the fore as regulators, LPs and GPs react to the new environment. Chief amongst these issues has been a demand for greater transparency and accountability. “Through the period of the crisis, generally the standards of corporate governance, demands from LPs, levels of reporting with respect to transparency, frequency have been increased,” notes Tim Mann, Head of Asia Fund Administration at Mourant. “This is not a short-term trend, and GPs are increasingly turning to specialist providers like ourselves to assist.” Ray Haarstick, CEO and founder of fund administration specialist Relevant Equity Systems., likewise notes new trends in this area: “Our business is off about 10-15%,” he admits. “But many of our top customers have used the slowdown to refine their operations. So our development team has been focused on various future enhancements and custom reports. Compliance with the increasing number of regulations (e.g. FAS 157, IFRS etc) have also motivated them to provide much more detailed quarterly reports, and in a more timely manner.”

As Matthew Arkinstall, investment director of UK-based Greenpark Capital, characterizes it, the GFC impact has progressed through two stages: panic, and then the wait for a new equilibrium. In the immediate

2008

1h2008

1h2009

2,455.4

1,488.3

141.0

Bangladesh

60.0

-

-

Cambodia

7.5

7.5

19.7

China (PRC)

14,406.8

11,550.8

2,368.5

Hong Kong

14,185.0

9,102.0

1,726.0

8,215.3

5,207.0

1,844.0

55.0

55.0

-

3,848.6

2,289.0

432.5

Australia

India Indonesia Japan Malaysia

51.4

38.5

262.0

241.1

241.1

183.9

26.1

16.1

-

Singapore

1,747.7

337.7

654.2

South Korea

3,243.8

1,012.8

-

69.4

69.4

-

6.3

6.3

2.5

New Zealand Philippines

Taiwan Thailand Vietnam Total

“Those opportunities arose mainly from single LP interests becoming available. We closed on some at very attractive prices,” he confides.

A brightening future Hepp sees no evidence of a downward revision of investment plans among his clients. He agrees, however, that implementation has slowed due to a drop in deal flow which he attributes to lower investment activity and the adverse funding environment of late, which has forced many GPs to postpone their fund raising plans. So while private equity in general, with some $500 billion of uninvested capital, is in excellent position to provide much-soughtafter medium-term risk capital, real

“GPs are increasingly  turning to specialist providers like ourselves to – Tim Mann assist.”

Secondaries

Private Equity Funds raised Amount (US$m)

crisis aftermath, some LPs found themselves overcommitted and over-leveraged. This led to deal flow where the main driver was the wish to crawl out from under unfunded commitments or to secure cash to repay debt, he notes. “The pricing discount grew very large indeed,” he told AVCJ. “So at Greenpark we were able to secure some very attractive transactions.” The second phase has featured a stand-off between secondary buyers and sellers. Each is waiting on the other to initiate some kind of pricing détente. “What’s needed now is patience and discipline,” he contends. “When the dam breaks, we foresee it delivering several years worth of deal flow at 20-40% discounts. But the prospect of $140 billion worth

605.4

605.4

-

$49,224.8

$32,026.9

$7,634.4

Number 41 | Volume 22 | November 5 2009 | avcj.com

of transactions at 60% discounts was never realistic.” Overall, however, Arkinstall gives Asia high marks for preparedness and resilience, partly because of the lessons learned back in the regional 1997-98 crisis, and partly because of its ongoing, galloping growth. “We are witnessing an unprecedented event of several billion people playing economic catch-up,” he says. “So the argument that at some point private equity in Asia will rival that in Europe or the US seems to us like a foregone conclusion.” Dr. Stefan Hepp, CEO of SCM Strategic Capital Management AG, concurs on both this view of the secondaries market and a brightening future in Asia. They too noted the significant downward pressure on valuations of active fund portfolio companies, while simultaneously benefitting by the increase in secondary opportunities.

consolidation is coming to private equity players; he expects their numbers to decline by as much as 40% globally. That isn’t likely to prove much of a drag on Asian prospects, however. “Unlike past cycles, where the region was seen as the emerging market, the last leg of the bull market of this cycle has shown, demonstrably, that Asia must be an integral part of a strategic private equity allocation. So while it may not feel like that at the moment in the region, we think that this crisis will ultimately be a boon to Asian private equity,” Hepp contends. “Within the fund administration space, the future potentially is huge as the industry rebounds,” Mann concludes. “Business is starting to look quite positive, and we are preparing ourselves for the demands that this growth will bring.”

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Comment

Private equity and private infrastructure funds – evolution or revolution? John Campbell, Senior Partner at Campbell Lutyens & Co., gives his view on the state of development of private equity and infrastructure funds As 2009, the 200th anniversary of Charles Darwin’s birth and the 150th anniversary of ‘On the Origin of Species,’ draws to a close, it is timely to reflect on the state of the private fund industry today. Are private equity and infrastructure funds in a state of evolution or revolution? The private equity and private infrastructure classes have one – and only one – essential characteristic in common. Both deal head-on with the agency problem, the seriousness of which is a direct function of the distance between owner and manager. In private funds, as the recently published Walker Review on corporate governance in UK banks reminds us, this distance is relatively short. Effectively it is the distance between the GP, as the representative of the owner, and the executive management of each underlying portfolio company. This direct link between owner and manager is an essential factor in the performance which private fund managers are able to deliver for their LPs. By contrast, in the listed company sector the agency problem is amplified by the very large number of shareholders. The largest banks in the UK, for example, typically have around 300,000 shareholders. The wide array of regulatory and related constraints which impinge on contact between owner and manager in public companies is apparent in the very poor governance of many of those vehicles. Executive directors have frequently not been held to account by their non executive directors and too often neither of those parties have been held to proper and timely account by their shareholders.

52

Private funds, benefits and rewards Private fund investment is active investment in the sense that at all times the investor is intimately involved with the management of the investee company. The investor is in total possession of all the facts that pertain to the company’s position and prospects. There can hardly be a management team in any company which would not benefit from close interaction with an informed shareholder in order to maximise the long-term development of their company. That is why, over recent decades, private equity at the grassroots underlying investee company level has consistently outperformed public companies.

“The sharing of rewards has become more and more misaligned.” But that is at the grassroots. The legitimate question to be raised is how are those benefits split between the manager – the GP – and the institutions – the LPs – which provide that manager with its capital? Are the interests of these two parties aligned? Are the benefits appropriately shared? For more years than I care to recall I have argued that the sharing of rewards has become more and more misaligned. The development of new species of animals on the farm, consuming disproportionately large amounts of financial

fodder, has allowed some animals to become ungainly and lazy. They are no longer efficiently converting their financial fodder in a way which maximises the returns of the farmer who supports them. The root of the problem, as we all know, lies in the continuation of variations of the ‘2 and 20’ formula, combined with other financial terms which are significantly inappropriate in the context of the increasingly large pools of capital which certain GPs now manage.

Fund evolution and revolution Private equity funds are therefore facing a combination of evolution and revolution. The GPs are evolving by finally realising that they must go back to basics in order to be enabled to go forwards by raising future raise capital. They must go back to operating at levels of management, and transaction and other fees, which in aggregate meet the appropriate day-to-day costs of running an efficient and effective organisation. The capital profit at realisation made as a result of their uniquely hands-on approach should then be split between the owners and the managers. Nobody really argues that an 80:20 split of those profits in private equity is inappropriate if that is the only profit which the GP receives. In this way, a position of total alignment has been reached. The revolution, however, is that the LPs have finally started to exert the muscle which they should have exerted many years ago to insist that the GPs go back to the true style of partnership on which the industry was for many years based. The recent initiative of organisations such ILPA to address these fundamental issues is to be welcomed. But at the same time a cookie-cutter approach has to be avoided. Every fund is different in the resource which it requires to maintain and develop its fundamental capabilities. It is simply not appropriate to produce a set of standardised terms which must prescriptively apply in all cases. Guidelines as to best practice are appropriate but deep care must be taken to fine-tune the appropriate arrangements for each fund. Private equity funds are, however, reasonably ubiquitous in structure and style in that they typically involve broadly similar draw down, harvesting periods and fund lives. Private equity funds are therefore relatively straightforward to standardise when defining appropriate terms of engagement between the LPs and the GP.

Infrastructure funds By contrast, private infrastructure funds are very much more differentiated and complex. The number of idiosyncratic species now found in this part of the farm has multiplied. These

avcj.com | November 5 2009 | Volume 22 | Number 41

funds vary significantly in their characteristics. Some private infrastructure funds appropriately offer relatively short holding periods, which are comparable to the holding periods of the typical private equity fund. But other funds – and I would venture to suggest, the significant majority going forward – are much more appropriately established with longer life terms than would typically apply to a private equity fund. The unique underlying characteristic of infrastructure investing is that most infrastructure is able to deliver, within acceptable levels of predictability, long-term streams of income. That income in some cases is contracted, in other cases regulated, and in other cases largely influenced by purely economic factors. But in all cases, to be categorised as infrastructure investing, as opposed to pure corporate investing, there has to be a predictability of longer term flows of regular income. These differential streams of income are then priced to take into account the risks associated with achieving those returns. A true partnership is one in which each partner understands the requirements of the other party. Other than in the intensivity of interaction between the manager of a fund and the underlying companies in which the fund invests, private equity has little in common with infrastructure. Infrastructure investments can be held by institutional investors in a different part of their portfolios from the much higher risk and return class that private equity represents. Long-term streams of infrastructure income can be used to meet long-term liabilities. Often the infrastructure returns can be correlated with inflation, thus providing an even better match with underlying, typically inflation adjusted, pension liabilities. At a time when real estate is now much less able to deliver underlying flows of long-term contracted income, the infrastructure sector is uniquely able to provide this. The variety of the terms and structures of funds which are applicable to the private infrastructure class are considerably more complex than anything that has hitherto been seen in the private equity fund class. At Campbell Lutyens we have in recent years devoted considerable efforts to discussing with chief investment officers, chairmen of trustees, heads of asset liability management or of portfolio management what each individual institution is seeking from the infrastructure class. Many institutions seek several different forms of infrastructure exposure for different parts of their portfolios. But the very strong underlying theme which runs through most pension plans,

Number 41 | Volume 22 | November 5 2009 | avcj.com

life insurance companies and other long-term investors is the desire to buy and to keep the assets for the long-term and harvest the income over many years, rather than trade the assets.

Down on the private infrastructure farm On the private infrastructure fund section of the farm we therefore find species of funds with lives of 25 years, or more, and evergreen funds as well as the shorter life, more private equity-style funds applicable to certain assets, such as renewable energy development, or agent-of-change investment approaches, which

the assets for many more years than in private equity. In the final analysis the infrastructure GP can still be handsomely rewarded for success whilst taking lower shares of the total cake than would be appropriate in shorter term private equity funds.

Incentivising infrastructure management Deep thought has to be given to incorporating the right incentives for management when these incentives are designed to encourage best practice over a 25-year period. As institutions do not wish to see the underlying infrastructure

“Deep thought has to be given to incorporating the right incentives for management when these incentives are designed to encourage best practice over a 25-year period.” may be appropriately held for shorter terms. We have particularly worked on the development of structures and terms which truly seek to balance and align the interests of the LPs and the GP. In these structures, typically the LPs receive the basic bond-related return free and clear, i.e. the GP does not participate in the base level of return – which can often be compared to a bond of comparable duration, to which is added, in certain circumstances, a further margin. These base level returns, wholly attributable to the LPs, can be calculated either on nominal rates of return or on real, inflation-adjusted rates of return. Hurdles for performance can be established. Catch-up is appropriate for many funds but typically for the longer-term funds only down to the underlying base rate of return. Interestingly, transaction fees in infrastructure funds can be appropriate. In many cases an infrastructure fund only holds a minority position in an underlying asset specific special purpose vehicle. GPs should be encouraged to create transaction fees which are paid for by all consortium members in the SPV. If the GP receives no benefit from these transaction fees, it is unlikely to make the same efforts to persuade its SPV partners to pay them. Account must also be made of the lower overall but longer term, rates of return capable of being earned from underlying infrastructure assets compared to private equity assets, and the need to mitigate gross to net erosion at the fund level. The GP of a private infrastructure fund will typically take a smaller share of the total gross returns, but the partnership will hold

assets sold, trust has to be placed in third-party valuations in order to enable management to valorise their rewards. We have found that proper informed discussions between LPs and GPs has enabled creative, balanced structures to be put together which deliver alignment of interests. Essentially, therefore, it is in the structure of private infrastructure funds that real creativity has been seen in recent years in the private funds sector. The first and second generations of private infrastructure funds, which heavily replicated the private equity fund model, are no longer considered appropriate. In the first generation, before the value of long-term flows of predictable income became better understood, there were super normal returns to be made. The LPs and GPs could both be well rewarded whatever the disposition of the profits. In the second generation funds, after the re-rating of the value of these assets had taken place and the opportunity to re-finance them had been removed, there were some very unhappy partnerships. In the current third generation funds, evolution has resulted in new paradigms which are much more thought through in terms of structure, as well as in the managerial qualities required by the GPs to deliver long-term firstclass infrastructure asset management. 2009 has therefore been a long-overdue year of both revolution and evolution. Revolution, in the sense of a timely strengthening of LPs’ resolve. Evolution, in the sense of a much more nuanced understanding of the idiosyncrasies of different species of private funds, particularly in the private infrastructure fund space.

53

interview [email protected]

Industry Q&A: Suyi Kim Suyi Kim, Senior Principal at the CPP Investment Board, outlines the fund’s approach in Asia Pacific Q: Why did CPPIB decide to set up an office in Hong Kong? A: When we began implementing an active investment strategy in 2004-05, we didn’t have any exposure to emerging markets. We conducted a series of in-depth market studies and in 2006-07 concluded that the Asian market would be our top priority amongst emerging markets. Given our long-term investment horizon and the importance of Asia economies going forward, we are committed to this part of the world. We decided that we should open an office here with people on the ground. We’re one of the first Western pension funds to do that here in Asia. We hire people who understand Asian private equity, speak the language and have relationships in the market. Q: What is your strategy for private equity fund investments? A: Our private equity strategy is based on the partnership model. We do not invest in too many funds. When we invest, we are typically one of the largest investors in those funds and work closely with our GPs. If you look at private equity statistics, the average private equity fund return is below the S&P return. Therefore, our fund investment strategy is to ‘go big with the best.’ We also have an active direct investment program. Outside of Canada, we partner with our GPs to do direct investments. We think we have an edge and can lead deals in our home market but, outside Canada, we rely on our GPs. Our direct investment philosophy is that, if we’re not the best, we partner with the best. We employ that strategy here in Asia as well. Q: Where are you focused? A: We approach emerging markets systematically and progressively. We initially focused on North Asian countries – China, Korea and Japan. Next, we began covering India in 2008, and will start covering Australia as well. Other markets in Asia are still too small for us. Currently we have four relationships in China, one in Japan and three with pan-Asian funds. Q: How does your [fund] due diligence process work? A: We conduct in-depth due diligence. We

54

don’t outsource any of the due diligence. The investment recommendation is made by our Hong Kong team but our entire group (including Toronto and London) provides input throughout the process and engages in rigorous debate before making any investment decisions. Our internal process starts from a screening memo. At this time, we already have significant market and fund-specific knowledge, because we conduct regular market studies, have followed the fund for a long time and may have kept in touch with them for several years. If we want to proceed, we prepare a preliminary investment memo and discuss it with the group. It typically takes two to three months to complete due diligence. We conduct on-site due diligence where we meet all the senior investment professionals and visit or speak to the portfolio companies. We conduct extensive reference calls (30 to 40 on average) and analysis around fund performance. The process is iterative. We provide the group with an update memo which answers the key issues and questions the group raised initially. If the group is satisfied and approves the final investment recommendation, then we seek an approval from our internal investment committee. For funds we are investing in for the first time, we have to get approval from the Board, while for existing funds we have more discretion. Q: How much capital does CPPIB have to deploy? A: CPPIB currently manages $110 billion in three

“Given our long-term investment horizon and the importance of Asia economies going forward, we are committed to this part – Suyi Kim of the world.” investment groups (public, private and real estate investments). We’re growing very rapidly, which is different from a lot of other pension funds, because we have $6-8 billion net inflow every year. With a minimal return, we are expected to grow to $250 billion in the next six to eight years, and continue growing significantly beyond that. Currently we have about $10 billion invested in private equity funds and secondaries globally. If you include money we’ve committed to funds but not yet drawn down, we have $25 billion of exposure to private equity funds, which makes us one of the largest private equity investors in the world. Q: What percentage is deployed in Asia? A: For private equity fund investments in Asia, so far we have committed almost $2 billion in eight funds. We haven’t done any secondary deals yet. The percentage is small – about 5% of the private investment group’s funds. Q: Will that percentage or number grow? A: The percentage will grow, but we don’t have any specific allocations or targets. Because of the asset growth of CPPIB, even if we keep the percentage the same, our commitment will more than double in the near future.

CPP IB headquarters at 1 Queen Street East, Toronto

[This intervview originally appeared in a previous issue of AVCJ.]

avcj.com | November 5 2009 | Volume 22 | Number 41

Contact Allen Lee T: +(852) 3411 4966 / 3411 4945 E: [email protected] W: www.avcj.com

AVCJ Private Equity & Venture Forum 2009 Global conference series

Global perspective, local opportunities

Australia & New Zealand

DowNloAD to CAleNDAr

4-6 March \ The Westin, Sydney

Japan

DowNloAD to CAleNDAr

6-8 April \ Conrad Hotel, Tokyo

Middle east

DowNloAD to CAleNDAr

21 April \ InterContinental, Abu Dhabi

China

DowNloAD to CAleNDAr

20-22 May \ Park Hyatt, Beijing

taiwan

DowNloAD to CAleNDAr

15-17 June \ Shangri-La’s Far Eastern Plaza Hotel, Taipei

USA

DowNloAD to CAleNDAr

9 July \ Harvard Club of New York City

South Korea

DowNloAD to CAleNDAr

17 September \ Grand Hyatt, Seoul

Southeast Asia

DowNloAD to CAleNDAr

7-9 October \ The Fullerton Hotel, Singapore 22nd Annual

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AVCJ Private equity & Venture Forum

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India

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2-4 December \ Grand Hyatt, Mumbai

China M&A

DowNloAD to CAleNDAr

8 December \ Hyatt on the Bund, Shanghai

last updated: 7 Jul 2009

Convened by

More than $340 billion is invested in Asia

* accumulated investments between January 2001 and September 30, 2009. Source: AVCJ

Where have the funds come from? How are they being invested? In which sectors? What regulatory changes are making an impact on investment strategies? AVCJ provides the answers and more in its series of panAsianindustryreviews. Thereportsprovideanindependent overview of the private equity, venture capital and M&A activities in the region, including the latest statistics and analysis by AVCJ’s research team. The annual reviews

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also deliver insights on investments made, capital raised, sector-specific figures and more—making them essential reading for all private equity investors, investment bankers, accountants, lawyers, corporate financiers and management consultants looking at the Asian market. For more information or to order, call Sally Yip at +(852) 3411 4921 or email AVCJsubscriptions@incisivemedia. com.

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