Asia’s Private Equity News Source avcj.com November 06 2012 Volume 25 Number 42
Competing for funds Page 11 L Capital’s Asia plans Page 21 Take-privates in vogue Page 37
conference special issue aVcJ priVate equity and Venture capital forum Hong Kong 2012
The public face of private equityShould Asian GPs be holding themselves to a higher standard? Page 23
Number 42 | Volume 25 | November 06 2012 | avcj.com 3
Contents
editor’s Viewpoint 05 Asianprivateequity-theshowthatnever
stops
news 06 AXA,Carlyle,CHAMPPE,CIC,CyberAgent,
Fidelity,Olympus,Providence,Sequoia
Fundraising the big picture11 Globalandlocalplayersaretryingtoraise
fundsinachallengingmarket.Notallwillsucceedbesuccessful
asia’s emerging Lps13 InordertowinLPcommitmentsfromAsian
sovereignwealthfunds,GPsmustfindoutwhatmakestheseinstitutionstick
the Volcker impact17 Regulatoryreformhaschangedtheprivate
equityLPbase.Newstrategiesarerequired
pe & pr: all about the brand23 Privateequitygloballyisunderheightened
scrutiny.AreAsianGPspayingenoughattentiontotheirpublicimage?
pe’s public profile26 Howentrepreneurs,government,media
andthepublicviewtheassetclassinAsia
sustainability matters33 PEfirmsareuppingtheircommitmentto
environmentalandsocialgovernance
inVestment37 Take-privatedealsarecreatingheadlines
acrosstheregion,butabiddoesn’tnecessarilyresultinadeal
41 Infographic:Chinatake-privates
gp interViews21 RaviThakran,managingpartneratLCapital,
onwhatmakeshisfirmdifferent
31 JohnLewis,CIOatUnitasCapital,onwhyreputationisimportanttoGPs
42 MartinMok,partneratEQTPartnersAsia,onwhatslowinggrowthinChinameansforPE
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Number 42 | Volume 25 | November 06 2012 | avcj.com 5
editor’s [email protected]
it is but a few days before tHe 2012AVCJPrivateEquity&VentureForum–indeedyoumayfindyourselfreadingthisattheeventitself.Iampleasedtonotethatdespitethebeatingprivateequityhastakenincertainmarkets,ourconferenceisproceedingverywellanditispoisedtobeanothergreateventwiththevenueatfullcapacity.
Moreimportantly,fortheGPsintheroom,thenumberofLPsinattendancehasnotonlyincreasedbuthasalsodiversifiedconsiderablytoincludemorefamilyofficesandinvestorsfromoverseas.Thisisanothersignthatinstitutionsareincreasinglymoreinterestedinprivateequityasaninvestmentstrategythatcandeliveralphaintheirportfolios.
Sinceitslaunch,thewwForumhasalwaysbeenabellwetherfortheAsianprivateequityindustry,offeringsnapshotsofthepastandglimpsesofthefuture.Thisyear’seventwillbenoexceptionasourhighlevelspeakersexploreanumberofthekeyissueschosenbecauseoftheirrelevancetothemajorityofdelegates.
OnetopicIexpecttohearmuchabout–fromthepanelsandfromthefloorduringthequestionandanswersessionsthatfollow–istheroleofAsiaintheglobalportfolio.ManyinstitutionalinvestorsfromNorthAmericaandEuropearestillunderweightonemerging
marketsandwanttoboosttheirexposuretoGPsinthispartoftheworld.Butwhatisthebestwaytodoit–fund-of-funds,gatekeepers,regionalbuyoutvehiclesorcountry-specificfunds?ItalldependsonindividualLP’scomfortandexperiencewiththemanagersinAsia.
Letmestresshereandnowthatthefeedbackfromeventschanneledtomycolleaguesandmyselfisoneofthemostsignificantfactorsinshapingthefollowingyear’sconferenceagenda.Wewanttheaudienceandindustrytohaveasayinthecontent,soifyouhaveanythoughtsonthis,pleasesharethem.
OnequestionwegetaskedalotiswhatisthedifferencebetweentheAVCJForumandotherevents?Forstarters,AVCJhasbeenaroundfor25yearsandoneofthemainreasonsforthisisourwillingnesstoengagewiththeindustryandcreateabetterproduct,yearafteryear.Wethankyouforyourcontinuedparticipation.
Allen LeePublisherAsianVentureCapitalJournal
Asian PE – the show that never stops
Managing Editor Tim Burroughs (852) 3411 4909
Senior Editor Brian McLeod (1) 604 215 1416
Staff Writer Alvina Yuen (852) 3411 4907
Andrew Woodman (852) 3411 4852
Creative Director Dicky Tang Designers
Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow
Senior Research Manager Helen Lee
Research Manager Alfred Lam
Research Associates Kaho Mak, Jason Chong
Circulation Manager Sally Yip
Circulation Administrator Prudence Lau
Senior Manager, Delegate Sales Anil Nathani
Senior Marketing Manager Stacey Cross
Marketing Manager Rebecca Yuen
Director, Business Development Darryl Mag
Manager, Business Development Samuel Lau
Sales Coordinator Debbie Koo
Conference Managers Jonathon Cohen, Zachary Reff, Sarah Doyle
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Conference Coordinator Fiona Keung, Jovial Chung
Publisher & General Manager Allen Lee
Managing Director Jonathon Whiteley
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The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of
AVCJ Group Limited. ISSN 1817-1648 Copyright © 2012
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Asia - Total Private Equity Funds Raised by Country
Source: AVCJ Research
Australia
China (PRC)
Hong Kong
India
Indonesia
Japan
New Zealand
Philippines
Singapore
South Korea
Taiwan
Vietnam
avcj.com | November 06 2012 | Volume 25 | Number 426
AUSTRALASIA
Verde targets $52m venture fundAustralianventurecapitalfirmVerdeisseekingtoraiseA$50million($52million)forafundthatwillfocusonbringingtechnologytomarket.Itwillconcentrateoninnovationsinthemedical,defenseandtechnologysectors.ThegovernmentwillprovideadministrativesupporttothevehicleworthuptoA$200,000peryearoverfiveyears.CapitalwillbesourcedfromprivateandinstitutionalinvestorsinAustraliaandoverseas.
Ten Network, CHAMP PE agree Eye saleCHAMPPrivateEquity’sportfoliocompanyoOh!mediahasagreedtopayA$113million($117million)forEyeCorp,TenNetworkHoldings’outdooradvertisingbusiness.LastweekitdownsizeditsoriginalofferofA$145milliontoA$110million.
Quay Partners appoints Australia managerJohnZaknichasjoinedQuayPartnersasaninvestmentmanagerinSydney.TheappointmentisoneofaseriesofseniorhiresastheAustralianfund-of-fundsandadvisoryfirmbuildsitsnewlyestablishedinfrastructureteam.MatthewMcPheewillleadQuayPartners’infrastructureinitiativeinBostonandisjoinedbyNancyMangravitiaslegaladvisor.
Allegro Funds leads MBO of Australia’s Hastie ServicesAllegroFundshascompletedamanagementbuyoutofAustralianindustrialservicesgroupHastieServices,monthsafteritsparentcompany,Lazard-backedHastieGroup,wentintoadministration.Thebuyout,realizedseesthemid-marketinvestorpickupallthreeHastieServicesgroupcompanies:HastieServicesandSpectrumFire&SecurityinAustralia-eachofwhichhadreceiversandmanagersappointedtothembackinMay-andCowleyServicesinNewZealand.
Fundraising rebounds with foreign investor supportThefiscalyearendedJune2012wasreportedlythebestfundraisingyearfortheAustralianprivateequityandventurecapitalindustrysince2007-2008,withmorethanA$3.3billion($3.4billion)raisedby21funds.According
totheAustralianPrivateEquityandVentureCapitalAssociation(AVCAL)/Ernst&Young2012Yearbook,theamountraisedconstitutesa59%uponthepreviousyear’sfigure.Commitmentsfromoverseasinvestorsrepresentedmorethanhalfthetotalamountraised..
GREATER CHINA
Baidu to acquire Providence’s stake in iQiyiProvidenceEquityPartners,thespecialistmediaandcommunicationsGP,willsellitsstakeinChina-basedonlinevideoportaliQiyi.comtoBaidu.Providenceheldtheassetfortwo-and-a-halfyears,havingreportedlyinvested$50million.Thetransactionisexpectedtocloseinthefourthquarterof2012.Uponcompletion,BaiduwillhaveasubstantialmajoritystakeiniQiyi.
CDIB to set up a private equity fund in ChinaTaipei-basedChinaDevelopmentIndustrialBank(CDIB),theinvestmentbankingunitofChinaDevelopmentFinancialHolding,hasteamedupwithChina’sstate-ownedJiangsuHigh-TechInvestmentGrouptosetupaRMB2billion($321million)PEfund.ThefundwillinvestexclusivelyinJiangsuprovince.
AXA Private Equity opens Beijing officeAXAPrivateEquityhasopenedanofficeinBeijingaspartofeffortstoboostitsexposureinnorthAsiaasitseekstoraise$500-600millionforathirdregionalfund.WithAXACapitalAsiaIInow80%deployed,thefirmreachedafirstcloseof$300millionforitssuccessorvehicleinSeptember.Aswithpreviousfunds,70%ofthecorpuswillbecommittedtoAsianGPswhiletheremainderischanneledintodirectinvestments.
PE investors inject $50m into Huaxia Dairy OlympusCapitalhasledagroupofinvestorsincludingCaliforniaTechnologyVentures,HerostarHoldingsandGrandRiverCapitalincommitting$50millionstakeinChinesemilkproducerHuaxiaDairyFarm.Thedealfollowsa$45millioninvestmentinHuaxialastyearbyanotherOlympus-ledgroup,whichincludedEuropeandairyproducerMuellerMilchManagement.Olympusputin$30million,whileMuellerMilchpledged$10millionandexistinginvestorscommitted$5million.
Insurers get green light for foreign PETheChinaInsuranceRegulatoryCommission(CIRC)hasissuedthelong-awaitedregulationonoverseasinvestmentsmadebydomesticinsurers,includingcommitmentstoprivateequityfunds.Qualifiedinsurancecompaniesarenowpermittedtoinvestin25developedeconomiesand20emergingmarkets.
ClearVue leads $20m round for beauty brandLumi,aleadingnutritionalbeautyproductsfirminChina,hasraisedRMB120million($20million)ofSeriesBfundingledbyClearVuePartners.Fidelity,JAFCOandCapventalsoparticipatedintheround,alongwithexistingshareholder,DCM.WilliamChen,managingpartnerofClearVue,willjoinLumi’sboardofdirectors.
CIC buys stake in Heathrow Airport HoldingsChinainvestmentCorporation(CIC)hasboughta10%stakeinHeathrowAirportHoldingsfromSpanishbuilderFerrovialandotherinvestorsforGBP450million($725million).
Ferrovialsoldits5.72%stakeintheairport’sparentFGPTopcotoStableInvestmentCorporation,awhollyownedsubsidiaryofCIC,forGBP257.4million.Aspartofthetransaction,andatthesamepricepershare,Stableacquiredanother4.28%fromothershareholdersforGBP192.6million.
FollowingthedealFerrovialwillcontinuetobeanindustrialpartnerinHeathrowwithareduced33.65%stake.GovernmentofSingaporeInvestmentCorporation(GIC)andAlindawillalsoremainshareholdersinFGPTopco.
“WewillcontinuetoworkwiththenewshareholdersandwithexistingshareholderstoensurethatHeathrowAirportHoldingsretainsitspositionasoneofthebestinfrastructureassetsintheworld,”saidInigoMeiras,CEOofFerrovial,inastatement.
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avcj.com | November 06 2012 | Volume 25 | Number 428
China Everbright-Macquarie fund in debut dealTheGreaterChinaInfrastructureFund,a$1.5billionvehiclejointlylaunchedbyMacquarieGroupandChinaEverbright,hasmadeitsfirstinvestmentsintwoChinesecompanies.Thefund,whichisinitssecondtrancheoffundraising,invested$100milliontobecomethesecond-largestshareholderinZhejiangWannaEnvironmentProtection.TheotherinvestmentwasinaShenyang-basedwatersupplyproject.
Bravia Capital in talks with Spice JetHongKong-basedBraviaCapital,whichfocusesoninvestmentinthetransportationandlogisticssector,isintalkstoinvestinIndianbudgetairlineSpiceJet.SpiceJetwillusethecapitaltopurchaseaircrafts.ThecompanyisplanningtotakedeliveryofsixBoeingplanesnextyear.
NORTH ASIA
CyberAgent invests in Taiwan start-upCyberAgentVentureshasinvested$500,000inPolydice,theTaiwanesestart-upbehindrecipe-themedsocialnetworkiCook.twfora15-20%stake.ItisCyberAgent’sfirstinvestmentinaTaiwanesecompanysinceitopeneditsTaipeiofficelastyear.TheinvestmentwasmadeviatheIT-focusedCA-JAICChinaInternetFundII.
Paul Hastings opens Seoul OfficePaulHastingshasopenedanofficeinSeoul,its20thlocationglobally.ItfollowsanumberofinternationallawfirmsinsettingupapresenceinSouthKorea.JongHanKimwillleadthenewofficeandDanielKimwillbeheadupthecorporatepractice.SeveralotherlawyerswillalsorelocatetoSeoul.
SOUTH ASIA
Sequoia India invests in pathology chainSequioaCapitalhasinvestedINR400million($7.5million)inIndianpathologyservicesproviderSuburbanDiagnositicfora30%stake.Thecompanywillusethefundstoexpanditsnetworkandupgradeequipmentatitsexistingcenters.
GE Capital to invest in Biocon subsidiaryGEcapital,theprivateequityarmofGeneralElectric,hasagreedtoinvestINR1.25billion($23million)fora7.69%stakeinSyngene,asubsidiaryofIndia’sBiocon.Syngene,acontractresearchorganization,offersdrugdiscoveryanddevelopmentservicestoclientsincludingBristol-MyersSquibb,Abbott,EndoPharmaandDuPont.
DAR Capital launches India movie fundDARCapitalGroup,aLondon-basedprivateequityfirm,haslaunchedaINR1billion($18.6million)moviefundthatwillprovidefinancingtoprojectsthroughoutIndia.TheDARMentorCapFilmFundwillbeoperatedbyDARMedia,asubsidiaryofthePEfirm,andinvestmentadvisorycompanyMentorCapManagement.Itwillhaveaninvestmentperiodoffiveyearswithaliquidationoptionafterthreeyears.
Fidelity backs Triviton HealthcareFidelityGrowthPartnersIndiahasinvestedINR4billion($74.4million)inmedicaltechnologyfirmTrivitronHealthcare.ThefundingwillbeusedtomakelateralacquisitionsinEuropeandtheUSaswellastoimprovetheChennai-headquarteredcompany’sdistributionnetworkinSoutheastAsia,theMiddleEastandAfrica.TheinvestmentfacilitatesthepartialexitofHeadlandCapitalPartnersandePlanetVentures
SOUTH EAST ASIA
Ekuinas acquires Malaysian shipping services providerEkuinas,theMalaysiansovereignwealthfund,hascompletedaMYR220.9million($72.3million)buyoutofOMNIPetromaritime,acompanythatprovidesoffshoresupportvesselstotheoilandgasindustry.Ekuinasacquiredan82.5%stakeinOMNIforMYR150.9millionandinjectedMYR70millionofadditionalcapitaltopaydowndebtandsupportexpansionplans.
KV Asia reaches first close of more than $100mKVAsiaCapitalhasreachedafirstcloseonitsdebutfundofover$100million.Thefulltargetis$250million,whichwillbedeployedinSoutheastAsia,withIndonesiaexpectedtofeatureprominently.Accordingtomarketsources,LPsparticipatinginthefirstcloseincludeAdamsStreetPartners,HermesGPEandMorganStanley.
Silk Road expects three Myanmar deals by year endSilkRoadManagementexpectstocompletethreeinvestmentsinMyanmarbytheendoftheyear,markingtheSoutheastAsiannation’sfirstprivateequitydealsinabout20years.TheinvestmentswillbemadeviaSilkRoad’sMyanmarHumanCapitalFund,whichclosedinSeptemberat$25million.
SE Asian PE deals to rebound in 2013SoutheastAsia’sPEinvestmentswilltopickupnextyearastheregion’simprovingeconomicoutlookattractsnewfunds,saidSebastienLamy,apartneratBain&Co.Heprojectstransactionsacrosstheregionin2012tomatchlastyear’s$5.3billionorfallshort.“Deal-makingintheregionwillpickupin2013or2014.,”hesays.
Carlyle to buy Diversey JapanTheCarlyleGrouphasagreedtobyJapanesesanitationbusinessDiverseyJapanfromtheSealedAirCorporationforJPY30billion($377million).DiverseyisoneoftheleadingprovidersofsanitationandhygieneproductstoinstitutionalcustomersintheJapanesemarket.Thecompanyrecordedapproximately$321millionfortheyearendedSeptember2012.
Thetransactionisexpectedtobecompletedbytheendofthisyear.ThesaleofDiverseyJapancomesayearafterSealedAir,knownforitsBubbleWrapbrand,boughtDiverseyHoldingsina$4.3billiondealtoexpandintocommercialcleaningandsanitation.TheinvestmentcomesviaCarlyleJapanPartnersII,whichreceivedJPY215.6billion($1.9billion)incommitmentsin2006,makingitthelargestJapan-focusedvehicleeverraised,althoughthecorpuswassubsequentlyreducedtoJPY165.6billion.
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Number 42 | Volume 25 | November 06 2012 | avcj.com 11
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asKed wHetHer He is relieVed tHatBainCapitalcloseditsAsiafundaheadofthecompetition,JimHildebrandt,aHongKong-basedmanagingdirectorwiththefirm,hesitatesbeforeoptingforadiplomaticanswer:“Fundraisingisdifficultatpresent–itisareallycompetitivemarket.Thebestfundsaregettingthecapitaltheyneedforfollow-onfunds,butothersarenot.Alotlessmoneyisbeingraisednowthan5-6yearsago,andit’salotmorealignedtotheopportunitiesoutthere.”
BainAsiaFundIIreachedafinalcloseof$2.3billioninJuly,roughlyhalfwaybetweentheinitialtargetandthehardcap,afteraboutoneyearinthemarket.Thevehicleismorethantwicethesizeofitspredecessor,raisedinlate2006.
Ahostofglobalandregionalbuyoutplayersarestillinthemarketlookingtoraisesizeablevehicles,someofwhicharesubstantiallylargerthanthoseraisedinthepreviouscycle.ShouldKKR,TPGCapital,TheCarlyleGroup,AffinityEquityPartners,MBKPartnersandRRJCapitalallmeettheirtargets,nearly$25billionincapitalwouldbeaddedtotheAsiapool.
Pushing the limitItcouldbearguedthatthisiscommensuratewiththesizeoftheAsiaopportunity.X.D.Yang,managingdirectorandco-headofCarlyleAsiaPartners,observesthatprivateequitystillonlyaccountsforasmallportionofChinesecompanies’capitalneedsgiventhecountry’sGDPstandsat$7trillion.Otherindustryparticipantstalkupthepotentialforgreaterdealvolume–andlargerticketsizes–comingoutofSoutheastAsia,JapanandSouthKoreathanhasbeenthecaseinrecentyears.
Nevertheless,thequestionremains:ArethesefirmstryingtoraisetoomuchcapitalforAsia?“Onecouldconfidentlysaythattoomuchmoneyisbeingraised,”saysDougCoulter,headofAsianprivateequityatLGTCapitalPartners.“Ifallthatcapitaldoesgetraised,ontopofallthedrypowderinamarketthatreallyisn’tthatdeep,howdoyoudeployit?Returnswillfallandinvestorswillbedisappointed.”
Asia’smid-marketGPspresentadifferentsetofinvestmentopportunitiesbuttheyalsofaceastarklydifferentfundraisingreality.WhentheglobalbuyoutfirmsraiseAsiavehiclestheyleveragepre-existingrelationshipswithlarge
EuropeanandNorthAmericaninstitutions.Eveniftheyfindfewerdoorsarebeingopenedtothemthesefirmshavetheresourcestogoandknockonhundredsmore.“Theyhave50-stronginvestorrelationsteamsthatdonothingbutraisecapitalonaglobalbasis,”saysMounirGuen,CEOofplacementagentMVision.“Theseteamsworkthemarketincessantly.”
Thisisastrongcompetitiveadvantageatatimewhenthefundraisingenvironmentischallenging.Asia-focusedPEfundshaveattracted$40.7billionincapitalsofarthisyear,
comparedto$66.9billionfor2011asawhole.Interestingly,thenumberoffundsthathavereceivedcommitmentsstandsat181,bysomedistancethelowestnumberseeninsevenyears.Asaresult,averagefundsizehasjumpedto$224.9millionin2012,upfrom$160millionthepreviousyear.ItimpliesthatLPsarefocusingonasmallernumberofmanagers,socompetitionforallocationsisintensifying.
“YoufindpeopletravelingalotmoretotheUSandEuropeandfocusingoninvestorrelationsevenduringtheinvestmentperiodofafund,”saysSebastiaanvandenBerg,HongKong-basedmanagingdirectoratHarbourVestPartners.“GPsneedtofindabalancebetweentimespentonclientservicesandtimespentinvesting.”
ThisisapertinentissueforallGPsthatoperatewithrelativelysmallteams,andfeedsthroughtomorefundamentalquestionsconcerningtheviabilityoftheirbusinessmodels.ItisestimatedthatanAsianmanagerneedstohaveabout$1billionundermanagement–ideallynotspread
overtoomanysimilarfunds–togeneratethefeesrequiredtosupportanIRteamandrelatedresources.IftheGPhasapan-Asiafocusandmaintainsinvestmentteamsinseveralcities,budgetsareevenmorestretched.
Itisthereforeimportantthattimespentonthefundraisingtrailisusedefficiently,targetingLPswhomightfeasiblycommittothekindofvehiclebeingmarketed,butnoteveryonegraspsthis.“AlotofGPsspendmonthsbarkingupthewrongtree,”saysVincentNg,apartneratplacementagentAtlantic-PacificCapital.“They
losemomentumandpeoplestartaskingwhytheyhavebeeninthemarketforsolong.”
LPshaveready-madestrategiesforlessprovenmanagerswhomightstumbleduringtheprocess.Inordertoavoidbeinglockedintoafundthatisseeking$500millionbutisstuckonlessthanhalfthat,anLPmightattachconditionstotheagreement,allowingthecapitalcommitmenttobewithdrawnifafirstcloseisn’tachievedatacertainlevel.
Concessionsaside,though,thereisonekeyareainwhichanAsianGPcanstandoutfromthecrowdintheeyesofinstitutionalinvestors:completesomeexits.
“AlotofcapitalhasbeenputtoworkinAsiabutbeforecommittingmoreinvestorswillwanttoseesomerealcash-on-cashreturns,”saysvandenBerg.“TheonlymarketthathasshownitcandeliverreturnsandliquidityconsistentlyisAustralia.InemergingmarketsGPswanttoholdontoolong.Thereisabeliefthatcompanieswillsimplycontinuetogrowat30-40%perannum.”
A divided marketGlobal and local players are in the market trying to raise new regional and country vehicles. The former can rely on institutional relationships and IR might to get the job done. The latter face a resources squeeze
No. of funds
Asia private equity fundraising
Source: AVCJ Research
80,000
60,000
40,000
20,000
0
500
400
300
200
100
0
US$
mill
ion
Fund
s
Funds raised (US$m)
2005 2006 20082007 2009 2010 2012YTD
2011
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Number 42 | Volume 25 | November 06 2012 | avcj.com 13
tHe great and tHe good of tHeinstitutionalinvestmentworldgatheredinQuebecin2010tolookatwaysinwhichtheycouldcollaborate.Disintermediationwasinevitablyakeytheme:Howcouldtheseinstitutionscutoutthemiddlemeninordertoreducefeeexpenditureandfocusondirectdealstailoredtotheirlong-termhorizonsratherthanaseven-yearfundcycle?
ChinaInvestmentCorporation(CIC),Beijing’s$409billionsovereignwealthfund,wasinattendanceandtheexecutiveslikedwhattheyheard.“CICsubsequentlysetupitsownroundtablewithaviewtounitingLPs–theultimatecapitalproviders,notfund-of-funds–andtalkingaboutnewideasandinvestmentproducts.Therewasaverystrongresponse,”saysoneindustryparticipantwhoattendedthemeetings.“Gradually,moreandmoreLPsarethinkingabouthowtheycanworktogether.”
Infrastructureistheclassicexampleofwherealargeinstitutionalinvestor–perhapsanAsiansovereignfundwitharelativelyyoungalternativesprogram,limitedshort-termliabilitiesandlotsofliquidity–wouldseektocommitcapitalforlongperiods.However,realestate,up-sizeprivateequitydealsandventurecapital,particularlyinthecontextofnewenergy,arealsocitedasareasofinterest.
CICdoubleditsexposureto“long-termholdings,”understoodtoincludeprivateequityanddirectinvestmentsandhedgefunds,in2011to31%asitextendeditsinvestmenthorizonfromfiveto10years.Directtransactionsinthelast12monthsaredominatedbyenergyandinfrastructureplays,suchasFrance’sGDFSuezandThamesWaterUtilitiesandHeathrowAirportHoldings.However,italsoacquireda$2billionintereststakeinAlibabaGroupinsupportofthefirm’srepurchaseofastakeinitselffromYahoo.
Strategic imperativesThischangeinstrategyonthepartofAsiansovereignwealthfundshasbeenlonganticipatedandthemotivationswidelyanalyzed.ButwhatdoesitmeanforGPsthatseetheseinstitutionsaspotentialfundinvestors?TheywillcertainlyhavetoalterthewayinwhichtheyapproachthelikesofCIC,KoreaInvestmentCorporation(KIC),Malaysia’sEmployeesProvidentFund,TemasekHoldingsandGovernmentof
SingaporeInvestmentCorp.(GIC),butitdoesn’tmeantheycan’tdobusinesswiththem.
“Theselargeinstitutionalinvestorsarestartingtodomoreontheirown,inordertoreduceoverallcostsandcapturemorepremium,buttheystillneedgoodpartners.Theycan’tdoeverythingontheirown”saysScotKalb,formerchiefinvestmentofficeratKICwhonowrunshisowninstitutionalinvestmentconsultancy,KLTIAdvisors.“ThewatchwordforGPsispartnership.–It’snotjustaboutreturns,it’saboutworkingtogether.”
CIC’sAlibabadealisinstructiveinthisrespect.Thesovereignfundhadbeeninnegotiationswiththee-commerceplatformformorethana
yearaboutparticipatinginthe$7.6billionYahoobuyback,partlyduetouncertaintyaboutthetimingofthetransaction.Theequityportioncameoutat$3.9billionand,afterCICtookitscut,theremainderwasdividedupbetweenBoyuCapital,CITICCapitalandCDBCapitalaswellasexistinginvestorsSilverLake,DSTandTemasek.
Itwasafairlytypicalclubdealwithnoshortageofinterestfromtheprivateequitycommunity.However,Boyuwasinvolvedfromtheoutset,advisingCICandhelpingfacilitatethetransaction.“BoyuwasinstrumentalinnegotiatingthetermsonbehalfofCIC,”saysonesourcefamiliarwithboththesovereignfundandthisdeal.“Particularlywhennegotiatingwithdomesticguys,CICistoobossyandtalksoftenbreakdown.Sotheyneededanintermediary.”
Putsimply,Boyugotapieceoftheaction
thankstoitsfamiliaritywithCICandbydeliveringavalue-addedservicethatfewinthemarketcouldrealisticallyprovide.ItisastrategythatotherGPswoulddowelltoemulatewithanyofAsia’semergingLPs,butitrequiresanunderstandingofhowtheseinstitutionsoperate.
Motivating factorsTwothirdsofsovereignwealthfundsinexistencetodaygloballyweren’taround10yearsago,sotheiralternativesprogramsarestillimmature.Thedesireforexposuretotheassetclassarisesfromaneedtocounterbalancemuchweightierpublicequitiesholdings.Stockmarketinvestorspayanembeddedpremiumthatreflectstheliquiditysuchassetsoffer;aninstitutionhappytoholdontoassetsfordecadesseenoreasonforpayingthispremiumacrossitsportfolio.
Whilealternativesofferbetterreturns,thesecomewithahigherpricetagintheformofmanagementandperformancefeesandothercosts,whichcanaltertherisk-adjustedreturnprofileoftheinvestment.Kalbpreachesadisciplinedapproach–a750-basispointpremiummighteasilybewhittleddownto250withoutpropercostcontrols–andcarefulmanagerselection.
“Withpublicmarketsyoucandiversifymanagerswithoutmuchportfolioconstructionrisk,butinthealternativesspace,thedisparityinperformancebetweenfirstandfourthquartilemanagersisenormous.Ifyoudiversifytoomuchitcanundermineperformance,”hesays.“Poorprogramconstructionisnoteasilyfixedbecauseofthelengthofcommitments.Ifyouhave300managersandwanttogetitdownto75,itcouldtake10-15years.”
TherealdangeriswhensovereignfundsstipulatethatalternativesmustaccountforacertainportionofoverallassetsandmanagersrespondbyallocatingtoagrowingnumberofGPsasthecapitalattheirdisposalincreases.
DougCoulter,headofAsianprivateequityatLGTCapitalAdvisors,observesthatthebiggestmistakeistryingtobuildaninvestmentplatformtooquickly.“AnewCIOcomesinandsaysweneedtoincreasePEexposureandnextthingyouknowtheyhaveputlotsofmoneyintotheworstvintagefundsinthemarket,”Coultersays.Headdsthatcertaininstitutionshavelearnedfromtherashdirectcommitmentsthatcharacterized
Bagging a sovereignLed by a clutch of sovereign wealth funds, Asia’s emerging LPs are looking to boost their alternatives exposure. Fund managers in search of allocations must find out what makes these institutions tick
“Large institutions are starting to do more on their own in order to reduce costs and capture more premium, but they still need good partners. They can’t do everything on their own” – Scott Kalb
QUARTILIUM Quartilium manages € 1.4 billion of assets invested with 90 leading private equity
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theirearlydaysandhavesincefocusedonexpandingorganicallyandslowly.
Itisworthnotingthatmanagersareunderenormouspressuretoputcapitaltoworkonceaninvestmentplatformissetup.WhenKalbarrivedatKICin2009privateequityactivitywasvirtuallyzeroandhehadtocreateanentirealternativesprogram.Injustunderthreeyears,KICinvestedabout$10billiononacommittedcapitalbasisacrossabroadspectrumofalternatives.
Withthisinmind,hestressestheneedfornascentAsianLPstotargetprivateequityfirmsthatarecapableofscalingupintermsoffundsizeandinfrastructure.Theseinstitutionshavetodeployconsiderableamountsofcapitaleachyearandsoa$50millionallocationtoamid-marketmanagerisn’tgoingtomovetheneedle.Furthermore,ifthatallocationisgoingintoafundwithacorpusof$200million,sizeableco-investmentopportunitiesmightalsobelimited.
Going smallerOtherindustryparticipantshaveadifferenttake.“WeareseeingsomeoftheAsiansovereignfundsmakesmallercommitmentsandbecomemorenimble,”saysSebastiaanvandenBerg,managingdirectoratHabourVestPartnersinHongKong.“Theystartedtheirinvestmentprogramsmakingbigcommitmentstobuyoutfundsandnowtheyarelookingtogolower,usingfund-of-fundsbutalsogoingindirectly.”
ThesourcefamiliarwithCIC’sstrategyconfirmsthatashiftisunderwayfromglobaltoregionaltocountrymanagers,ostensiblytogetclosertoexpertiseinindividualmarkets.Insomecases,asovereignfundwilltakeastakeintheGPinadditiontoanchoringthefund,butthereisnohardandfastrule.“It’snotjustaboutsavingfeesandcarrybutgettingabettervarietyofinvestmentoptionsthataremostcustomizableandsuitthesovereignfund’sneeds,”thesourcesays.“Directinvestmenthasalwaysbeenafocus.”
Inthissense,eventhoughLPsarekeenonpursuingdirectinvestmentopportunities,totalallocationstoGPsareunlikelytodecrease.Rather,theymightberedistributedtofocusondifferentfundsbasedonissuessuchasthesizeandnatureofco-investmentopportunities.
Somesovereignfundsarealreadysetupforthis.Temasek’snorthAsiasubsidiaryPavilionCapitalisknownforbackingsmallerregionalGPs.
Itgoeswithoutsayingthatco-investmentopportunitiesshouldfeatureprominentlyinanypitchamid-marketAsianGPmakestooneoftheregion’ssovereignwealthfunds.Accordingtooneplacementagent,aUSorEuropeanGPisunlikelytogetaface-to-facemeetingwithalargeAsianLPunlesstheirfundis$3.5billionormoreandthereforeclassifiedaslargecapin
globalterms.AnyonebeneaththisthresholdisreferredtogatekeeperswhoadvisetheLPonassetallocationindevelopedmarkets.Asianallocations,however,arehandledinhouse.
Butitisn’tassimpleassettingupasinglemeetingandsharingtheinvestmentpipeline.TheseLPswanttoestablishrealpartnershipswithmanagersandmakingthebreakthroughrequirespersistence.OneGPrecallstheoriginationprocesstaking12-18monthsfromthefirstdiscussiontoclosingthedocument.Duringthisperiod,theGPmetwiththeprospectiveAsianinvestorsixtimesandtheinvestormadetwositevisitstoconductduediligence.
Indeed,itisadvisabletoestablishrelationshipswellbeforetheofficialfundraisingprocessbegins.“Approachingpeoplefroma
fundraisingperspectivealoneisnotasfruitfulasitusedtobe,”saysVincentNg,apartneratplacementagentAtlantic-PacificCapital.“AlotofAsianLPswanttobuildrelationshipsearlyon–notwhenyouneedthemoneybutwhenyoudon’tneedthemoney.”
Tobuildfamiliarity,fundmanagerswilltalkLPsthroughtheirportfolios,explainingthegoodtimesandthebad,andalsoputforwardco-investmentopportunities.Althoughsomeinstitutionssplituptheprimaryandco-investmentfunctions,inmanycasesitisthesamegroupofpeoplerunningthebusinessforaparticulargeography.Thereforetheymightberesponsivetothiskindofvalue-add.
KLTI’sKalbstressesthatco-investmentshouldn’tcomewithafeeattached.HisviewisthatGPsingeneralmustbepreparedtogivemoregroundonupfrontandhiddencosts,includingtheintroductionofhurdlessothatinvestorsaren’tpayingperformancefeesonbeta.
Share the knowledgeWhendealingwithAsianLPsthathavelessexperiencewiththeassetclassorlimitedresources,GPsarealsoexpectedtooffertraining,informationandeventechnology.Ngsaysthatplacementagentsgoinandtrytoactasaconduit,sharingmarketknowledge–eveniftheyareintheprocessofmarketingabuyoutfund,theywillofferviewsontheventurecapitalenvironmentiftheLPexpressesaninterestinthearea.Broadlyspeaking,fundmanagerscandomuchthesame.
“Ifyouhelpthemthinkthroughconceptsandfollowthelearningcurve,theywillseeyouastransparentandasagoodsourceofinformation–andyoufindthatthenexttimetheyareinyourcitytheyasktocomebytheofficeandmeettheteam,”hesays.“AsaGPyouarenotgoingtoidentifyyourmaincompetitorsduringthesemeetings,althoughsomeofthemoreconfidentmanagershavebeenknowntodothis.”
HowfaraGPiswillingtogointhenameofgeneratinggoodwill–andpotentialfundcommitments–fromsovereignwealthfundsandotherlargeinstitutionsisultimatelyafunctionofthefundraisingenvironment.ItreflectsthewiderGP-LPpowerdynamicandthenegotiationsthattakeplaceonfeesandtermsandconditions:amanagerindemandcangivelessaway.
However,Kalbseesitaspartofamuch-neededrealignmentofinterest.“GPshaveforgottenthattheprivateequityindustrywasnotcreatedsothatPEprofessionalscouldbecomerich;itwascreatedtohelpLPsdiversifytheirportfoliosandinvestinilliquidassetclassestogenerategreaterreturnsfortheirconstituents,”hesays.“ThisbusinessisallaboutGPshelpingLPstobebetteratinvesting.”
Asian sovereign funds' asset allocation
Source: AVCJ Research
Absolute returns
Cash & othersNatural resources
Public equities
Real estateFixed income
Private equity & infrastructure
Government of Singapore Investment Corp,
2011-2012
Absolute returnsCash & other
Public equities
PE, direct investment, real estate & infrastructureFixed income
China Investment Corp, 2011
Absolute returnsReal estateCash & other
Public equitiesFixed income & commoditiesPrivate equity
Korea Investment Corp, 2011
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Cooley’s Global Private Investment Funds group is
highly specialized in serving private equity, growth
equity and venture capital clients. We have extensive
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科律的全球私募投资基金业务组致力于为位于
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自1989年起科律就一直参与中国私募投资基
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律师事务所。科律协助成立的专注投资中国的
创投美元基金和成长型美元基金在数量上远超
过任何其他律师事务所。
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“tHere is definitely an extinction eventunderway”confidesoneAsianGP.NotlongagothismanagerhadtocompletelyreconstructhisLPbaseaftertheUSfinancialinstitutionsthathadpreviouslybeensuchenthusiasticinvestorswereunabletore-upforanewvehicle.Privateequityfirmsgloballyarefacinganewfundraisingrealityinthelightofrecentregulatoryreforms.Casualtiesareexpected.
“Aftertheglobalfinancialcrisis,banksstartedlookingatilliquidassetsinadifferentwayandprivateequitybecameabithardertostomach,”hecontinues.“DoddFrankhasbeenthenailinthecoffinintermsofmakingitprohibitivelydifficultforbankstobestrongintheassetsclass.”
TheDodd–FrankWallStreetReformandConsumerProtectionAct,togivethelegislationitsfullname,wassignedintolawin2010andrepresentsthemostsignificantredrawingofUSfinancialregulationsincetheGreatDepression.Thegeneralideaispreventbankingsystemcollapseandakeytenetofthepolicyisrestrictingbalancesheetexposuretoalternativeassets.
Forprivateequity,thekeysectionistheVolckerRule,whichcameintoeffectinJuly.Itprohibitsanybankingentityfromengaginginproprietarytradingoracquiring,orretaining,anykindofownershipinterestinaprivateequityfundorhedgefund.Morespecifically,theruleimposesa3%capontheamountoftier-onecapitalbankscaninvestinsuchvehicles.Theyarealsounabletoaccountformorethan3%ofanysinglefund.
FactorintheincreasedcapitaladequacyrequirementsimposedonlargefinancialinstitutionsundertheBaselIIIstandards,andbanks’alternativesambitionshavebeenmoreorlessneutered.GPsinneedofprimarycapitalfindtheiroptionsarelimited.
Taking the strainAsia-focusedprivateequityfirmsfeeltheimpactindifferentways.Theglobalbuyoutfunds,busyraisingtheirlatestregionalvehicles,havesufficientlylargeinvestorbasesthattheycanmanagethefalloutbytargetingLPclassesmoreaggressively.SomesmallerfundsmightnothaveanyUSfinancialinstitutionsontherosteratall.
Twomid-marketGPsthatreachedfinalcloses
inrecentmonthsdespiteupheavalintheirLPbasesareIndonesia’sSaratogaCapitalandTheLongreachGroup.AUSfinancialinstitutionwasoneofthreeanchorinvestorsinSaratoga’s$150millionsecondfund,whichclosedin2009.WhentheGPreturnedtothemarketlatelastyear,theLPwasunabletoparticipate,citingtheVolckerRule.RidingonawaveofinterestinIndonesianmanagers,Saratogastillaccumulated$600millioninamatterofmonths.
Longreach,reliantonalargernumberofUSfinancialinstitutionsinitspreviousvehicleandseekingtoraisecapitalforthecurrentlyunfashionableJapanesemarket,facedamuchtougherproposition.Thefundraisingperiodlastedtwoyearsandtheinitialtargetof$750millionwasscaledbackto$400million.
AccordingtoPreqin,banksaccountfor6%ofLPsglobally.AmongUSLPsthatproportionislower–1%comparedto2%in2008.Thoughthepercentagechangeissmall,theimpactonAsian
fundsispronouncedaseventhoseinstitutionsabletoretainprivateequityinterestsintheregionhavehadtolimittheirexposure.
TheextenttowhichUSbankshaveshedexistingprivateequityprogramsinrecentyearsisevidencedbytheboomingsecondariesmarket.SpeakingtoAVCJlastmonth,BryonSheets,aUS-basedpartnerwithsecondariesspecialistPaulCapital,saidthatcurrentdealflowis1.5timeswhatthefirmwasworkingoneventwoyearsago.Alittleoverhalfofourdealflowiscomingfrombanksandsignificantlymorethanhalfintermsofdollars.
Toputtheshiftintoperspective,3%ofthecumulativetier-oneassetpoolofthelargestbanksintheUSisestimatedatbetween$2billionand$5billion.
“InlightofthischangeGPshaveturnedtonewsourcesoffundssuchassovereignwealthfunds,insurancecompaniesandprivatebankingclients”saysPhillSmith,apartneratlawfirmMayerBrown.“Furthermore,someGPshaveturnedawayfromcollectiveinvestmentschemescompletelyandnowfocusontailor-mademanagedaccountsforlargeinstitutionalinvestors.”
Rebuilding jobLongreachdidn’thavetodoanythingasextremeasabandoninglimitedpartnershipmodel,buttheLPbaserequiredsignificantrecalibration.Accordingtomarketsources,70%ofthecapitalcommittedtotheGP’s$1billiondebutfund,raisedbetween2004and2006,camefromUS-
basedinvestors.JapaneseLPsaccountedfortherestofthecorpus.
Intherecently-closedsecondfund,theUSportionplungedtoaroundonethird,Japan’ssharestayedmoreorlessthesame,andafinalthirdcamefromAsiaex-Japaninvestors.SovereignwealthfundsfromSouthKorea,SingaporeandMalaysiaarethoughttofeatureprominentlyinthefinalportion.
InAsia,wherebankshavetypicallyformedamuchlargerchunkoftheLPbasebynumberofinstitutions,therehavebeensomesignificantchangesoverthepastfouryears.In2008,20%of
In Volcker’s shadowWith the Volcker Rule and Basel III compliance forcing US financial institutions to pull back from private equity, some Asian GPs are in a state of flux. New fundraising strategies are required
Banks & Investment BanksInsurance CompaniesCorporate InvestorsFund of Funds ManagersGovernment AgenciesAsset ManagersInvestment CompaniesFund ManagersPublic Pension FundsSovereign Wealth FundsPrivate Sector Pension FundsFamily O�ces & Wealth ManagersOthers*
Asia-based LPs
Source: Preqin
Proportion of Asia-based investors- 2012
Proportion of Asia-based investors- 2008
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LPswerebanks;by2012thesharehadfallento15%.Governmentagenciesnowaccountfor10%oftheregion’sLPs,upfrom7%in2008.Pensionfundsareunchangedon4%.ThechangessuggestthatnotonlyUSbanksareseeingtheirprivateequityinvestmentscurtailedbytheVolckerrule.
“TheVolckerRulewillaffectnon-USfinancialInstitutions,”confirmsJayBaris,apartneratMorrisonFoersterinNewYork.“Towhatextentisstillnotclear–theruleshavebeenproposedbutnotyetfinalized,butitcouldaffecttheirabilitytoremaininthebusiness”
TherulestatesthatAsianbanks,oranyforeignbankingorganizationwithUSsubsidiaries,arepreventedfromproprietarytradinginasimilarwaytoUSbanks.TheonlybankinggroupsexemptedarethosethatconducttheirbusinesssolelyoutsidetheUSontheprovisionthatnoownershipinterestinafundisofferedorsoldintheUS.Asaresult,AsianbanksareforcedtochoosebetweenmaintainingaUSpresenceandholdingontoaprivateequityportfoliointheirowncountries.
“YouhavetomakeadecisiononwhetheryouwanttopromotebusinessdevelopmentintheUS,andcooperationbetweenthetwocountries,orfocusonyourdomesticdevelopment–currentlythelegislationisunclear,”saysMounirGuen,CEOofplacementagentMVision.“ItcapturesyouunderitsguidelinesthesamewayasifyouareaUSdomesticentity.Soyouareputinapositionwhereyouhavetodecidewhatismostimportanttoyou.”
Thelegislationhasalreadyattractedcriticisms
fromAsianinstitutionswhobelievetheyhavebeingundulyconstrained.EarlierthisyeartheAssociationofBanksinSingaporesubmittedapositionpapertoUSauthorities,requestinganexemptionfromrule.
A new worldWiththeprospectofasmallerpoolofinternationalbankswillingorabletocommittoprivateequity,bothGPslargeandsmallmustadapttoanewclimate.Someanticipateatrendtowardsinvestmentsinlarger,moreestablishedGPs.Wherethelargerbankswereoncemorewillingtotakeariskinbackingsmallerprivateequityfirms,itisdoubtfulwhethermorerisk-averseLPs–governmentagenciesorfund-of-funds,forexample–wouldbewillingtoinvestinamanagerwithoutasolidtrackrecord.
Itissuggestedthatyounger,moreindependentfirmsmightdifferentiatethemselvesbyfocusingonmorecontrarian
markets.InthiswaytheymightbeabletoofferLPsakindofexposuretheycan’tgetelsewhereandatthesametimeavoidlike-for-likecomparisonstomoreexperiencedcounterparts.
“Smartmanagerswillalwayscomeupwithwaysandnewstrategiestoattractinvestors,”saysLornaChen,aHongKong-basedpartnerwithShearman&Sterling.“Iwouldn’tthinkthatsmallGPswillbecomeextinctbecauseoftheVolckerRuleandcomplianceburdens.”
However,itremainstobeseenwherethesemanagersarepreparedtodrawtheline.Accordingtoanecdotalevidence,anumberofsmallerGPshaveagreedtogiveupstakesinthemselvesinreturnforasovereignwealthfundsprovidingseedcapitaltovehiclesthatotherwisemightnotberaised.
“Ithinkasaresultofregulation,smallerfirmswillbemoredesperateandwillingtodothingstheymaynotwanttodo,suchassellequityinthemselves,”saysoneAsia-focusedGP.
US representation in different global LP categories
2008 2012
Fund-of-funds 22% 7%
Publicpensionfunds 17% 12%
Foundations 16% 25%
Endowments 12% 18%
Privatesectorpensionfunds 11% 12%
Fundmanagers 4% 7%
Insurancecompanies 4% 6%
Assetmanagers 3% 3%
Familyoffices&wealthmanagers
3% 9%
Investmentcompanies 2% 2%
CorporateInvestors 2% 2%
Banks&investmentbanks 2% 1%
Others 2% 1%
Source:Preqin
sec registration: the compliance burden “OurByrestrictingtheextenttowhichbankscaninvestinprivateequity,theVolckerRule
hasnarrowedtheinvestoruniverseforprivateequityfirms.Butfundraisingisn’ttheonlyfacetofPEtargetedbytheDodd-FrankAct,ofwhichtheVolckerRuleispart.GPs,includingcertainAsia-basedmanagers,arenowobligedtoregisterwiththeUSSecuritiesandExchangeCommission(SEC).canrestrictthewaytheyapproachtheirpotentialinvestors.
“Itisagamechanger,”explainsJayBaris,aNewYork-basedpartnerwithMorrisonFoerster,“Dodd-Frankhasremovedsomeoftheexemptionsfromtheregistrationrequirementthatmanyadvisors,includingadviserstoVCandPEfunds,reliedon.TheeffectswillbefeltoverseasbecausethereachofUSlawislongandwide,whileGPsmaynotrealizetheyaresubjecttotheseregistrationrequirements.”
Forthelastsixmonths,allGPswithUSinvestorshavebeenrequiredtofilewiththeSECaseitherregisteredinvestmentadvisors(RIA)orexemptreportingadvisors(ERA).
ForthosethatfileasRIAs–i.e.thosethathaveUSinvestorsintheirfunds–theprovisionsrequire,amongotherthings,adoptingandimplementingwrittenpoliciesandprocedures,designatingachiefcomplianceofficer,maintainingbooksandrecordsandimplementingacodeofethics.Theymustalsodiscloseconflictsofinterestandotherinformationandensurethatadvertisingandperformancereportingcomplieswithregulatoryrules.
“Itisdefinitelyabigcomplianceburden,especiallyformid-tolarge-sizeGPs,butfromafundraisingperspectiveitisnotnecessarilybad,”saysLornaChen,apartneratShearman&Sterling.“ItmeanstheycantellinvestorsduringtheduediligenceprocessthattheyareincompliancewithSECrulesbybeingfullyregistered.Inthiskindofenvironmenttheyarefindingitisagoodthingtobelinkedtoaregulator.”
However,GPsshouldalsoconsiderthatanyinformationtheydisclosetotheSECaspartoftheregistrationapplication–andthereisstillsomeuncertaintyamongindustryparticipantsastoexactlyhowmuchdetailmustbeincluded–willbepostedontheSECwebsite.
“Ingeneraltheyarelivingwithmorescrutiny,soIthinkGPsthatareRIAsarebeingmuchmorecautiousabouthowtheypresenttheirtrackrecord.”saysIanO’DonnelloflawfirmCooley.“TheyarespendingmoretimereviewingallLPcommunicationsthantheyusedto.GPsarefeelingmorelimitedinwhattheycansay,whichcanimpacthowmuchpunchthemarketingmessagehave.Thatprobablyputsmoreimportanceonface-to-facemeetings.”
Sale of Unisteel Technology Limited
by KKRto SFS Group
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Number 42 | Volume 25 | November 06 2012 | avcj.com 21
Sale of Unisteel Technology Limited
by KKRto SFS Group
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Sale of the Burger King New Zealand franchise by
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With one of the highest transaction success rates in the region, we take great pride in our ability to connect corporates, entrepreneurs, and investors to the vast opportunities emerging in Asia.
Having advised on more than US$2 billion worth of M&A transactions in the past twelve months, Rippledot Capital has established itself as oneof the top boutique advisory firms in theAsia Pacific region.
Q: L Capital Europe was created in 2001. What was behind the decision to come to Asia?
A:Priorto2000,LVMHwaspresentinAsiabutitwasprimarilyfocusedonJapan,Korea,TaiwanandafewothercitieslikeHongKongandSingapore.Itwasonlyfrom2000thatthegroupreallyfocusedonemergingAsiaanditisnowthelargestregionintheworld,accountingforthan40%oftotalrevenuethisyear.By2010,withourbrandsontopinalmosteverysectorwedealin,itwastheperfecttimetostartthekindofplatformwehave.LCapitalAsiadiffersfrommostprivateequityfirmsinthatwearefocusedoncertainsectorsinwhichwehaveadeepknowledge.Webringaverygranularvalue-addtoportfoliocompanies,drawingonourownexpertiseandrelyingonLVMH’sresourcesforadditionalhelp.
Q: What is the nature of the relationship between L Capital Asia and LVMH?
A:Weareasubsidiaryofthelistedcompanybutweworkatarm’slengthfromit,operatingasanindependentplatform.LVMHisfocusedonluxurywhileLCapitalAsiaisfocusedonthelayersbelowthat–theaspirational,affordableandalternativesegments.WhileLVMHlooksatlargeglobalassets,welookatregionalnationalcompaniesandsmallerticketsizes.LCapitalAsiahasalotofknowledgeandLVMHisinterestedinthat–ourportfoliocompaniesareintiertwo,tierthreeandtierfourcities;LVMHisn’ttheretodaybutitmaybetheretomorrow.Havingsaidthat,wearesensitivetoourportfoliocompanies’confidentialityissues
andwenevershareinformationwithLVMHbeyondwhatissharedwithotherLPs.LVMHcontributedlessthan10%ofourfundandasasponsortheydoreceiveashareofthecarriedinterest.
Q: What is the makeup of your overall LP base?
A:WehaveadiversifiedportfolioofLPs–largeinvestmentbanks,pensionfunds,privatebanks,familyofficesandvariousplayersthatareinsimilarbusinessestousinAsiaPacific.Wetellthem,“DomesticconsumptionandtheemergenceofAsia’smiddleclassisarenaissance-likerevolution.”Itisoneofthebiggestenginesforglobalgrowthandweofferaccesstothebestcompaniescateringtothatmarket.
Q: L Capital Asia’s $650 million debut fund was raised in 2010. How much is deployed and are you thinking about a successor vehicle?
A:About70%ofthefundwillmostlikelybecommittedbytheendoftheyear.HalfhasbeendeployedinChina,20%inIndiaandtherestinSoutheastAsia.Weplantostartlookingatasuccessorvehicleearlynextyear.
Q: You have invested in 11 companies in the region. Have these been predominantly minority deals?
A:Wetypicallylookforminoritystakesbecausewebelievetheentrepreneurshouldremaininthedrivingseat.InChinaalotofcompanyownersarefirstgeneration–theyarehungrytogrow,don’twanttogiveupcontrol,butarewillingtogiveaminoritystaketoapartnerlikeus.Havingsaidthat,weare
notopposedtotakingmajorityinterests.
Q: The portfolio includes two Indian fashion companies, Genesis Luxury and Fabindia. What are you doing with them?
A:Genesissellsown-brandproductsandalsorepresentsforeignbrands.Wearehelpingthemtoexpandtheportfoliowithbetterqualitybrands–forexample,werecentlyacquiredtheexclusiveIndiarightsforArmani.Wearealsotakingthemintonewsegments,havingobtaineddistributionlicensesfor16-17beautybrands.Thenthereisrecruitment,helpingthecompanynegotiatebetterrentalandmediacontracts,improving
supplychainsandinventorymanagement,andcontributingtoown-branddesigns.Fabindiasourcesethnicproductswithcontemporarydesignsfrom50,000artisansacrossIndiaandsellsthemtourbancustomers.Wearehelpingwithstoreandproductdesignbutalsolookingatinternationalexpansion.
Q: How big can these companies become?
A:InfiveyearsGenesisshouldbemorethanfourtimesitscurrentsizeandwewanttotakethecompanypublic.LCapitalAsiaonlyinvestedjustoverayearagobutwehavealreadybeenapproachedbytwoofthelargestlistedcompaniesinIndiaaboutsellingtheasset.
Q: What is your approach for portfolio companies in more developed markets, such as Emperor Watch & Jewelry?
A:WhenweinvesteditwasprimarilyaHongKongcompanybutwearetryingtogetthementrenchedinChinaandSoutheastAsia.Wehaveturneditintoamorerobustcompanyoverall.Ifyoulookatthe1881storeinHongKongitisnumberoneintheworldforsalesofRolexandPatekPhilippe.Similarly,wehavehelpedthemtosourcediamondsdirectlyfromdiamondpolishersinIndia,whichmeansbetterpricesandproductselection.TheyusedtogoviaabrokerinHongKongwhowasbuyingfromAntwerp.Wearealsohelpingthemcreateajade-inspiredjewelrycollection.Chinesewomentendtofavorjadeabovediamondsbutwehaveyettoseeareallycontemporary,beautifully-designedrangeofjadejewelry.
RAvi THAKRAN | industry Q&a [email protected]
The aspiration angleL Capital Asia, a private equity firm sponsored by LVMH, the world’s largest luxury goods company, was set up in 2008 and closed its first fund in 2010. Managing Partner Ravi Thakran tells AVCJ what makes the firm different
“We invested in Genesis just over a year ago but we have already been approached by two listed companies about selling the asset”
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daVid rubenstein selling lemonade,BillConwayworkingincallcenterandDanielD’Anielloservingupdonuts:thesewerethe“what-might-have-been”snapshotsofferedbyTheCarlyleGroup’sfoundersintheir2011Christmasvideo.Itwasentertaining–privateequityjargonreeledofftothebemusementofthemanorwomaninthestreet–butithadasecondarypurpose:remindingviewersthattheseindustrytitansareordinaryguystryingtobuildextraordinarybusinesses.
KKRhasalsoengagedinvisualstorytelling,albeitlessseasonalandmoreserious.Itswebsitefeaturesathree-minutevideoproducedbythePrivateEquityGrowthCapitalCouncilearlierthisyearinwhichKKRprofessionalsdemonstrate“value-addinaction”atportfoliocompanyRockwoodHoldings.Theprofessionalsconducton-siteanalysisattheUS-basedchemicalcompanyandthescreenultimatelycutstoRockwood’sCEO,whosays,“Theprivateequitypartnerhasbeengreatforus.”
BothKKRandCarlylearenowlistedcompaniessotheymustdevotemoretimeandresourcestoprofilemanagement.Yetinthelast12monthstheyandotherprivateequityfirmshavecomeunderevencloserpublicscrutiny.AssoonasMittRomneylaunchedhisbidfortheRepublicanpresidentialnominationpoliticalrivalsbegandevisingwaystomilktheindustry’sintermittentfailuresandcutthroatreputationforallitwasworth.
TheimageofPEinEuropeislittlebetter,withpoliticiansinGermanyandtheUKlongstandingcriticsoftheperceiveddamagecreatedbyleveragebuyouts.AlmosthalfofLPsinterviewedforthelatesteditionofCollerCapital’sglobalprivateequitybarometerconsiderthegeneralreputationofPEasbad;onlyonein10saidtheassetclassisseenasagoodthing–droppingtoonein20amongEuropeaninvestors.
“Privateequityiscertainlyanicetargetforcriticismandindustryparticipantshaven’tseenbrandbuildingasparticularlyimportantwhileit’sactuallyverynecessary,”MarkusAbleitinger,managingdirectorofAsiainvestmentmanagementatCapitalDynamics,tellsAVCJ.“Wearecertainlyawareofwhetherornotaprivateequityhousehasapositivebrandimagebecausetheseareusuallysuccessfulfirmsthataren’tshyabouthavingtheirnamesmentionedinpublic.”
WhileitisclearthatprivateequityneedstoimproveitspublicprofileintheWest,theassetclassisconsiderablylessdemonizedinAsia,wheretransactionshavetraditionallyfocusedongrowthcapitalratherthanleveragedbuyouts.Andtheninsomelessdevelopedcountries,privateequityissimplyunknown.
“ThebiggestchallengeconcerningPE’spublicimageisthelackofawarenessoftheassetclassitself.Assuch,manypotentialportfoliocompaniesdon’teventhinkaboutitasavehicleforcapital,”saysStevenOkun,directorofpublicaffairsofKKRAsiaPacific.“Thisprovidesanopportunityforustocreateafullpicture–notsomethingyoucanfindintheUSwhereeveryonealreadyhasanimageofprivateequityinonewayoranother.”
Going mainstreamAlthoughAsiaisstillarelativelyyoungplayeringlobalprivateequity,itisedgingnearertothemainstream,atwhichpointAsiangovernmentsandtop-tierdomesticfinancialinstitutionswillpaymoreattentiontoit.Abroaderpublicprofiledrivenbymediacoverageandincreasedregulationwillinevitablyfollow.
Certaingovernmentagenciesintheregionarealreadytryingtopromotetheassetclass,thesophisticationoftheireffortsdependentonrespectiveknowledgeandexperience.China’sNationalSocialSecurityFundannouncedinSeptemberthatithadcommittedRMB22.6billion($3.6billion)to16venturecapitalandprivate
equityfundstoenhanceinvestmentreturns;aSenateenquiryinAustraliaalsoconcludedthatprivateequityisgoodfortheeconomy;KoreaandSingapore–bothaggressivetechnologicalinnovators–areencouraginginvestmentintostart-upsthroughventurecapitalfunds.
“ThespeedatwhichPEhasgonefromobscuritytohouseholdnameinChinasurprisedeveryone,”saysYichenZhang,CEOofCITICCapital.“TheassetclassisprobablybetterknowninChinathanintheUS.Andit’sgenerallyapositiveview:ifyouaskthetopcollegegraduateswhattheywanttobe,it’sstillinvestmentbankingandprivateequity.AlotoftheprivateequityexecutivesinChinahavealmostrock-starstatus.”
FollowingtheleadoftheirWesterncounterparts,largefinancialinstitutionsinAsiaaretransformingintomulti-strategyassetmanagersinordertoappealtoabroaderbaseofinvestors.ChinaLife,forexample,haswonapprovaltolaunchasubsidiarytoinvestinprivateequity,whiledomesticbrokeragesChinaInternationalCapitalCorporationandCITICSecuritiesappeartobemovingintonewassetclassesasfastastheregulationswillallow.
InIndia,privateequitysubsidiarieshavebeenestablishedbylocalfinancialservicesgiantssuchasInfrastructureLeasing&FinancialServices(IL&FS),InfrastructureDevelopmentFinanceCompany(IDFC)andICICIBank.Feedingintothegeneralinvestmententhusiasm,mostofthecountry’sbusinessnewspapersnowhaveaspecificprivateequitybeatintendedtoinform
A good citizenPrivate equity globally is under more scrutiny from more directions than ever before, placing a higher value on good branding and reputation. Does the asset class also suffer from the same profile problem in Asia?
LPs on private equity’s public reputation
Source: Coller Capital Global Private Equity Barometer, Summer 2012
Good 10%Bad 45%Neutral 45%
Proportion of investors that belive the LP community should speak out in defence of PE
Source: Coller Capital Global Private Equity Barometer, Summer 2012
No34%
Yes66%
Why are state-owned enterprises (SOEs) looking to invest overseas, when the Chinese market and consumer base is still growing?
Most sectors in China are faced with lack of effective demand and serious overcapacity problems, so SOEs have intrinsic motivation for global expansion and invest-ment. Chinese government policy tries to guide appropriate SOEs into becoming leading global enterprises through overseas mergers and acquisitions.
How can private equity firms assist SOEs in their quest to expand overseas?
Screening targets and joining investment negotiations; helping SOEs create international and professional teams internally; identifying external intermediary agencies for transaction purposes; assisting with communications – on a political and policy level as well as a social and cultural level – in the target country; contributing to the planning and implementation of post-investment management strategies.
Outbound Private Equity Investment by State-Owned Enterprises in China
Which sectors and geographies do you think are most likely to be targeted by SOEs when investing overseas, and why?
Firstly, natural resources. The first choices for mergers and acquisitions are regions that are rich in oil, coal, iron and other mineral resources, notably Africa, Australia and Canada. These non-renewable resources are important strategic materials for China’s further economic development, but the country itself is unable to supply them domestically.
Secondly, telecom assets in Asia and Africa. On one hand, China’s telecom operators have tremendous financial strength; on the other hand, the corresponding countries need to improve their telecom infrastructure but financial or technological limitations preclude them from using independent contractors or operators.
Thirdly, commercial banks, investment banks and financial services institutions in the US, Europe and other developed countries. China’s state-owned financial institutions want to accumulate experience in operating and managing financial assets via mergers and acquisitions, as well as expanding their businesses globally.
Fourthly, transportation infrastructure in Africa, Asia and South America, including railways, highways, airports and seaports. China has huge excess capacity in these areas and requires a global market to help digest it.
Finally, commercial real estate, including the hotel and services industries in the US and Europe, because Chinese players want to learn how to meet the evolving needs of domestic customers.
Do you see this trend accelerating or decelerating over the next 3-5 years?
This trend will accelerate in the next 3–5 years. China’s SOEs have sufficient liquidity and the inherent impulse to invest.
What has the overall performance been so far for outbound private equity investment from China?
We are still at a very early stage, and there is a lack of understanding of market conditions as well as the impact of the global economic downturn. Another reason is time concerns. Private equity investment is illiquid and long-term, so investors must wait to see the full effects.
Alex Chen is Managing Partner of Silver Star Global Capital, a financial advisory company which focuses on private equity, investment management, and financing services for emerging enterprises in Greater China. Mr. Chen was previously Partner of Greenbridge Capital, also a financial advisory company focused on China. From 2004 to 2005,
he worked for Zero2ipo as Managing Director. He helped to found the China Venture Capital Association in 2003 and acted as the Deputy Secretary-in-Chief of the organization until 2004. From 1997 to 2003, he founded two famous business magazines in China: CEO&CIO and Digital Fortune. During his financial advisor career, Mr. Chen has helped about 50 companies in China raise money from PE/VC firms, for a total of about US$ 1 billion. Mr. Chen is an expert on the PE/VC industry in China and has vast relationships in this industry. He graduated from Peking University with Bachelors and Masters degrees.
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andeducatethepublicabouttheassetclass.“Fiveyearsago,therewasverylittlemedia
coverageconcerningprivateequityandpeopledidnotfullycomprehendtheindustryorrecognizeanyoneworkinginit,”ArchanaHingorani,CEOofIL&FSInvestmentManagers,says.“Buttoday,instarkcontrast,PE-relatednewsandtransactionsdominatetheheadlines.”
Theemergenceofprivateequityinthepublicdomaindemandsaresponsefromindustryparticipants.Ignoretheissueandthevoidinthenewsflowwillsoonbefilledbyuninformed,perhapsovertlynegative,coverage;beproactiveandthereistheopportunitytoinfluencethepublicview.Itisespeciallyimportantwhenapproachingpotentialinvesteecompanies–whosemanagementmaynotbetoofamiliarwiththeassetclass–inmarketswheretherearecompetingsourcesofcapital.
ThisexplainswhythelikesofKKRandCarlyleareemployingmorepublicrelationsexecutivesinlocalmarkets.EvensomelocalGPsthathaveyettospendlargeamountsonmediacampaignsarebeginningtotakeactiverolesinthemediaandatindustryevents.
“Aswearebetterknown,wearemoremindful
ofourpublicprofilethanbefore,”JohnZhao,CEOofHonyCapital,tellsAVCJ.“Butwehavealwaysbeenverycareful.Evenwhenwewerenobody,wewereseriousaboutbuildingandprotectingourreputation,especiallyinemergingmarketslikeChina.”
Adding valueApositivebrand,however,doesn’tcomesimplyoutofwords.Aprivateequityplayercanonlypublicizeitssuccessifitisgenuinelybringingvaluetoinvestorsandportfoliocompanies.Inthiscontext,first-handaccountsfromentrepreneurswhohavereceivedprivateequityfundingandexpertise,andbenefitedfromtheexperience,areworththeirweightingold.Wordspreadsthroughouttheirbusinessnetworksandsuddenlyotherentrepreneursaremorewillingtolistentoproposals.
Inordertodrawmoreattentiontoitsvalue-addstrategy,KKRteamedupwiththeEmergingMarketsPrivateEquityAssociation(EMPEA)toproducein-deptharticlesontheroleofprivateequityintwoofitsportfoliocompanies.First,JiuqingDeng,chairmanofModernDairy,emphasizesKKRasatruepartnerthat“works
alongsideusateverystageofModernDairy’sdevelopment.”ThenYuchengLin,CEOofUEL,explainshowhewasableto“leverageKKR’sglobalresources,extensiveoperationalandfinancialexpertiseandtakeadvantageoftheirChinateam’slocalexperienceandtrackrecordofsuccess.”
“Togetthemessageouteffectively,itisbetternottotalkaboutyourself,buttohaveothersprovidingtestimonials.Thisgeneratesgreatercredibilityfortheworkyouhavedonetogether,”saysKKR’sOkun.
TheAustralianPrivateEquityandVentureCapitalAssociationtakesasimilarapproachinitsmediaoutreachefforts.RoundtablediscussionsarearrangedfeaturingaprivateequityexecutiveandtheCEOofaportfoliocompany.TheCEOtakesthelead,explainingwhyhechosethisparticularPEpartnerandwhathasbeengainedfromtheexperience.
International angleForforeignprivateequityfirmsoperatinginAsia,perhapsthemostsignificantelementofvalue-addisaccesstotheirglobalnetworks.Inpracticalterms,thismightinvolveidentifyingnewcustomersandsuppliers,makingintroductionstopotentialdevelopmentpartners,orbringinginexecutiveswhohavefacedandovercomesimilarbusinesschallengesinothermarkets.
“WhenprivateequityplayerstalkaboutbrandinginAsia,theyincreasinglyunderstandthatcompaniesintheregiondon’tlackmoneybutareclamoringforaccesstointernationalmarketsandindustryknow-how,”saysRichardBarton,aspecialistinstrategiccommunications.“Foranyinternationalfirmwishingtobeacredibleplayerintheregion,thesearethethingstheyneedtodemonstrate.”
Apartfrompromotingindividualsuccessinsupportingportfoliocompaniesasameansofgeneratingnewinvestmentopportunities,industryparticipantswouldliketoseecollaborativeeffortsaimedatshoringupthegeneralreputationoftheassetclass.ThereisasensethatprivateequityinAsiaisworkingtoadeadline–actnowandconsolidatetheindustry’sstandingandthiscouldpreemptanynegativepublicitythatmightotherwisehavepoliticiansclamoringfortighterregulation.
“Asregulatoryauthoritiesgloballyhavebeenmoreattentivetopotentialrisksattachedtoallfinancialproducts–plusthefactthattheydon’treallyunderstandprivateequity–communicationisimportant,”DavidPierce,CEOofSquadronCapital,tellsAVCJ.“ThisisespeciallytruewhenprivateequityinAsiahasmainlybeenaboutgrowingsmallandmedium-sizedenterprises,whichisexactlywhatpolicymakersarelookingfor.”
Here to stay: building stable gp platforms“IattendedaconferencerecentlyatwhichpeopleaskedtheLPstherewhattheyworryabout
themost.TheanswerisclearlywhentheirGPsmakethefrontpage–unexpectedlyandnotforgoodreasons,”saysVincentHuang,apartneratglobalfund-of-fundsmanagerPantheon.“Iamsuretherearefundmanagersthatareincreasinglyawareofthisbutpublicimagetraditionallyhasn’tbeenatoppriorityofmostGPs.”
Sincetheglobalfinancialcrisis,privateequityhasbeenforcedintoamorecloselyregulatedandscrutinizedspace.LPsarecertainlybecomingmoreselectiveintheirinvestmentsandthereislesstoleranceforeverythingfrombadreturnstobadimage.TherushtoinvestinChinaandIndiafundshasbeenreplacedbycaution.Thereisnomoreeasymoneyforfirst-timefunds.Alignmentofinterest,sustainablebusinessmodelsandstableteamsarehighpriorities.
SomeGPsarecertainlyawareofthat.HonyCapital’sCEOJohnZhao,forexample,tellsAVCJthat,fromtheoutset,hewasfocusedon“buildinganinstitutionthatwouldlastforever.”
SimonPillar,co-founderofPacificEquityPartners(PEP),addsthathiscompanyhasalsobeenconsciousoftheneedtobuildingalong-lastingfranchiseratherthanaGPthatdisbandsafterjustoneortwofunds.“Thefirm’snamedoesnotreflectthefoundersandwealwayssetouttoestablishabrandthatdoesn’trelyonanyoneorsmallgroupofindividuals,”Pillarexplains.“Wehaveovertheyearsinstitutionalizedwhatwedo.Wehopethismeanswehavelearntfrommistakesandimprovedthewaywedobusiness.”
GPsthatexudestabilityandlongevityareasourceofcomfortforLPs.However,MarkusAbleitinger,headofinvestmentmanagementforAsiaatCapitalDynamics,arguesthatastrongbranddoesn’tnecessarilymeanaprivateequityfirmwillstayinbusinessfor20years.Ultimately,GPsarejudgedontheirtrackrecords.
“ThereisasayingatSequoiaCapital:‘You’reonlyasgoodasyournextinvestment,’”Ableitingersays.“Astoughasitmaysound,abusinessmodelisonlyasgoodasthelastdeal.Whenyouscrewup2-3dealsyouareindanger,regardlessofthestatusofyourbrandorthepublicorindustryawarenessofyourcompany.”
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AUSTRALIA
Katherine Woodthorpe, CEO, Australian Private Equity & Venture Capital AssociationtHree to four times a year, a groupofjournalistsfromanAustraliannewspapersitsdownwithaprivateequityexecutiveandtheCEOofoneofhisportfoliocompanies.ThePEexecutivedoesverylittleofthetalking,leavingittotheCEOtoexplainwhyhebroughtinprivateequityandwhatit’slikeworkingforthem.
ThisisoneoftheAustralianPrivateEquity&VentureCapitalAssociation’s(AVCAL)roundtablesintendedtoimprovemediarelationswiththeindustry.“ItisveryfrankandbecausetheCEOisatthecoalface,ratherthanamanagerbehindthescenes,theygetagoodresponsefromthemedia,”saysKatherineWoodthorpe,CEOofAVCAL.
ThepublicfaceofprivateequityinAustraliahasbeentarnishedinrecentyears.AlthoughtheCooperReviewplacedthefeespaidtoPEmanagersunderthespotlight–promptingaminorityofinvestorstoreconsidertheirallocationstotheassetclass–thefalloutfromsomeoftheleveragedbuyoutsthattookplacepriortotheglobalfinancialcrisishasbeenmuchmoredamagingfortheindustry’sprofile.
Inthelastfewweeks,embattledmediagiantNineEntertainmentunderwentadebtrestructuringthatsawCVCCapitalPartnerslosealloftheA$1.8billioninequityitpumpedintothecompanythroughseveralhighlyleveragedtransactionsbetween2006and2008.Detailsoftheprotractednegotiationswereleakedtothepress,fuelingapublicperceptionofprivateequitythatdoesn’treflectthereality.
“Theythinkeverythingishighlyleveragedbuyouts–peopledon’tunderstandtheshadesofgraythattheindustrycomesin,”Woodthorpesays.“Oneoftheproblemsisthatthesedealsinvolvedbrandname,butthevastmajorityoftransactionsaresmallercompaniesthatnoonehasheardofbecausetheymakeshippingcontainersorconstructionsitetoilets.”
Ifaprivateequity-backedcompanygoesintoreceivershipitreceivesfarmorecoveragethansituationsinwhichthereisnoPEinvolvement.Atthesametime,storiesaboutinvestmentsgeneratinga6xreturnforLPsandhelpingmovebusinessesforwardgetlittletraction.
Whilenotingthisdisparity–whichisnotuniquetoAustraliaamongdevelopedmarkets–Woodthorpebelievesprivateequity’spublicprofileisfarbetterthanitwasfiveyearsago,partlybecausethereisageneralrecognitionamongGPsthattheworldhaschangedandtheymustbecomemoreengaged.
AVCALalsorunseventsdesignedtofacilitateabetterunderstandingofprivateequityingovernmentandcorporatecircles.ArecentseminarsawcorporateexecutivesandPEprofessionalsparticipateinpaneldiscussions,attractingaround40attendeesfromthebusinessworld.
“Thereisaperceptionamongcorporatesthatprivateequityinvestorsarehostilebidderswhocomeandkickthetires,”saysWoodthorpe.“Itremainsachallenge.”
CHINA
James Wang, partner, Han Kun Law Offices, BeijingpriVate equity is a broad term - itmightbeusedtorefertoleveragedbuyouts,pre-IPOfinancing,growthequity,venturecapital,orperhapsalloftheabove.WhileinmorematuremarketssuchastheUSandEurope,theleveragedbuyoutisadominantforce,withtransactionsizesthatdwarfthelikesofventure
capital,Chinaisstillverymuchasmall-capplay.Therearenoneofthenegativeconnotationstiedtoleveragedbuyoutsbecausesuchdealsdon’texist.Assuch,privateequity’spublicimagediffersfromelsewhere.
IntheWest,themediaisalltoowillingtobrandprivateequityinvestorsaslocustswhoacquireundervaluedcompanies,sackworkersandstripoutandselloffassetstopaydownthedebt.ThegeneralpublicinChinaislargelyoblivioustothiskindofcritique.Atthesametime,though,noconsistentviewsareexpressed–bythepublicorinthemedia–towardstheassetclass.Mostpeopledon’tunderstanditasafunctionofassetallocation.
Thisisanimportantpointbecause,regardlessofthefactthattheydon’tfullyunderstandPE,peopleareinvestinginit.Amongthosewhoparticipate,thereisageneralpreferencetobetonlyareaswithwhichtheyarefamiliar.Anentrepreneurwhohasmadehisfortuneinthetechnologysector,forexample,ismorelikelytoinvestinfundstargetingthatsector–orevensetuphisownfundtargetingthatspace.
Thechannelsthroughwhichindividualsparticipateinsuchvehiclesareasinformalastheirgraspoftheassetclassmightsuggest.Agroupoflike-mindedentrepreneursmightbeentrustcapitaltoanacquaintancewithsomeVCexperience.TheGPandLProles,soclearlydefinedinWesternprivateequity,areblurred;littleifanythingissetoutincontractform.
Insomeextremecases,these“investorclubs”reachasignificantscale,atwhichpointoperationsdobecomemoreprofessional.YunfengCapital,whichwassetupbyDavidYuandJackMa,foundersofFocusMediaandAlibabaGroup,respectively,hasapartnerrosterthatreadslikeawho’swhoofCEOswhohave
Australia
China
Around the region: Private equity’s public facePrivate equity is more entrenched and better understood in some Asian markets than others. What do the various stakeholders - entrepreneurs, government, media, public - make of the asset class?
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takenChinesetechcompaniespublicintheUS.Thecollectiveexperience,resources,expertiseandconnectionsoftheseindividualsmakesforapowerfuldeal-sourcingtool.
Highnetworthindividualswhodon’tbelongtotheseclubsaretypicallyapproachedbyplacementagentsregardingPEcommitments.Shanghai-basedwealthmanagementfirmNoahisacaseinpoint.Ithasestablishedawidenetworkofwealthyclientsandsucceededinraisingcapitalforanumberoffunds.
However,thefundraisingenvironmentisalotmorechallengingthisyearcomparedtothepasttwoyears.ThisispartlyattributabletothesharpdropinpublicmarketvaluationsinChina,whichmakesitmoredifficultforprivateequityandventurecapitalfirmstoexittheirinvestmentsatshortorderandforhighmultiples.
Formanyhighnetworthindividualsthatcommittedcapitalinmorebullishtimes,theassetclasshassuddenlybecomemuchlessattractive.Theyloseinterestanddefaultoncapitalcalls.Inthiscontext,it’sfairtosaythepublicfaceofprivateequityinChinaisn’tasrosyasitoncewas.
INDIA
Vikram Utamsingh, head of transactions and restructuring for KPMG Indiaa positiVe deVelopment in india’sprivateequityenvironmentsincetheglobalfinancialcrisishasbeenabetterunderstandingandastrongerappreciationfortheassetclass.Businessownershavebeguntoseeprivateequitynotonlyasjustanothersourceofcapitalbutmoreasapartnerforgrowth.
TheweakprimarymarketcoupledwithhighinterestratesoverthepastthreeyearshasmeantthatIndianfirmshavehadtolookatalternatesourcesofcapitalfortheirexpansionplans.Asaresult,notonlyhavebetterdealsflowedtoPEinvestors,butalsoentrepreneurshavebecomemoreappreciativeofthevaluethataprivateequityfirmbringsalongwithitsinvestment.
Ourresearchindicatesthatmorethan12companiesthatraisedmoneyfromprivateequitybetweenNovember2010andApril2012initiallygotregulatoryapprovalforIPOsbutsubsequentlychangedtheirplans.Forexample,anATMoutsourcingandsystemintegrationcompanyraised$33millionfromTPGCapitalinJune2011.Anenergycompanyreceivedabout$45millionfromaninternationalinfrastructurefund,havingrecognizedthatthispartnerhasastronglocalknowledgeoftheindustryaswellasaglobalnetworkofcontactsandexperience.
LargeIndianbusinessgroupsthatpreviouslywouldnothavepartneredwithprivateequityfirmsarenowapproachinginvestorstosupportexpansionintheoverseasmarkets.TheTataGroupandMahindra&MahindragrouphaveeachpartneredwithPEfirmsonspecificopportunities.
KPMGresearchbasedoninterviewswithbusinessownershasshownthatPEinvestorsarealsoplayingamoreactiveroleintheirportfoliocompaniesdespitebeingminorityshareholders.Theycanattractmanagementtalent,helpdevelopnewbusinessmodels,improvecorporategovernanceandidentifynewpartnersandcustomers.Inaddition,PEfirmsareincreasinglyhiringspecialiststoaddvaluetothesecompanies.
Asforthegeneralpublic’sviewofprivateequity,itisquitedifferent.ThisisbecausetheIndianmediaonlyfocusondealsandthechallengestheindustryfacesintermsofexitsandreturns.Also,theregulatorscontinuetohaveadifficulttimedistinguishingthisassetclassfromfinancialinstitutionalinvestorswhotargetshort-termpublicmarketdeals.TherecentlyissuedAlternativeInvestmentFund(AIF)regulationsimposeunnecessaryrestrictionsonfundraisingandfundmanagement.
TheIndustryisrespondingandhasformedworkinggroupsundertheIndianVentureCapitalAssociationandtheConfederationofIndian
Industrytointeractwithdifferentregulators.Thisapproachseemstobeworking.However,thegeneralpublicperceptionisamuchmoredifficultchallengetoovercome.
JAPAN
Joji Takeuchi, CEO and co-founder, Brightrust PE JapanVenture funds? “good guys.” Hedgefunds?“Greedyandscary”Buyoutfunds?“Whatdotheydo?Aretheyvulturefunds?ThisiswhatIthinkthe“uninformed”publicwouldsayifaskedabout“funds.”But,formostpeople,itishardtodistinguishbetweensomanydifferenttypesoffundsandunderstandexactlywhattheydo.
Broadlyspeaking,Ibelievethepublicimage
ofprivateequityhasimprovedsignificantlyinthelast10years.TheShinseiBankbailoutin1999-2000paintedanegativepictureoftheassetclassduetothespecificcircumstancesofthedeal.Inmid-2000s,MurakamiFund,anaggressiveactivisthedgefund,challengedpublictolerancelevelsof“greed-drivencapitalism.”
Inbetweenthem,alotofcorporaterestructuringandturnaroundswereexecutedbylocalprivateequityfunds.ManyinvolvedwellknowndomesticcompaniessuchasKaneboandDaiei.Asaresult,thepublicimageofprivateequityimprovedanditestablisheditselfintheJapaneseeconomyandsociety.Nonetheless,“fund”stillhasnegativeconnotationswhenusedinconjunctionwithcorporateacquisitions…
Small- and medium-sized enterprises (SMEs):SMEsaccountformorethan75%ofJapanesebuyouts,butanumberofthesecompaniesstilldeclinetomeetwithprivateequityfirms,possiblyduetothevultureimage.GettingaccesstothesedealsiscriticalforGPs.Whileforeigninvestorsinevitablyfindittough,captivefundscanleveragetheirtiestowell-knowninstitutions.
Large companies: MostlargelistedfirmsarehappytobuyportfoliocompaniesfromJapaneseandnon-Japaneseprivateequityplayers.Manywillalsosellsubsidiariestothesesameplayers.ProblemsonlyarisewhenPEinvestorstrytoacquirethesefirmsintheirentiretyormake“difficult”requests,suchmanagementchanges.
Investors:Inthepast10years,IhavenotmetasingleprofessionalintheprivateequitydepartmentofaJapaneseinstitutionwhosaid,“IdonotlikePE.”Manyhavebecomefansoftheassetclassbutregulatorydevelopmentsinrecentyears–notablyBaselIIIsolvencyrequirements–meanthisenthusiasmcannolongerbereplicatedattheinstitutionallevel.
Government: Themostearnestsupporterofprivateequity–onadomesticlevel–istheMinistryofEconomy,Trade&Industry(METI).ItwantstoseetheindustrydevelopandhassupportednumerousinitiativestopromoteforeigninvestmentsintoJapanesePEfunds.Theseincludethe2009taxreformthatsubstantiallyeliminatedtaxliabilityforforeigninvestorsinJapaneselimitedpartnerships.
Politicians:Theperceptionofprivateequityamongpoliticiansvariesdependingontheindividual’sknowledge.Itwouldbefairtosaythe
Japan
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Affinity Equity Partners is an independently owned
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May 1999
Mando ClimateControl Corp
Lead Investor
First leveraged buyoutin Korea by financial
sponsors
October 1999
Mando Corporation
Co-Investor
Leveraged buyout ofKorea’s dominant
auto parts company
December 1999
NS Electronics Bangkok Ltd
Sole Investor
Largest financial restructuringand recapitalisation buyout inThailand by a financial sponsor
February 2000
Himart Co Ltd
Lead Investor
Leveraged buyout ofKorea’s largest consumer
electronics retailer
April 2005
Loscam Limited
Sole Investor
Leveraged buyout of aleading returnable packaging
hire company in Australia
August 2005
The FaceShop Korea
Sole Investor
Leveraged buyout of aleading cosmetics company
in Korea
October 2005
Joint Lead Investor
November 2007
Leveraged buyout of a leadingindependent semi-conductor
test and assembly service providerlisted on the Singapore Exchange
United Test andAssembly Center Ltd
Joint Lead Investor
July 2009
Leveraged buyout of thesecond largest brewery
in South Korea
Oriental Brewery Co Ltd
Sole Investor
September 2011
Investment in the leadingfresh food provider in Korea
Pulmuone Foods Co, Ltd
Lead Investor
May 2011
Leveraged buyout ofNew Zealand's largest
poultry producer
Tegel Foods Ltd
October 2011
Leveraged buyout of Australia'slargest meat processor
Primo GroupHoldings Pty Ltd
Lead Investor
October 2009
Buyout of the leadingmanufacturer of energy-savingelectrical equipment in China
Beijing Leader & HarvestElectric Technologies
Lead Investor
September 2012
Investment in the third largestlife insurer in Korea
Kyobo Life Insurance
Lead Investor
September 2012
Investment in the leadingconsumer automotive services
group in Indonesia
Lead Investor
PT MitraPinasthika Mustika
online
Korea Digital Satellite Broadcasting
Number 42 | Volume 25 | November 06 2012 | avcj.com 29
pe & [email protected]
depthofunderstandingisquitemodest.Media: Themainstreammedia’sstanceon
privateequityalsovaries.Thelesstransparentthefund,themoresusceptibleitistocriticism.ThereisalsotheexpectationthatprivatefundsshouldplayamajorroleinenergizingJapaneseeconomy.
SOUTH KOREA
Sunny Yi & Wonpyo Choi, partners, Bain & Company’s Seoul officewHile tHe memory of priVate equity’stumultuousearlyyearsstilllingersinKorea,publicsentimentseemstohaveturnedacorner.ForeignPEinvestorsenteredthecountryduringthetoughdaysoftheAsianfinancialcrisisandfunds’healthyreturnsweremetwithstrongresentmentbyanationstrugglingwithmassiveunemployment.
Somedeals,likeNewbridgeCapital’sacquisitionandturnaroundofKoreaFirstBank,wereviewedmoreforthedramaticreturnsreapedbyforeigninvestorsthanforthesignificantimprovementsmadetothebusiness.Others,likeLoneStar’spurchaseofKoreaExchangeBank,endedinscandalandfueledacontinuingcontroversyaboutthewisdomofforeignersbuyingassetsinfinancialservicesandothersensitiveindustries.
Whileadegreeofsensitivityremains,itissoftening.AndtherearesignsthatKoreansasthegovernmentoffersmorevocalsupportandasmorecompanies,investorsandindividualsfeelitspositiveeffects.It’sonlybeeneightyearssincethegovernmentallowedlocalPEfundstooperate.
AmongKorea’sbusinessleaders,thosewhohaveusedprivateequityasavehicleforgrowthorcapabilitybuildingtendtobemorepositivethanthosewhohavenot.DoosanwiselyreliedonPEtocarveoutitsnon-corebusinessesandde-leverageitscapitalstructure.FilaboughtAcushnet,aleadinggolfbrand,withthehelpofPEinvestors.Manyownersofmid-capcompaniesarenowusingPEastoolsforgrowthcapitalortocash-out.Someareworkingwithglobalorregionalfundstoexpandoverseas.
Actionsspeaklouderthanwords,soeachsuccessfulPEdealinKoreaservestoquiettheskepticismthatonceragedsostrongly.
Privateequitystillhasitsshareofdetractors.Forexample,conflictsfrequentlyarisewhenPEfundstakeboardseatsandexercisetheirrights–angeringownerswhoareaccustomedtomakingalltheimportantdecisionsthemselves.Thereisalsoresistancewhenfundsstructuredealstogainfavorabledownsideprotection.And
becausemanyPEplayerslackyearsofexperienceworkingwithmajorfirms,theyalsolacktheinsightsandknowledgethathelpsimprovecompanies.
However,suchchallengesarenowbeingbalanced–andoutweighed–byvisibleevidencethatPEhasmuchtocontributetoKorea’seconomy.Thegovernmentandregulatorsarepositivetowardstheassetclassprovided
dealsdon’tinvolveover-leveraging,massiverestructuringorleakageofcoretechnology.
Thedaysofbottom-feedingaregivingwaytotangibleportfoliovaluecreation.PEfundsarebecomingmoreactivelyinvolvedinmanagementandoperations,upgradingportfoliocompanies’managementinfrastructuretomakethemmorescalable,findingnewcustomers,suppliersandpartners.Thesearenotonlyrequirementsforprivateequitytoflourish,butalsothebestwaytoimprovetheindustry’soncenotoriousimage.
SOUTHEAST ASIA
Dean Collins, partner, O’Melveny & Myers, Singaporegauging perceptions of priVateequityamongstthepublicandvariousstakeholdersinSoutheastAsiaischallengingforanumberofreasons,mostobviouslybecauseitsconstituentcountriesdonotthinkasone.Cultural,social,lingualandeconomicdisparitiesconfoundgeneralizations.
AtoneendofthescalesitsSingapore:modern,transparent,user-friendlyregulationandmakingaconcertedefforttoattractmoreforeignprivateequityfirms.Publicviewsontheassetclassaregenerallypositivebecausethegovernmentispushingalltherightbuttons.
Myanmarisattheotherendofscale.“Somegovernmentshaven’taddressedtheirmindstoprivateequityyet,”saysDeanCollins,aSingapore-basedpartnerwithO’Melveny&Myers.“Myanmarhasjustpassednewrulesonforeigninvestment.It’snotaboutPE;it’saboutrecognizingthisisapoorcountrythatneedsforeigncapital.TheyarenotdiscriminatingbetweenPEandcorporations.”
Lookingattheregionasawhole,economies
arenotaspenetratedbyPEaselsewhereinAsia.“Foryears,therewereonlyfourlocalGPsin
Indonesia–plusafewinternationalguysabovethemlookingfordeals–andnowthereare5-6,”saysCollins.“InThailandthereareonlytwoestablishedprivateequityfirms,andalthoughVietnamsawasharpincreaseinGPsafewyearsago,mosthavesincefadedtothemargins.”
Giventhegrowth-orientednatureofmanytransactions,togetherwiththestrongconsumersectorfocusincountriessuchasIndonesia,whereverthepublicandbusinesscommunitiesactuallyhavereasonablyinformedviewsonprivateequity,theytendtobepositive.
CollinscitesIndonesianmovietheaterchainBlitzMegaplexasanexample.Theentrepreneurwhostartedthebusinesswouldn’thavebeenabletodosowithoutsupportfromlocalGPQuvatManagement.Fromapureconsumerpointofview,beforeBlitzcamealong,Indonesiaonlyhadonemovietheaterchain,sothereisasensethatPEhasmadeapositivecontribution.
“Whatyoudon’thaveyetinSoutheastAsiaarethemillionairesyoufindinChinawhogotrichthankstoprivateequity-backedIPOs,”Collinsadds.“Peopleareinfluencedbytheirfriendsandcontacts–ifonepersonreceivedPEcapitalthentheotherswantinvestmentaswell–buttherearen’talotofstoriesaboutthisguyorthatguygettinghismoneyfromCDHInvestments.”
Thereare,however,acoupleofprivateequityprofessionalswhoenjoyareasonablyhighpublicprofile.GitaWirjawan,founderofAncoraCapital,isnowIndonesia’strademinister,whileSandiagaUno,co-founderofSaratogaCapital,isaregularcontributortolocalmedia.
Lastmonth,UnousedhiscolumninTheJakartaPosttocriticizemediacoverageoftensionsbetweenIndonesianfamilyconglomerateBakrieGroupandUKfinancierNathanielRothschild,whotogethercontrolBumi,
anIndonesiancoalproducer.Thepublicresponsewas,tosaytheleast,mixed.
ItservesasareminderthatSoutheastAsiaischaracterizedbyanassetownershipmodelunderwhichalotofpowerliesinthehandsofafewfamilies.Privateequityfirmsneedtodobusinesswiththesefamiliesandsothepublicperceptionofonewillinevitablyruboffonthepublicperceptionoftheother.
South Korea
Southeast Asia
ABU DHABI | BEIJING | BRUSSELS | DÜSSELDORF | FRANKFURT | HONG KONG | LONDON | MILAN | MUNICH | NEW YORKPALO ALTO | PARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC
shearman.com
Shearman & Sterling has an established presence with a 139-year legacy. It is one of the world’s leading international law firms known for its expertise in virtually every area of law relating to commercial and financial activity, from advice on investment funds, capital markets, corporate/mergers and acquisitions, project development and finance transactions through to representation in international arbitration and litigation.
With a long-standing commitment to Asia for more than 30 years, we offer a sophisticated approach to deliver innovative and integrated strategic, tactical and technical advice to our clients. Our core practice areas include:
INNOVATION...SOPHISTICATION...INTEGRATION...
▪ Acquisition Finance▪ Asset Management▪ Banking & Finance▪ Capital Markets▪ Direct Investment
▪ Fund Formation▪ Intellectual Property▪ Litigation▪ Mergers & Acquisitions▪ Private Equity
▪ Privatizations▪ Project Development
& Finance▪ Regulatory & Compliance
Number 42 | Volume 25 | November 06 2012 | avcj.com 31
ABU DHABI | BEIJING | BRUSSELS | DÜSSELDORF | FRANKFURT | HONG KONG | LONDON | MILAN | MUNICH | NEW YORKPALO ALTO | PARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC
shearman.com
Shearman & Sterling has an established presence with a 139-year legacy. It is one of the world’s leading international law firms known for its expertise in virtually every area of law relating to commercial and financial activity, from advice on investment funds, capital markets, corporate/mergers and acquisitions, project development and finance transactions through to representation in international arbitration and litigation.
With a long-standing commitment to Asia for more than 30 years, we offer a sophisticated approach to deliver innovative and integrated strategic, tactical and technical advice to our clients. Our core practice areas include:
INNOVATION...SOPHISTICATION...INTEGRATION...
▪ Acquisition Finance▪ Asset Management▪ Banking & Finance▪ Capital Markets▪ Direct Investment
▪ Fund Formation▪ Intellectual Property▪ Litigation▪ Mergers & Acquisitions▪ Private Equity
▪ Privatizations▪ Project Development
& Finance▪ Regulatory & Compliance
Q: How conscious are you of the Unitas Capital brand?
A:Wecontinuallytrytobuildupourreputationandthestrengthofourbrandthroughtheinvestmentswemakeandtheclarityofourstrategy,aswellasthewayweinteractwithmanagementpartnersandLPs.Ifwearecreateadistinctvaluepropositionthatattractspotentialportfoliocompanies,resultingingooddealsandgoodreturns,thevaluepropositionwillbecleartoLPs.Sowhatwesaytothetwogroupsisverysimilar.
Q: In terms of what LPs require of Unitas, how important are environment, health and safety (EHS) issues?
A:Universally,increasedattentionisbeingpaidtocomplianceandpeopleareparticularlysensitiveaboutemergingmarketsbecausetheseissuesgetplentyofcoverage.TakeforexampletheissuessurroundingChinesecompanieslistedintheUS.Weareverycarefulandhavestrictcomplianceproceduresinplaceatallourcompanies.Wehaven’tseenahugechangeintermsofLPsaskingforlotsofdocumentationbutIwouldn’tbesurprisedifthattrenddeveloped.
Q: To what extent is EHS a priority when exiting investments to multinationals?
A:StrategicinvestorshavemadeChinaatoppriorityandtheyarelookingforacquisitionsformarketentryorexpansion.However,theydogetnervousaboutsystemsandcompliance,andtheriskofendingupinaverymessysituation.Onethingwecandoisensuretheportfoliocompanyisveryclean.
WhenUnitasandAffinityEquityPartnerssoldBeijingLeader&HarvestElectricTechnologiestoSchneiderlastyear,anumberofstrategicinvestorswereinterested.Onereasonitappealedtothemwasthecompanyhadgoodsystemsandaleadershipteamthatcouldinteractwithmultinationals.Affinityandourselvesdidalotofwork,introducingnewseniormanagementandestablishingbetterfinancialsystemsandcontrols.
Q: What kind of post-close conditions do strategic investors seek to impose?
A:Itvaries.ThereareEuropean-styletransactionswherethereisnorecourseforthebuyerandit’ssimilartobuyingapubliccompany.Ontheotherhand,youhaveUS-styleacquisitionswheretherearemorecovenantsandundertakingsonthepartofthesellerandmorerecourseforthebuyer.Dependingoncompetitivedynamicsinthedealandotherfactors,aprivateequitysellermightacceptsomerecoursebutitwouldtypicallybeverylimited.Andinnoeventwouldthebuyerbeabletorecovermorethanthesellers’proceeds.TherehavebeensituationsintheUS,forexample,whereahugeenvironmentalliabilityemergedandthebuyerhasgoneafterthesellerformorethantheypaid.
Q: What about the brand and reputation in a fundraising context? Your current vehicle closed in 2008, so presumably you are thinking about returning to the market…
A:Wehaven’tfinalizedtimingforournextfund.Westillhave
capitalleftinourcurrentfundandourfocusisoninvestment,but,yes,wewillenterthemarketinthenottoodistantfuture.Wefeelourparticularniche–beingaleadingAsianfranchiseintheindustrialandconsumer-
retailspaces,combininglocalAsianknowledgewithglobalbusinessanddealexperience–isrecognizedbyexistingandprospectiveLPs.WehavealongtrackrecordinAsiaandapowerfulvaluecreationmodelthatisuniqueinthemiddlemarket.SeveralofouroperatorsareformerCEOswhohaverunbusinessesanddonedeals,andoneachinvestmenttheyshareresponsibilitywithso-calleddealpartners.Theyalsosharecarriedinterestacrossthefund.
Q: You have made two
investments this year – Korean
outdoor clothing maker NEPA and Chinese restaurant chain Babela’s. What are your operating partners doing with these companies?
A:WithNEPA,thefocusinparticularishelpingthemexpandoverseas.Koreaisthesecond-largestoutdoorapparelmarketintheworldandthecompanyhasdevelopedlineswithgreatdesignandperformancecharacteristics.Wethinkitsproductswillhaveappealinforeignmarkets,startingwithChina.EugeneSuh,wholeadsourconsumerandretailbusiness,andJayLee,whowasformerlyCEOofBuyTheWayandbeforethatwasatYumBrandsandPepsiCo,areinchargeofthatinvestment.WithBabela’s,thereisagoodbrandandplatformbutawholerangeofoperationalimprovementsarerequired,rangingfromprocurementtorestaurantdesigntowhat’sonthemenu.GeneandJayarealsoworkingonthatalongsideJimTsao,whoalsocomesfromanoperatingbackgroundandleadsouroveralleffortsinChina.
Q: Where do you see the most investment potential right now?
A:PublicmarketvaluationshavecomedowninChinabutyoustilldon’tseealotofentrepreneurswillingtosellcontrollingstakestoPEinvestors.However,weareseeingmoredealflowinemergingprivately-ownedconsumerandretailbusinessesandcross-borderindustrial.WeownfourcompaniesthatwereoriginallybasedoutsideofAsiabuthaveabigpresenceintheregion.OurfocusisonglobalizingthemandhelpingthemexpandinAsia.
JOHN LEWiS | industry Q&a [email protected]
Reputation mattersJohn Lewis, chief investment officer at Unitas Capital, talks to AVCJ about the importance of reputation in Asia from fundraising through post-deal value-add to exiting portfolio companies to multinational buyers
“We have a powerful value creation model that is unique in the middle market in Asia”
www.aims-international.netwww.aims-china.com
With leadership in the private equity sector moving from country specific to global markets, we encourage private equity companies to look for talent beyond borders. AIMS has been at the forefront of conducting global,
multi-country and local searches. Our experience across all five continents has allowed us to build an extensive network with a diversified talent pool which extends beyond borders and cultures. Our 400 consultants and over
100 offices in 80 countries enable us to search locally and truly globally.
We believe in being creative in our search, by giving priority to understanding our client’s brand, target group, company culture, company structure, lifestyle and philosophy. We use non-traditional channels to look exclusively
for those outstanding professionals who can combine a unique mix of financial knowledge, business leadership and managerial skills and have the vision to be attracted by great growth opportunities and new challenges.
AIMS industry teams and specialists’ combined knowledge and experience allows us to understand the dynamics and trends of each industry’s job market. We provide our clients with savvy insight and advise during and after their talent
search processes. Our track record is cemented by the strong relationships we have built over the years with our clients.
Identify the Right Talent
Motivate and Develop Talent
Build Strong Relationships
Cop
yrig
ht ©
AIM
S In
tern
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nal 2
012,
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ight
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Argentina • Australia • Austria • Albania • Armenia • Azerbaijan • Belgium • Brazil • Bulgaria • Bosnia & Herzeg. • Chile • China • Colombia • Croatia • Czech Republic
EMEA | AMERICA | ASIADenmark • Egypt • Estonia • Finland • France • Germany • Greece • Georgia • Hungary • India • Israel • Italy • Indonesia • Japan • Kazakhstan • Latvia • Lithuania
Luxembourg • Macedonia • Mexico • Morocco • Norway • Malaysia • Moldova • Montenegro • Philippines • Poland • Portugal • Romania • Russia • Singapore • SlovakiaSouth Africa • South Korea • Spain • Sweden • Switzerland • Serbia • Slovenia • Netherlands • Turkey • Thailand • UAE • UK • Ukraine • Uzbekistan • USA • Venezuela
Talent Acquisition and Development Worldwide
ASIA PACIFIC LOCATIONHong Kong | Shanghai | Beijing | New Delhi | Mumbai | Bangalore | Chennai | Singapore | Sydney | Seoul | Kuala Lumpur | Manila | Vietnam
For further information, please contact us at [email protected]
Number 42 | Volume 25 | November 06 2012 | avcj.com 33
www.aims-international.netwww.aims-china.com
With leadership in the private equity sector moving from country specific to global markets, we encourage private equity companies to look for talent beyond borders. AIMS has been at the forefront of conducting global,
multi-country and local searches. Our experience across all five continents has allowed us to build an extensive network with a diversified talent pool which extends beyond borders and cultures. Our 400 consultants and over
100 offices in 80 countries enable us to search locally and truly globally.
We believe in being creative in our search, by giving priority to understanding our client’s brand, target group, company culture, company structure, lifestyle and philosophy. We use non-traditional channels to look exclusively
for those outstanding professionals who can combine a unique mix of financial knowledge, business leadership and managerial skills and have the vision to be attracted by great growth opportunities and new challenges.
AIMS industry teams and specialists’ combined knowledge and experience allows us to understand the dynamics and trends of each industry’s job market. We provide our clients with savvy insight and advise during and after their talent
search processes. Our track record is cemented by the strong relationships we have built over the years with our clients.
Identify the Right Talent
Motivate and Develop Talent
Build Strong Relationships
Cop
yrig
ht ©
AIM
S In
tern
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nal 2
012,
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Argentina • Australia • Austria • Albania • Armenia • Azerbaijan • Belgium • Brazil • Bulgaria • Bosnia & Herzeg. • Chile • China • Colombia • Croatia • Czech Republic
EMEA | AMERICA | ASIADenmark • Egypt • Estonia • Finland • France • Germany • Greece • Georgia • Hungary • India • Israel • Italy • Indonesia • Japan • Kazakhstan • Latvia • Lithuania
Luxembourg • Macedonia • Mexico • Morocco • Norway • Malaysia • Moldova • Montenegro • Philippines • Poland • Portugal • Romania • Russia • Singapore • SlovakiaSouth Africa • South Korea • Spain • Sweden • Switzerland • Serbia • Slovenia • Netherlands • Turkey • Thailand • UAE • UK • Ukraine • Uzbekistan • USA • Venezuela
Talent Acquisition and Development Worldwide
ASIA PACIFIC LOCATIONHong Kong | Shanghai | Beijing | New Delhi | Mumbai | Bangalore | Chennai | Singapore | Sydney | Seoul | Kuala Lumpur | Manila | Vietnam
For further information, please contact us at [email protected]
pe & [email protected]
tHe planned $8.9 billion expansionofapetrochemicalplantintheeasternChinesecityofNingboprovokedawaveofprotestsbyresidentslastmonth.Theywereconcernedaboutplanstoproducetheindustrialchemicalparaxyleneatthefacility,whichcouldcauseuntolddamagetothelocalenvironmentandhealth.Afterthreedaysofdemonstrations,thelocalgovernmentannouncedthattheprojectwouldnotgoahead.
ThisscenariohasbeenrepeatedtimeandagaininChinainrecentyears.Itissymptomaticofagrowingawarenessofenvironmentandsustainabilityissuesglobally,andisreflectedbytheincreasingnumberofprivateequityfirmsputtingenvironmentalandsocialgovernance(ESG)higheruptheagenda.ArecentPricewaterhouseCooperssurveyintotheresponsibleinvestmentpracticesof17PEhousesfoundthat94%offirmsbelievethatESGactivitiescancreatevalueattheirportfoliocompanies.
“Peoplenowadaysaremoreawareofbriberyandcorruptionissues,governanceproblemsincompanies,workerparticipationandexploitationissues,andenvironmentalissuessuchasreductionincarbonfootprintandfueleconomies,”saysClaireWilkinson,generalcounselatplacementagentMVisionandchairoftheEuropeanVentureCapitalAssociation’sResponsibleInvestmentWorkingGroup.
Compliance isn’t enoughForthosefirmsinvestinginChina,complianceisakeyissue.Whilemanylocalcompaniesmayhaveundergoneenvironmentalimpactassessments(EIAs)–todeterminetheimpactaproposedprojectmayhaveontheenvironment–andobtainedthenecessarypermits,onnumerousoccasionspermitrequirementshavenotbeenimplemented,meaninginvestorsfindthemselvesliabletopaylargesumstobringprojectsuptothemark.
AccordingtoJamesM.Pearson,CEOofPacificRiskAdvisors,whichconductsenvironmentalandsocial(E&S)duediligenceonbehalfofinvestors,firmsthatareonlyinterestedinbeingcompliant–asopposedtowantingtobackfirmswithsuperiorESGrecords–aresettingtheirstandardstoolow.
“Ifyou’renotincompliance,you’rebreakingthelaw,sothosepeoplewhoarereallyhappy
becausethey’recompliantareatthebottomofthebottom,”hetellsAVCJ.“Theyshouldbesayingthey’rebetterthancompliance,whichwouldmeantheyareabletoidentifyalotofoperationalimprovementsstaringthemintheface.I’venevergonetoafactorythat’sbeen100%incomplianceanyway–I’vealwaysfoundsomethingregulatory-wise,whetherit’stheenvironmentorhealthandsafety.”
LaborissuesarealsoacauseforconcernamongGPs.Thebiggestissue–inChina,inparticular–isthatoftenpotentialtargetshavenotpaidforsocialinsurancefortheirworkers,despitethisbeingrequiredbylaw.Afirminvestingintosuchacompanyneedstobeawareofthis,toensureback-payisprovidedandthatallfutureemployeeshaveappropriatehealthcareandaccidentcoverage.Insomecases,alackofinsurancemightbecauseenoughtowalkawayfromadeal.
“Ifyou’vegot100workersandforthelast10yearsthey’vebeenexposedtosometoxicchemical,theymaybecomingbackillandyou’reliabletobesued,”pointsoutPacificRisk’sPearson.
ComplianceandlaborissuesarenothingnewamongAsiancompanies,though.What’schangingistherecognitionfrominvestorsoftheimportanceoftheseissues,andriskmanagementisaprimemotivator.ChinaInvestmentCorp-backedChina-ASEANInvestmentCooperationFund(CAF),whichinvestsininfrastructure,energyandnaturalresourcesinSoutheastAsiaandChina,viewsE&Sduediligenceasjust
anothermethodforanalyzingthecapacityofaninvesteecompany’smanagement.
“IfapotentialinvesteecompanydoesnothaveasoundgraspofESGmanagementorthewillingnesstoimprove,thiscanbeasymptomofgreaterissuesathand,”explainsDeanRobinson,anassociateatCAF.“Byhelpinganinvestee
companyimproveitsESGperformance,thisinturncanhelpminimizerisksandimprovevalue.”
It’salsonotmerelythereputationoftheindividualcompanythatisatstake,either,butthebrandofthefundasawhole.NoGPwantstohaveanentityintheirportfoliothatconstitutesanenvironmentalreputationalrisk.Thisdoesn’tmeanthataninvestmentwon’ttakeplaceifanegativeESGfactorishighlightedinpre-dealscreening.Itsimplymeanstheinvestmentmanagerwilltakeonthatprojectwell-informedoftherisksandawareofthevaluethatcanbeaddedbyinstitutingnewproceduresormitigatingdownsides.
LP preferenceLPexpectationsconstituteanothersignificantdriverforPEfirmstofocusonESG.AccordingtoCollerCapital’slatestglobalprivateequitybarometer,themajorityofEuropean(70%)andAsia-Pacific(59%)LPsmonitor–orexpecttostartmonitoring–GPs’ESGpolicies,andmostindustryparticipantsbelievethiswillgrowincomingyears.SomeinvestorsstillpaylittleattentiontoESGissues,however,withColler’ssurvey
Sustainable alphaIncreasing numbers of PE firms are upping their commitment to environmental and social governance issues at future and existing portfolio companies. What’s their motive?
Do you have a policy on ESG issues and/or responsible investment?
Source: Pricewaterhouse Coopers survey, March 2012
50% of PE houses surveyed lack a policy on ESG issues
NoYes
Do you have systems in place to measure value created from ESG initiatives?
Source: Pricewaterhouse Coopers survey, March 2012
Only 40% of PE house have systems in place to measure
value created from initiatives
NoYes
Number 42 | Volume 25 | November 06 2012 | avcj.com 35
notingthatonlyaquarterofNorthAmericanLPsmonitorESGstrategies.
“ThereareexceptionsofcoursewithsomenotableUSpublicpensionplansbeingveryactiveinthis,”saysMVision’sWilkinson.“Ithinkthisissocietal.TheendinvestorsareexpectinggoodreturnsfromtheirfiduciariesandmaybeinNorthAmerica,consumershaven’tyetmovedtowardsdemandingthatthosereturnsarealsobasedonsustainableinvestmentcriteria.”
Othermotivationsforarobustapproachto
ESGincludethepotentialcost-savingsforthePEfirm.KKRandDoughtyHansonareamongahandfulofinvestorsthathaveattemptedtoquantifythefinancialimpactoftheirenvironmentalactivitiesinmonetaryterms.KKR,forexample,claimsthatthankstobeingpartofitsGreenPortfolioProgram,investeecompanyOrientalBreweryhassaved$5.3millionandavoidedgenerating40,000metrictonsofgreenhousegas(GHG)emissions.Collectively,the23portfoliocompaniesthathavetakenpart
intheschemehaveachievedmorethan$365millioninfinancialimpactandavoided810,000metrictonsofGHGemissions,2.2milliontonsofwaste,and300millionlitersofwater.
“Cost-savingsarewhatmakestheprogramsustainableoveralongperiodoftime.Ifit’sdonetherightway,thisprogramshouldgoonforever,”saysSteveOkun,directorofAsia-Pacificpublicaffairs.“Ifitmakesbusinesssensetodosomething–andyoucanhaveanenvironmentalimpact–whywouldn’tyoudoit?”
Exit gainsArelatedadvantageisthebenefittheGPseesonexit.Thenotionof“sustainablealpha”–creatingadifferenceinvalueattheexitpointthroughfocusingonsustainabilityrisk–isonethatisgainingtraction.NotonlyitisadvisabletohavereputableE&Sproceduresincasethecompanydecidesthepursuealisting–theHongKongStockExchangehasjustintroducednewESGreportingrequirementsandotherexchangeshavetheirownstipulations–butfirmsgoingdownthesecondaryortradesalerouteshouldalsobeconsideringtheimpactESGcanhave.
“YoucanharponabouthowcomplianceisexpensiveandtakestimebutthesmartGPsgetit,”saysVikramRaju,seniorglobalfundsspecialistfortheInternationalFinanceCorporation(IFC).“Ifyouhavetwoequalcompanies–onewithESGstandardsandtheotherwithout–thecompanywithESGstandardscancommandabettermultiple.Ifyoudon’thavethis,itdefinitelydentsyourvaluations.”
ThepotentialmagnitudeofE&Sdisastersandpressurefrominvestors,particularlyIFCandAsianDevelopmentBank,meanit’saforegoneconclusionthatthePEindustry’sresponsetoESGwillevolverapidly.Whatformthisevolutionwill–andshould–takeisamatterfordebate.
“Attheoperationallevel,PEinvestorleadersinESGintegrationlikeRobecoPrivateEquitywillhelppushtheindustrytomovepastatendencytofocusononeortwoESGissues(suchascorruptionorwater)andtakeamoreholistic,engagingapproachwiththeGP,”saysDavidDoré,researchmanageratASrIA,anorganizationthatpromotessustainablefinanceandresponsibleinvestmentinAsia.“WewouldexpectanevengreaterawarenessthatESGintegration,suchasfocusingonemployeesatisfactiontherebyloweringsickleavesandincreasingproductivity,isnotinconflictwithvaluecreationandoperationalefficiency.”
AsdemandsfromsocietyandLPsrise,thosefirmsthatdevelopin-housecapabilitiestotackleESGmaybeinamuchstrongerpositionthanthosethatdonot.Themoreforward-lookingfirmswillseethisasanopportunityratherthanachallenge.
pe & [email protected]
global pe firms’ esg policies for asia cVc capital partners“OurESGpolicyinAsiaisconsistentwithourglobalpolicy.Asaresponsibleinvestor,CVCiscommittedtotheeffectivemanagementofESGissues,whichitbelievesshouldbeanintegralpartoftheoverallinvestmentprocess.Alldealteamsarethereforerequiredtoconsiderthesustainabilityimplications(bothrisksandopportunities)ofacquiringatarget,andtoformallydocumenttheirevaluationintheteams’investmentpapers.Inordertoassisttheteam,acomprehensiveonline‘SustainabilityToolkit’covering11industrysectorsisavailabletoprovideguidanceandhelpteamsidentifyrelevantESGissuesoneachdeal.”
tpg capital“TPG’scommitmenttosustainabilityinAsiasupportsthefirm’slong-standingconsiderationofenvironmental,healthandsafetypracticesinduediligence,investmentdecisionsandoperations.Ourfocusonsustainabilityenablesustomakebetterinvestmentdecisionsandachievegreaterresultsforinvestors,portfoliocompaniesandstakeholders.TPG’ssustainabilitycommitmentensuresthatsustainabilitypracticesareimplementedandthatmeasurableresultsareachievedinourcompaniesandouroperations.Weincorporatesustainabilityconsiderationsintoourinvestmentdiligenceanddecisionsandstriveforgreatertransparencyandgovernancefromourcompanies.”
KKr“In2009,webecamesignatoriesoftheUnitedNations-backedPrinciplesforResponsibleInvestment,inparttogiveusaplatformtoengagewithourinvestorsandpeersonmanagingESGissues.Inaddition,wepartnerdirectlywithanumberofLPstohelpdefineandprioritizeourESG-relatedeffortsaswellastolearnfromtheirexperiences,includingthroughour‘ESGroundtables,’whichwestartedholdinginsomecitiesin2010.”
bain capital“ESGprinciplesareatthecoreofBainCapital’svalue-addedinvestmentapproach.Weencourageouremployees,worldwide,togivebacktothecommunitiesinwhichtheyliveandwork,tohelpthebusinessesthatwecollaboratewithtobeenvironmentallyefficientandtohelpensurethatthemanagementteamswithwhichwepartneroperatewiththehigheststandardsofintegrity.”
the carlyle group“CarlyleemploysESGprinciplestocreatelong-termvalueforourinvestors.Weareintegratingresponsibleinvestmentguidelinesintoourinvestmentdecision-makingprocessforcontrolling,corporatebuyoutsacrossourportfolios.WecanworkwithourportfoliocompaniestofacilitatetheirevaluationoftheESGissuesassociatedwiththeirbusinesses.Asaresultofourencouragement,morethan60Carlyleportfoliocompanies–representingmorethan90%ofCarlyle-controlledcompanies–reviewedtheiroperationsinaccordancewiththePrivateEquityGrowthCapitalCouncilguidelinescorporatesocialresponsibilityin2011.”
MelbourneLevel 27, 101 Collins StreetMelbourne VIC 3000P: +61 3 9653 9228
Andrew Stubbings - [email protected]: +61 400 143 046
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Number 42 | Volume 25 | November 06 2012 | avcj.com 37
in tHe two years since cHamp priVateEquitycloseditsthirdbuyoutfund,theAustralianGPhascompletedfivedeals,twoofthemtake-privates.Themostrecent,GerardLightingGroup,departedthedomesticbourselastmonthtojoinearlieracquisitionoOh!media,anoutdooradvertisingcompany,intheCHAMPportfolio.
Australiahastraditionallyofferedrichpickingsforprivateequityfirmschasingtake-privatesand2012isnoexception.PacificEquityPartners(PEP)acquiredcleaningandcateringcontractorSpotlessGroupinAprilwhileTPGCapitalhasbeenengagedintheon-again,off-againpursuitofstrugglingsurfwearmanufacturerBillabong.
Ontheothersideoftheworld,take-privatetransactionsofUS-listedChinesecompaniesreachedanewhighinAugustasFocusMediareceiveda$3.5billionofferfromaPEconsortium.Japanhasalsobeenbusy,withAdvantagePartnersbuyinghomebuilderYasuragiUnisonCapitalmovingforautopartsmakerAsahiTec.
Despitethisrecentactivity,Asianprivateequity-backedtake-privatetransactionsin2012accountforjustafractionofthevolumetransactedfiveyearsago.AsofOctober,$1.8billionhadbeencommittedacrossseventransactions;duringtheliquidityboomof2006-2007,whenbuyoutsofallkindsgrewexponentially,thereweremorethan40take-privatescollectivelyworth$31billion.
Thetougherdebtfinancingenvironmentispartlyresponsibleforthedisparity,butthegreatestchallengeisrootedinthewillingnessoffoundersandmajorityshareholderstotakepartinsuchtransactions.
“Inthegenerallylowvaluationenvironmentthathaslastedforsometimenow,take-privatesarebecomingamoreviableoptionforexistingshareholderstopursueanexit,”TatsuoKawasaki,afoundingpartneratUnisonCapital,tellsAVCJ.“Butgoingprivatedoescreatealittlebitofashocktothecompanyandyouneedtoexplaintomanagementandshareholderswhyitmakessenseinthisenvironment.”
Timid investorsThepublicmarketmalaisethatfacilitatestake-privatedealsislong-standing.WhileAustralia’sbenchmarkS&P/ASX200Indexistradingattwo-thirdsofitspre-globalfinancialcrisislevel,Japan’sNIKKEI225andHongKong’sHangSengIndexare
down50%and30%,respectively.Inthisclimate,investorexpectationshaveweakenedtothepointthattheyareopentooffersofimmediateorguaranteedliquidity.
“IfyouthinkbacktoourattemptedtakeoverofFlightCenterinearly2007,therewasasensethatthemarketwasinexorablyrising,”TimSims,founderandmanagingdirectorofPEP,tellsAVCJ.“PEhadexpresseditsinterest,andshareholderswereabletotellthemtogoawayintheexpectationthatthreemonthslaterthemarketwouldrewardthemwithahighershareprice.”
Thebestexamples–inanAustraliancontext–ofhowperceptionshavechangedareinvestmentgroupPerpetualandBillabong.Inbothcases,take-privateofferswerespurnedandthesharepricessubsequentlytanked.
KKRbidforPerpetualinOctober2010,offeringA$38-$40ashareforatotalconsiderationofA$1.75billion.Monthsoflimited
engagementfollowedasthetargetcompanyrepeatedlyinsistedtheofferwastoolow.WhenKKReventuallywalkedaway,Perpetual’ssharepriceplunged50%.
InFebruary,TPGwaspreparedtopayA$841millionforBillabong–orA$3.30pershare,upfromapreviousofferofA$3–onlyforthecompany’sboardtodemandatleast$4pershare.Asthecompany’scommercialdifficultiesbecamemoreapparent,itsstockbegantoslideandTPGreturnedwithaA$694millionoffer.Theboardreluctantlyopeneditsbookstotheprivateequityfirm.TPGwithdrewitsofferinOctoberafterconcernsemergedduringduediligence
andBillabongisnowtradingbelowA$1.Fearfulthatweakpublicmarketscouldfurther
underminethepersonalworththeyhavetiedupintheircompanies,foundersandshareholdersinseveralmarketsare–theoretically–moreopentoaprivateequitysolution.Somecompanychairmenactivelycourtprospectiveinvestors,offeringaccesstoassetsatcheapvaluations.
“Alotoftop-tierUS-listedChinacompanies,forexample,arenowtradingatahighsingle-digit,whereasifyousourceaprivatebusinessinChina,youneedtopaysomethinglike12-15xtheforwardprice-to-earnings(P/E)ratio,”DonaldYang,managingpartnerandCIOatAbaxGlobalCapital,explains.“Whenyoulookatthequalityofcorporategovernance,internalcontrols,andfinancialmanagement,theadvantageclearlygoestothelistedcompanies.”
Formanymid-capChinesecompanies,themainreasontheywentpublicintheUSinthe
firstplacewastoraisefunds.However,eversincefinancialirregularitieswereuncoveredatanumberofChinesefirmsthatlistedinAmericaviareversemergersthisfunctionhasceasedtobevalid.ChairmenarepayingtheadditionalcompliancecostsofmaintainingUSlistingandallthewhilemarketcapitalizationsareshrinking.
Whilenotalltake-privatedealsaresponsoredbyprivateequityinvestors,HonsonTo,headofprivateequityatKPMGAsiaPacific,suggeststhatPEfirmscanprovidefinancialandrestructuringexpertisetothesecompanies,inadditiontocapital.TheirmerepresencecanalsoboostaChineseissuer’scredibility.“Marketparticipants
The privatization playTake-private transactions have created headlines in a climate of low public market valuations. Companies are being targeted in Australia, Japan and the US, but a bid doesn’t necessarily result in a deal
No. of deals
Take-private transactions in Asia since 2005
Source: AVCJ Research
20,000
15,000
10,000
5,000
0
30
25
20
15
10
5
US$
mill
ion
Dea
ls
Investment amount (US$m)
2005 2006 20082007 2009 2010 20122011
Number 42 | Volume 25 | November 06 2012 | avcj.com 39
areeagerlyobservingthegrowingtrendoftake-privatetransactionsandanypotentialfirst-moveradvantage,althoughitremainstobeseenifsuchcompaniescanbesuccessfullyrelistedinafewyears’time,”Hosays.
MauriceHoo,globalleaderofOrrick’sM&Aandprivateequitypracticegroup,agreesthatPEplayerswhounderstandthevaluationdifferentialbetweenmarketsareplayingavitalrole.
“Almostallofthesetake-privatetransactionsareaimedatgoingprivateintheUSandthengoingpublicinHongKong,wherethecompaniesshouldexpecttofetchahighervaluation,”hesays.“Thisisduetonotonlyanabsenceofnegativepublicity,butalsoaninvestmentpublicthatshouldunderstandthecompanyanditsbusinessinChinamuchbetterthanintheUS.”
Inaccessible debtWhilelowvaluationsandrelativelyhigherlistingcostscanpresentacompellingcaseforgoingprivate,AustraliaandJapan,whichbetweenthemaccountfor60%ofAsia’sPE-backedprivatizationssince2005,aren’tseeinganythingliketheactivityof2006-2007.
Debtfinancingisakeyissue.Banksinbothcountriesarestillwillingtosponsorleveragedbuyoutsbuttherearefewerparticipantsthanbeforeandthedebtportionofdealsislessgenerous.InAustralia,forexample,Europeanbankshavemoreorlesscompletelyexitedthesyndicationmarketandthefourmajorlocallendersfocusonsmallerdeals.PrivateequityfirmsmustthereforerelyonUSandstrongAsianbanksforsupport.
“ThedealdebtmarginsandthegearingratioshavechangedconsiderablyfromthepeakoftheboomtothecurrentpositioninAustralia,”saysMarkMalinas,co-headofprivateequityatlawfirmAllens.“Debt-to-equityratiosofaround4xwerecommonin2006-2007andyoucouldgetamarginof2-2.5%overthebankbillswaprate;nowyouhavegearingratiosofaround2xandamarginataround4-4.5%.”
Withlessdebtfinancingavailable,privateequityplayershaveshiftedtowardssmallerandmid-marketdeals.Lastyear,theaveragePE-backedtake-privatedealinAustraliaandJapancameto$252millionand$116million,respectively;itwas$1.7billionand$604millionin2007.Anotheroptionissettingupclubdeals,butthatmaymeanalongerandmorecomplicatedexecutionprocess.
Take-privatesforUS-listedChinesecompaniesareontheoppositetrajectory,althoughit’sworthnotingthatdebtfinancing,whileavailable,islimited.Dealflowwasnegligiblein2006-2007,but45transactionshavebeenannouncedin2010-2012,16oftheminvolvingprivateequity.
Howeveranannouncementisnoguaranteeofaclosure:onlyfourofthesePE-backeddealshavebeencompletedasofOctober,datafromAVCJResearchandRothCapitalPartnersshow.
AbaxGlobalCapital’sbuyoutofFushiCopperweldisexpectedtocloseinthefourthquarter,twoyearsaftertheofferwasfirstsubmitted.Theprivateequityfirmhasonesuccessfultake-privatetoitsname–HarbinElectric–butthistookoneyeartotransact.
Game of chickenThelongexecutionprocesssuggeststhat,whencalculatingthepremiumtobeofferedtoshareholders,privateequityfirmsandcompanymanagementshouldtakeintoaccountthepossiblepricefluctuationsandthechangingvaluationexpectationsfromshareholders.
Justinthelastweek,a$1.7billiontake-privatebidsubmittedbyCVCCapitalPartnersandtheMalaysianstateofJohorforthecountry’stwomainKFCfastfoodfranchiseesmetwithoppositionfrominvestorsoneyearafterthedealwasannounced.Theyclaimedthattheoffercamesolongagothatthepricenolongerrepresentsthecompany’struevalue.
Sotherearetwoissuestoconsiderwhendealingwithshareholders.First,theymayloseinterestduringaprotracteddealprocess.Second,manycompanyownersinAsia–usuallythefirst-generationfounders–arenotfondofdelistingforprestigereasonsandoftenloathtogiveupsizeableportionsofequity.
“Youalsoneedtoremembertotreatminorityshareholdersfairlybecauseoftenanumberofthemunhappywiththeprice,”saysUnison’sKawasaki.“Ithinkithasbecomeclearoverthelastdecadethattheymayeventuallyspeakout.Forpeoplelikeus,theseconsiderationsareveryimportantandwemustmakesureatransactionisvalidfromallangles.”
Inaddition,KenChen,aShanghai-baseddirectoratL.E.K.Consulting,suggeststhatChinatake-privatesinparticularhavebeenaseller-ledgameinthelastcoupleofyears,giventhatthereismorecapitalthangoodcompanies.AlotoffundsraisedinthelastcoupleofyearsarestillintheprocessofuseuptheirdrypowderbeforereturningthecapitaltoLPs.
“Privateequityplayersdon’twanttocomeacrossastoodesperateduringnegotiationsbecauseitwillbemadeknowntoeveryoneinthepublicmarket,”saysChen.“Bothsideshaveprideandit’slikethegameofchicken.Whenthefounderturnsdowntheoffer,whyshouldwecomebacktoyou?”
ShouldeachoftheChinatake-privatesannouncedin2012actuallyclose,theregion-widefigurewouldballoonby$6.3billion.Butcomparedtotheboommarketin2006-2007whenassetpriceswererisingsteeply,thecurrenteconomicoutlookismoredifficulttopredict.PEplayersarecertainlyawareoftheuncertaintiesandskepticalaboutpayinghighprice.
Inthefaceofavaluationexpectationgapbetweenbuyersandsellers,ChristopherKelly,apartneratLinklaters,saysprivateequityplayersshouldemphasizehowtheycanaddvaluetotargetcompaniesratherthanjustfocusingongeographicarbitrageobtainedthroughbuyingUS-listedAsiaassetsandrelistingtheminHongKong.
“MostAsiatargetsarelookingbeyondthecashthatPEhousesbringtothetable.Whattheywantissomelevelofexpertiseforfuturegrowth,”Kellysays.“Certainprivateequityhousesarenowpursuinga‘buy-and-build’strategy–youpurchasetheasset,takeitprivateandbuildtheplatformbybuyingcomplementaryassets.TheresultingbusinessshouldbeworthmorethanthesumofthepartsandthevaluecreatedcanberealisedviaanIPOortradesale.”
Leading Asia take-private deals since 2005
target company investor amount (us$m) date country
InvestaPropertyGroup MorganStanleyRealEstate 5,400 May-07 Australia
MacquarieCommunicationsInfrastructureGroup
CPPIB 5,300 Mar-09 Australia
CharteredSemiconductorManufacturing
AdvancedTechnologyInvestmentCompany
3,900 Sep-09 Singapore
ShinCorp SiamCommercialBank;Temasek 4,600 Jan-06 Thailand
IntollGroup CanadaPensionPlanInvestmentBoard 3,000 Aug-10 Australia
Skylark AIG;CVC;Nomura 3,000 Jun-06 Japan
Healthscope Carlyle;TPG 2,400 Jul-10 Australia
Parkway KhazanahNasional 2,400 Aug-10 Singapore
TheTokyoStarBank AdvantagePartners;CollerCapital;LehmanBrothers
2,200 Dec-07 Japan
DCAGroup CVC 2,000 Sep-06 Australia
Source:AVCJResearch
Partnering Innovation since 2004
MachineryMaterialsEnergy
帝沃森投资
Number 42 | Volume 25 | November 06 2012 | avcj.com 41
Since 2005, China has accounted for just 4.5% of PE-led privatizations in Asia by value. With 11 deals in the pipeline involving Chinese companies listed in the US, this share could rise to 13.6% - provided they all close. It is not unusual for these stocks to trade at a discount to the offer price post-announcement. This is largely due to uncertainty about the deal getting done. Given all the regulatory, legal, tax and due diligence considerations, transactions can take months to close, and some fall apart along the way.
Pending PE-backed privatizations of US-listed Chinese companiesTarget Investor Announced Value (US$m) Pending
Fushi Copperweld Abax Global Capital Nov-10 363.8 723
ChinaCast Education Corp Undisclosed Nov-11 343.1 362
AsiaInfo-Linkage CITIC Capital Jan-12 941.8 296
China Transinfo Technology SAIF Partners Feb-12 146.6 264
ShangPharm TPG Capital Jul-12 177.7 128
Focus Media The Carlyle Group/FountainVest Partners/CITIC Capital Partners/CDH Investments/China Everbright Aug-12 3,565.4 90
LJ International FountainVest Partners Aug-12 63.4 90
7 Days Group The Carlyle Group/Sequoia Capital Sep-12 634.7 46
3SBio CITIC Private Equity Sep-12 331.0 62
Feihe International Morgan Stanley Private Equity Asia Oct-12 146.0 39
Yongye International Morgan Stanley Private Equity Asia/Abax Global Capital Oct-12 330.0 27Source:AVCJResearch
Time lag between deal announcement and completion
Source: AVCJ Research
Harbin Electric
Funtalk China
China Fire & Security
Chemspec International
Days0 100 200 300 400
The Chinese share of PE-backed take-private activity in Asia
Source: AVCJ Research
2009 2010 2011 2012 YTD Non-China China China announced
US$
milli
on
12,000
9,000
6,000
3,000
0
China take-private deals
avcj.com | November 06 2012 | Volume 25 | Number 4242
Q: EQT Greater China II is a 2005 vintage fund. Are you now looking for exits?
A:Thefundmadenineinvestmentstodate;oneofthose,LBXPharmacies,filedinFebruarywiththeShanghaiStockExchange.TheIPOmarkethasbeenslowingdownbutwearehopefulofapprovalbynextyear.WehavehadtripledEBITDAduringthefour-yearownershipperiodarejustwaitingfortheenvironmenttoimproveforaliquidityevent.
Q: What have you done to boost the company’s earnings?
A:WhenEQTfirstwentintothedeal,LBX’sgrossmarginwasinthe22%range–foraretailerthat’snotreallygoodenoughandthereasonwasnotenoughhighmarginproductswerebeingsold.Thecompanychangeditsprocurementstructuresonowover40%ofitsproductsarenowinthehigh-margincategory,upfrom20%.Grossmarginshavesincerisenfrom22%to35%.Theothermajorinnovationinvolvedstoreformat.LBXwenttovisitmarketleadersintheUK,thePhilippinesandJapan.Afterrollingoutasecond-generationstore,thecompanyhiredaleadingJapanesepharmacytocomeintobuildfiveflagshipoutletsforus.Asaresult,LBXhasmanagedtobranchoutintoawholenewcustomerdemographicwithathird-generationstoreformatthatattractsyoungercustomers.
Q: When the IPO markets are struggling what can you do to develop other exit channels?
A:Fortunately,onlytwoofEQT’sportfoliocompaniesaretargetingIPOsandthemarket
fortradesalesisstillquitestrong.ItisimpossibletopredictthemarketbutifyoulookattheShanghaiStockExchange,Chinahasn’tbeenthischeapforwellover10years.Thereismoderatelyslowgrowthbutwhenthemarketistradingatitslowestindecadesyouhave
tobelieveitisnotgoingtogetmuchworse.AndIbelievethewholethingisturningacorner.
Q: What can you do to insulate portfolio companies against slowing macro growth in China?
A:Weinvestincyclicallyneutralcompanies,suchasLBXPharmaciesandQinyuanBakery,whichhaveseenEBITDAincrease25%and50%,respectively,sofarthisyear.HongKong’sJapanHomeCentrehasalsoseenEBITDAjumpby12%despiteHongKong’sGDPbeingreviseddownto1-2%.Thekeyiswewerealittlebitgun-shyduringthe2006-2007globalliquidityboomwheneveryoneelsewasinvestinginminingandreal-estate.Somedidwellandgotoutquickbutothersdidn’t.
Q: What impact is slow growth in China having on the investment environment?
A:Anyoneheavilyexposedto
thecommoditiesmarket,realestateorthebankingsectorissuffering.IspoketosomeofthetopChineseprivateequityfirmsrecentlyandasked,iftheywereaddtogetheralltheprofitsfromtheirportfoliocompaniessofarthisyear,woulditbegrowingorshrinking.Atleast
twosaiditwouldbeshrinking.EarningsforcompaniesintheShenzhenCompositeIndexaredown11%andindustrialprofitsinChinaarefallingacrosstheboard.Whatdoesthatmeanforprivateequity?Fortunatelyforus,EBITDAacrossallourcompaniesinthirdquarterisup32%year-on-year.
Q: What impact is this changing environment having on how GPs’ investment strategies?
A:Itishavingadeepimpact.Peoplearerealizingthatit’snotaboutinvestinginanythingthatseemstobegrowingorheadingforanIPO.Insteadtheyhavetobecarefulinselectingbusinesseswithgoodcashflow,stabilityandneutralitytothecycle.Companiesinvolvedinpharmaceuticalretail,bakedgoodsandhouseholdproducts–likeLBX,QinyuanandJapanHomeCentre–canbeimprovedbybettermanagementandindustrialbenchmarking.These
areallthehallmarksoftraditionalprivateequitywhenitstartedintheUSandEurope,somethingChinahasmovedawayfrominrecentyearswiththeboominpre-IPOinvestments.However,thecountrywilllikelyreturntothesefundamentals.
Q: A number of PE firms are taking advantage of weak public market valuations by doing take-private deals – and in June EQT did this with Singapore-listed China Healthcare. What are your plans for the company?
A:ChinaHealthcarehasdoneverywelltodate.Thisisbecauseofoperatingleverageandthenursinghomesincreasingutilizationratesto95%whilesimultaneouslyincreasingprices.Thecompanyhasalsorampeduphomecareandtrainingservices,soallthebusinessenginesarehumming.EQTbroughtinco-investorsandtogetherwehavea49%stakewhilethefounderholdstherest.Thebusinessplanisbaseduponimprovingexistingnursinghomeservicesandbuildingmorecenters.AccordingtotheSingaporegovernment,by2030onefifthofthecity’spopulationwillbe65oroverand,giventhedepthoflocalwealth,peoplewillbeabletoaffordnursinghomes.Theaimistobuildmorecentersasthegovernmentgivesoutmorelicensesandtheyhavejustannounced10morewillbeissued.ChinaHealthcarealsohasacenterinMalaysiaandasecondopeningby2013.ThecompanywillcontinuetogrowinMalaysia,whichhassimilardynamicstoSingaporeintheformofanageing,affluentpopulation.
MARTiN MOK | industry Q&a [email protected]
Change management Martin Mok, a Hong Kong-based partner at EQT Partners Asia, talks to AVCJ about what slowing economic growth and slowing public markets mean for private equity investors in China
“If you look at the Shanghai Stock Exchange, China hasn’t been this cheap in over 10 years”
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