dEal oF thE wEEk Funds Head above water? · Tokihiko Shimizu Director-General, Research Department...

ASIAN VENTURE CAPITAL JOURNAL

PRIVATE EQUITY ASIA

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Asia’s Private Equity News Source avcj.com August 07 2012 Volume 25 Number 30

FoCus dEal oF thE wEEk

Head above water?Select Asian GPs go off shore for the fi rst time in search of foreign LPs Page 7

China public accessRegulators allow PE into the QFII program 2

Gold star for NavisGP exits Indonesia education business Page 13

Data f ile Page 15

aVCJ rEsEarCh

avcJ Will Skip an iSSue neXt Week for the Summer holidayS. We return on auguSt 21

Indonesia’s Capsquare achieves fi rst close

Page 14

Philippines gets fi rst ever infrastructure fund

Page 14

Funds

dEal oF thE wEEk

Bain in $1b deal for leading Indian BPO fi rm

Page 13

History plays its part in shaping Asian PE

Page 3

Apollo, CHAMP Ventures, GIC, Gobi, Gresham, Innovation Works, KKR, L Capital, Mandarin Capital, Ping An, Polaris

Page 4

Editor’s ViEwpoint

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Number 30 | Volume 25 | August 07 2012 | avcj.com 3

Editor’s [email protected]

With 2012 marking the 25th anniversary of the AVCJ Hong Kong Forum – and, give or take a year, the Asian Venture Capital Journal itself – we have been taking a trip down memory lane for some special content to be released later in the year. This involves sitting down with some of the professionals who were here at the beginning of private equity in Asia. Times have certainly changed, although it is interesting how some old issues still cast a shadow.

Given that I spend most of my time talking to people about current issues and their likely future impact on the asset class, it is eye-opening to step into the past.

In my previous job I spent several years covering China’s economic and business beat, and contextualising the country’s growth story – a pet topic for many editors and a cornerstone of many features, good and bad – usually required a few sentences on its origins. The starting point was the early 1990s and the relocation of low-end manufacturing from around the region to China, a land of low costs and scale of production.

Asia’s private equity pioneers were there before all that. China and India were not on the radar; Japan was what it largely still is, an insular market; Australia had yet to see the corporate reforms that ushered in the buyout exponents; Hong Kong, Taiwan and bits of Southeast Asia accounted for the bulk of opportunities.

And these were, by today’s standards, plain vanilla opportunities. Pitch an Indonesian jeanswear manufacturer (no brands, no retail, just a production line) to a GP now and you’d probably be laughed out of the office. Pre-1990, these were some of the most profitable investments. Similarly, private equity targets in tech manufacturing have evolved into more sophisticated, high-end operators, although several investors from the early days can claim to have backed businesses that are now under Acer.

Deal sizes were of course much smaller. A $30 million fund offered ample firepower for Asian investments, a figure that seems almost absurd when placed against the multi-billion dollar buyout vehicles now deemed appropriate for the

region. This had consequences as to how much people were earning and how many staff they could employ – a 2% management fee on a $30 million fund wouldn’t go far even back then.

I couldn’t resist asking one industry participant at what point he became personally wealthy as a result of private equity. “In the early years it was hand-to-mouth and there were just three of us running the business for a long time,” he replied. “Things started to change once the US guys got interested in the late 1990s and early 2000s.”

Restructuring opportunities that emerged in the region in the aftermath of the Asian financial crisis certainly put the region on the map – J.C. Flowers and Ripplewood prospered from their investment in Long Term Credit Bank of Japan (now known as Shinsei Bank) in 2000, and Newbridge Capital did the same with Korea First Bank, which it rescued in 1999.

Those events belong to a different chapter in the history of the asset class in Asia, but their legacy lives on, particularly in terms of the relationship between private equity, government and financial services.

Last week, the South Korean government once again failed to offload Woori Finance Holdings after receiving no preliminary bids. Woori is one of the last financial sector assets that remains in state hands from the post-Asian financial crisis bailouts. Accusations that the likes Newbridge took advantage of Korea at a time of weakness to make lucrative investments, and the more recent messy fallout from Lone Star’s involvement in Korea Exchange Bank mean a foreign private equity buyer is unlikely. Unfortunately, other interested parties appear to be thin on the ground.

Still young compared to the markets in Europe and North America, Asian private equity is already being influenced by its own history.

Tim BurroughsManaging EditorAsian Venture Capital Journal

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avcj.com | August 07 2012 | Volume 25 | Number 304

AsiA PAcific

Apollo launches two Asia real estate fundsApollo Global Management has launched two funds that will invest in commercial real estate in Asia, seeking up to $750 million in capital. It comes barely three months after the private equity firm disclosed that it has raised about $255 million for an Asia-focused credit fund and an offshore affiliate.

PE firms target iNG’s Asian insurance assets ING is said to be in talks with several parties, including Apollo Global Management, J.C. Flowers & Co. and a team backed by The Blackstone Group, over the sale of different parts of its Asian life insurance operations. The initial plan was to divest the business in a single sale, but breaking it up may generate higher proceeds.

AustrAlAsiA

colonial first state buys tDf’s broadcasting assetsColonial First State, an Australian wealth manager owned by Commonwealth Bank of Australia, has agreed to buy French broadcasting group TDF’s Finland business. The company, known as Digita, owns Finland’s largest broadcast tower network as well as offering various terrestrial and digital television services. The acquisition will be made via First State European Diversified Infrastructure Fund.

tech entrepreneurs to create Aussie Vc fundA group of Australian technology entrepreneurs have joined forces to create a new venture capital fund, Blackbird Ventures. Led by Bill Baree, managing director of Southern Cross Venture Partners, and Rick Baker, formerly a portfolio manager at MLC, Blackbird will combine the investment capability of at least 14 Australian technology entrepreneurs.

cHAMP Ventures buys Ansett Aviation centreCHAMP Ventures has taken a majority interest in Ansett Aviation Centre, a training facility bought from administrators in 2004 following the

collapse of Ansett Australia, the country’s second-largest carrier. It is the third investment out of CHAMP Ventures’ recently raised seventh fund. Margaret Jackson, formerly chairman of Quantas, has been brought in to perform the same role at Ansett.

GrEAtEr cHiNA

innovation Works raises $148m for fund iiInnovation Works, the tech incubator started by Google’s former China head Kai-fu Lee, has so raised $148 million for its second fund. Lee confirmed to Sina that fundraising efforts began in April, but didn’t disclose the target size or details of the investment strategy, only saying that the aim was to attract leading institutional investors.

Mandarin capital warned cDB of suntech scandalSino-Italian PE player Mandarin Capital Partners advised China Development Bank (CDB) as early as three years ago that it shouldn’t invest in Suntech Power Holdings’ southern Italy initiative

due to concerns about fraud. The Chinese solar company has since announced that EUR560 million ($690 million) in German government bonds it used to secure financing from CDB were apparently forgeries.

Arbitrator dispute leaves foreign investors uneasyThe China International Economic and Trade Arbitration Commission (CIETAC), the national body responsible for resolving commercial disputes, has suspended its Shanghai and Shenzhen branches. The move has provoked concerns among foreign investors over the validity of existing contracts that stipulate the Shanghai and Shenzhen branches as arbitrators in the event of dispute.

NDrc backs Gobi’s second rMB fundChina’s National Development Reform Commission (NDRC) has invested RMB50 million ($7.9 million) in Gobi Partners’ second renminbi-denominated fund. The latest injection takes the Yingzhi RMB Fund to RMB350 million in size. The NDRC has been searching opportunities to invest in government-backed venture capital funds that target high-tech sectors.

Ping An launches $157m venture capital fund Ping An Insurance, the world’s second-largest life insurer by market value, has established a RMB1 billion ($157 million) venture capital fund. It will target sectors including financial services, consumer products, healthcare, automobiles and tech, media and telecom. The insurer may invite third-party LPs to participate in the fund corpus.

NortH AsiA

Woori launches $495m PE fund with Posco, EiGKorea’s Woori Asset Management has launched a private equity fund in partnership with domestic steelmaker Posco and US-based EIG Global Energy Partners. The vehicle was created in February and has a target size of KRW560 billion ($495 million), with Woori serving as GP as well as contributing 0.5% of the capital.

PE firms bid for Korean weapons manufacturer Four private equity firms and a European defense

Australia’s Gresham PE in $180m Witchery Group exitGresham Private Equity has agreed to sell fashion retailer Witchery Group to Country Road for A$172 million ($180.2 million). The deal will see Witchery CEO Ian Nairn replace Howard Goldberg as head of Country Road, which is majority-owned by South Africa’s Woolworths Holdings.

Gresham has held the asset for six years, having originally paid an estimated A$130 million for it via Gresham Private Equity Fund 2, a A$325 million vehicle that closed in 2005. Witchery is a 40-year-old brand offering apparel and accessories for men, women and children. One year after buying the brand, Gresham completed the bolt-on acquisition of Mimco, a leading Australian fashion accessories designer.

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company have reportedly submitted bids for a stake in South Korea’s LIG Nex1. The weapons manufacturer is offloading a 49% interest worth around $440 million. IMM, Actium and STIC Investments are among the PE investors keen on the asset. A preferred bidder will be chosen this week.

Entrepreneurs launch Korea start-up acceleratorA group of South Korean serial entrepreneurs has launched a start-up accelerator intended to connect domestic companies with their global counterparts. Advisors and mentors to the program include US tech entrepreneur and Dallas Mavericks owner Mark Cuban and Vint Cerf, Google’s chief internet evangelist.

Polaris invests in Japan’s Myland real EstatePolaris Capital Group has acquired a 30% voting stake in Myland Real Estate through its second country-focused fund. The investment is part of the Japanese property broker’s wider strategy to expand its business in preparation for an IPO in the next couple of years. The transaction was structured as a subscription for new shares in Myland.

soutH AsiA

KKr hires Akhil Puri for india capstone team KKR has hired Akhil Puri from TPG Capital as a director for its Capstone unit. He will lead the private equity firm’s engagement with its portfolio companies in India. Capstone’s current assignments in the country include Dalmia Cement and supporting the expansion of domain registration company Go Daddy.

Motilal oswal PE in $87m second close on new fundMotilal Oswal Private Equity has reached a second close of INR4.86 billion ($87 million) on its India Business Excellence Fund II, with Squadron Capital reportedly among the investors. The fund is expected to achieve a final close by the end of the year. The India Business Excellence Fund II has a target size of $175 million.

iNfusE Ventures launches incubation program Indian Fund for Sustainable Energy Ventures

(INFUSE Ventures), an early-stage fund focused on sustainable energy and cleantech, has launched a program in the Indian Institute of Management Ahmedabad to foster start-ups that require seed capital. Selected applicants will gain access to seed equity investment of up to $50,000 at the beginning, and subsequent venture capital funding of up to $2 million.

india’s Vistaar receives $7m from Vc playersBangalore-based small enterprise financing company Vistaar Financial Services has raised INR400 million ($7.1 million) in Series B funding from Lok Capital and Omidyar Network as well as existing investors Elevar Equity and SVB Capital Partners. Vistaar raised INR150 million in its Series A round from Elevar and SVB in May 2010.

l capital backs indian cinema operator PVrL Capital, the private equity arm of luxury group LVMH, will invest just under INR1.1 billion ($19.4 million) in cinema and entertainment company PVR for a 10% stake. As part of the deal, L Capital will set up a joint venture with the Indian firm that will focus on in-mall entertainment, gaming, food and leisure.

sBi commits $3m to indian e-learning providerSBI Holdings has invested more than $3 million in to India’s Liqvid, an online content provider that specializes in English language training. SBI Ven Capital Singapore’s Brijesh Pande will join the Liqvid board. Operating under the EnglishEdge brand name, Liqvid provides solutions for use on PCs, tablets and mobiles.

oman india fund backs explosives makerOman India Joint Investment Fund (OIJIF), a PE vehicle owned by Oman’s sovereign wealth fund and India’s State Bank of India, has invested INR720 million ($13 million) in explosives manufacturer Solar Industries. The fund will pick up 4.28% of the Indian firm’s expanded capital through a preferential allotment.

soutHEAst AsiA

Gic boosts cash exposure, warns of global volatilityGovernment of Singapore Investment Corp’s (GIC) exposure to alternative assets remained unchanged during the year ended March 2012 as cash reserves rose steeply at the expense of fixed income and developed market public equities holdings. Group President Siong Guan Lim noted in the fund’s annual report that global markets have experienced considerable turbulence in the last year.

silk road finance enters MyanmarFrontier markets-focused investment bank Silk Road Finance has set up a Myanmar subsidiary and won a mandate to raise a private equity and venture capital fund dedicated to investing in the country. The new entity, known as Mandalay Capital, is modeled on Eurasia Capital, Silk Road’s Mongolia investment banking arm.

Ntt investment Partners backs Philippines’ MigoNTT Investment Partners, the corporate VC arm of Nippon Telegraph & Telephone Corp, has committed $2 million to Migo Entertainment, a Philippines-based digital content distributor. Migo mainly trades in Taiwan and Philippines, but is expanding its mobile content distribution products and services into other emerging countries.

l capital creates fashion venture, signs up designers L Capital is in talks with India’s top designers and Evoluzione, a local retailer, to set up a fashion venture which will consolidate separate designer names. The PE player, part of luxury group LVMH, will invest INR2 billion ($35.9 million) in the entity.

Rohit Bal, the award-winning Kashmiri Pandit fashion designer from New Delhi, and Sabyasachi Mukherjee, who owns over 20 stores across India and the US, will join the new corporate structure, which aims to scale up operations of individual designers domestically and globally. More designers are expected to join in due course. The company will own significant minority stakes in the businesses of the each designer.

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J-Star hopeS that itS carefully laid groundwork will come to fruition this year. The Japanese mid-cap private equity firm started reaching out to foreign investors in 2007 towards the end of fundraising for the firm’s debut vehicle. The management team’s plan was to build relationships with these LPs so they could put a face to a track record the next time they came calling in search of capital. That time is now.

J-Star raised JPY$12 billion ($153 million) for its first fund, all from domestic investors. In the ensuing five years, Japan has endured a global financial crisis and last year’s earthquake, tsunami and nuclear crisis. For many of the large institutions previously active in the asset class, withdrawal has been a function of necessity: banks obliged to comply with the Volcker Rule and insurers dealing with the fallout of natural disaster. Others have benched themselves through choice, disillusioned by the performance of some of the larger domestic GPs that are struggling to deploy capital.

“Some of the major institutional investors have gone quiet so small- to mid-size PE firms that are able to demonstrate performance are trying to raise capital from overseas,” says Gregory Hara, director and president of J-Star. “We have been communicating with some LPs for several years. Establishing direct relationships is the hard part for GPs going overseas for the first time.”

J-Star is targeting around JPY15 billion for its second fund and expects foreign investors to account for more than 50% of the corpus. The PE firm now has a few overseas LPs in its first fund – stakes were picked up via the secondary market – and has co-invested in deals with several others. It is relying on their interest in the new vehicle translating into capital commitments.

Looking overseasIn a difficult fundraising environment globally, mid-market players across Asia are under pressure. Two other nations, however, find themselves in a similar quandary to Japan. For varying reasons and to varying degrees, domestic LPs in Australia and South Korea are scaling back commitments to local private equity firms, forcing these industry participants to look for support overseas.

These are not spin-outs or first-time

managers; most are established players in their home markets, with a couple of funds and at least the semblance of a track record behind them. But how do these managers convince global investors who have the pick of GPs globally that their markets and their investment theses are a cut above the rest?

“Even if GPs aren’t raising international capital right now, they are discussing it internally,” says Vincent Ng, a partner at Atlantic-Pacific Capital. “Maybe they have decided to wait for cost reasons, or because they got a good RFP [request for proposal] from a local LP, or because they aren’t confident of success in the current global

economic environment. But they are waiting more out of necessity than desire.”

The fundraising numbers imply as much. Australian GPs attracted just over $1 billion in the first half of 2012, down from about $2.2 billion in each of the two previous years. Capital-raising in Japan tumbled to $253 million in the first six months of the year, compared to $2.2 billion in 2011 and $1.5 billion in 2010. South Korea saw a similar level of retrenchment: 22 vehicles raised $653 million in the first half, down from $4.7 billion and $5.7 billion for the previous two years.

Australia, Japan and South Korea are Asia’s most mature markets, offering buyout opportunities versus the growth deals that dominate China and India. Yet South Korea and Australia are in many respects polar opposites.

The former has LPs that are still very active in the asset class domestically, although the capital base is quite concentrated and tight on terms. Barely a handful of PE firms have succeeded in raising money overseas. The latter is seeing LPs become fussier about fund manager selections, driven by fee concerns and an increasing appetite for international GPs. However, there are stronger ties with foreign LPs among the small- and mid-cap players, arguably enhanced by a common language and familiar legal processes.

CHAMP Ventures closed its seventh fund at A$475 million ($485 million) in late June, with more than half of the capital coming from

overseas investors, compared to less than 1% in its previous vehicles. Fellow lower mid-market investor Archer Capital Growth Funds still has 60% domestic investors in its recently raised A$300 million second fund, but the foreign share is up significantly from the predecessor vehicle.

Both GPs are part of larger groups that already have substantial international investors in their buyout funds and these relationships proved useful, but they guarantee a meeting, not a commitment.

“The process takes longer because you are competing for capital with all other PE firms globally and the investor base doesn’t know you as well,” says Gareth Banks, a director at CHAMP Ventures. “You have to explain about the merits of the Australian economy compared to other

Leap into the unknownWith commitments from domestic LPs easing off, Australian, Japanese and Korean GPs are looking to raise capital from overseas investors. They are entering new territory and some are better prepared than others

Fundraising: Australia, Japan & South Korea

Source: AVCJ Research

8,000

6,000

4,000

2,000

0

120

100

80

60

40

20

0

US$

mill

ion

Fund

sJapan No. of funds South Korea No. of fundsAustralia No. of funds

2006 20082007 2009 2010 2011 1H 2012

Japan Amount (US$m) South Korea Amount (US$m) Australia Amount (US$m)


jurisdictions and the benefits of the segment in which you are investing.”

Sing for your supperSelling the virtues of one’s domestic economy is easier for some than others. According to Craig Cartner, managing partner at Archer Growth, foreign investors were generally receptive to opportunities in Australia’s small to mid-market buyout space, partly because it is a very clear investment thesis that has worked before.

Japanese mid-market firms, meanwhile, are in what one industry participant describes as a “scorched earth situation.” They have to make the case why they can succeed where the larger buyout firms of the last vintage struggled, despite operating in a flat-iining economy.

“There are a lot of people out there raising money globally and so how do you stand out

from the pack as a GP?” asks Andrew Thompson, head of private equity at KPMG Australia. “The overarching issue for the LP is: ‘If domestic LPs in your country are not investing, then why should we?’ It takes a bit of explaining.”

Given that most large North American pension funds are unwilling to write checks smaller than $50 million, they don’t appear to be appropriate investors for Asian GPs seeking to raise less than $500 million. As such, mid-cap players must be more selective in targeting LPs.

Placement agents and fund formation lawyers can play a role here – the former actively matching GPs and LPs and the latter helping put together documents that meet international investors requirements, ranging from Institutional Limited Partners Association (ILPA) compliance to basic spelling and grammar.

However, industry participants who spoke to AVCJ offered mixed responses. Some see a trickle of business from certain markets, while others say the expected trend has yet to materialize.

Australian mid-market GPs that are looking to boost overseas investor numbers – such as CHAMP Ventures and Archer Growth – are readily named; so are their Japanese counterparts, including J-Star, Polaris and Valiant.

Few practitioners, though, could identify Korean PE players currently on the road with similar ambitions. Vogo Investment does want a substantial portion of its third fund, which has a target size of $650 million, to come from foreign investors, but the GP had 20% overseas money in its previous vehicle, so is hardly new to the game.

Anomalies might be explained by the kind of LPs mid-market private equity firms are targeting and how they are going about it. This in turn offers insights into the level of sophistication and international awareness behind such efforts.

Hara says J-Star has considered using a placement agent but so far hasn’t gone through

with it, in part because Japanese mandates haven’t been popular of late and in part because J-Star isn’t convinced by the value-add. Hara sees Asian fund-of-funds and family offices as the best fir for J-Star: the average ticket size is manageable and there is a genuine interest in Japan as part of a diversified regional portfolio. They are also easier to reach – most fund-of-funds are only too willing to come to him.

“We barely get any visits from domestic investors but these fund-of-funds regularly come to Japan, whether it’s for fundraising or monitoring their current investments,” Hara says. “I’d say 50-60% of the communication is them coming to visit J-Star.”

However, there is a general appreciation that a balanced investor base is more sustainable. A North American LP with a private equity staff of four and just a handful of GP relationships in the region is inevitably a difficult sell. China, India and Southeast Asia have been the key areas of interest in recent years and even those may

be accessed via pan-regional funds. Although fund-of-funds are friendlier to country-specific vehicles, they face their own pressures.

“Fund-of-funds are going to the market every 18-24 months and they have to demonstrate to investors an ability to find the next gems that can deliver absolute returns,” says Atlantic-Pacific’s Ng. “The macro issues in Japan and the long J-curve therefore create potential headwinds.”

He adds that an increasing number of funds-of-funds are responding to these concerns by eschewing the blind pool for Japanese co-investments, in which the J-curve is shorter, the fees are lower and they have more influence on what happens with the target companies.

Diversity, at a priceThe reality is that a truly diversified LP base comes at a price. Asia-based private equity firms must travel to the US, Europe and the Middle East to meet prospective investors and then employ international standard advisors and structures. CHAMP Ventures’ Banks recalls making 5-10 trips to the US and Europe during the most recent fundraising period. “There are extra travel costs but it’s more about the amount of time you spend on the road,” he says.

Mid-market private equity firms tend to operate under reasonably tight economics and taking 3-4 senior professionals on the road for several months to raise a fund means less time is devoted to investments and divestments.

In terms of structure, it a case of replacing fund frameworks that were set up to meet domestic requirements with those that are acceptable to international investors.

Firstly, there may be incongruities on fees. Atlantic-Pacific’s Ng cites Korea as an example. Domestic LPs remain active in the asset class and they have traditionally pushed for lower fees and a shorter fund life than are normally agreed for international GPs. If a PE firm wants to retain some of its existing domestic investor base as well as reaching out overseas, it must strike a balance on terms and conditions. “There is often a conflicting thesis,” says Ng.

Secondly, the fund structure itself may need to be replicated offshore, and the legal and tax leakage issues vary by market.

The structures employed by Australian funds – a managed investment trust onshore and a limited partnership offshore – are generally clear to investors and GPs alike, but there have been changes in recent years. Belgium and Luxembourg entities, once placed in between the Australian target and Cayman Islands parent entity, are no longer used after the authorities decreed there wasn’t sufficient substance to quality for tax treaty benefits. Now the Cayman fund normally invests directly and if the ultimate

CoVEr [email protected]

Commitment to Asian GPs by LP origin

Source: AVCJ Research

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Domestic LPs Other Asian LPs Non-Asian LPs

100

80

60

40

20

0

%

CoVEr [email protected]

LPs come from treaty jurisdictions, they don’t pay tax on the proceeds from investments.

For lower mid-market fi rms there is another structure, the venture capital limited partnership (VCLP), which is exempt from domestic tax. This could minimize the cost of bringing in foreign LPs – and assuage their tax concerns – but investments must fall within certain criteria.

Korean and Japanese GPs also tend to use separate domestic and off shore structures, even though regulators have introduced measures that allow all investors to be pooled together. Once again, it comes down to giving foreign LPs certainty about tax treatment.

“If a Japanese GP is trying to raise money in the US using a Japanese limited partnership, it might not be the best route because investors aren’t familiar with the regulatory regime and they want to understand the tax implications in their own jurisdiction,” says Alex Last, a partner at Mourant Ozannes. “You want people to focus on your strategy and your team, and that means eliminating questions that are raised elsewhere..”

The status quo for both markets remains a Cayman fund routed through operational entities in secondary jurisdictions that off er tax treaty benefi ts – typically Singapore or Malta for Korea, and Ireland or perhaps Hong Kong for Japan. It is not unusual for GPs to employ several off shore

structures to accommodate diff erent LPs, and this adds to the cost. If the PE fi rm in question doesn’t have a solid base of fee-generating assets already under management, scraping together the resources can be challenging.

“Japanese GPshave relatively small teams, so the administration is diffi cult,” says Kazushige Kobayashi, managing director at Capital Dynamics. “It is a big burden.”

In for the long haulHowever, the burden won’t dwindle as long as a private equity fi rm has foreign investors on board. A stable of domestic LPs will likely have similar IR requirements and a GP might be able to do face-to-face meetings with all of them in the space of an afternoon. Dealing with investors scattered

across the globe means understanding individual requirements, which may involve delivering documents under four diff erent reporting standards and in 12 diff erent formats.

“You end up with 70 investors on the fi rst close – each one is negotiated and each investor is represented by a diff erent law fi rm,” explains Paul Christopher, managing partner of Mourant Ozannes’ Hong Kong offi ce. “That’s a signifi cant amount of leg work.”

He adds that some GPs are stepping up their expenditure, appointing advisory boards and international law fi rms that have credibility in the market. The initial outlay might dwarf previous budgets, but the pay-off could be signifi cant – a 2% annual management fee on $100 million in commitments from overseas investors over a fi ve-year investment period would easily outweigh additional fundraising costs incurred.

There is also the sense that failing to accommodate these LPs could see a PE franchise decay, as talented staff move on, portfolio companies struggle and funds underperform, leaving little hope of raising any new capital at all. “We want to have a more balanced investor base,” says J-Star’s Hara. “If something happens, then suddenly you might fi nd capital is going away. Even though we are small and it’s tedious and costly, we appreciate the diff erence it makes.”

Where do these funds come from? How are they being invested? In which sectors? What regulatory changes are making an impact on investment strategies?

AVCJ provides the answers and more in its series of pan-Asian industry reviews. The reports provide an independent overview of the private equity, venture capital and M&A activities in the region, including the latest statistics and analysis by AVCJ’s research team. The annual reviews also deliver insights on investments made, capital raised, sector-specific figures and more—making them essential reading for all private equity investors, investment bankers, accountants, lawyers, corporate financiers and management consultants looking at the Asian market.

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inveStor appetite for chineSe StockS reached a new low in July: The benchmark Shanghai Composite Index closed at 2,103 points, down 5.5% from June and its lowest level since March 2009. The Shenzhen Composite Index fell even more sharply, losing 8.5% of its value over the course of the month.

With the government wary of the impact this malaise is having on investors, regulators’ long-term plans to bring stability and wider participation to the capital markets has been given a short-term boost. In July, the China Securities Regulatory Commission (CSRC) loosened restrictions on the Qualified Foreign Institutional Investor (QFII) program through which overseas investors gain exposure to public debt and equities. This included opening the door to private equity firms.

It is a step in the right direction, but PE investors have yet to find out the conditions under which they will be allowed to operate, while longstanding QFII concerns about quota size and tax treatment remain unresolved.

“Given that the valuation of many public companies in China is even lower than private companies these days, QFII might be appealing to offshore private equity funds,” Maurice Hoo, global leader of the firm’s M&A and Private Equity Practice Group, tells AVCJ. “However, it remains to be seen how much quota will be apportioned and how many foreign private equity funds may – under their own constitutional documents – invest in the A-share market.”

Rapid reformsChina has introduced a raft of reforms designed to expand the QFII program in recent months. In April, the CSRC raised the overall QFII quota by $50 billion to $80 billion. One month later, the foreign exchange regulator promised fast-track approvals for quotas going to medium- and long-term overseas funds. Between January 1 and July 20, China distributed a total of $7 billion in quotas to 52 QFIIs. This is equates to more than 20% of the quota granted to 149 investors throughout the program’s 10-year history.

The inclusion of private equity is good news for the asset class as it means the costs of

buying into domestically listed companies are significantly reduced. Previously, private equity firms could only hire quotas from established QFIIs, usually international banks, if they wanted to participate. The rental price is understood to be prohibitively expensive due to limited supply and strong demand driven by an increasing number of exchange-traded funds (ETFs) that track the performances of A-shares.

The latest reforms also see qualification thresholds for existing categories of foreign investors substantially lowered. Insurers, pension

funds and asset management institutions – the latter category now includes PE funds – are required to have at least $500 million under management to qualify for a QFII license, down from $5 billion. This will create a window for smaller funds to enter into the A-share market.

“I expect a lot of mid-sized fund managers, which has asset under management of $500 million to under $5 billion, will be potential QFII applicants after the relaxation of QFII program,” says James Wang, a partner at Han Kun Law Offices. “Many of these players – who have been interested to participate into A-shares – were not qualified but are now thinking about applying for quotas on their own.”

While the CSRC has created a favorable platform for foreign PE players to bet on local stocks, the maximum stake a QFII can own in a Chinese listed company is currently 30%. This is an improvement on the previous cap of 20%, but it is still not large enough to accommodate the demands of many PE investors, who prefer to take a significant minority stake in portfolio

companies, if not overall control. In addition, given the current average quota

size is just $100-150 million, it is questionable whether QFII offers private equity players sufficient scope to acquire significant minority stakes in multiple public companies.

“The most likely private equity QFII applicants will be funds that have the flexibility or capacity to get minority stakes in public deals, and are looking to access to public companies that have attractive valuations and track records,” John Gu, senior M&A tax partner at KPMG, tells AVCJ. “To those funds which want to gain control or a board seat through public deals, this scheme may not be suitable.”

Taxing uncertaintyGu adds that PE funds which aren’t put off by these restrictions should still be aware of the taxation problems tied to the QFII program. The State Administration of Taxation has released only two documents pertaining to QFII: Circular No. 155 in 2005, which guarantees a business tax exemption on gains arising from investments; and Circular No.47 in 2009, which imposes a 10% withholding tax on dividends and interest income. It is unclear whether a QFII would also be subject to a 10% levy on capital gains.

Any charges on the profits generated by QFIIs are likely to be passed on to fund managers and their investors. Legal and tax advisers argue that private equity players – who are new to the QFII club – should address the potential tax issue with advanced and detailed planning. Until Chinese regulators offer further clarification, the best approach for GPs right now is to work through various potential taxation scenarios and seek agreements with their LPs to compromise on calculation methodologies.

“When GPs draft their limited partnership agreements, they should be aware of the potential taxation risks concerning their investments in Chinese listed companies,” says Han Kun’s Wang. “For example, they may preserve the right to ask for the return of distributions in case the authorities ask for previously unclaimed QFII taxes, even though in practice the risk of back-claim is relatively low.”

China grants private equity an A-share investment platformChina’s securities regulator has loosened restrictions on participation in the Qualified Foreign Institutional Investor (QFII) program and opened the door to private equity firms. Do they want to go through it?

“To those funds which want to gain control or a board seat through public deals, this scheme may not be suitable” – John Gu


pearSon’S m&a activity folloWS a familiar emerging markets theme. In May the education and publishing company bought GlobalEnglish, a cloud-based English-language learning specialist with 75% of its subscribers in Asia and Latin America. In the last 18 months, Pearson has also assumed control of Global Education & Technology and TutorVista, test preparation and tuition companies in China and India, respectively.

For Navis Capital Partners, however, Pearson’s key acquisitions came in 2009 and 2010. First, it picked the Wall Street Institute’s (WSI) China franchise for $145 million. Then it bought WSI outright from private equity owners The Carlyle Group and Citi Private Equity for $92 million, becoming the global franchisor.

“When Pearson acquired WSI they were very clear that they intended to become the operator in high-growth markets,” says Jean-Christophe Marti, a partner at Navis. “From that point we

knew that they would be a contender for the WSI business in Indonesia.”

Last week Pearson did indeed become the new owner of the WSI Indonesia franchise, paying Navis $16.3 million for the asset, which comprises four training centers that serve more

than 8,000 students. It is the private equity firm’s fifth exit in the last eight months and only the second ever to deliver a return of 10x.

The large multiple is explained by Navis building up WSI Indonesia from scratch. The Malaysia-based private equity firm acquired a 75% interest in the Thailand franchise in 2006, assuming control from two entrepreneurs. One year later, it negotiated with the WSI parent

company to take the business into Indonesia, making a greenfield investment of $16.3 million.

An Indonesian entity, Efficient English Services, was set up in conjunction with a local partner, an ex-banker who took about 10% of the business. Navis’ approach was based on its

experiences in Thailand, and many practices were replicated. The WSI model has three tenets: computer-based training, classroom-based training and social clubs. Marti notes that the social element in young markets like Thailand and Indonesia is more important than in Europe.

Despite these commonalities, markets must be addressed individually, which explains why WSI primarily exists as a set of country franchises. “As a multiple franchisee, there is diversification but little scale because you have to set up all the marketing and systems locally,” says Marti. However, he adds that language tuition services are a lucrative market in Asia because the demand to learn English is often unmet by national education systems.

Navis retains WSI Thailand and is introducing two new training centers, taking the total to nine. The business isn’t regarded as a likely target for Pearson because the growth potential is limited compared to Indonesia. However, as a portfolio company of Navis Asia Fund IV, which is now approaching the end of its holding period, an exit is expected in due course.

indian buSineSS proceSS outSourcing (BPO) firms, once a prime target for private equity investment several years ago, have inevitably become a hive of exit activity. The Blackstone Group last year sold its 66.25% stake in Intelenet Global Services to UK-based Serco for $634 million. Warburg Pincus and ICICI Bank are looking to offload their interests in WNS and Firstsource, respectively.

Now are a more mature stage – gradually consolidating rather than rapidly growing – the BPO industry is no longer a prime target. But Genpact is an exception.

Last week, the Indian BPO company, which is listed on the New York Stock Exchange, announced a 57% year-on-year increase in second-quarter net profit to $61.1 million and revenue growth of 18%. The combination of a strong balance sheet and an international presence explains why Bain Capital was willing to pay $1 billion to Oak Hill Capital and General Atlantic (GA) for a 30% stake in the business.

It on course to be the largest Indian private equity transaction since Bharti Infratel received

$1 billion from a consortium of investors led by Temasek Holdings in 2007.

“Genpact has earned its leadership position by partnering with global companies to improve business outcomes,” Bain said in a statement. “Their relentless focus on the client and moving up the value chain has resulted in impressive revenue and client growth since becoming a public company in 2007.”

The private equity firm will acquire 68 million shares at $14.76 apiece, subject to a two-and-a-half year lock-up period. The investment is expected to close later this year once stockholders – including Oak Hill and GA – receive a special dividend of $2.24 per share. As part of the deal, Bain can name four directors to Genpact’s board, while Robert Scott will continue to serve as chairman of Genpact and N.V. Tyagarajan will retain his role as president and CEO.

Oak Hill and GA originally invested $500

million in Genpact in 2004, taking a 60% stake. Following the company’s IPO in 2007, which generated another $500 million, the private equity firms’ interest has fallen to its current level of 41%. The two investors were expected to complete a full exit from the asset, which analysts valued at $1.4 billion. Bain and Apax Partners were reportedly among the interested buyers.

“GA and Oak Hill had been searching potential buyers for most of the summer,” a source with direct knowledge on the transaction tells AVCJ. “Bain wanted to get as much as 40% at a fixed price of $1 billion, but GA and Oak Hill didn’t agree.”

The investment will be made via Bain affiliate South Asia Private Investments, which will in turn draw capital from the private equity firm’s second Asia fund – a $2.3 billion vehicle that closed in July – and its 10th global fund, the source adds. The debt portion of the transaction is expected to be no more than $300 million.

dEal oF thE [email protected] / [email protected]

Navis profits from Pearson’s expansion drive

Bain in bumper $1b deal for India’s Genpact

SE Asia: Foreign tongues

BPO: A maturing market in India


there’S little doubt that indoneSia iS the flavor of the month in private equity circles at present, but questions remain over deal access. Information on private companies is sparse, local relationships rule, entrepreneurs are wary of selling equity and the regulations can be opaque. Competition is also intense, with corporate strategic investors, hedge funds and large family-owned conglomerates all looking for deals.

In such circumstances, what strategy should a local GP pursue? For Capsquare Asia Partners the answer is to seek out early-stage opportunities. The goal is to improve transparency, governance and management so that these companies are suitable for the mid-market being targeted by so many existing and first-time managers.

“We target focus on mid-market companies, looking to deploy $10-15 million per transaction, mostly for control positions, and we might exit to private equity firms or trade buyers,” says a source familiar with Capsquare. “Many GPs are looking to deploy $20 million or more and they are usually getting minority stakes and no control.”

Investors appear suitably convinced by the

Capsquare approach. The firm has reached a first close on its debut fund, having accumulated more than two thirds of the target amount. It expects to complete fundraising – around $75 million from LPs plus $8 million from the GP – in the fourth quarter of 2012 and perhaps as soon as late October.

The target pales when placed against the two most recent Indonesia funds: Northstar Pacific Partners raised $820 million for its third vehicle in summer 2011 and Saratoga Capital closed its second fund last month at $600 million. However, there are at least five other GPs in the market targeting debut funds of $200 million and upwards to invest in Indonesia and Southeast Asia, and none has reached a first close.

Capsquare signed up an anchor investor in early 2012 – an Asian fund-of-funds – and this helped generate interest among other LPs. The investor base includes endowments, fund-of-

funds, pension funds and family offices. North America accounts for the majority of capital raised so far.

Capsquare’s leadership team consists of Ridwan Budijono and Christian Sugiarto, formerly of Headland Capital Partners and Northstar, respectively. The full complement of 15 professionals has been in place since late 2008. Among them are people with experience in Capsquare’s target

industries: FMCG, retail, education and healthcare. The private equity firm previously invested in

six companies on a deal-by-deal basis, sourcing capital from the founders’ industry and personal networks. Current assets under management come to around $30 million. “Having a track record of investment is important because Indonesia is an opaque market,” the source says. “There has been a lot of publicity about how investors have flocked to the market, but now we are seeing a bit of outflow. Indonesia is not easy to navigate.”

the deciSion to become the firSt-ever Philippines-dedicated infrastructure fund can’t have been easy one. As with any vehicle, a number of criteria needed to be in place to ensure the success of the Philippine Investment Alliance for Infrastructure (PINAI).

First, appropriate regulation and government support for private sector investment in infrastructure was required. Second, a fund manager was had to be found with the appropriate model and expertise in new markets as well as experience in the Philippines in particular. That’s where Macquarie Infrastructure and Real Assets (MIRA) stepped in, bringing with it a track record in launching infrastructure funds in emerging markets including China, India, Mexico, Africa and Russia.

“MIRA has a strong track record in terms of establishing first-time infrastructure funds, and the Philippines is a continuation of that evolution,” Frank Kwok, a senior managing

director for MIRA in Asia, tells AVCJ. “Our decision to establish PINAI now is a result of significant prior due diligence and Macquarie’s long standing presence in the Philippines.”

As the fund manager, MIRA will control how the $625 million raised from LPs gets deployed. The vehicle reached its target size with its first and final close, which was announced last week. Alongside Macquarie itself, investors include the

largest Filipino pension fund, Government Service Insurance System (GSIS), Dutch pension fund asset manager APG, and the Asian Development Bank, all of which played an active role in the selection process of MIRA as the GP and the

development of its investment mandate. PINAI will invest equity and equity-like

instruments directly in infrastructure businesses and projects in the Philippines. These will include brownfield and greenfield projects across segments such as transport, power, renewable energy, water and telecom infrastructure.

MIRA’s Kwok expects such opportunities to become increasingly accessible in the coming years because strong government support for infrastructure development now exists, allowing investors to take advantage of the nation’s young, fast-growing population and projected economic growth. “The main impediment in capturing this demographic dividend has been the country’s historical underinvestment in infrastructure. We believe the tide is turning in this regard and we have been encouraged by the steps the administration has taken to promote private investment and the progress being made by the government’s PPP programme,” says Kwok.

As an early participant in the Korea’s public-private partnership program, MIRA also takes comfort from the Philippines’ track record of private sector investment in the power and road segments. It is seeing opportunities open up in other, related, areas as well.

“The time hasn’t been quite right for a Philippines-focused infra fund before,” adds Kwok, “But MIRA has a differentiated approach when it comes to making our funds successful.”

[email protected] / [email protected]

Capsquare eyes early-stage Indonesia

Philippines launches first infra fund

MD: Ridwan Budijono

Infra angle: Philippines wants roads


PRivATE EqUiTY DATA FiLE | aVCJ [email protected]

private equity in aSia

Investment Breakdown by Country From 1 January to 31 July 2012

investee country amt. invested uS$mln no. of deals (disc.) no. of investees

China (PRC) 11,341.7 238 130 238

Australia 4,949.0 50 30 50

India 3,413.4 223 163 216

Japan 2,957.6 193 143 192

South Korea 1,582.2 75 70 73

Malaysia 1,554.8 11 10 11

Hong Kong 1,506.6 14 13 13

Mongolia 425.0 1 1 1

New Zealand 274.5 9 6 9

Singapore 138.4 17 7 17

Indonesia 126.2 10 3 10

Thailand 100.0 5 1 5

Sri Lanka 43.7 3 3 3

Vietnam 30.0 7 2 7

Taiwan 10.2 4 2 4

Philippines 2.0 1 1 1

Closed Fund

location: Hong Kong

Fund name: Kerogen Energy Fund L.P.

Closing Amount: US$1 billion (final close)

launch date: September 2011

Fund Manager/Advisor: Kerogen Capital (Asia) Ltd.

stage Focus: Expansion/ Growth Capital

Industry Focus: Mining and metals

Geographical Focus: Africa, Australasia, Middle East, North Asia, South Asia, South East Asia, China (PRC)

Contact: Jason Cheng

Phone: (852) 2127-3088

Website: www.kerogencap.com

update: Kerogen Capital has reached a final close in excess of US$1 billion for Kerogen Energy Fund. The Fund specializes in providing growth and development capital to small and medium-sized companies in the oil and gas sector, primarily invests in geographies of strategic importance to Asian demand, particularly China. Investors include North American foundations and endowments, family offices, fund-of-funds, an affiliate of a Middle East sovereign wealth fund, and investors in Singapore and China.

neW Funds

location: Philippines

Fund name: Philippine Investment Alliance for Infrastructure (PINAI)

Target Amount: US$625 million

launch date: July 2012

Fund Manager/Advisor: Macquarie Infrastructure and Real Assets (MIRA)

stage Focus: No Preference

Industry Focus: Infrastructure, Transportation/Distribution, Utilities

Geographical Focus: Philippines

Contact: Wei Cheong

Phone: (65) 6231-2766

email: [email protected]

Website: www.mirafunds.com

update: Macquarie Infrastructure and Real Assets (MIRA) has set up a US$625 million of Philippine Investment Alliance for Infrastructure to finance big-ticket infrastructure projects under the Philippines' public-private-partnership (PPP) scheme. The Fund targets to finance 5 to 10 infrastructure projects worth a maximum of US$125 million each in power distribution and generation, transportation, airports, mass transportation, natural gas or renewable energy, utilities including water, and social infrastructure projects. Four local and foreign groups, including state pension fund Government Service Insurance System, Asian Development Bank, Algemene Pensioen Groep and the Macquarie Group have invested in the fund.

fund-raiSing monitor

Asian Venture Capital Journal

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