inDustRy Q&A Abe’s balancing act...daddy? Managing Editor Tim Burroughs (852) 3411 4909 Staff...

Asia’s Private Equity News Source avcj.com April 16 2013 Volume 26 Number 14

AnAlysis DeAl of the Week

Abe’s balancing actPE welcomes Japan’s reforms, but what about the long-term fix? Page 7

Little to smile about1Q analysis: Asia fundraising weakens 0

Succession planningQuadria buys India’s Milestone-Religare Page 12

Data f ile Page 15

AVCJ ReseARCh

Unitas completes Exego exit to Genuine Parts

Page 12

KKR agrees Alliance Tire Group buyout

Page 13Capital Dynamics inks China partnership

Page 13

DeAl of the Week

Shearman & Sterling’s Chen on China regulation

Page 14

Do princeling funds offer more than nepotism?

Page 3

Carlyle, CIC, Goldman Sachs, Hony Capital, Hongye, MGPA, QIC

Page 4

eDitoR’s VieWpoint

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Another month, Another princeling fund. Okay, so they’re not that prolific but there is a familiarity to PE platforms built upon the shoulders of Chinese leaders’ offspring in terms of the nature of their emergence. It starts with a whisper. In the case of Nepoch Capital – the private equity firm co-founded by the son of He Guoqiang, who stepped down from the Communist Party’s highest echelon in October 2012 – the rumors began last year, months before the story made headlines last week. “There’s a new princeling fund in the market, run by the son of a very senior government official,” people were saying.

And once there is momentum, there is no turning back. Regardless of the GP’s desire to remain below the radar, meetings must be held with potential investors. Due diligence is conducted, which includes researching the personal and professional backgrounds of key executives. The fund must also create a pipeline of investments – and maybe complete a couple of deals to impress prospective LPs – and the princeling’s clout would be brought to bear when dealing with company owners and managers.

Past history also suggests that, once these funds are raised, the princeling retreats from the limelight. Winston Wen, son of former Premier Wen Jiabao, departed for a job at a state-owned enterprise within five years of – and four funds – of co-founding New Horizon Capital. Last year, Lefei Liu, who set up CITIC Private Equity in 2008, relinquished the title of chairman – although he remains CEO – ahead of his father’s elevation to the Politburo Standing Committee.

It is hard to believe that a change in job title would be accompanied by the sacrifice of all economic interest in the GP or the funds it manages. It is also feasible that the princeling would quietly wield his influence on deals. Nevertheless, the timing of Nepoch’s emergence is interesting: He Guoqiang is a retiring politician, not one still on the rise.

Some LPs are prone to flights of fancy when it come to China funds. If a GP has a unique selling point that suggests access to deals

beyond the reach of others, warning signs in the due diligence might be overlooked. But the more experienced China investors want to see evidence of a sustainable franchise before they commit to a fund, and team stability is a key part of this.

In this respect, the cult of personality that characterizes Chinese private equity is not altogether helpful. Firms are often created on the basis of a certain individual’s contacts and pedigree; they can hire all the associates they like but that person’s relationship with a senior official at the China Securities Regulatory Commission, for example, is what gets portfolio companies to the front of the listing queue.

This dynamic is to be expected in an emerging market, but as a private equity firm matures its talent pool should deepen. A princeling operation therefore has a limited shelf life unless it is able to demonstrate that its competitive advantages stretch beyond nepotism.

In some cases this is already happening. New Horizon raised $1 billion for its most recent buyout fund despite Wen’s departure; Boyu Capital may count Alvin Jiang, grandson of former President Jiang Zemin, among its ranks, but the firm has a strong team overall, led by ex-TPG Capital executive Mary Ma; and CITIC Private Equity has always been more than just a princeling operation, given its association with the CITIC and close ties to domestic brokerage CITIC Securities.

Nepoch is said to have received $200 million in LP commitments towards an overall target of $500 million, so the business is certain to get off the ground. Whether it gains credibility with foreign institutional investors – which remains a must if a GP is to scale up its fund sizes – remains to be seen.

Tim BurroughsManaging EditorAsian Venture Capital Journal

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GLOBAL

Formation 8 raises $448m, eyes VC opportunitiesFormation 8, a start-up venture capital firm that targets US businesses with the potential to expand into Asia, has raised $448 million for its debut fund. Headquartered in Silicon Valley, the firm has eight operating professionals based out of offices in Beijing, Shanghai, Seoul and Singapore

ASIA PACIFIC

SBI in Series B round for Australia’s PanvivaA joint venture fund run by Japan’s SBI Group and US-based Jefferies Group will provide A$4 million ($4.2 million) in Series B funding to Australian business software provider Panviva. The capital, which came from the $124 million SBI Jefferies Asia Fund, will be used to support Panviva’s cloud-based product development, accelerate its growth in the telecom and banking sectors, and consolidate its position in the US health insurance market.

MGPA announces second close on real estate fundMGPA has held a second close of EUR50 million ($65 million) on its latest Asia property fund with a further commitment from a German insurance company. The vehicle, MGPA Asien Speziafonds, which specifically targets German investors, has so far received EUR135 million.

University of Michigan commits to MSPEA IVThe University of Michigan has committed $25 million to Morgan Stanley Private Equity Asia’s (MSPEA) fourth pan-regional fund. The vehicle, which reached a first close of $750 million, has a final target of around $1.5 billion. The university, which has assets of $9.4 billion, invested $40 million in two previous MSPEA vehicles.

AUSTRALASIA

QIC looks to develop its direct China exposureQIC, an Australian investment manager QIC with more than A$69 billion ($73 billion) under

management for a combination of domestic and international clients, is stepping up its efforts to develop bilateral investment opportunities in China. The group is considering opening an office in the country, which would be its fourth overseas base.

Continuity Capital to boost Asia credit exposureContinuity Capital, the Australian private markets asset manager, will expand its Asia credit business from its new office in Hong Kong, with

demand for debt-based products in the region expected to remain robust. “We are especially interested in pan-regional credit strategies and are convinced that demand for credit from Asian companies will continue to outstrip supply, offering superior risk-adjusted investments,” said Scott Hancock, who leads the Asia operation.

Sycamore proceeds on Billabong with $300m offerA consortium supported by US-based Sycamore Partners will enter exclusive negotiations to buy Australian surfwear company Billabong, but any deal will be priced at a substantial discount to the original offer tabled last December. The consortium is willing to pay A$0.60 per share for all outstanding shares, valuing the company at A$287 million ($300 million)..

GREATER CHINA

Gopher in $80m first close on China secondaries fundGopher Asset Management, the private equity arm of NASDAQ-listed Noah holdings, has reached a first close of RMB500 million ($80 million) on its debut China secondaries fund. The firm sees opportunities arising from domestic private equity firms needing to return capital to LPs but having limited exit options amidst the current IPO drought.

Goldman, GIC invest $100m in China’s iKangGoldman Sachs and Government of Singapore Investment Corporation (GIC) have committed $100 million to Chinese private health management company iKang. The company will use the capital to expand its network of treatment centers into third- and fourth-tier cities and develop a new business line relating to health check-ups, according to a statement.

Hony Capital acquires 10% stake in Chinese developerHony Capital has bought a 10% stakes in Shanghai-listed property developer Shanghai Chengtou Holding for RMB1.8 billion ($290 million), becoming the second-largest shareholder in the company. According to a regulatory filing, Hony bought 299 million shares at RMB6 apiece, and is now subject to a 36-month lock-up period. Chengtou saw its stock soar about 10% once the strategic partnership plan was announced.

PE firms seek partnerships with Korean corporates Private equity firms are best served working with South Korean conglomerates rather than competing against them for assets, with collaborative efforts to secure overseas assets a strong potential source of deal flow, industry participants told the AVCJ Korea forum today.

“The chaebols are prepared to pay higher prices, they have better access to low-cost local borrowing, and they can easily provide incentives from their business portfolios,” said Taigon Kim, senior partner and head of Korea at

Headland Capital Partners. “I don’t think financial investors should try to compete on price with the chaebols. They should compete in other ways or try to cooperate with the chaebols.”

The test case for this approach remains Fila and Titlist. The Italian sportswear company was bought by its Korean franchisee in 2007, which proceeded to snap up Acushnet, owner of the Titlist golf equipment brand four years later, supported by Mirae Asset Private Equity, the National Pension Service of Korea (NPS) and Korea Development Bank.

NPS subsequently formalized a structure through which corporates and private equity could invest alongside each other with the creation of the Corporate Partnership Program. The pension fund contributes half the capital and 12 large Korean conglomerates put up the rest.

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Hongye commits $100m to California’s Singpoli CapitalChina’s Hongye International Investment Group has committed a $100 million in private equity to California-based firm Singpoli Capital to develop green energy, biochemistry, media, high-tech and real estate construction projects.

Carlyle buys Shanghai office tower from ForterraThe Carlyle Group has paid $267 million for Central Plaza, a Shanghai office building owned by Singapore real estate fund Forterra Trust. Forterra said in a regulatory filing that the price represented an 8.5% discount on the building’s market value of RMB1.8 billion ($290 million)

CIC, ADM support buyout of lithium producerChengdu Tianqi Industry Group, a Chinese lithium products manufacturer, has completed the acquisition of Australian miner Talison Lithium, with support from China Investment Corporation (CIC) and Hong Kong-based special situations group ADM Capital. The transaction values Talison at C$848 million ($836 million).

Kuwait’s Asiya launches Hong Kong operationKuwait’s Asiya Investments has opened a Hong Kong office, only its third service center globally, in response to rising demand from Arab investors for exposure to Asia. Asiya Hong Kong will deepen the group’s relationships with local institutions and businesses, with a view to sourcing more investments.

Advent International opens China officeAdvent International has opened its first China office in Shanghai. Advent China will work on local investments the PE firm’s core sectors of chemicals, healthcare, retail, consumer and leisure.

NORTH ASIA

Morgan Stanley-backed Hyundai Rotem targets IPOHyundai Rotem, a South Korean railway and defense systems manufacturer backed by Morgan Stanley Private Equity Asia (MSPEA), has applied to the Korea Exchange for an IPO. The

company is looking to raise KRW300-400 billion ($270-360 million). Hyundau Motors owns 57.6% of Rotem. which recorded a net profit of KRW78.4 billlion last year. The rest of the company is held by MSPEA,.

KKR appoints turnaround specialist as Japan CEOKKR has hired Hirofumi Hirano, who led the AlixPartners team that advised on the turnaround of Japan Airlines, as managing director and CEO for its Japan operations. Current CEO Shusaku Minoda has been promoted to chairman. This is the third addition the private equity firm has

made to its Japan team in six weeks.

SOUTH ASIA

Tano India backs Shree Shubnam LogisticsTano Capital is set to invest INR800 million ($15 million) in Mumbai-based Shree Shubham Logistics (SSL) for an undisclosed stake, supporting the company’s domestic expansion.The capital came from Tano India Private Equity Fund II, Livemint reported. The PE firm reached afinal close of $111.3 million on the fund last year,.

Baring PE boosts stake in Manappuram FinanceBaring Private Equity Partners India has increased its stake in gold loan company Manappuram Finance to 9.71% through an open market transaction.. The PE firm on Thursday acquired 1.8 million shares in Manappuram Finance for INR36 million ($640,000).

Warburg Pincus invests in Avtec, Actis exitsWarburg Pincus has acquired a minority stake in Avetec, an Indian manufacturer of precision-engineered products, facilitating an exit for Actis. The value of the transaction was not disclosed.Actis invested $17.8 million in Avtec in 2005 for a 30% stake.

Tata Consultancy Services buys PE-owned IT firmTwo French private equity firms have exited IT services provider Alti to Tata Consultancy Services (TCS) for EUR75 million ($98 million) in cash as the Indian business outsourcing company seeks to broaden its footprint in Europe. CM-CIC LBO Partners and IDI Group had been investors in Alti, alongside company management, since 2008.

SOUTHEAST ASIA

Carlyle hires UBS banker to open Indonesia officeThe Carlyle Group plans to become the first global buyout firm to open an Indonesia office, hiring a banker from UBS to lead its efforts in a country that has proved difficult to navigate for many larger PE players. Carlyle completed its first Indonesia deal last year.

Capital Dynamics to launch $154m Japan-focused FoFSwitzerland-headquartered asset manager Capital Dynamics plans to launch a JPY15 billion ($154 million) Japan-focused fund-of-funds. A source familiar with the matter said Japanese corporate pension funds will be among the investors in the new vehicle, which will target mid-cap buyout funds.

The decision to launch the fund was said to have been first made a year ago but it comes at a time when government fiscal and monetary policies have improved LP sentiment toward the country.

Capital Dynamics, which has been active in Asia for nearly 10 years and has $17 billion in assets under management, opened its Japan office in 2010, hiring former AIC CEO Kazushige Kobayashi as managing director. The only other Asia office is in Hong Kong.

It was one of four firms consulted by Japan’s Government Pension Investment Fund (GPIF) as part of its feasibility study on potential investment in alternative assets, including private equity.

Last week, Capital Dynamics announced it has partnered with China-focused fund-of-funds manager Diligence Capital in a bid to expand its geographic footprint in the country.

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When JApAn’s bubble burst in the early 1990s the period that followed was meant to be a lost decade. By the time the global financial crisis hit in 2008, followed three years later by a devastating earthquake and tsunami, it was clear the lost decade was more like two lost decades. By 2011, Japan’s public debt had surpassed $13.6 trillion – at around 230% of its GDP, it was the largest percentage of any nation. Sagging economic growth and an aging population didn’t help matters.

Last December a new government came to power under Prime Minister Shinzo Abe with promises of drastic action to fix Japan. The Liberal Democratic Party (LDP) leader is an unlikely comeback kid, having ended his previous tenure as prime minister in 2007 after just one year in office. But following December’s landslide election victory – and enjoying support from both the upper and lower houses of parliament

– Abe is back and he has pushed through unprecedented economic reforms.

The markets have responded favorably, with the Nikkei 225 Index up 25% so far this year – although the initial impact is purely psychological. “I think foreign investors are interested in Japanese stocks not so much because of particular policies but because of the indication that policy makers are leading the country in a different direction and have indicated at least where they want to take it,” says Joji Takeuchi, CEO of Tokyo-based consultancy Brightrust.

The “Abenomics” policy package has been described as a “three arrows” approach comprising monetary, fiscal and structural measures. Together they aim to tackle Japan’s three economic problems of slow growth, deflation and a dependence on deficit spending. The idea is that on its own each policy can broken, but implemented together they cannot.

The first steps were taken earlier this month when Haruhiko Kuroda, newly installed governor of the Bank of Japan (BoJ), launched an aggressive monetary expansion campaign. It includes an annual inflation target of 2%, negative interest rates and increased public investment. In total, the bank plans to pump about $1.4 trillion into the economy over a two-year period in order to break Japan’s deflationary cycle.

“The plan is to double the monetary base between now and the end of 2014,” says Nicholas

Smith, Japan equity strategist with CLSA in Tokyo, who describes Abenomics as a “print, pump and shape up” strategy. “At the moment the assets of the BOJ are about 33% of GDP, and they want to take that up to 60%. By comparison, the US Federal Reserve’s assets are around 20% of GDP, so we are in totally unchartered territory.”

Exits impactSo far, what has this meant for private equity? One of the short-terms effects, driven by the capital markets resurgence, has been an increase in IPOs. Last month, the Japan Venture Capital

Association said it expects a 67% jump in public offerings this year with 80 new issues compared to 48 in 2012. Most of these are likely to come in the information technology sector, particularly in the social networking space.

A recent example has been The Carlyle Group’s exit of its majority stake in software company Broadleaf, which generated JPY24.4 billion ($253 million), the private equity firm’s second Japanese IPO in three months. The trend for more offerings is supported by data from AVCJ Research which show that the number of PE-backed IPOs in the country has increased every year since the global financial crisis. In 2012, there were 36 offerings on various Japanese bourses, which collectively raised more than $9 billion in total. Ten of those were in the information technology sector.

However, not all lucrative exits have come via IPO. KKR generated a 5x money multiple on selling recruitment service firm Intelligence Holdings to Temp Holdings for JPY68 billion last month. The PE player claims to be positive about the impact of Abe’s policies and it has been busy bolstering its Japan team in recently, with three new hires taking the total headcount to 12.

“KKR views the Abe administration of one encouraging industries to grow and be more profitable,” says Shu Minoda, CEO of KKR Japan, who expects investment opportunities to increase under the new leader. “As such, companies in Japan will find more value in partnering with a global private equity firms like KKR, which can work with Japanese companies through local teams and also by connecting them to their global network.”

Global buyout firms have been more active in Japan in recent months, but it is debatable how much this is to do with Abenomics. Private equity investment has held steady at around $8 billion in each of the last three years – up from the post-global financial crisis slump but well short of the 2007 peak of $16.8 billion – although buyouts specifically have risen sharply. Control deals generated $6.9 billion in 2012, compared to $4.6 billion in 2011 and $2.5 billion in 2010.

“Generally, Japan is working off a pretty low base for private equity volume,” says Josh Porter, a managing director with Advantage Partners

The Abe effectJapanese Prime Minister Shinzo Abe has unveiled aggressive economic reforms, sending the country’s stock market up and its currency down. PE can benefit but longer-term change would be even more helpful

No. of deals

Japan PE investments

Source: AVCJ Research

20,000

15,000

10,000

5,000

0

600

500

400

300

200

100

US$

mill

ion

No. o

f dea

ls

Amount (US$)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


in Tokyo. “There isn’t a lot of room for volume to go down. So, with other positive trends, we are fairly optimistic about the outlook, irrespective of macro policy changes.”

Although improving public market valuations have made the IPO route more attractive, it will still account for only a small minority of Advantage’s exits. Porter notes that Abenomics has helped on a more general level by inspiring confidence among trade buyers and there is ongoing robust demand from corporate and other funds.

Industry practitioners expect to see more activity on the secondaries front in particular as large pan-regional funds pick up companies from country-focused GPs with a view to expansion outside of Japan. Permira’s $1 billion acquisition of sushi chain Akindo Sushiro from Unison Capital was one of the stand-out transactions in 2012.

Double-edged swordAt the same time, higher public market valuations and strategic interest can make life tougher for GPs on the investment front as prices increase. However, not all see it as a bad thing. “I would say the effect is both good and bad to be honest,” says Greg Hara, president of Tokyo-based mid-cap buyout firm J-Star. “Prices will go up but I believe this will be justified by leverage finance factors. Thanks to the BoJ’s policies, banks are

very keen to provide financing to increase returns on their assets.”

Advantage’s Porter adds that increased valuations reflects the growth opportunities in Japan, stressing that valuations have been low for such a long time that the recent jump is more a case of normalization rather than unwarranted inflation.

Distress-focused investors are unlikely to be so cheerful. Restructuring Japanese corporates, particularly in the electronics industry, is seen as a rich source of potential deal flow as evidenced by Advantage’s recent acquisition of Sanyo Electric’s digital camera unit. But improving macroeconomic conditions and the availability of cheap financing ease pressure on companies to divest.

In the four months since Abe returned to office, the yen has dropped 20% against the dollar, turning around the fortunes of export-oriented businesses. Sony, for example, appears to have stopped the rot by announcing a loss of just JPY10.7 billion in the final three months of 2012 compared to JPY158 billion in the corresponding period in 2011.

Porter, however, feels these opportunities may still persist, especially where corporates are beleaguered by structural issues in addition to weaker exports. “Certain companies have been fairly active in looking at selling off assets and that is been driven by challenges in the market

and overseas competitors,” he says. “If they see the macroeconomic environment is improving and that their fortunes might improve, it’s possible they may hold off but I don’t think that is necessarily the case.”

Long-term gambitThe rebound in investor confidence that is the root cause of these private equity trends, while encouraging, doesn’t represent a long-term fix to Japan’s problems. The argument goes that without the third arrow of lasting structural change, monetary easing will only get the economy so far. “It is a bit like a firework display – you don’t need a lot of skill to light the blue touch paper and return five yards,” says CLSA’s Smith.

Brightrust’s Takeuchi adds that the long-term impact of Abenomics depends on whether the government can initiate actions that fundamentally increase the productivity of Japanese industry. “What is really dangerous is that they spend all this money without doing much regulatory reform,” he says. “In a few years time, we could find ourselves in a situation nothing has really changed and it will create a huge sell off in yen and Japanese government bonds.”

One development that suggests Tokyo has its eye on lasting change is the interest in participating in negotiations for the Trans-Pacific Partnership (TPP), a comprehensive free trade agreement designed to liberalize economies and facilitate cross-border capital flows. The TPP, which is an expanded version of the Trans-Pacific Strategic Economic Partnership between Brunei, Chile, New Zealand and Singapore, was a key point of debate in Japan’s election last year.

The significance of such a move would be symbolic as much as anything else, adding weight to the government’s existing commitments to encourage foreign investment through regulatory change. For example, the Japanese Ministry of Economy, Trade and Industry introduced a tax reform in 2009 that exempts foreign investors from domestic tax if they use a domestic limited partnership, which is the standard vehicle for most local GPs.

Possible future reforms include lifting restrictions on investment in the agriculture sector, relaxing the protracted approvals process for new medicines to boost activity in healthcare and life sciences, modifications to the tax law to facilitate the transfer of assets from older to younger generations, and the introduction of free-trade or free-regulation zones.

“By joining the TPP, Japan would be seen as taking action towards reform,” says Takeuchi. “This would make the country a much more attractive place to invest.”

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Abenomices: the lp impactThe monetary, fiscal and structural reforms enshrined in Abenomics have created a greater

appetite for Japanese private equity among foreign investors. The initial impact on the yen, which has dropped 20% against the dollar in the past four months, creates a clear economic rationale for participating in the asset class.

“The concern 12 months ago was whether investors were going to see a 20-30% reduction in the value of their investment due to yen depreciation over a fund cycle,” says Josh Porter, a managing director with Advantage Partners. “If they were to invest at that time, because they are dollar based, the difference would need to be made up by additional investment returns. Now that concern seems to be less of a factor.”

For Japanese LPs, this development is largely irrelevant. Longer lasting reforms are required before the country’s traditionally conservative pension funds participate in private equity.

The Government Pension Investment Fund (GPIF) has completed the first stage of a feasibility study for launching a private equity and infrastructure investment program, a first for such a large Japanese pension fund. But most of the capital would be deployed overseas because the domestic PE market is too small for the world’s largest public investment fund. With more than JPY108 trillion ($1.31 trillion) under management, a 10% allocation to private equity equates to $131 billion.

Regardless, if GPIF does start committing capital to the asset class, even abroad, some argue it will have a knock-on effect on institutional investors that are better placed to invest domestically.

“In the case of Japanese LPs, they are cautious and tend to follow the best practices offered by the likes of GPIF,” says Kazushige Kobayashi , managing director at Capital Dynamics. “With the macroeconomic situation improving and more foreign investors looking to Japan, I think gradually Japanese investors will be invest more at home.”

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1) Bifurcation in pan-regional buyout fundraisingIt has become a hallmark of every interview and press release heralding a first, second or final close: this was achieved despite a difficult fundraising environment. The argument is difficult to dispute based on the statistics. In the first three months of 2013, Asia-focused funds raised a total of $6.8 billion, AVCJ Research’s provisional data show, the lowest level seen since the fourth quarter of 2009. These figures normally change as additional activity comes to light, but the historical variation isn’t particularly large.

Targets are being slashed across the board and the average length of time spent in the market has lengthened, due in no small part to those unfortunate GPs seeking to raise funds – usually first or second timers – on the basis of little or no track record. Clearly, a mid-market manager on Fund IV who has returned capital to LPs from the previous three vehicles is likely to prevail over a similar-sized GP that has generated no exits from its first fund and wants to raise a second.

The global and regional buyout firms occupy a different category, thanks to their extensive investor relations teams and large LPs’ tendency to gravitate towards larger funds and brand names.

Yet even at this end of the market, fortunes appear to be splintering. It emerged recently that The Carlyle Group has passed the $1 billion mark on its fourth Asia buyout fund, which launched in May 2012. The fundraising pace is broadly comparable to that of TPG Capital, which began marketing its sixth regional vehicle one month earlier and is said to be on about $1.5 billion.

Both expect to reach final closes – of $3.5 billion and $4 billion, respectively – by the end of the year. TPG took one year to accumulate $4.25 billion for its January 2007 vintage Fund V; Carlyle Asia Partners III came to market 12 months later and achieved a final close of $2.55 billion in April 2010, the global financial crisis having slowed progress.

Comparisons are inevitably drawn to KKR Asian Fund II, which launched last May and is thought to have attracted commitments of around $6 billion, although it has yet to announce a final close. The private equity firm took about 18 months to raise $4 billion for its first regional fund in 2006.

The first quarter of 2013 saw two significant

fundraises on the pan-regional and country-focused front. Affinity Equity Partners took just five months to reach a first close of $1.5 billion on its fourth Asia fund, which has a hard cap of $3.5 billion, while China-focused CDH Investments took about the same length of time to win $1 billion in commitments from LPs for its $2 billion fifth vehicle.

How much should we read into prevailing market perceptions of GPs and its impact on the speed of fundraising? Based on California Public Employees’ Retirement System (CalPERS) data, Affinity’s previous fund – 2007 vintage – had delivered an IRR of 15.7% and a multiple of 1.5x as of September 2012; KKR Asian Fund I (2007) was on 13.1% and 1.4x; Carlyle Asia Partners III (2008) was on -4.9% and 0.9x; and TPG Asia V (2007) was on -3.5% and 0.9x.

So it appears recent performance counts for something. Then there are the factors that don’t suit spreadsheets: team stability (TPG has seen turnover, particularly in its China team, while KKR has yet to lose anyone in the region); the makeup

of the LP roster (generally speaking, regional firms are likely to have narrower investor bases); alignment of interest (Affinity has a one-fund approach, while Carlyle has four PE vehicles in Asia alone); co-investment opportunities and other participation incentives; and, perhaps more now than ever, an Asia strategy that incorporates China but isn’t beholden to it.

LPs’ priorities vary considerably but the global trend if for fewer, more significant manager relationships. While a rapid fundraise doesn’t necessarily lead to effective deployment, it does demonstrate a level of faith in a GP and the power of momentum should not go unappreciated.

2) Large-cap deals are laggingAt A$900 million, TPG Capital’s acquisition of poultry producer Inghams Enterprises in March was the third-largest buyout in Australia since the global financial crisis, excluding real estate and infrastructure. Ignoring those two categories once again, Inghams came in at nearly twice the size of the second-largest deal completed in the

Hard timesFirst quarter analysis: Mixed fortunes for Asia buyout funds on the road; large-cap deals weaken, but venture capital activity is on the rise; exits one of few bright spots thanks to spurt in trade sales

Largest pan-regional funds in the marketFund name launch target size (us$m) First close (us$m) size of predecessor (us$m)

KKR Asian Fund II May-12 6,000.0 3,000.00 4,000.0

TPG Asia VI Apr-12 5,000.0 1,500.00 4,250.0

Affinity Asia Pacific Fund IV Sep-12 3,500.0 1,500.00 2,800.0

Carlyle Asia Partners IV May-12 3,500.0 700.00 2,550.0

MBK Partners III Sep-12 2,250.0 1,250.00 1,600.0


Asia fundraising by jurisdiction


1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013

US$

mill

ion

25,000

20,000

15,000

10,000

5,000

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OtherSouth Korea

India SingaporeJapanAustralia Hong Kong

China


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first quarter of 2013. The top 10 transactions together accounted

for $4.6 billion, down from $6 billion for October-December 2012, and $11.3 billion, $10.3 billion and $6.9 billion in the first, second and third quarters of the year. The absence of large-cap deals contributed to a 24% quarter-on-quarter decline in Asia private equity investment to $8.5 billion, the lowest level in more than four years.

China saw the sharpest decline in activity with investment dropping 50% to $1.3 billion. Deal flow has declined every quarter since June 2011 apart from July-September of last year, which included the announcement of the Focus Media buyout and Alibaba Group’s buyback from Yahoo.

The decline is consistent with the continued deterioration in fundraising as country-focused vehicles attracted just $2.9 billion – of which $1.5 billion went into renminbi-denominated funds, an all-time low. It is no coincidence that growth deals, a focal point for the pre-IPO oriented local currency vehicles, fell 71% quarter-on-quarter. No China transaction made the top 10, which is unprecedented.

While Japan also witnessed a slowdown on previous quarters, South Korea joined Australia as the only major Asian market to post an increase in deal value. With MBK Partners agreeing to buy a majority stake in clothing retailer NEPA for $558 million and a STIC Investments-led consortium paying $384 million for a stake in weapons manufacturer LIG Nex1, Korea was well-represented in the top 10, continuing a strong run that dates back to the second quarter of 2012.

Looking at transaction breakdown on a regional level, the predictable slowdown in buyout and growth activity – the latter more significant than the former – was accompanied a weakening PIPE deals. Given the rebound in regional equities markets, perhaps this is no surprise, but the cumulative value of public market investments, $911 million, was the lowest in more than two years.

On the flip side, there was notable uptick in start-up and early-stage investment, which rose 670% quarter-on-quarter to $1.1 billion, albeit from a low base. China contributed $200 million to the total but the stand-out performer was India, which saw transaction value jump to $738 million from $37 million in the final three months of 2012.

3) Trade sales drive exits reboundAmidst all the difficulties surrounding fundraising and investment in Asia, exits represented a sole bright spot in the first quarter of 2013. Yes, the IPO market continues to frustrate with a paltry 16 private equity-backed offerings generating $892 million. This is really low – the quarterly average in a disappointing 2012 was $8.6 billion – and

a drop-off in mainland China activity is largely responsible.

Yet there was a resurgence in overall exits, which reached $12.7 billion, up from $11.2 billion in the final three months of 2012. More importantly, the strong trade and open market sale figures that underpinned this performance were not driven by sovereign wealth funds trimming their stakes in China’s state-owned banks or large-scale infrastructure deals, as is often the case.

KKR saw a 5x return on its investment in Japan’s Intelligence Holdings when the recruitment services provider was sold to Temp Holdings for $713 million in March. Also in Japan, Advantage Partners exited Komeda’s Coffee to MBK Partners, generating a 7x money multiple. In Australia, Unitas Capital completed the second of its two-stage exit of auto parts supplier Exego to US-based Genuine Parts for $800 million, an investment that has delivered a 3.3x return, while Archer Capital sold Ausfuel to Trafigura-owned Puma Energy for $650 million, having paid about $120 million for the business three years ago.

The latter transaction is particularly interesting: CHAMP Ventures acquired Ausfuel in its early days,

grew the business to a scale that would appeal to Archer, which supported further expansion to a point where the company became a viable target for a multinational. As with each of these buyout deals – which together accounted for more than one third of trade sale value for the quarter – it is an example of private equity creating and then realizing value from a business.

The open market sale proceeds were even more concentrated, with three transactions contributing nearly three-quarters of the total. While Cerberus Capital’s protracted exit from Japan’s Aozora Bank brought a frustrating investment to a close, the first quarter saw The Carlyle Group complete Asia’s largest cash exit from China Pacific Insurance. The private equity firm sold the last of its stake for $795 million, bringing the cumulative proceeds to more than $5 billion against an investment of $400 million.

However, Goldman Sachs is poised to take the crown as it inches towards a full exit from Industrial and Commercial Bank of China. A 0.4% stake was sold in January for $998 million, putting the investment bank on course to generate in excess of $9 billion, having committed $2.6 billion in 2006.

Largest private equity exits, 1Q 2013investee Value (us$m) stake (%) Date exit type pe seller

Aozora Bank (Japan) 1,617.5 50.0 Jan-13 Open market Cerberus Capital

Matahari Department Store (Indonesia) 1,304.0 46.4 Mar-13 Trade sale CVC; GIC

Industrial and Commercial Bank of China (China)

997.6 0.4 Jan-13 Open market Goldman Sachs

Exego Group (Australia) 800.0 70.0 Mar-13 Trade sale Unitas Capital

China Pacific Insurance (China) 795.2 2.2 Jan-13 Open market Carlyle

Trauson Holdings (China) 761.9 100.0 Jan-13 Trade sale CCB International Asset Management

Intelligence Holdings (Japan) 713.5 100.0 Mar-13 Trade sale KKR

Aus Fuel (Australia) 650.0 Feb-13 Trade sale Archer Capital

Komeda's Coffee (Japan) 482.6 100.0 Jan-13 Trade sale Advantage Partners

Envirowaste Service (New Zealand) 411.5 100.0 Jan-13 Trade sale Ironbridge Capital


Asia private equity exits by type


1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013

Public market Secondary Buyback Trade sale

US$

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ion

25,000

20,000

15,000

10,000

5,000

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it seems counterintuitiVe For A private equity firm to invest in inventory – if anything, they are known in the West for cutting working capital post-buyout – but this is what Unitas Capital did on acquiring Exego, a car parts supplier that operates under the Repco brand across Australia and New Zealand.

“When you look at the business, a mechanic has a customer with a car on a hoist and they need the replacement part as soon as possible,” explains John Lewis, the private equity firm’s CEO. “The mechanic calls several suppliers and if you don’t have the part he will call someone else next time. So we invested about $80 million to increase the range of parts available, driving a resurgence in the trade business.”

Unitas acquired the business in 2006 for an enterprise valuation of around A$570 million (then $460 million), seeing the potential for a turnaround. Exego had gone public three years earlier but was struggling, a strong brand underpinned by operational and financial disarray that came after the previous CEO and management cashed out in through the IPO.

Last week it completed its exit from the company as Genuine Parts bought the remaining 70% for $800 million, including debt. The US-based firm took a 30% stake in Exego for $150 million last January with an understanding that it would complete a buyout once its target reached certain earnings thresholds. According to sources familiar with the transaction, Unitas has gained $440 million on an initial investment of $192 million for a 3.3x return.

“We reached the threshold at least one year ahead of what we had expected,” Lewis explains. “Genuine Parts was willing to pay a higher multiple of a higher underlying level of profits, once they had been in the business for a while. For us, it was a significantly better gain than if we had sold the whole company at the beginning. For them, it was a low-risk approach.”

Unitas claims that Exego’s EBITDA has more than doubled during its ownership period with annual revenues topping $1 billion, driven by

a revitalized Repco retail business as well as trade sales to mechanics. Exego’s other interests – lighting brand Ashdown-Ingram, motorcycle-wear manufacturer McLeod Accessories, and engine services provider Motospecs – also contributed to bottom-line growth.

The alterations made to Exego’s operations were implemented by a new CEO, John Muller, who built a strong management team around him, including CFO I.S. Lim, who performed the same role at another Unitas portfolio company, South Korean

retailer Buy The Way. The Exego board was also augmented by individuals with relevant experience, such John Adams, former CEO of AutoZone, a US auto parts success story.

“He offered strategic guidance and a network of contacts that proved invaluable in introducing best practices as well as identifying potential buyers for the business when it came time to exit,” Lewis says.

For Amit VArmA, buying inDiAn gp Milestone Religare was never part of the plan. He left financial services group Religare last year to set up Quadria Capital with Abrar Mir, formerly of NBD Sana Capital. They recently launched a debut fund, targeting of $300 million for healthcare investments in South and Southeast Asia.

While Varma was making preparations for the next phase in his career, Milestone Religare – a 50-50 joint venture between Milestone Capital Advisors and Religare – faced an uncertain future. In 2011, Milestone’s founder, Ved Prakash Arya, died in a freak accident and his family decided to exit the JV, which is responsible for the INR4.5 billion ($82.8 million) India Build-Out Fund. But who would buy it and would the fund’s LPs be happy?

“There was a lot of interest in the Araya stake and I wasn’t the only option but things developed over the last couple of weeks,” Varma tells AVCJ. “There was a lot of pressure from LPs

and others to do this.”While not the only option, Varma was

arguably the most logical. As a representative of Religare, he had been involved in the JV from the outset and serves on the boards of several portfolio companies. He also offered

stability. Both the Arya family and Religare agreed to sell their stakes in Milestone Religare, making the GP a wholly-owned subsidiary of Quadria’s onshore India unit. Religare remains an LP in the fund, alongside investors ranging from blue chip domestic banks to high net worth individuals.

Milestone Religare’s four investment professionals in Mumbai are being retained and will take responsibility for managing the fund’s six portfolio companies – three in healthcare, two in education and CARE Ratings, India’s second-largest credit ratings agency. There have been two partial exits and the portfolio will be wound down over the next 24-36 months.

“We are currently about 1.8-2x on the portfolio but this is clearly no reflection of what will eventually happen on exit,” Varma says. “We have made follow on investments in these portfolio companies that have been much richer.”

There is little crossover between Milestone Religare and Quadria – the latter is run by a separate team of six investment professionals – beyond an interest in healthcare. Quadria, which is eying a first close of $100 million in the second quarter, focuses on healthcare delivery, life sciences, medical technology and retail healthcare. More than two thirds of its corpus will be concentrated on the first two areas and only 30% of the capital will be deployed in India.

“There is going to be an avalanche of opportunity in healthcare in South and Southeast Asia in the next 10 years,” Varma explains. “The key statistic is that 80% of healthcare expenditure is out of the private pocket and only 20% is public expenditure. There is a fundamental need for high-quality healthcare as incomes increase across the region but a lack of infrastructure and manpower to deliver it.”

DeAl of the [email protected]

Unitas patches up Australian auto parts firm

Quadria carries the Milestone-Religare torch

Repco: Goodbye Unitas

Life sciences: Big opportunity


inDiA is expecteD to see An increAsing number of secondary buyouts in the next couple of years as GPs look for ways to monetize existing portfolios in the face of a difficult public market environment. While KKR’s acquisition of Warburg Pincus’ majority stake in Alliance Tire Group (ATG) conforms to the trend, Heramb R. Hajarnavis, a director at KKR, is keen to emphasize that this is no normal Indian company.

“You are likely going to see a lot more secondary deals in India arising from investments that took place between 2006 and 2008. We see ATG as fairly unique. At the time of the original investment this was still a greenfield business from a global perspective that the founder had come up with. You don’t normally see this in an India context,” he tells AVCJ.

Warburg Pincus took a 70% interest in ATG in 2007 as part of a $150 million buyout with Yogesh Mahansaria, former CEO of India’s Balkrishna Tyres. The foundations were an Israeli

entity but Mahansaria built the business into a global operation through a combination of bolt-on deals and organic expansion. Sales increased from $125 million to more than $500 million during Warburg Pincus’ investment period.

ATG now has manufacturing plants in Israel and India, plus R&D facilities in Israel, India, the US and South Africa, employing more than 2,500 people worldwide. It specializes in off-road tires, typically used in the agricultural and construction industries, principally selling to customers in Europe and North America, although there are plans to

boost market exposure in Latin America and Australia.

Future growth is expected to come through a combination of rising global demand – mechanized equipment is increasingly used in farming, for example – and a dominant market position. The big global tire manufacturers have moved away from the off-highways segment,

potentially leaving more space for ATG. According to sources familiar with the

transaction, KKR has agreed to buy Warburg Pincus’ controlling stake plus a small amount of equity from Mahansaria, who remains involved in the business. It will pay $450-500 million, and assume around $125 million in debt, for a stake in excess of 80%.

KKR is committing $300 million in equity from its first Asia fund, with Crescent Capital Group Ivy Funds’ Ivy High Income Fund providing the remainder through a mezzanine financing tranche designed by KKR Capital Markets.

The private equity firm opted for mezzanine rather than issuing a high-yield bond via the public markets because of the flexibility it offers. When dealing with private investors, there is the possibility of negotiating to reduce the number or structure of the covenants on the debt and altering the interest payments schedule.

“This was a private structure, which allowed us to develop a bespoke financing solution, for example with covenants that fit the growth profile of the company,” Hajarnavis adds.

AFter A DecADe spent exploring the possibilities, Capital Dynamic concluded that best way for a global fund-of-funds manager to properly penetrate the Chinese market was “inside-out” – work with people in Beijing who come from Beijing. This is the rational for the firm’s tie-up with Diligence Capital, a 10-year-old local fund-of-funds.

“Other industry players may deploy different strategies such as ‘outside-in’ to get into China,” says Thomas Kubr, who recently stepped down as Capital Dynamics’ CEO but remains executive chairman, focusing exclusively on client development and overall strategy. “A lot of people try to access China through Singapore or the US West Coast. That’s similar to trying to access the US market through England. Yes, people may speak the same language but are they of the same culture?”

To Kubr, any Asia strategy needs to have China at its center. He has visited the country close to 40 times in the past six years in order to figure out the best way of achieving this, before settling on Diligence Capital.

Under the strategic partnership, the Chinese firm will stay operationally independent but its English name has changed to Capital Dynamics China. According to a source familiar with the situation, Diligence Capital appealed to the Swiss firm is because it is one of the few China players running both renminbi and US dollar-denominated investment vehicles at the same time. This eases Capital Dynamics’ path towards fundraising in China, as well as avoiding the regulatory restrictions that apply to offshore investors.

“We have established a very tight cooperative arrangement and we definitely plan to offer our clients – whether Chinese or international – a fully integrated investment solution. It should be to the degree that people know there are two separate corporate entities, but with one product in the future,” Kubr explains.

Capital Dynamics’ other Asia bases are in Hong Kong and Tokyo, where it set up operations in 2007 and 2010, respectively.

The most commonly used means by which foreign fund managers set up renminbi platforms is through joint ventures with local funds. It improves the efficiency of due diligence but it can alignment with investors based in the West can create problems for portfolio companies.

What might be best practice in the US is not necessarily best practice in China.

Backed by the 10-strong Diligence Capital team in Beijing, Capital Dynamics doesn’t need to set up a separate management team to oversee its China business. This function

has been entrusted to Diligence Capital’s founder, Andy Ge, who has previously worked for the Legislative Affairs Office of China’s State Council, where he helped draft laws covering finance, capital markets, investment and private equity.

“We have invested over $1 billion in China market so far,” Kubr adds. “I expect this partnership could generate substantial dividends.”.

DeAl of the [email protected] / [email protected]

KKR kicks tires, buys Alliance

Capital Dynamics goes inside-out in China

Inside-out: A Chinese strategy

Alliance: Deals on wheels


Q: Why were PE and VC excluded from China’s Securities Investment Fund Law (SIFL)?

A: First, the National People’s Congress pulled back as a result of uncertainty and anxiety. Second, it is deemed to be a political compromise to keep the status quo. When the draft SIFL came out including proposed language regarding private equity and venture capital, it suggested that the Chinese Securities Regulatory Commission (CSRC) would be responsible for regulating the industry. Then, during the drafting process, a number of private equity professional associations submitted a joint position paper voicing their opposition to including PE and VC in the revised law without specifying how the industry is going to be regulated and who is going to regulate it. The provisions were then removed from the final draft.

Q: Why are local private equity fund managers so anxious about falling under the SIFL?

A: They are afraid that excessive regulation of the industry could restrict the industry’s development. There is no objection to proper regulation, but they are against excessive regulation, or vague provisions that could lead to excessive regulation. The draft SIFL did not clarify fundamental questions such as which regulator would be the proper supervisor of the industry. It was unclear how different government agencies such as CSRC and National Development Regulatory Commission (NDRC) would divide their power in this respect: Whether they both

would regulate the industry; whether some exemption or lighter regulation would be applicable to PE fund managers; and where the line would be drawn between a public fund and a PE fund because they are included in the same set of laws. To illustrate the issue of which regulation to follow, the NDRC recently reiterated its call for PE funds with more than RMB500 million ($81 million) in assets to register with local governments. The CSRC issued a similar registration requirement only one month ago. This created uncertainty over whether PE managers have to comply with both sets of rules. Without any clarification, compliance would be very difficult. Operational

risks would also increase due to confusion among managers as to which regulator they should report to.

Q: Do you think China’s regulators should elaborate a new set of rules specifically for PE and VC, different from the SIFL, to better regulate the industry?

A: Ideally, there should be a single set of rules for private equity and venture capital with clear

regulations including registration and reporting procedures. Guidelines in the form of government rules and circulars are fine to keep the regime flexible. If would also be helpful if the two regulators could coordinate with one another to issue those rules.

Q: What does the uncertain regulatory environment mean for foreign fund managers operating in China?

A: Foreign private equity fund managers are frustrated particularly when they raise capital in China because of a lack of clarity in the regulatory framework. Managers operating funds with more than 200 investors in China may be classified as public under the

Chinese securities laws and rules, although those regulations were not devised with PE and VC in mind. Some conservative foreign fund managers are keeping their China expansion plans on hold due to these uncertainties.

Q: How do offshore US dollar funds compete with onshore renminbi-denominated funds?

A: The emergence of renminbi funds in the last couple of years has obviously led to an increase

in competition for foreign fund managers. If you look at the numbers, the market is packed with renminbi funds that are aggressively looking for portfolio companies. In addition, foreign fund managers find it harder to tap the China market because they require government approvals for transactions and currency conversion. Renminbi fund managers, on the other hand, do not have to go through the same procedures, which means they can deploy capital faster and more easily.

Q: To what extent have illegal fundraising activities affected domestic managers in China?

A: In mature markets, private equity is more sophisticated and institutional, which means that

investors can only participate if they meet certain criteria. In China, the fundraising process is loosely regulated and this has led to illegal fundraising activity. Domestic distributors have taken advantage of loopholes in the law to sell products through retail channels to investors who don’t fully understand the asset class. It creates a lot of trouble and unfair competition for both foreign and legitimate domestic fund managers.

inDustRy Q&A | LoRNA [email protected]

Risk factors For domestic private equity funds in China, regulation remains a clouded issue – it is unclear who should be responsible for the issue and how. Lorna Chen, a partner with Shearman & Sterling, explains where the difficulties lie

“Without any clarification, compliance would be very difficult. Operational risks would also increase due to confusion among managers as to which regulator they should report to.”


PRivATE EQUiTY DATA FiLE | AVCJ [email protected]

priVAte equity in AsiA

Investment Breakdown by Country From 1 January to 31 March 2013

investee country Amt. invested us$mln no. of Deals (Disc.) no. of investees

Australia 2,479.3 23 15 23

India 1,799.8 61 48 60

South Korea 1,398.2 29 29 29

China (PRC) 1,334.5 81 49 81

Japan 1,109.7 63 47 63

Philippines 324.0 3 2 3

Malaysia 299.9 4 3 4

Vietnam 200.0 1 1 1

Hong Kong 112.0 5 2 5

Singapore 85.1 19 17 19

Indonesia 35.0 7 1 7

New Zealand 2.5 3 1 3

Taiwan 1.1 5 1 5

Thailand 0.6 2 1 2

Maldives - 2 - 2

CLoSED FUnD

Location: Hong Kong

Fund name: Affinity Asia Pacific Fund IV, L.P.

Closing Amount: US$1.5 billion (first close)

Launch Date: September 2012

Fund Manager/Advisor: Affinity Equity Partners Limited

Stage Focus: Buy-outs (MBO/MBI/LBO), Expansion/ Growth Capital

Industry Focus: Consumer products/services, Electronics, Financial services, Manufacturing - Light, Medical, Services - Non-Financial, Transportation/ Distribution

Geographical Focus: China (PRC), Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand, Vietnam

Contact: Tang Kok-yew

Phone: (852) 3102-8328

Email: [email protected]

Website: www.affinityequity.com

Update: Affinity Equity Partners has reached a first close of US$1.5 billion on its fourth fund. Affinity Asia Pacific Fund IV has a hard cap of US$3.5 billion and it will have the similar investment strategy as the previous funds, focuses on growth capital and buyout opportunities in Pan-Asia region in diversified sectors.

nEW FUnDS

Location: China (PRC)

Fund name: Morgan Creek Partners Asia II, LP

Target Amount: US$300 million

Launch Date: March 2013

Fund Manager/Advisor: Morgan Creek Investment Consulting (Shanghai) Co., Ltd.

Stage Focus: Buy-outs (MBO/MBI/LBO), Expansion/ Growth Capital, Start-up/ Early Stage

Industry Focus: No Preference

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

Contact: Jason Zhang

Phone: (86) 21-6075-1688

Email: [email protected]

Website: www.morgancreekcap.com

Update: Morgan Creek Capital Management has launched its second fund of funds at US$300 million. 60% of the fund will focus on Chinese GPs engaged in growth and buyout deals, with a smaller portion of the corpus going to venture capital.

FunD-rAising monitor

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