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December 2005 Issue
In Brief

Alluring returns in Asian Private Equity have attracted foreign houses to return and come into the region. An analysis of their latest entry strategies Feature
A China Investment is Put in Limbo following issuance of new regulations. Warburg Pincus' plight in Datang Telecom exposes another set of unforseen factors in the Middle Kingdom Analysis
Australia Leaps to Prominence on the back of strong returns and the activities of some of its participants in other markets Focus
Mando’s Exit is Driven by Hyundai instead of private equity investors unveiling a web of complexities surrounding this investment Divestment
Cultural Divides in Japan Corp frustrate restructuring experts while opening up opportunities to savvy investors Japan Corner
Notables
Newbridge calls on Hanaro
Kasen’s sponsor picks up slack
Blackstone Asia broadens role
Bank queue
Newbridge closes big buyout fund
Catalyst and CHAMP get discount
Moving into China lands
IPO delays test patience
Listing hub in Greater China
Minth accelerates on debut
Punjab Tractor pulls new investor
PVR to show profit to ICICI
FDI rules may tighten in Japan
Nikko drops Kanebo
Pacific Golf tees up listing

Buyouts
Conventional Private Equity
Divestments
India Corner
Japan Corner
Summary
Market Watch
Index & Exchange Rates

Maps in the East

For the second consecutive year, brilliant returns continue to fill Asian private equity’s divestment record book. In the first three quarters of the year, over US$15.2 billion has been returned to the industry through 96 exit results (fig.1). The year boasts the sale of two of Asia’s earliest signature buyout transactions, including Korea First Bank and KorAm Bank. It also fuelled an extraordinary level of exhilaration when China’s search engine, Baidu.com, was listed on NASDAQ. The dazzling debut left behind an Asian venture capital investment legacy that has mesmerised global investors.

Convinced that Asia shall be private equity’s next “promised land”, foreign establishments are streaming into the region, employing an array of strategies to establish their foothold.

Return of the Institutions

The uninterrupted and phenomenal return record in Asian private equity together with the region’s burgeoning economic growth are powerful factors that have been alluring foreign houses to the East. Even some of the institutional investors that previously halted their Asian programme are revisiting or have already made commitments to the Asian private equity landscape. Credit Suisse First Boston which ceased its Asian private equity investment programme in the mid 90’s, has reemerged on the scene as the sponsor of a China fund. According to sources, the investment banking arm of the Swiss financial institution has pledged 40% of the US$500 million that the management team of China Renaissance Capital Investment is targeting in their first investment vehicle.

The list of institutional investors that have revived or are reviewing their Asian agenda is growing. There are mentions that Prudential Insurance Company of America, which halted all of its fund sponsorship programme by 2001, has rekindled its Asian affection through subscription to a Hong Kong-based private equity fund. Even the UK-based 3i plc, which sealed the doors of its Japanese operation in 2004,has allocated capital to a Japanese fund.

Boosted by impressive returns, corporate limited partners are declaring their Asian position. Intel, which has long invested in Asia through its corporate venturing arm, Intel Capital, has decided to ...

Focus

Leaping to Prominence

Australia is assuming an increasingly pronounced profile in buyout markets outside of the country

For nearly a decade, the Australian private equity industry has largely been regarded as a market of its own with few connections to its regional or global counterparts. Following a series of outstanding returns achieved by regional buyout investors since 2004, the country has emerged as pan-Asia buyout houses’ favoured investment destination. The recent naming of Macquarie Bank as the possible acquirer of The Carlyle Group’s Taiwan Broadband Communications is the latest confirmation that Australian institutions are ready to assume a more prominent role in the global buyout market. During the year, there have been a number of defining movements suggesting Australia’s rising role on the global buyout stage.

Drawing Regional Heavy Weights

Australia emerged as an investment destination when pan-Asian buyout houses began to seek opportunities in the region in late 1999. Since then, four of Asia’s five largest buyout firms have established an Australian address, underscoring the country’s importance in regional buyout firms’ investment expedition map. Affinity Equity Partners and CVC Asia Pacific were the earliest to have created their foothold, with Newbridge Capital and The Carlyle Group being the most recent entrants. CCMP Capital Asia is expected to relocate one of its partners Down Under shortly. The largest island in the southern hemisphere is the only buyout market that houses Asia’s five leading and most active buyout investment firms, further evidencing Australia’s central role in Asian buyouts.

There are compelling reasons for pan-Asian buyout firms’ unfaltering faith in Australia. With the exception of Impulse Airlines, all companies committed by pan-Asian buyout firms since 2000 have richly rewarded their respective investors, with Pacific Brands and Just Group being the most illustrious examples. Pacific Brands returned over seven times of invested capital to its investors while Just Group generated four times. In April this year, CVC Asia Pacific, Ironbridge Capital Pty Ltd. and GIC Special Investments Pte Ltd. nearly doubled their original invested capital when they sold their holdings in Affinity Healthcare Ltd., after having held the hospital operator for 18 months. In October, the UKbased Prudential Corp. celebrated the sale of Taverner Hotel Group as its Australia subsidiary, Catalyst Investment Managers Pty Ltd., disposed of the hotel operator and is estimated to have earned an internal rate of return of 26% for an investment held for just over four years. In August, DB Capital Partners, the private equity investment arm of Australia’s Deutsche Asset Management sold Pacific Handling Solutions Pty Ltd. (trading as Loscam) to Affinity Equity Partners. This secondary buyout is estimated to have returned 4.5-fold of the invested capital to DB Capital Partners’ coffers. It is one of the best buyout divestment results in 2005 (fig.10).

Winning Factors

Australia’s well-developed private equity market infrastructure offers not only consistent returns, but a new dimension of opportunities to other Asian markets. In taking up a controlling stake of Air International Thermal Holdings, the subsidiary of Air International Group, CCMP Capital Asia is entering the China market via its investee company that is based in Australia. The acquired company supplies heating and cooling units to automobiles with operations in China, Australia and USA. As China will be the source of engineering as well manufacturing, Air International Thermal Holdings is expected to relocate its engineering centre to China, as acknowledged in a statement made by Futuris Corp., the ultimate parent organisation of Air International Group, at its 2004 annual general meeting.

Australia’s buyout investors are reaping the fruit coming from an investment community that advocates international practices. Its buyout funds are enlisting a growing list of non-domestic limited partners. CHAMP Private Equity, which announced the final closing of Australia’s largest buyout fund at A$950 million (US$730 million) this year, received approximately one third of its commitments from the USA and another third from Europe. Both Singapore government’s GIC Special Investments and the Netherlands-based AlpInvest Partners have subscribed to Ironbridge Capital’s maiden fund.

In response to the increasingly globalised market, Australia’s buyout investors are broadening their investment parameters beyond home boundaries. In June this year, Macquarie Capital Alliance Group and Macquarie Bank deployed a combined US$297 million to take over BBC Broadcast, a subsidiary of the BBC Corp. Hailed as a landmark buyout investment, BBC Broadcast was the first UK-based company acquired by an Australia-based group (fig.12). The Sydney Morning Herald described the transaction as “turning the tables on Australia’s colonial history”.

The names of Australia’s domestic buyout firms are increasingly associated with companies outside of the land where the kangaroos live. In the beginning of the fourth quarter this year, Ironbridge Capital completed its acquisition of Barbeques Galore, a NASDAQ-listed company that has retail operations in both the USA and Australia. Most recently, Catalyst Investment Managers was bidding for Waco International, a leading scaffolding company in South Africa while Macquarie Bank is reportedly close to acquiring Taiwan Broadband Communications, one of the four major cable TV operators in the island.

Observation

As the global investment community intensifies their activities in Australia, Asia’s most developed private equity market is becoming increasingly competitive for buyout firms to consummate transactions. The Carlyle Group, despite having set up an operation in Australia, has yet to log one Australian company in its deal book. Newbridge Capital lost a formidable bidding war when it intended to take over Australian Leisure and Hospitality Group. The private equity house was outbid by Woolworths Ltd. which was willing to pay premium price for its acquisition target. CVC Asia Pacific ultimately missed out in its bid to become the owners of 14 hospitals from Affinity Healthcare for the second time. The most recent consortium that encountered rejection was in the US$2.6 billion bid for Goodman Fielder, which was led by Bain Capital, with Goldman Sachs and Australia-based Pacific Equity Partners joining the pact. (fig.8). While the grass may seem green over the Australian fence, it will take more than a kangaroo hop to clinch a deal and secure satisfactory returns. ��

News

Sponsor Buys Kasen’s Shares to Stabilise Market

Kasen International Holdings (‘Kasen’) announced that UBS, the sponsor of its global offering, bought 34.59 million shares in the company. UBS, undertook such actions “in its capacity as stabilizing manager of the Global Offering”, said Kasen in a public statement. The number of shares acquired by UBS, at between HK$2.13 (US$0.27) and HK$2.45 each, represents 11.4% of the total number of offer shares available in the global offering.

On 20th October, Kasen, backed by Warburg Pincus, was listed on the Hong Kong Stock Exchange. At its debut, its shares failed to attract support from investors. It closed at HK$2.37 each, a 6.68% decline on its offer price.

Warburg Pincus first committed US$22 million in Kasen back in 2003. In January 2004, it increased its commitment to China’s largest leather maker by an additional US$15 million. At Kasen’s initial public offering, Warburg Pincus sold a portion of its holdings and currently continues to hold an approximate 18.44% equity position in the company (China)

The Bank Queue

Global institutions are exhibiting an insatiable appetite for Chinese bank stocks. Following China Construction Bank’s global public offering of shares in October which raised over US$8 billion, the list of foreign investors expressing their interest in taking an equity stake in banks in China continues to grow.

Following earlier indications that Goldman Sachs’ private equity arm will team up with Germany’s Allianz and American Express to commit US$3 billion in Industrial and Commercial Bank of China (‘ICBC’) in taking up a 10% stake, the country’s largest bank received gestures from a new list of investors. According to reports, Middle East investors from Abu Dhabi and Kuwait are the latest conveying their interest to take up shareholdings in ICBC. Market analysts believe ICBC could raise as much as US$1 billion from Kuwait alone.

In the meantime, ICBC is expected to seal the deal with Goldman Sachs, Allianz and American Express before the close of the year. With Goldman Sachs allocating US$1.8 billion in this US$3 billion deal, it is set to be the largest private equity deal not only in China, but for all the Asian markets outside of Japan. (China)

Listing Hub in Greater China

In a development that further highlights Hong Kong’s position as the dominant stock market in Greater China, the territory’s bourse has been registering increasing interest from Taiwan-based companies. According to reports from Taiwan Economic Journal, by the end of 2005, there will be seven companies from Taiwan that have a Hong Kong bourse address. Together, they will raise an estimated US$846 million from global investors. The amount will represent a four-fold increase from the US$215 million raised in 2004 (fig.9).

Taiwan’s stocks are receiving enthusiastic response on Hong Kong bourse. Foxconn International Holdings, a subsidiary of Hong Hai Group, that was listed on Hong Kong Stock Exchange in February this year, saw its share price soar, breaking beyond HK$10 (US$1.28) mark. Compared to its offer price of HK$3.88 it represents a 258% increase.

As Taiwan seeks to internationalise its enterprises, a buoyant platform in the form of Hong Kong’s bourse appears more than adequate. (Hong Kong)

Moving into China Lands

The interest in opportunities within China has lead to a proliferation of funds and investment strategies over the past 24 months. The latest developments for two different investors provide an indication of the variety of paths being attempted.

SW Kingsway, which has previously launched funds targeting private equity investments in the Middle Kingdom, has recently announced plans to raise between US$50 million and US$100 million for investment in China’s real estate in 2006. Fund raising has commenced and the first transaction has been made. In April, Ocean Express, a residential project in Beijing was acquired for 236 million yuan (US$29 million).

Another group with ambitions in China is Ewing Management Group. Formerly affiliated with The Carlyle Group, the firm is planning to gain ownership of Chinese companies through the acquisition of bad loans. Declaring its intentions in Asia, Ewing Management Group has appointed former Secretary of State, Mr. James A Baker III as an investment partner and its senior advisor in Asia. It has a US$1 billion war chest from the fund it raised in 2004. (China)