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January 2006 Issue
In Brief

Clinching Deals Will be the Test with an increasing number of new faces coming into the market Feature
An Unorthodox ‘Asian’ Model generates super returns, leading questions to viable model Analysis
Hong Kong’s Bourse is Favoured by Chinese companies but challenges lie ahead Greater China Corner
China Holds the Card to Sale of its bank assets, even though foreign investors are the cash providers Greater China Corner
Foreign Houses are Setting up Funds in India with Intel making US$250 million pledge India Corner
Sale of Kanebo Marks Closing Chapter to corporate restructuring in Japan Japan Corner
Notables
Macquarie’s new gem
Shenzhen VC Captures 1/3 of the Nation’s Activities
Noreclo’s founder moves to DBS
Thailand Equity in TV
Waco - done deal
Aspiring to Fund and Manage
CHAMP’s star exit
Taiwan Mulls Limited Partnership Structure
AlpInvest gets US$11bn
Carlyle’s Greater China story
Goldman finds a China home
Astute Moves
Walden, NIF in Rock Mobile
Suntech debut on NYSE
Merrill boosts Indian presence
Bessemer et al in Indian hotel
India’s Persistent got Silicon funds
Actis sold part of Nitrex
Warburg Pincus’ latest windfall
Normura sold Millennium

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

Dealing with Deals

Once, Asian private equity was an asset class that only the most committed long-term investors had the desire to be affiliated with. The tide of fortune has changed dramatically during the past 24 months, thanks to a solid list of uninterrupted impressive return records. To players in the financial industry, it is now considered chic to be in Asian private equity. As the Asian industry enjoys its first golden era on a global scale, 2006’s economic buoyancy will shape the landscape in Asian private equity. The New Year shall greet a rising number of new arrivals to the East, but competition for deals will reach a new level of intensity. Even to some of the most established institutions in Asian private equity, the months ahead shall define their position on the Asian map.

The Visitors

The seeds that govern the prevailing and future course of development in the Asian private equity industry were sown in early 2004. The listing of Japan’s Shinsei Bank and its subsequently spectacular performance have erased previous doubt over the viability of the Asian private equity model. It ushered in a strong list of global buyout houses, such as Apax Partners, Blackstone Group, Bain Capital, Kohlberg, Kravis & Roberts as well as Permira. There is however another group that is quietly nibbling into the market and making defining movements. They are the hedge funds.

In early 2005, Mr David Rubenstein, a founder of The Carlyle Group warned that hedge funds would pose a competitive threat to buyout firms in terms of their capability to clinch deals and lure talent. There are early indications that his observation is accurate. While none of the global buyout firms that hung up their signage during 2005 has made transaction record, two hedge fund groups have successfully clinched three deals in China and India separately (fig.1).

The San Francisco-based Farallon Capital revisited Asia in 2005 after an absence of three years since it took a majority position in Indonesia’s Bank of Central Asia in 2002. The hedge fund house made two commitments in India. In the real estate business of Indiabull Financial Group, Farallon Capital was able to gain a controlling position, joining less than a handful of financial investors that have been successful in ...

Analysis

An 'Asian' Model

k1 thrives on an unconventional Asian private equity model

The management of Singaporebased k1 Ventures Ltd. (‘k1’), PCG/ Greenstreet Ventures LLC (‘PCG/ Greenstreet’), celebrates its fourth anniversary with the investment company that was created by Keppel Corp. As PCG/Greenstreet enters its fifth year with k1, the latter recorded a surge of 93.51% on its revenue to S$153.9 million (US$91.83 million) in the quarter which ended on 30th September 2005, compared to S$79.53 million from the same period in the previous financial year. Its profit before tax climbed to S$12.3 million, an impressive 70% increase.

Since taking over k1 in September 2001, with the exception of the following 12 months which recorded a loss of S$78.42 million, k1 has been in the black. By the end of its 2005 fiscal year which ended on 30th June, the once technology-focused investment company was able to report a profit before tax of S$72.9 million to its shareholders. Its net assets have expanded by 46.74% from S$405.25 millions in 2002 to S$594.68 million in 2005 while net asset value for each of its shares reached S$0.31 (fig.4). In March 2005, k1’s investors were richly rewarded with a dividend of S$0.01 per share.

In the history of Asian private equity, the four years in which PCG/ Greenstreet took over the management rein of k1 were the most volatile for the industry, and the Asian private equity model was questioned as a viable investment blueprint. In these four years, while buyouts assumed its dominant role, growth/expansion financing in Asian private equity was subdued. k1 has not only been able to brave the unfavourable winds, but it has also demonstrated consistent returns and transformed into a major player in mid-size transactions. PCG/ Greenstreet Ventures’ unorthodox approach challenges the principles of traditional private equity investing.

Rising from the Rubble

Established in July 2000 at the crest of the technology bubble, k1 was listed on the Singapore Stock Exchange with a technology focus. It was christened with a capital pool of S$500 million. Within the next 12 months, k1 had invested in 19 technology related firms at an aggregate cost of S$85.7 million. But with the burst of the technology bubble, k1 wrote down approximately S$67.5 million, or 78.8% of the original total amount invested. Mired in financial trouble with dismal prospects, in September 2001, PCG/Greenstreet took control of the management of k1 through a capital injection of S$52.8 million.

The partners at PCG/Greenstreet are a very different breed from typical Asian private equity firms. All of them have had a wealth of operational experience. Mr Steven Green, the leading partner, was formerly an US ambassador to Singapore. Prior to his diplomatic appointment, he had 25 years of experience in corporate restructurings and expansions in various industries. For eight years, he was the chairman and chief executive of Samsonite Corp. The other two partners, Dr. Yip Yan Wong and Mr Gary Winnick are veterans in the corporate world. Dr Wong is the founder and chairman of WyWy Group as well as Yeo Hiap Seng respectively, two of Singapore’s known corporations. Mr Gary Winnick was a founder of the now defunct Global Crossing Ltd. Despite the demise of his fiber optics global telecommunications network firm, Mr Winnick nonetheless is a visionary in this industrial sector. Compared to senior partners of private equity firms, these three men may not be financial wizards like their counterparts, but their extensive operational knowledge and expertise have been instrumental in guiding k1 to its road of recovery (fig.5).

Crossing Borders

Despite Mr Green’s background in Asia and the fact that k1 is a company listed on the Singapore bourse, he crossed new borders in the Asian private equity model. While “investing in Asia” is a hot trend nowadays, k1 Ventures instead directs its resources to the U.S.A.. It also deviated from the traditional private equity approach by seeking listed instead of private companies and holding the investments for short periods, with the longest term being 28 months (fig.6).

Five months after PCG/ Greenstreet took control of k1, the new managers quickly dialed into a prime opportunity by acquiring PrimeCo. Personal Communications (‘PrimeCo.’), along with a consortium of investors. PrimeCo. was Chicago’s oldest and only hometown service provider in the wireless sector. For an investment of US$7.8 million, k1 was able to pocket a net gain of an approximate US$1.48 million within a period of six months.

By late 2002, when soaring fuel prices had yet to become a reality, k1 turned its direction to the energy sector. It set up a joint venture with McMoRan Exploration Co. (‘MMR’), one of the world’s largest oil and gas exploration operations, in December 2002. Two years later, k1 sold the venture and realised a gain of approximately US$4.75 million. In financial year 2002, energy/natural resources comprised 30% of k1’s portfolio make-up, indicating its astute foresight to the future trend of the energy sector. k1 reported profits in both disposals of its shares in The Gas Company of Hawaii as well as in SEMCO Energy. In the former, the investment company made a US$123 million gain after a transaction total of US$115 million, while in the latter, it made a gain of US$5 million for a deal value of US$50 million. Significantly, k1 made all these gains within a relatively short investment holding period, ranging from six months to 28 months.

While k1 appeared to have focused on the energy sector, it also diversified itself in other industries. K2 Inc. is a sportswear company while Unext LLC and Knowledge Universe Learning Corporation, are education-related investments. Its latest acquisition, Helm Holding Corporation is a rail transportation equipment company.

k1 also mitigated its risk exposure in focusing on listed companies with virtually all of them based in the USA.

Despite k1’s unconventional approach, its strategy has won the endorsement of its shareholders through its share price performance. At the beginning on September 2001, the month of PCG/Greenstreet’s management takeover, k1’s share price was S$0.18. Its share price plunged to S$0.13 in April 2001 as investors frowned on the massive write-offs reported by k1. At the end of September, k1’s share price reached a historical high of S$0.37, representing a 106% jump from its share price in September 2001.

Observation

In July last year, k1 achieved a milestone when it committed S$796 million in taking up an 80.1% stake in Helm Holdings, the largest locomotive operating leasing company and the largest independent railcar leasing company in North America. Thus k1 has joined the mid-market buyout investors rank. It has taken the partners at PCG/Greenstreet a fleeting four years to wean off k1’s venture capital legacy, to thrive in its journey as a growth/ expansion investor and graduate to join the buyout league.

Whether k1’s model of investing in listed companies that are thousands of miles away from its own fund management base for a relatively short investment holding period is an acceptable strategy is a question that begs answers from the institutional investors’ community. Yet compared to Transpac Industrial Holdings which is another listed investment company on the Singapore Exchange Ltd, and one of Asia’s earliest listed investment vehicles, their respective performances are poles apart. Managed by Transpac Capital, one of Asia’s oldest private equity firms, in the past 12 years since Transpac Industrial Holdings came into operation, its value has been depleted by S$66.6 million. k1 has defined an Asian private equity model, at least for its peers that are listed investment companies.

Greater China News

Shenzhen VC Captures 1/3 of the Nation’s Activities

Shenzhen, the city next to Hong Kong, is by far one of China’s most vibrant venture capital hubs, according to information released by the Taiwan Venture Capital Association. At the end of last year, Shenzhen was home to 197 venture capital firms with an aggregate of over 20 billion yuan (US$2.5 billion) under management. According to an estimate by 21st Economic Century Herald, at the end of 2004, there were 217 domestic venture capital firms managing a capital pool of 24 billion yuan in the country, indicating Shenzhen’s central role in China’s venture capital industry.

The most prosperous city in Southern China outside of Hong Kong, over 80% of these 197 venture capital fund management firms are in fact owned by the private sector, indicating the magnitude of economic liberalisation taking place in Southern China. It is estimated that the Shenzhen venture capital industry has invested in more than 600 companies, representing an investment total of eight billion yuan, with 60% of the capital directed to the local enterprises.

Currently, Shenzhen Capital Group Co. Ltd. is one the largest venture capital firms in China with US$361 million under management. In recent months, Shenzhen witnessed active foreign private equity investment activities. Shenzhen Minrun Agricultural Products Distribution Chain Stores received an initial US$37.1 million from Ashmore Investment Management, while pengpeng.com raised US$12.5 million from SAIF Partners. Hong Kong-based TVG Capital Partners is known to have committed capital to Cellon International, but no investment amount was disclosed (fig.16)

Aspiring to Fund and Manage

After having witnessed the merits of venture capital financing to the growth of companies, some of China’s aspiring entrepreneurs are venturing into fund management area. Mr Victor Koo, former president of Sohu.com has decided to set up a “Search Fund”. Employing the concept that originated at Stanford University, a search fund pools together capital raised by the entrepreneur who intends to acquire existing companies or new ventures. 1Verge, established by Mr Koo is based in Beijing, but no actual fund size was disclosed.

The market also speculates that Dr Edward Tian, the second in command at China Netcom Corp., one of the key architects in the company, could be shifting his attention to set up a venture capital fund as well. He is believed to be raising an US$30 million fund and is expected to leave his current position.

Both Sohu.com and China Netcom had earlier received funds from private equity investors. The former was seeded by private individuals from Massachusetts Institute of Technology. It subsequently received venture funds from Intel Capital and was backed by IDG Venture Technology Investment. China Netcom owes its early stage growth to Goldman Sachs as well as the corporate venturing arm of News Corp.

Taiwan Mulls Limited Partnership Structure

In a development that reflects a new stage of development of private equity in Asia, the Taiwan government is currently considering introduction of the limited partnership structure, not only for the island’s venture capital industry, but also for high tech companies as well as those in the services sector. Despite being one of the largest and oldest venture capital communities in Asia, venture capital investing in Taiwan is conducted through a company structure which has an evergreen life cycle. The move signals Taiwan’s intention to join the rest of the Asian private equity community in adopting international fund management paradigms.

Astute Moves

China’s rising capital expenditure is dictating some of the latest movements taken by Taiwanese companies in mainland China. According to a survey undertaken by the island’s Ministry of Economic Affairs, there are clear indications that Taiwanese companies are moving further north and west to set up their operations. In the first ten months of 2005, Taiwan’s enterprises have directed over US$4.7 billion to mainland China with four locations, Hebei, Shandong, Sichuan and northeast registering a sharp increase of capital flow from Taiwan-based investors. The Shandong province topped the list in over US$100 million, nearly double the amount received in 2004.

China currently houses 66,466 Taiwanese companies, accounting for an investment total of US$41.52 billion.