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February 2006 Issue
In Brief

Survival of The Fittest Is The Game as players bid for quality assets including managerial talent Feature
Who Is The Fa i r est Of All? An analysis of Asia’s two largest emerging markets, China and India Analysis
A Pearl in The South Brings luster to investment record in Southeast Asia Divestment
China’s Amended VC Rules and other regulatory liberalisation marks a new stage of development in the country Greater China Corner
Institutions From The Malay Peninsula are seeking opportunities in India India Corner

Buyouts Take a Backseat in Japan as investors seek growth/expansion opportunities Japan Corner
Notables
Seoul’s 1st listed road fund
PEP closes at A$1.2 bn
Newbridge bids for PCRD
Merger of two China media cos
Baidu.com Still Middle Kingdom’s Search Prince
Minsheng’s IPO postponed
Survival of the Fittest
Taiwan launches brand fund
Pacific Alliance in baby goods
PE investors buy public shares
NeGoldman seals ICBC deal
Warburg rides with land boom
Investor Asia sold Memorex
Orix’s road fund
Intas bought and sold
Sanyo got US$3bn

Funds
Buyouts
Technology
Divestments
Greater China Corner
India Corner
Japan Corner
Summary
Index & Exchange Rates

Telling Signs

If activities in the first month of the year are indicators of the coming trend, then 2006 shall witness a kaleidoscope of defining movements. As players compete fiercely for quality assets, seek to establish or further consolidate their presence in the region, new meaning is being added to the Asian private equity dictionary. Capital deployment to private companies is no longer the paramount principle as investors direct resources to acquire shares in the public domain. Buyout investment disciples are no longer adhering strictly to the “controlling position” gospel that they preach.

After two years of an illustrious investment return record, as Asian private equity enjoys an unprecedented level of accolades. Yet, the senior management turnover movement during the first five weeks of the year casts a long shadow on fund management firms’ ability to sustain their past illustrious performance without the long term commitment of their best talent.

Blurry Definitions

Although January was filled with festivity activities, with Christmas/New Year and Chinese Lunar New Year only four weeks apart, private equity investors in Asia took no time to lounge about. It was by far the busiest first month of the year, with US$7.1 billion in transactions known to have taken place, representing 46.7% of the 2005 transaction aggregate. Each day brought in dossiers of new transactions. The first few weeks of the year have not only reinforced Asian private equity investors increasing shift to public companies, but significantly, buyout investors taking minority stakes in their acquired assets.

Newbridge Capital (‘Newbridge’) greeted the new year by further pursuing its strategy to take minority positions in listed companies. Its plan to purchase the shares of two listed companies, Taiwan’s Taishin Financial Holdings (‘Taishin’) and Singapore’s Pacific Century Regional Development Co. (‘PCRD’) received extensive press coverage. In both transactions, when and if completed respectively, the buyout specialist firm cannot exercise management influence to the companies, at least in the near term.

Newbridge’s proposal to deploy an approximate US$127 million to acquire shares from all of PCRD’s minority shareholders could be interpreted as an overture to an eventual buyout position in the company. The share price of PCRD, the investment vehicle for Mr Richard Li, chairman of PCCW, Hong Kong’s largest fix-line telecommunications operator, has been lethargic for quite some time. The day before Newbridge made its move known, PCRD’s share price stood at S$0.23 (US$0.14), a far cry from the S$1.77 recorded in October 2000 when PCRD was at its corporate height. Yet should Mr Li decide to shift his interest, Newbridge would have favourably positioned itself to gain control of PCRD’s assets.

The deal that brought bewilderment to the market was Newbridge’s agreement to acquire NT$27 billion (US$844 million) worth of securities from Taishin, Taiwan’s second-largest credit-card issuer. When its holdings are fully converted, Newbridge would have become the largest single institutional investor in Taishin, with a 22% equity position. The private equity house ...

Analysis

The Hare and Tortoise Race

Asia’s two largest emerging markets are defining their position in private equity

For nearly two years, China and India have been locked in a tight race for their position in private equity. The 2005 trends shed further insight into these two markets. While China led in the 2005 return results, its private equity market is more vulnerable to changes stemming from external factors. On the other hand, India appears to have built more sustainable fundamentals to compete in the long run.

Funds

Like big sponges, Asia’s two emerging giants have been absorbing institutional capital from all parts of the world. In 2005, private equity funds that focus purely on China or India have raised a combined total of US$4.3 billion, representing nearly one-third of the pool of fresh capital coming into the Asian private equity market, excluding Japan. Private equity funds for India attracted over US$2.3 billion of commitments from limited partners, slightly ahead of the US$1.95 billion recorded by China funds.

During 2005, China attracted a greater number of funds, with 20 funds, 43% more than that for India. But the average fund size for the latter, at US$166.6 million, is virtually double that of China, which stood at US$97.6 million. The largest fund for investment opportunities in China, CDH Investments achieved its final closing at US$310 million. In India, the largest fund is ChrysCapital’s ChrysCapital IV fund, which closed at US$550 million. India is no longer home to funds with a petite fund size. Some of the funds which closed during 2005, such as Actis’ Actis India Fund II, LP, Baring Private Equity Partners’ Baring India Significantly, China’s private equity funds are dominated by foreign players which accounted for 63.15% of the US$1.95 billion during the year. The equation was reversed in India, where local fund management firms took up the lion’s share, at 65.90% of fresh capital for 2005. The relatively large pool of capital raised by local fund management firms provides the Indian private equity industry with a healthy cushion that minimises the negative impact of external forces.

Investments

China, however, is in the commanding position when it comes to attracting capital deployment from private equity investors. The world’s most populous nation recorded nearly US$3 billion in transaction total during the 12 months of 2005, more than double the US$1.4 billion registered by India. The disparity in transaction sums recorded by both markets clearly indicated that investors are willing to pledge much larger sums of capital to China-based companies. The average deal size in China stood at US$34.37 million while that for India was US$15.83 million. The significantly smaller average deal size in India affirmed the country’s large enterprises are still under the control of a pocket of wealthy families that are not ready to release their assets to third party investors. Whereas in China, with the government’s gradual deregulation, transactions commanding large price tag are being consummated.

Although there is a wide gap in the transaction sums captured by both markets, they share a common theme in the eyes of private equity investors. Companies in growth/expansion stages secured the bulk of capital deployment. In China, over 81.5% of the US$3 billion has been directed to this group of companies, while in India, it was 87.4%. Ironically, while enterprises in both markets are in need of capital infusion in order to fuel the growth of their companies, it has been particularly difficult for investors to gain a control of companies in these two markets. In both China and India, less than 7% of the companies that received funds from private equity investors granted their financial backers the privilege of controlling positions in their companies.

In China, the information technology and telecommunication sectors remain the favoured industry for private equity investors. They accounted for 23.4% or US$701 million of the 2005 transaction aggregate, leaving a host of all other industries to compete for the remaining capital. But in India, the capital deployment is evenly spread among a clutch of industrial sectors. While the services sector, particularly those that provide business outsourcing process, managed to lead in capturing 20.4% of the US$1.37 billion transaction sum recorded for 2005, the banking and finance as well as the healthcare sectors were not too far behind, with each accounting for 19.3% of the investment total.

Divestments

Despite the fact that India’s stock market is among one of the oldest in the world and is very efficient, ironically, it is the China-based companies that prefer initial public offerings (‘IPOs’) while this is not the case for India. In 2005, both China and India recorded similar number of exits, at 48 and 49 respectively. Over 81% of the divestments in China were made through the IPO route, with 17% of them through trade sales. Hong Kong’s well-established stock exchange together with NASDAQ’s interest in China’s technology stocks have provided two powerful platforms for China-based companies to offer their shares to public investors.

The exit profile in India is however not so skewed. While IPOs remained the preferred exit route, capturing 51% of the divestment results, trade sales accounted for 39% of the divestment movements. Indian companies prefer to conduct their IPOs within the domestic market. During 2005, no India-based companies backed by private equity made their debut on NASDAQ.

Observation

The result that speaks volume is the investment return. In the top quartile, China leads as more than half of its return results were well above an internal rate of return of 150%, versus 36% for India. Yet in terms of the multiple of the invested amount being returned, China and India are in a tie, with each returning close to four-fold of invested capital to their investors during the year. It remains too early to draw a conclusive answer.

Japan Corner

Greeting Growth

Buyouts take a backseat as Japan greets welcoming signs of economic rebound

For more than four years, private equity in Japan has been synonymous to buyouts. Following the sale of Kanebo by the Industrial Revitalisation of Japan that was concluded in late January, a chapter of corporate restructuring in the country has closed. With Nikkei 225 on an ascending path, breaking through 16,000 for the first time in 16 years, it signaled Japan’s readiness to welcome economic growth that has eluded the world’s second largest economy for nearly 15 years. In the land of cherry blossoms, its private equity investors have been vigilant to the advent of the changing winds. For the first time since the new millennium, investment in companies that promise growth is prospering.

For the four years ending December, taking controlling positions in companies have defined Japan’s leading position in Asian buyouts. But in 2005, buyouts registered a drastic decline both in terms of fund pool as well as transaction sums, indicating private equity investors have been focusing their attention on non-controlled situations.

After enjoying a record year in 2004 in which over US$2.7 billion of capital came in for buyouts, the US$396 million registered in 2005 was a petite 14.5% of that in the preceding 12 months. It was also the first decline in the buyout fund pool since 2001. Instead capital for non-buyouts accounted for 81% of the 2005 capital pool, a development that bespeaks investors’ assessment of the future dynamics in Japan’s economy.

Even in terms of transaction values, buyouts have lost their reigning position. The US$2.1 billion consummated during 2005 was less than half of the US$5.5 billion recorded in 2004. This can partially be explained by a large decline in the average deal size. In 2004, the average buyout deal had an enterprise value of US$305 million, while that in 2005 was US$162.6 million, a 47% drop.

The 12 months ending December was the first calendar year that registered capital deployment to companies in growth/expansion situations surpassing capital deployment to the buyout stage. Of the US$4.7 billion that Japan attracted from private equity investors during the year, 50.3% or US$2.34 billion was captured by companies that are seeking future growth.

Significantly, investors are willing to commit a large sum even without securing a controlling position in the acquired company. In 2005’s largest transaction, Seibu Group, Cerberus Asia Capital and Nikko Principal Investments Japan committed ¥160 billion (US$1.4 billion) for a 33% equity position. The trend was in sharp contrast to the past, in which virtually all transactions that passed the US$500 million enterprise value provided investors a controlling position deals.

After four years of commanding the lead position in the Asian buyout scene, ‘controlled’ deals have assumed a less prominent role in Japan. With the return of non-buyouts, hopefully, investors will be able to boast spectacular returns similar to those lauded by buyout investors.

News

Baidu.com Still Middle Kingdom’s Search Prince

China’s five year old internet search engine operating company, Baidu.com holds the title as the leader in the country in terms of usage and brand recognition, although its position is under threat. According to a survey completed by the NASDAQ-listed Keynote Systems in mid January, it found that China’s search engine users gave higher marks to Google in terms of “quality”, compared to Baidu. Over 68% of the consumers that participated in the internet performance study by Keynote System described Google as a “high quality” search site, as compared to 61% accorded to Baidu and Alibaba/Yahoo.

In August last year, China Internet Network Information Centre (‘CNNIC’) reported that Baidu was the clear leader among all other search engines in the country in commanding the traffic. It led Google by nearly 19% and captured 51.5% market share. Keynote Systems’ recent survey was also in agreement with CNNIC’s findings, but did suggest that Google can replicate its success in China by transferring its blueprint to China.

Google is also a shareholder in Baidu. In 2004, it paid US$10 million for a 4% stake in Baidu. (China)

Survival of the Fittest

Rising operational costs and fierce competition are testing the growth prospects of some of China’s promising companies that earlier received backing from private equity investors.

GST Holdings, China’s dominant fire alarm system producer, faces a drop in the gross margin in the face of price wars. The company expects a further decline in the sale price of alarm systems. In the first half of 2005, GST Holding’s gross margin was down 50% compared to 60% back in 2002.

In late 2004, 3i plc invested US$20.5 million in GST Holdings. In June last year, GST Holdings was listed on the Hong Kong Stock Exchange. Its share price is currently trading at HK$1.75 (US$0.23), representing a 1.74% increase of its offer price of HK$1.72

For China Paradise Electronics, which is backed by Morgan Stanley Private Equity Asia, Hong Kong’s formidable rental is a hindrance to the retailer’s expansion plan in the territory. It has decided to recoil from its original plan to expand overseas and add 90 new stores in 2006.

In January 2005 and October 2005, Morgan Stanley Private Equity Asia injected a total of US$58.19 million into China Paradise Electronics, the third largest household appliances shop. In October 14th, 2005, China Paradise Electronics was listed on Hong Kong Stock Exchange. (China)

Minsheng Bank Unlikely to Float on Hong Kong Bourse Soon

Despite institutional investors’ keen interest to take up an equity position in Chinese banks, they will have to wait a bit longer to own China Minsheng Bank’s public shares. The first national bank owned by the private sector, Minsheng Bank is unlikely to proceed with its planned Hong Kong listing. Since 2004, Minsheng Bank was known to have aspired to become a publicly-listed company on the Hong Kong Stock Exchange (‘HKSE’), but so far, its public debut dream remains a distant reality.

In December 2004, the shareholders of Minsheng Bank approved its plan to seek listing status on HKSE, but with a time limit of 12 months. In June 2005, Minsheng Bank was given the green light by the HKSE to proceed with its public offering. So far, Minsheng Bank has yet to comply with HKSE’s requirement to produce a publicly-audited account within six months after receiving such an approval. This together with the expiration of that endorsed by Minsheng Bank’s board point to another postponement of its public offering plan on the HKSE.

According to sources, the price that Minsheng Bank could offer to global investors would be in the range of HK$5.28 to HK$5.83 (US$0.68 to US$0.75) each. This is significantly lower than the price paid by the International Finance Corp. (‘IFC’) when it purchased the lender’s shares back in 2003. At that time, the IFC paid circa HK$6 for each of Minsheng Bank’s share.

Ironically, Minsheng Bank’s prolonged HKSE listing plan could be caused by the titanic floats of state-owned banks. In October last year, Bank of Constructions raised over US$9 billion and was the largest offering, on a global scale, since 2001. In the first half of this year, China’s largest bank, Industrial Commerce Bank of China is scheduled to go public, while that for Bank of China is slotted for the second half of the year. These two banks’ public offerings are expected to soak up a massive pool of foreign institutional capital, leaving little room for Minsheng Bank to attract investors’ attention.

In order to maintain its capital adequacy ratio above the required 8% threshold as edited by the banking regulators, Minsheng Bank’s board has recently approved a plan to issue a 4.3 billion yuan (US$534 m) hybrid bond that has a 15-year life. (China)