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May 2006 Issue
In Brief

The Takeover of PAMA Group by EMP Global casts light on the rugged journey in assuming full autonomy in Asian private equity fund management Feature
Two Different Profiles of Managers are emerging in both China and India that highlight very dissimilar developments taking place in these two most favoured investment destinations in Asia Analysis
Signs of a Bonanza Year for Funds are beginning to show after a variety of funds announced impressive final closing sums at the beginning of this second quarter Funds
Premise of Investing in China is based on fusion of the Eastern and Western culture, according to a study conducted by Deloitte Research Creater China Corner
China Stocks are Courted by Bourses with both Hong Kong and NASDAQ maintaining their commanding positions Greater China Corner
Infrastructure Investing in India gathers momentum as the country registers its largest infrastructure investment India Corner
Longreach Group's US$750 m Funds underscores investors' keen interest to access Asia's largest economy Japan Corner
Corporate Investors Bet on information technology companies as both domestic and foreign groups commit capital in promising ventures Japan Corner
Content

Pan Asia
News
Funds
Buyouts
Growth/Expansion
Investment & Divestment
Divestment

Greater China
News
Recruit Takes Its Position in 51job
China Travel Industry Poised to Become 3rd Largest
China Unveils Partnership Law to Spur Growth of Its Venture Capital Industry
Taiwan Institutions Gesture to Foreign Investors
Buyouts
Growth/Expansion
Technology
Divestments

India Corner
News
Buyouts
Growth/Expansion
Technology
Divestments

Japan Corner
News
Funds
Buyouts
Growth/Expansion
Technology
Divestments

Summary
Index & Exchange Rates

One Goal, Two Like Minds

Their names spell seniority. They are the encryption of two dominant personalities in Asian private equity. They were brought together by their quest to retain full autonomy over their fund management, with an unwavering determination to remain part of the Asian burgeoning private equity scene. In late April, it has finally become official that the Hong Kong-based PAMA Group (‘PAMA’) is to merge into the Asian operations of the Washington-based EMP Global LLC (‘EMP Global’). Mr Michael C. Kwee, chairman of PAMA, will assume responsibilities as vice chairman for EMP Global’s Asian operations, while Mr Moeen Qureshi, chairman of EMP Global will continue in his current capacity. The merger will not only amalgamate the resources of two fund management teams that have extensive pan-Asian investment experience, but will also be the first litmus test on how these chairmen of their respective firms will collaborate, as they share a new path in their fund management careers. The alliance also unveils some of the formidable challenges in Asian private equity fund management without the support of institutional resources. At a time when an increasing number of partnerships are choosing to be in charge of their own destiny, PAMA’s decision to join hands with EMP Global sheds light on defining factors in fund managers’ pursuit of independence.

PAMA Group

For a good part of the past two decades, PAMA had been a prime force in Asian private equity. It traces its roots to 1986 when the US-based The Prudential Insurance Company of America (‘Prudential’) established its Asian fund management unit, Prudential Asset Management Asia (‘Prudential Asia’). Between 1986 and 1994, Prudential Asia managed a US$500 million proprietary and non-discretionary investment programme entirely funded by its parent company. After more than eight years managing funds solely from Prudential, in 1993 PAMA’s parent insurance company sponsored its first Asian private equity fund that sought third party institutional capital. Prudential Asia Private Equity Ltd. Partnership I (‘PAPE I’) was launched, to which Prudential contributed US$50 million. It did not take long for PAPE I to achieve its target in the ensuing year and at US$261 million, it was then the largest non-proprietary Asian private equity fund.

Prudential Asia’s core private equity investment team received an overwhelming positive statement from institutional investors on their capabilities by the final closing of Prudential Asia Private Equity Partnership II (‘PAPE II’) in August 1998. PAPE II secured institutional commitments to the tune of US$540 million, 35% above its original target of US$400 million. In this pool of capital, Prudential’s contribution was US$75 million.

There were grounds for institutions’ absolute faith in Prudential Asia’s private equity team. At a time when many Asian private equity fund management firms were plagued by senior management turnovers, Prudential Asia had been able to retain its core senior managers, each of whom had chalked up more than a decade of investment experience with the firm. Two years after the final closing of PAPE II, the private equity investment team at Prudential Asia was ready to remove the institutional crutch that had supported them for more than a decade and a half. In November 2000, Mr Kwee, incumbent chairman of PAMA, led the completion of a 100% management buyout from its parent company, Prudential. Joining him were some of Prudential Asia’s longest serving and best talents, Messrs, Timothy Chia, Clifford Cheung, Yong Nam Tan and Allen Anderson. Together, they represented an accumulated investment experience of more than 65 years. The high profile management buyout was lauded by limited partners and admired by other general partners as a defining milestone in the evolution of private equity in Asia.

Since becoming independent, PAMA had yet been able to increase its pan-Asia fund pool which remains at US$1.3 billion. This despite the fact that the managers at PAMA had proven experiences in buyout transactions, and institutional investors have been scouting for opportunities to make allocations to experienced buyout teams. At the time when the management buyout took place in late 2000, PAMA’s management team had completed 100 transactions, of which 18 were management buyout or buy-in situations. Nonetheless, in September last year, PAMA closed the NIF-PAMA Japan Private Equity Fund with the modest size of US$155 million, a middle market buyout fund in Japan, in partnership with NIF-SMBC Ventures. The enthralling ideology of maintaining an independent fund management status has, however, proven to...

Analysis

The New Breeds

Two different profiles of managers are emerging in China and Indian

The Asian private equity party continues. In the first quarter of the year, the industry recorded an astounding US$5.6 billion of fresh capital; while the investment sums directed to 82 companies across the region aggregated to a staggering US$11.3 billion. Excluding the exceptional US$1.3 billion raised by the Macquarie Road Korea Infrastructure Fund for South Korea through its public debut, China and India were the undisputed magnets to institutional capital, attracting US$448 million and US$212 million respectively. It is the deal consummation profile that bespeaks the mesmerising allure of these two markets. In the first three months of the year, 20 China-based operations attracted US$4 billion, representing 34.7% of the transaction total. Although India clocked up an aggregate US$699 million, due to its relatively smaller average deal size, with details of 37 transactions known, the country is by far the busiest market for private equity investors. Together, China and India accounted for 70% of the 82 deals consummated in the first quarter.

As China and India assume paramount positions in the Asian private equity landscape, revolutionary movements are taking place in these two markets, with each having its own set of characteristics that portend the future path of private equity in their respective universe.

China

After a series of remarkable investment results in technology companies, the myth that profitable venture capital investment in China is a chancy bet has been quashed. It began with the public debut of Ctrip.com on NASDAQ in late 2003, in which venture investors of the travel and hotel reservation portal have been richly rewarded. The Carlyle Group boasted an internal rate of return that exceeded more than 1,000%. When Baidu.com, China’s largest search engine, was listed on NASDAQ, its early investors reaped phenomenal returns in over a 100-fold, further affirming a sharply different investment climate in China this time around.

Silicon Valley icons and those located further on the East Coast of the USA are convinced that China will be the playground for their future “home runs”. To them, in addition to China’s alluring potential, the country, for the first time, is endowed with a pool of managers who have proven leadership and operational skills. They were the pulse behind some of the most lauded technology companies in China. The credentials of this outstanding group of new talent have not only met the lofty standards demanded by elite US-based venture capital firms, but also provide the latter the vital link to the local community. These, fused with the extensive capital and direct equity investment experience from the west, are a powerful formula of success.

The Silicon Valley-based Doll Capital Management (‘DCM’) was one of the very first to test the East and West formula. In April 2005, it announced a strategic partnership with Legend Capital, the corporate investment arm of Legend Holdings, China’s leading technology company. The alliance was cemented through a US$3 million commitment made by the Silicon Valley-based venture capital firm. Mayfield Fund, Greylock Partners and New Enterprise Associates also employed the same approach. They have chosen to be the US allies for China’s young and aspiring local venture capital firms. Mayfield Fund joined hands with Gold Sand River, a local fund management firm formed by three partners. Greylock Partners and New Enterprise Associates have decided to journey with two local entrepreneurs in partnership and set up Northern Light Venture Capital.

Both Accel Partners and Ignition Partners are ready to manage their respective dedicated China funds, while teaming up with local venture capital firms. In early March, Accel Partners and IDG Technology Venture Investment, China’s longest venture capital corporate investor, announced the final closing of their joint venture fund, IDG-Accel China Growth Fund. Institutional investors expressed their overwhelming faith in this kind of partnership, as IDG-Accel China Growth Fund was oversubscribed and closed at US$290 million, compared to an original target of US$250 million. Ignition Partners joined hands with Qiming Venture Partners, a newly-formed local venture investment firm, and made a pledge to plough no less than US$200 million into China’s venture capital market.

Significantly, these foreign venture capital firms have successfully recruited some of China’s most outstanding entrepreneurs. Mr Hurst Lin, formerly founder and chief operating officer of Sina.com joined DCM, appointed as its partner. For a brief period, Mr Zhou Hongyi, formerly president of China Yahoo! and founder of 3721, served as partner of IDG Venture Technology Investment, which is Accel Partners’ China ally. Even though both Sequoia Capital and Draper Fisher Jurveston had decided to establish their respective China-focused funds, they have chosen those endowed with entrepreneurial spirit and proven operational expertise to be their key men to steer the rudder of their China ships. Sequoia Capital has appointed Mr Neil Shen, the founder and president of Ctrip.com to be its managing partner. Northern Light Venture Capital recruited Feng Deng as its key man, former founder of Netscreen in Silicon Valley.

To some of China’s most talented managers, being a partner in a venture capital fund management firm is the most aspired occupation. The former president and chief operating officer of Sohu.com, Mr Victor Khoo has decided to set up his own venture capital fund, christened as Search Fund. Most recently, Mr Edward Tian, the man who is responsible for the ascendancy of China Netcom, gave his blessing to set up a broadband fund for China.

India

Although the Indian private equity industry is also witnessing a pool of talent joining its burgeoning market, a vastly different trend is taking place. Unlike China where foreign houses have been the catalyst to recruit the pool of dynamic venture capital managers who have been icons of China’s technology companies, Indian private equity is enlisting a different crop of managers.

The high profile appointment of Mr Akhil Gupta, currently managing director of Blackstone Group’s Asian operations, who was formerly in charge of Reliance Industries’ corporate development, is the exception rather than the rule. Instead, the fund management firms hanging up their signs are those who are veterans in the fund management industry, either abroad or at home. Significantly, however, this new breed of fund managers prefer an independent status and are confident of being able to achieve their respective ambitious fund targets.

Mr. Vinod Khosla, a doyen of Silicon Valley and an Indian national, formerly a partner of Kleiner Perkins Caufield & Byers, has set up his own venture, Khosla Ventures. Described by others as the first global venture capital fund management firm by an India national, Khosla Ventures has already made commitments in India. It has teamed up with the Small Industries Development Bank of India, and other investors to invest US$2.5 million in SKS Microfinance. Another prime force in Silicon Valley’s non-resident Indian community is Mr Kanwal Rekhi. An angel investor, Mr Rekhi had previously invested in Exodus Communications, has decided that the time is ripe to launch an India-focused fund, Inventus Capital which has a target of US$150 million to US$175 million. Its focus is to fund Indian startups.
Although both Messrs Khosla and Rekhi have been resident in Silicon Valley, it is noteworthy that they are confident of seizing opportunities in India without setting up alliances with local parties.

At home, India witnesses the mushrooming of a host of new and independent fund management firms. They are led by partners who have discarded the institutional cushion that provides comfortable fringe benefits, to assume full responsibility for their fund management journeys. Two of IL&FS Investment Managers’ former senior managers, Messrs Muneesh Chawla and Hetal Gandhi, are setting up their separate fund management firms. Mr Chawla’s Blue River Capital is a partnership between himself and Mr Shujaat Khan, who was formerly a partner at ChrysCapital. Once limited partners shunned first time fund management teams, but Blue River Capital proves the mood has changed. Its maiden fund has received commitments of just over US$100 million.

Mr Hetal Gandhi is teaming up with Mr Charles Johnson, former co-president of Franklin Templeton Investments and chief executive officer of Templeton Worldwide, as well as Mr Carlton Pereira, formerly with KPMG India, to form Tano Capital. Its first fund has already received US$55 million of commitment and the team is confident to reach the goal and secure institutional commitment for an additional US$100 million.

The pursuit to assume an independent status is in vogue in India private equity. Hardly a month has gone by without announce of new fund management teams. Most recently, three former Morgan Stanley executives have teamed up and launched Old Lane. Messrs Guru Ramakrishnan, Vikram Pandit and John Havens have left their previous prestigious employing institution and launched a private equity fund with a target size of US$500 million. This investment vehicle shall principally seek opportunities in the infrastructure segment.

Observation

Two very different kinds of new fund managers are emerging in the Asian private equity industry. China is likely to be home to the next generation of venture capital fund managers. This development augurs well with Beijing placing the promotion of science and technology as priority in the country’s next 5-year plans. By 2020, China hopes to commit 2% of the country’s gross domestic product for research and development in science and technology, so its dependence to foreign technology would be reduced to no more than 30%.

India has an environment that breeds both venture capital and growth/expansion fund managers. Bangalore continues to be the hotbed of technology companies, while the vast pool of listed companies that have very little trading movements offer a unique window to advocates of growth/expansion capital. It is, however, the pool of budding independent fund managers who will define the future market dynamics in India, absent any institutional interferences.

For the first time in the history of private equity, Asia’s two giant emerging markets are endowed with their respective pool of managers with proven track records. This, together with their indepth knowledge of the local market and access to sizeable pool of capital, are formidable qualifications. Their rising profile could either complement or threaten pan-Asian or global houses’ ability to consummate deals in these markets.

Greater China News

Recruit Takes Its Position in 51job

Recruit Co. Ltd. (‘Recruit’), a human resource services company in Japan, is positioned to take up a significant minority stake in 51job. In its first phase, Recruit purchased 8.45 million of 51job’s common shares at US$13 each. The transaction equated to US$109.9 million and would allow Recruit to take up a 15% equity position. Recruit has the option to increase its holdings by an additional 25% over a three-year period. If this proceeds, Recruit would take up a 40% equity position in 51job.

51job is a leading provider of integrated human resources services in China that is listed on NASDAQ. One of its earliest investors is Doll Capital Management which committed US$8 million in 51job in 2000 when the online recruit firm was established.

China Travel Industry Poised to Become 3rd Largest

The China’s travel industry is forecast to be a US$301 billion market in 2006, compared to US$246 billion in 2005, according to statistics released by the World Travel and Tourism Council. It is to set to become the world’s third largest tourism market and overtake Germany, France and Spain. Within the decade, China has the potential to be the second-largest tourism economy, according to the Council. By 2016, the world’s most populous nation’s tourist market is expected to exceed US$1 trillion.

China’s burgeoning middle class is fuelling the growth of its tourist industry. In 2004, domestic consumers made 1.1 billion trips and 28.8 million trips abroad. In 2005, Air China Ltd., the country’s largest carrier, posted a net income of 2.41 billion yuan (US$301 million), from 2.39 billion yuan in the preceding year. However, thus far, foreign private equity investors have demonstrated lethargic interest in portals serving the travel industry.

China Unveils Partnership Law to Spur Growth of Its Venture Capital Industry

China is planning to waive its partnership law to spur the development of the venture capital industry, according to Xinhua News Agency . The Standing Committee of the National People’s Congress, the country’s top legislature, recently unveiled the draft version of a newly-amended Partnership Law, under which partners of a venture capital or accounting firms will be allowed to shoulder limited liability for corporate debt.

“A lack of limited partnerships has been a stumbling block of China’s venture capital businesses”, said Mr Yan Yixun, a vice-director of the National People’s Congress’s Finance and Economy Committee.

Before the amendment, the law only governed unlimited partnerships and required all partners to assume unlimited liability for corporate debt. This amendment is expected to drive the industry on par with international practice. According to Mr Yan, partners will be required to shoulder responsibilities for mistakes that took place during their work. Xinhua News Agency however did not elaborate as to when the amended law would be screened by the legislature.

Taiwan Institutions Gesture to Foreign Investors

Taiwan’s institutions are favouring private placements as a means to raise capital from foreign investors. Three of the island’s largest establishments are known to have undertaken or in the process of undertaking this process.

Shin Kong Financial Holdings which holds Shinkong Life Insurance Co. has recently completed a NT$7 billion (US$223 million) private placement through the issuance of common shares. The fresh capital will be used to acquire banks, indicated a spokesman at Shin Kong.

The Chinese Bank was even prepared to place its shares at a discount price in order to attract foreign funds. In mid April, the bank sold 1 billion special B shares at NT$7.5 and raised NT$7.5 billion. The issue price of NT$7.5 was a 25% discount to the NT$10 per share that analysts believe The Chinese Bank could command.

Another Taiwanese bank known to be in discussions with foreign investors for infusion of capital is Bank of Overseas Chinese which was planning to raise as much as NT$10 billion. Earlier, Bank of Overseas Chinese received reportedly NT$595 million from New York Life Insurance which took up a 5% equity stake.