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November 2006 Issue
In Brief

Private Equity’s Value to Asia’s growing companies in emerging markets should be recognised Feature
Returnees Are Shaping China’s Economy as their enterprise values are generating superior returns Analysis
CVC Asia Pacific Clinches Its First media deal following Australian government’s liberalisation in this industrial sector Buyouts
Affinity Equity Partners Docks A Deal in Singapore Buyouts
Investors Pursue South Korea Assets despite negative press reports on the KEB saga Buyouts
Thailand Equity Fund Pares Down holdings in Central Pattana with a smile Divestment
Prices on Taiwan Media Assets Rising as evidenced by the sale of China Networks to MBK Partners Greater China - Buyouts
NASDAQ’s 1st Non-Tech Chinese Co.Greater China - Divestment
Corporate Buyouts on Indiansub-continent India Corner - News
Soaring Foreign Interest in Indiaas evidenced by accelerating deal paceIndia Corner
India Scores Another BPO Successfollowing recent listing of ExlServices on NASDAQIndia Corner - Divestment
Public to Private Deals in Momentumwith Carlyle and Unison acquiring Toshiba CeramicsIndia Corner - Buyoutd
Content

Pan Asia
News
Warburg Pincus Extends into Real Estate
Funds
Buyouts
Technology
Divestments

Greater China
News
From Tel Avi to Asia
A Slab of Concrete in the Cement Industry
Appeal of Properties
Funds
Buyouts
Technology
For the Next Generation
Star in the East
Divestments

India Corner
News
Investment
Growth/Expansion
Technology
Divestments

Japan Corner
News
Funds
Buyouts
Divestments

Clarification
Obituary
Summary
Index & Exchange Rates

Big is Beautiful

This seems no longer true for private equity, at least for the time being. With each day bringing a new record for either the size of a fund or a deal, private equity has been capturing headlines in global financial publications. Yet, along with the publicity, is the relentless scrutiny by the press of all aspects of private equity management. Another development that warrants attention is the US Department of Justice’s probe into fund management firms’ investment practices. In early November, the Wall Street Journal revealed that the private equity arm of Merrill Lynch had received a request for information from the Department, which was reportedly taking initial steps to determine whether Merrill Lynch Global Private Equity was engaged in anti-competitive behaviour in its deal-making process. The private equity unit of Merrill Lynch was part of the consortium that participated in the US$21 billion takeover of HCA Inc., a hospital chain, and the largest buyout on record. Since July, when the HCA deal was announced, private equity has become a focus of the watchful eyes of the financial community. Hardly a day has passed without a topic relating to private equity being mentioned. A September article by the Financial Times commented on some of the resisting forces that the industry is now encountering when courting target companies for takeover purposes. The Economist described the “hard-nosed buyout groups are showing unusual friendliness” in a new club deal trend. While the label “Barbarians at the Gate” has been used to describe buyout groups’ approach to deals, an October cover story of BusinessWeek, titled “Gluttons at the Gate”, unveiled the high and multiple levels of fees being extracted by private equity houses from their invested companies. Ironically, all these public comments have come when the private equity industry has “largely shaken off its swashbuckling image” and become “more sophisticated…(and) more respectable”, as the Financial Times has aptly described the development of the industry.

Cherished Values

In Asia, where private equity has now come of age, after years of investors questioning the sustainability of its model, the merits of private equity deserves to be acknowledged. Since 2004, the Asian private equity industry (‘industry’) has successfully maintained a profitable track record. In the 33 months ending September this year, an estimated US$44.5 billion has been returned to investors’ coffers, compared to an invested capital of US$16.1 billion. This is an impressive 2.7 return multiple on investment principally made since the beginning of this decade. Private equity management firms in Asia have not only provided required capital to growing companies, but also a solid pathway to a prosperous future. This is illustrated by the share price trading performance of those companies that have previously received private equity capital before they become a public company. In the period under survey, at least 60 private equity investee companies are known to have gone public, with over 55%, or 33, of them being able to sustain trading performance above their first day closing prices. Of these 33 companies, over 72.7% of them have also been trading above their applicable sector indices. This trend is an affirmation of these companies’ strong financial fundamentals, a central factor to motivate public investors’ to loosen their purse strings. The companies that have benefited most from private equity investors’ financial support are those based in China and India. Companies coming from these two markets account for 75.8% of those that fall into the category that are trading well above their first day closing price. Overall, China leads in taking up 45.5%, followed by India which claimed 30% of the pie, with Singapore trailing behind as a distant third at 12% (fig. 1). Significantly, all China-based companies have not only been able to sustain share price well above first day closing prices, but have also out-performed the indices applicable to the bourses on which they are currently listed. Only 40% of India-based companies can rival China’s unblemished record. With both China and India enjoying envious economic growth, private equity can proudly claim to be playing a significant part in this process that, in turn, propels Asia to a new high on the global economic stage.

Observation

Given the mesmerising return record that Asian private equity has been able to demonstrate, it is a feat to identify companies that have failed to benefit from the backing of private equity capital. The recent demise of China Paradise Electronics Retail Ltd., (‘China Paradise’), is an exception rather than the norm. Between January and October 2005, Morgan Stanley Private Equity Asia and CDH Investment invested a total of US$67.5 million into China Paradise, which went public on the Hong Kong Stock Exchange (‘HKCE’) in mid October last year. But a year later, in early November this year, China Paradise became the shortest-listed company on the Hong Kong bourse as it came under the full control of Gome Electrical Appliance Holding, a rival to China Paradise. Yet China Paradise’s fall was largely fuelled by its aggressive expansion plan. Between July 2005 and June 2006, the number of its stores grew from 105 to 225. In the meantime, its net income after tax sunk to 15.52 million yuan (US$1.89 million) in the second quarter of 2006, compared to 165.4 million yuan six months earlier. China Paradise’s fall did not prevent its private equity investors from clocking a three times return before it was removed from the HKSE.

News

Warburg Pincus Extends into Real Estate

Warburg Pincus becomes one of the very first global private equity firms to add real estate funds under its management umbrella. It announced the final closing of its first real estate fund, Warburg Pincus Real Estate I, LP, at US$1.2 billion, which will invest in real estate opportunities worldwide.

This is 12th fund raised by the global private equity firm. Warburg Pincus states that a substantial increase of “proprietary real estate deal flow” around the world is one of the reasons for adding this new dimension to its fund management mandate.

In Asia, Warburg Pincus’ exposure to real estate has largely been confined to China. The private equity firm was first known to have committed US$64.7 million to the Hong Kong-listed Guangzhou R&F Properties in July 2005. It has proven to be a profitable investment, with US$73.6 million known to have returned to Warburg Pincus’ coffers after having pared down its holdings in the property company after a series of share disposals. In July this year, it invested US$295 million in Greentown China Holdings, the largest property developer in Zhejiang province.

In India, a separate team of professionals has been recruited to oversee investment in this area.

Greater China- News

From Tel Avi to Asia

The Israel-based Infinity Venture Capital has newly established a US$100 million to US$150 million fund that will invest in Israeli companies that are operating outside of the country. As an indication of Asia market’s growing importance to Israel, some 40% of this pool of capital will be directed to China, while the residual percentage will be distributed to India and Russia.

In June 2004, Infinity Venture Capital entered into an agreement with the Suzhou government to announce the launch of a US$10 million Infinity-CSVC Ventures L.P. In India, it partners with an independent venture capital fund management firm, Footprint, in order to access venture capital deals in that market.

A Slab of Concrete in the Cement Industry

China’s National Development and Reform Commission recently issued revised regulatory parameters for the country ’s cement industry. For all transactions that exceed US$100 million, it must receive the approval from the applicable authority.

With the construction industry enjoying a boom period, it is estimated by 2010 China would require 1.2 billion tons of cement each year, with the volume escalating to 1.3 billion tons in 2020.

In 2005, Morgan Stanley Private Equity Asia and International Finance Corp. participated in the largest cement transaction undertaken by private equity investors. Both investors committed an aggregate US$200 million in taking up convertible instruments in the Hong Kong-listed Anhui Conch Cement Co. Ltd.

Appeal of Properties

Property prices in China continued to rise, clocking up a 6.3% increase in the month of September, compared with the same period 12 months ago. Compared with the preceding month, August, the growth rate was in fact a 0.8% decline, according to the National Development and Reform Commission. Overall, prices of newly-built residential houses rose by more than 10% in major cities such as Beijing, Xiamen and Shenzhen.

China’s property market has become a favoured target for foreign private equity investors. In announcing its first global real estate fund, which closed at US$1.2 billion, Warburg Pincus made known that the fund will be seeking opportunities in China.

Greentown China Holdings Ltd. (‘Greentown’), in which Warburg Pincus has committed US$295 million, is currently raising a US$375 million 7-year bond to fund its expansion. The BB-rated bond received over US$1 billion in orders. It is an indication of investors’ keen interest to acquire China property assets.

Greater China- Technology

For the Next Generation

Investors are vying to participate in the growing percentage of population seeking to better their educational qualifications

For centuries, holding high qualifications in education has been the guiding torch of Chinese culture. Foreign private equity investors are capitalising on this cultural characteristic, as evidenced by the growing pool of capital directed to educational services providers. Most recently, SAIF Partners made an investment in such an enterprise. It has agreed to invest US$20 million in the Beijing Global IELTS School, which offers a wide range of education services that provide international courses.

Established in 1997, Beijing Global IELTS currently has 43 branches across the country, and is one of the most well established educational programme service providers in China.

In December 2004, Tiger Technology Fund invested US$59.73 million in New Oriental Education & Technology Group Inc.. In early September this year, it went public on the New York Stock Exchange, offering 30 million common shares to the public at US$3.75 apiece.

Star in the East

Greater China’s technology companies are attracting feverish interest from investors in the West

Silicon Valley might be the source of the world’s state-of-art technology, but its investors are flocking to the Greater China region in their search for the next winning technology.

Walden International, Asia’s largest venture capital firm and headquartered in San Francisco, has recently teamed up with a consortium of investors in Silicon Valley, including Lightspeed Venture Partners and Interwest Partners, to inject an aggregate US$35 million into Advanced Micro-Fabrication Equipment Inc. (‘AMEC’).

Established in 2004 in China, AMEC offers equipment for the world’s chipmakers to produce advanced integrated circuits.

Intel Capital, the venture investment arm of Intel Corp., has recently taken a 10% equity stake in Taiwan-based Incomm Technologies Co. Ltd. (‘Incomm’) for an undisclosed sum. A subsidiary of United Microelectronics Corp.. Incomm is regarded as a leader in Flash Memory Application Enabling technology.

The technology deal that is set to draw the Greater China region into the spotlight is the impending sale of Huawei-3C, a joint venture between 3Com Corp. and Huawei Technologies Co. (‘Huawei’).

In August this year, 3Com indicated that it would like to increase its equity holding in the joint venture. According to sources in China, Huawei is keen to sell all of its holdings in Huawei-3C, which is duplicating its products and has proven of little value to Huawei.

The latest report from Wall Street Journal indicated that Bain Capital and Silver Lake Partners were contesting to become the ultimate owner of Huawei-3C for a price range of between US$1.5 billion to US$2 billion.

To foreign technology investors, owning a percentage of Greater China’s technologies companies provides a passport to the region’s burgeoning market.