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January 2007 Issue
In Brief

Emerging Market’s Rising Prowess poses challenges to global private equity investors Feature
Mezzanine Financing’s Heightened activities underscore a new stage of maturity Analysis
Pakistan Sees PE Funds Launched that suggests it could be a new frontier Funds
Australia, NZ and Singapore Dominate buyout deal movements Buyouts
Listing of Vietnam’s FPT Signals a new chapter of PE development in the country Divestment
China Spells Out New Regulatory measures that could impede buyout movements in the country Greater China - News
Greater China Investors Commit with speed and focus Greater China- Investments
Three Energy Plays Went Public with performances that energised their investors Divestment
Boost to India’s Healthcare Industry following strategic and financial investors’ recent commitments India Corner - Growth/Expansion
Happy Ringtones Expected for Cellular’s impending IPO India Corner - Divestment
Having Entrenched Local Networks and the ability to offer more are crucial in Japan Japan Corner
Bain Capital Chosen by Sun Tel to be major shareholder sheds light on soft issues in accessing companies Japan Corner - Buyouts
Content

Case Study
Korea Exchange Bank
Singapore Yellow Pages

Pan Asia
News
Funds
Buyouts
Divestments

Greater China
News
Taiwan Chips to Cross the Strait
China Spells Out New Regulatory Measures
Funds
Investments
Focus & Actions
Technology
Venture Capital
Divestments

India Corner
News
Funds
Buyouts
Growth/Expansion
Divestments

Japan Corner
News
Funds
Buyouts

Summary
Market Watch
Index & Exchange Rates

The Emerging Force

When the curtain fell on 2006, a statement was made on the status of the global economy: emerging markets are the rising stars, and will dominate the world’s future economic direction. According to a December report by the Economist, at the end of 2005, the gross domestic product of emerging markets, on a purchasing power parity basis, accounted for nearly 50% of the global total. Drawing on statistics both from the International Monetary Fund and Morgan Stanley Capital International Inc, the Economist revealed that close to 70% of the total global foreign-exchange reserves are now being held in emerging markets’ vaults (fig. 1). As emerging markets assume an increasingly pronounced profile on the global economic stage, Asia is the leader, accounting for more than 52% of the MSCI Emerging Markets index. The largest emerging market block on the globe, Asia’s rising economic prowess has added new dimensions to the region’s complex investment environment. For those seeking to establish, or further consolidate, their footholds in Asia, a new set of testing factors are arising in local markets that could be formidable hurdles to overcome.

The Net of Regulations

The twelve months of 2006 evidenced one of the most revolutionary periods in the Asian private equity industry, during which regulators were mulling new measures that would harness more than just the merits of capital inflow, but provide more effective monitoring of the long term objectives of foreign private equity investors.
As one of the very first countries to open its doors to foreign investors, and welcome them to take full control of some of the nation’s most prized assets, South Korea was also one of the very first Asian nations to lay down regulations to improve monitoring of foreign buyout funds. Seoul issued an edict that, when a shareholder accumulates 5% or more of equity stake in a listed company, the ultimate purpose of the holder of these shares must be publicly declared.
However, it is those situations in which there had been no earlier defined regulations that have now become extreme tests for non-domestic private equity investors. In 2006, two incidents, Lone Star’s sale of Korea Exchange Bank (‘KEB’) and The Carlyle Group’s (‘Carlyle’) quest to assume a.....

Greater China- News

Taiwan Chips to Cross the Strait

In a landmark development, the Taiwan government has approved three of its semiconductor companies to invest an aggregate US$825 million into mainland China. The approval is a watershed in foreshadowing greater collaboration between the political rivals in this sector.

One of the companies that received the Taiwan government’s nod to inject capital into mainland China is Advanced Semiconductor Engineering Inc. (‘ASE’), which is the world’s number one chip assembly company. Significantly, however, The Carlyle Group (‘Carlyle’) is currently in discussions with ASE to take control of the company. The private equity house has agreed to commit an approximate US$5.7 billion for this deal. Should Carlyle succeed in clinching the deal, it would have immediate access to the mainland China’s chip market.

However, among the three companies that have been given the privilege to direct capital to mainland China, the amount allowable to ASE is the smallest. The other two chip makers, Powerchip Semiconductor Corp. and ProsMOS Technologies Inc., were permitted to direct US$400 million and UD$365 million respectively to the People’s Republic of China.

China Spells Out New Regulatory Measures

With foreign investors knocking on China’s doors, eager to pour capital into the country’s burgeoning economy, Beijing has recently made known a number of new regulatory measures that have given foreign buyout investors clearer guidelines.

According to Xinhuanet.com, one of the government’s official media outlets, the State Assets Supervision and Administration Commission (‘SASAC’) has identified seven industrial sectors that are deemed to be critical to the nation’s economy and ought to be either solely or majority-owned by the State. They are electrical power and distribution, oil and chemicals, telecommunications, armaments, aviation, shipping and coal. There are currently 161 large state-owned enterprises that are under the supervision of SASAC. More than 40% of them are engaged in these seven industrial sectors.

The announcement is expected to provide foreign investors clearer parameters as to the industrial sectors in which majority foreign ownership can be considered.

But foreign buyout houses are set to meet further regulatory scrutiny following a proclamation made by the National Development and Reform Commission (‘Commission’) at the end of 2006. Mr. Zhang Xiaoqiang, vice minister of the Commission, urged the government to take into account the “strategic and sensitivity” factors in attracting inflow of foreign capital. He also advocated the establishment of a special mergers and acquisitions review mechanism to assess whether injections of foreign capital into companies would ultimately help the State to achieve its goals. Mr. Zhang believed foreign funds should serve as a platform to assist local industry to improve its global competitiveness, as well as alleviating poverty, while also introducing environmental consideration.

Beijing is also tightening its grip on the media industry. According to the Financial Times, China has recently suspended its policies to allow minority foreign interest in local media production units. Quoting a spokesman from the State Administration of Radio, Film and Television, the paper said that China is to temporarily withhold from approving the creation of new joint venture companies in the media sector. However, the policy maker would allow production of films and television dramas by individuals.

But in the banking sector, in accordance with its commitments to the World Trade Organisation, China has opened up to foreign competitors. From 11th December 2006, foreign banks are allowed to lend money and take local currency deposits. All foreign-funded banks will be treated as local Chinese banks (fig. 24). Eight foreign banks are currently applying to change its local branch’s operational status. Citibank, Bank of East Asia, HSBC Holdings plc, Hang Seng Bank and Standard Chartered Bank have all submitted requests to transform their branches into locally incorporated banks.

Currently, foreign-funded banks represent a meagre percentage in China’s colossal banking industry. According to China Banking Regulatory Commission, the assets of foreign-funded banks added up to US$105.1 billion at the end of September 2006, accounting for 1.9% of the assets held by banking institutions in the country.

Greater China- Investments

Focus & Actions

Investors flock to Greater China, but with clear investment focus

The Greater China region, which has all the credentials to win foreign investors’ capital, witnessed vibrant investment activities during the few weeks leading up to the end of 2006. An unprecedented number of transactions were consummated in companies based in both the People’s Republic of China (‘PRC’), as well as Taiwan. But investors were clear in choosing the preferred industrial sectors to which they preferred to commit funds. While they were prepared to inject capital into an array of industrial sectors in the PRC, financial investors are keen on Taiwan’s banking and finance activities.

Alternative Energy

With a soaring appetite for fuel by China’s industries, the country’s energy sector recorded a combined US$225 million being directed to two principal power companies, the Jiangxi LDK Solar Hi-Tech Co. Ltd. (‘LDK Solar’) and China Coal Energy Co. Ltd.

Bolstered by past successful investment experience in the alternative energy sector, Natexis Private Equity Asia and JAFCO Investment (Asia Pacific) Ltd. (‘JAFCO Asia’) have teamed up with CDH Investments, to commit US$100 million to LDK Solar, a solar energy company based in the Jiangxi province. LDK Solar claims to be the biggest multicrystaline wafer manufacturer in Asia, and has the most advanced equipment and technology. In its forward corporate agenda, in addition to a NASDAQ listing in 2007, it also plans its production capacity to reach 1000MW by 2010.

While investors in LDK Solar believe in the future prospects of alternative energy, the US-based First Reserve Corp., a private equity firm that specialises in the energy industry, has decided that a traditional energy company will be the fuel for its future performance track record in Asia. Prior to China Coal Energy Co. Ltd.’s initial public offering (‘IPO’), it has teamed up with AMCI Capital to park US$125 million in the second largest coal enterprise in PRC.

First Reserve Corp. is a specialist investor in the energy sector, and has over US$12.5 billion under management through four funds; while AMCI Capital is a corporate venture fund held by shareholders and founders of American Metals and Coal International Inc.

Digital Media

Success breeds success. While the successful investment track record of Suntech Power Holdings has attracted its earlier investors to commit capital to LDK Solar, Focus Media also has had a similar impact on its earlier investors. In 2006, Focus Media’s pre-IPO investors have all retired their holdings in the outdoor digital media company, and boasted a returns multiple of more than nine times.

Recently, CDH Investments has further bolstered its digital media portfolio. The largest private equity firm in China committed US$35 million to the Beijing-based Towona Mobile TV Media Group Co Ltd. (‘Towona’), which operates TV screens in China’s public buses. For Towona, this is the second time that private equity capital came to the growing outdoor media company. Earlier, it had received US$10 million from Cathay Investment Fund, which is managed by the US-based New China Management Ltd.

The pool of investors that are pursuing digital media stock is swelling. In early December, a long list of private equity investors joined Merrill Lynch and committed US$24 million to CGEN Digital Media Network Co. Ltd. (‘CGEN’). The investor party counted TDF Capital, JAFCO Asia, Sumitomo Corp Capital Asia Pte Ltd., Hotung Investment Holdings Ltd. as well as the US-based Redpoint Ventures as backers of CGEN. The investee company is a pioneer in China’s in-store video display market. In November 2005, it obtained the exclusive right to operate in-store video in Carrefour hypermarkets. It also achieved a milestone in 2006 when it teamed up with home improvement retailer, B&Q, to establish specialised in-store TV operations.

Digital Media Group is another digital media company in the PRC that recently received funds from an international group of investors. The US-based Oak Investment Partners led Sierra Ventures, NIF SMBC Ventures and Gobi Partners in committing capital to Digital Media Group, which sets up advertising screens inside metro systems. While the investment amount was not disclosed, its spokesman used “tens of millions of dollars” to describe the committed sum.

The diversity of investors’ profiles in both CGEN and Digital Media Group, with both enlisting backers from the USA, Japan and PRC, underscores the increasingly crowded digital media market for investors. Collaborations between investor groups is key to access this fiercely competitive industrial sector.

Real Estate

The real estate investment sector is another industry that is being keenly pursued by financial investors. Two fund management groups, Blue Ridge China Partners and Tiger Global L.P., have recently earmarked US$50 million and US$72.8 million respectively to two real estate development companies.

Blue Ridge China Partners, a joint venture between the founder of eLong.com and the US-based Blue Ridge Capital, has decided to lift its stake in Henan Xin Yuan Real Estate Co. (‘Xin Yuan’). Teaming up with Equity International again in this second round of financing to the real estate company, the two investors committed an additional US$50 million. In August 2006, both had deployed a combined US$25 million into XinYuan, which was established in 1997 and is a specialist in mid-market quality housing projects.

Equity International is one of the largest real estate developers in the USA.

At the time when Xin Yuan received its second round of financing from its foreign investors, the Hong Kong-listed Baoye Group Co. Ltd. also made public the HK$563 million (US$72.2 million) capital injection from Tiger Global LP, the US-based hedge fund firm with over US$3.5 billion under management.

Tiger Global agreed to acquire 20% of Baoye Group’s H-shares, paying HK$10.88 each. The transaction sum represented a 9.33% discount to the closing price of HK$12.0 on 12th December, the day before the announcement was made. The net proceeds of this share placement will be used for the acquisition of properties, development of environmentally-friendly construction materials, as well as working capital.

The announcements made by these two separate groups of investors for Xin Yuan and Baoye Group followed that promulgated by H&Q Asia Pacific, one of Asia’s oldest private equity firms and a seasoned investor in China. It declared its plan to ally with Deutsche Bank’s real estate and infrastructure investment arm in providing hospitality services to China’s burgeoning travel industry.

H&Q Asia and Deutsche Bank will acquire, develop and convert sites for around 5,000 new rooms under the brand name of Hilton Garden Inn. The Hilton Corporation will provide expertise in site selection, development, training and brand management.

Joining the growing list of investors that enters the China property/hospitality market is the US-based Starwood Capital Group. It committed to a US$30 million strategic investment in Shanghai Jin Jiang International Hotels, one of China’s largest hotel operators. Starwood Capital became the largest third-party shareholder in the Jin Jiang, which went public on the Hong Kong Stock Exchange in December.

Raising the Bar Living Standards

China’s rising living standards have redefined investor capital flow movements. Investors are unreserved in committing significant sums to industries that produce quality products that meet consumers’ rising demands.

Morgan Stanley Private Equity Asia has teamed up again with Actis in committing US$73 million to Hunan Taizinai Group (‘Taizinai’). It is the single largest investment made to a dairy company in the Hunan province to-date. Taizinai is currently preparing for a debut outside of PRC. Joining these two investors is Goldman Sachs in this landmark investment in China’s dairy industry.

To Taizinai’s investors, especially Morgan Stanley Private Equity Asia and Actis, hopefully Taizinai could replicate the hefty returns that Mengniu Dairy had been able to achieve for its investors. One of the earlier investments in China, Mengniu Dairy returned more than US$124.5 million to all its investors for an original investment sum of US$24.5 million. The legendary investment had propelled private equity in China to a global stage.

But Goldman Sachs has decided to branch out into a new investment sector in China that is another indication that China’s growing wealthy middle class is seeking for improved living standards. Although the biotechnology sector has yet to establish profitable investment track record for its investors, the Wall Street investment banking house has teamed up with a consortium of investors and injected US$52 million in the Shanghai-based Cathay Industrial Biotech Ltd. A leading industrial biotechnology company, Cathay Industrial Biotech is currently the largest producer of bio-processed Dibasie Acids in the world. This commitment sets a record as the largest known to have been undertaken by foreign investors in a China-based biotechnology company.

Banking on the Banks

While foreign private equity investors have abstained from investing in Taiwan’s real estate, digital media and biotechnology sector, there is one industrial sector that investors are prepared to bank on in both Taiwan and PRC. It is the banking and finance sector. In the month of December, two financial institutions, one in China and another in Taiwan, received funds from foreign investors. Chongqing City Commercial Bank in Sichuan province welcomed two new investors as its shareholders while Taiwan’s Taishin Financial Holdings (‘Taishin’) toasted to the success of its latest shares placement following commitments made by Soros Fund Management LLC.

After months of discussions with various foreign investors groups, the Chongqing City Commercial Bank has decided to sell a 17% stake to Hong Kong-based Dah Sing Banking Group, and 7.99% to The Carlyle Group (‘Carlyle’) respectively. The sale of this combined 24.99% has helped the city commercial bank to raise 1.01 billion yuan or US$130 million. Both investors paid 2.02 yuan apiece for the 500 million shares that changed hands. The transaction price represented 1.87 times the bank’s book value.

The banking assets of the Chongqing City Commercial Bank have been keenly courted by a pool of foreign investors. In addition to Carlyle, Morgan Stanley as well as the Singapore Overseas-Chinese Banking Corp. were known to be in discussion with the lender.

Chongqing City Commercial Bank, which is planning to seek public listing status on the Hong Kong Stock Exchange in 2007, is one of the best performing city commercial banks. It currently enjoys a healthy balance sheet. It has been able to maintain a capital adequacy ratio at 12%, while its non-performing loan portfolio is less than 3%.

Across the Taiwan Strait, the US-based Soros Fund Management, through its Quantum group of funds, has taken up a 3.97% stake in Taishin, which had earlier received capital injections from TPG Newbridge Capital, as well as Nomura Financial Holdings. This is the third major fund raising exercise undertaken by Taishin in 2006.

The financial house has sold 266.7 million shares to QE International, an investment vehicle controlled by Soros Fund Management, which paid NT$15 (US$0.46) for each of Taishin’s shares. The purchase price was a 19.35% discount to the closing price of NT$18.6, the day before Taishin made public this deal. Through this share placement, the financial company has raised NT$4 billion.

The amount raised from Soros Fund Management is part of Taishin’s effort to shore up its capital adequacy ratio to 10.43%. In addition to the NT$4 billion coming from Soros Fund Management, Taishin’s existing shareholders will also be committing NT$6.7 billion.

In February 2006, Taishin raised NT$27 billion from TPG Newbridge Capital. It was then the single largest private equity transaction in Taiwan. Within weeks, Taishin secured an additional NT$4 billion from Japan’s Nomura Holdings. In the 12 months ending 2006, Taishin has successfully raised a total of NT$35 billion from three separate investors groups.

Although the Greater China market is viewed as one single economy, the vastly different investment focus employed by investors evidences the varying economic dynamics in this region.