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March 2007 Issue
In Brief

Buyouts & Venture Investors Adopt differing approaches in their “Go-East” blueprints Feature
Precision of Timing and Speedy negotiations are key to clinching a buyout deal in China Analysis
Limited Partners’ Demand for a SRI focus in future allocations will re-shape investment profile Institutional Corner
Buyout Pastures South of Equator are witnessing record deal activities Buyouts
Access to Take Control of RHB Capital in Malaysia underscores the muscle of Islamic capital Buyouts
Privatisation of AsiaSatellite testifies to deal creation that encompasses more than capital Greater China – Buyouts
Profitable Divestment Results continue to embellish China investment Greater China – Divestment
Infrastructure Financing in Vogue in India following the launch of a US$5 billion initiative India Corner – Funds
Real Estate and Infrastructure investments dominate the Indian market India Corner – Growth/Expansion
Listing of Firstource Concludes an exemplary journey with venture capital financing India Corner – Divestment
Buyout Investors Take Minority positions in three separate deals Japan Corner– Growth/Expansion
Content

Institutional Corner
Going Green

Pan Asia
News
Funds
Funds for Control and No Control
Buyouts
Barrels of Capital
Growth/Expansion
Venture Capital

Greater China
News
Buyouts
Growth/Expansion
Venture Capital
Divestments

India Corner
News
Funds
Infrastructural Deployment
Growth/Expansion
Divestments

Japan Corner
News
Growth/Expansion
Commentary

People on the Move
Summary
Index & Exchange Rates

The Asian Matrix

For the last two years, Asia has captured the keen attention of global private equity investors without respite. Ironically, the momentum is fuelled by a handful of global firms, especially those in the buyout sector. By all indications, their economic prowess has already re-defined the Asian private equity landscape, as evidenced by trends that have been taking place during 2006. In the twelve months ending December last year, Asian private equity recorded an additional US$26 billion of fresh capital. Of this, The Carlyle Group accounted for 17% through the final closings of three funds. The asymmetry is most pronounced in deal profiles. During the same period, the industry recorded an aggregate deal value that tallied up to US$50.67 billion, a 3-fold increase compared to the US$16.56 billion in the preceding 12 months. There were 12 deals in 2006 that are known to have exceeded the US$1 billion mark, adding up to US$26.93 billion. Of this, global firms have participated in 75.8% of the aggregate deal value, either as a sole financing party or joint investors . Within a short space of time, global heavy weights in private equity have not only swiftly consummated deals in record sums, but also re-arranged the Asian private equity landscape.

The High Flyers

In the late 90’s, when CVC Asia Pacific, CCMP Capital Asia (then known as JP Morgan Partners Asia) and The Carlyle Group concluded that it was opportune to explore buyout opportunities in Asia, they had all adopted the common strategy of setting up a dedicated Asian fund and recruiting professionals with lengthy investment experience. They have been also been dedicated disciples of buyout disciplines. The latest giant wave of arrival commenced in mid 2005 when The Blackstone Group (‘Blackstone’) first announced its return to Asia by setting up an office in India. It has ushered in an approach that has transformed the profile of the once subdued Asian private equity community. Funds for Asia In the buyout sector, since 2005 global buyout heavy weights such as Apax Partners, Bain Capital, Blackstone, Kohlberg Kravis Roberts & Co. (‘KKR’) and Silver Lake Partners had already established their respective...

Institutional Corner

Going Green

CalPERS’ recent commitments herald a new drive in investment principles

For some time “social responsibility investment”, or “SRI”, has been regarded as an investors’ chant with little action. This is about to change. In late February, the California Public Employees’ Retirement System (‘CalPERS’) revealed that it has earmarked US$400 million to a new fund that will focus on clean technology and energy investments. CalPERS has appointed Pacific Corporate Group, headquartered in La Jolla, California, as the manager of this new fund that will further pursue CalPERS’ mandated Environmental Technology Programme. The largest public pension fund scheme in the USA, with assets over US$230 billion, CalPERS will be the anchor investor in this clean technologies fund. Pacific Corporate Group is expected to raise further capital from other institutional investors.

The Environmental Technology Programme is part of CalPERS’ alternative investment programme that has committed US$22.1 billion in capital and US$12.1 billion in market value as of 30th June, 2006.

CalPERS’ latest move echoed the call made by the International Finance Corp. (‘IFC’) in November last year. The private sector investment arm of the World Bank called on banks in developing countries to increase their lending to companies wishing to invest in climate-friendly technologies.

In China, the IFC has recently orchestrated its first clean technology investment model. It is an investor in both Xinao Gas Holdings (‘Xinao Gas’) and the Fujian-based Industrial Bank. The latter provides commercial credit to customers of Xinao Gas to finance their clean energy projects. Xinao Gas, on the other hand, also offers advice on reducing energy consumption and pollution. The Industrial Bank extends its loan portfolio to users of equipment such as boilers and heating system that would fulfill this environmental-friendly goal established by the IFC. With US$150 million committed in these clean energy projects for a period of six years, the IFC revealed that the projects have resulted in a reduction of carbon dioxide in the vicinity of five to ten million tons per year.

There are indications that fund managers have become increasingly aware of this new investment criteria demanded by institutional investors, especially in China. In addition to the investments in alternative energy companies, such as Jiangxi LDK Solar Hi-Tech Co., Ltd, which received US$100 million from Natexis Private Equity Asia, CDH Investments, JAFCO Asia and Mitsubishi UFJ Securities Roosevelt, most recently Orchid Asia Group teamed up with Shenzhen Capital Group in taking up a stake in Yunnan Longsheng Green Industry (Group) Co. Ltd. At the same time, SAIF Partners also invested US$20 million in Greensaver Corporation which is headquartered in Taiwan. The company has completed the invention and patent application for the new silicate compound electrolyte. Earlier, CCMP Capital Asia had also committed US$35.75 million to Wuhan Kaidi Electric Power Co., Ltd., which is known for its first class design in new technologies and new products of environment protection, new energies and electric power industries

Funds

Funds for Control and No Control

Find management firms announced closings of their respective funds

After a year of exhilarating growth, 2007 is set to be another record year for fresh funds. There has been no abatement in institutional allocations to Asian private equity funds.

Funds for Control

The Malaysia-based Navis Capital Partners is the first Asian buyout firm that disclosed its fund raising progress in the year. It Navis Fund V, which has a target of US$1 billion, has already achieved its first closing in early February, receiving US$915 million commitments from institutions. With such an impressive result at Navis Fund V’s first closing, the fund is set to exceed its original target size. The Pennsylvania Publlic School Employees Retirement System is understood to have allocated US$100 million to the fund.

According to market sources, Affinity Equity Partners is another firm that is enjoying good progress in its fund raising exercise. Its latest fund is set to close well above US$2 billion. This, compared to the preceding fund’s size of US$700 million, is a staggering achievement.

Funds for No Control

Although buyout firms have been dominating the fund raising headlines, the final closings of two non-buyout funds did not escape the industry’s attention.

The Hong Kong-based Excelsior Capital announced the completion of its fund raising for its third fund, Excelsior Capital Asia Partners III, LP, which received commitments of US$185 million. Since severing its ties with Capital Z Partners (now known as CRZ Capital), the sponsor of its earlier funds, this is the first independent fund raised by the fund management firm.

The announcement capped a 15 month fund raising exercise, as Excelsior Capital Asia Partners III was launched in December 2005. It had a target of US$200 million to US$250 million. Capital Asia Partners III received commitments from a investors in the USA, Europe and Asia.

Separately, Walden International also announced the final closing of its latest fund, Pacven Walden VI, which received US$280 million of commitments from global institutions, including from some of the investors from the firm’s earlier funds. The fund enlisted some of the largest institutional investors in the USA as it backers, one of which is Indiana Public Employees Retirement Fund (‘PERF’) which has allocated US$20 million to Walden International’s latest fund. The Pacven Walden VI will continue to target investments in both the USA and Asia.

Another non-buyout fund management firm that is making progress in its fund raising campaign is the San Francisco-based Lombard Investments, Inc.. It recently received a boost when the UK-based CDC decided to allocate US$20 million to its latest fund, Lombard Asia III. At the beginning of February, Lombard Asia III had already received US$200 million in commitments from limited partners.

Despite the earnest efforts to those fund managers who advocate “non-control” situations, non-buyout funds failed to record an increase in aggregate fund pool. In fact, in the 24 months ending December 2006, there has been a slight decline in the capital pool that targets companies in growth/expansion or early stage, recording US$11.9 billion in 2005 and US$10.8 billion in 2006.

Gulf Fever

One of the driving forces that propels the soaring growth of Asian fund pool is the heightened interest from investors based in the Arab Gulf States. The Kuwait-based Global Investment House confirmed its plans to raise a US$2 billion Global Buyout Fund. Although the fund has a primary geographic focus in the Middle East, it also encompasses China as well as South Asia as part of its geographic focus.

In early February, the Dubai-based Abraaj Capital announced the first closing of its Infrastructure and Growth Capital Fund, at US$500 million. With a final target of US$2 billion, this fund, which seeks opportunities in growth companies as well as infrastructure projects, has included South Asia as part of its geographic focus. Significantly, the Infrastructure and Growth Capital Fund is co-sponsored by Deutsche Bank and the Bahrain-based Ithmaar Bank, one of the very first that is known to have received joint sponsorships from financial institutions in the West as well as those in the Arab Gulf States. The trend underscores investors from the Arab Gulf States are warming up to the concept of allying with firms in the West in order to pursue private equity opportunities worldwide.

Buyouts

Barrels of Capital

Islamic financing is gaining momentum in Southeast Asia

Rising oil prices have changed the dynamics of global financial markets. Capital from the Islamic nations, principally those in the Arab Gulf States, is fast becoming a third main stream, as investors from these countries venture outside their desert kingdoms. In Southeast Asia, home to the largest population of Islamic advocates, the rising profile of such financing is becoming increasingly conspicuous, with Malaysia being the centre of action.

In mid February, the subsidiary of the Kuwait Finance House, Kuwait Finance House (Malaysia) Berhad, announced a joint venture agreement with Pacific Healthcare Holdings Ltd. The latter is a Singapore-based healthcare services provider, and is listed on the main board of the Singapore Exchange Ltd.

Under the terms of the joint venture agreement, Kuwait Finance House (Malaysia) Berhad will take up a 60% stake in the newly-created investment vehicle, Aliph Pacific Pte Ltd., with Pacific Healthcare taking up the residual 40%. Aliph Pacific will inject either cash, or equivalent assets, of S$32 million (US$20.86 million). Through this joint investment vehicle, Pacific Healthcare seeks to further expand its healthcare businesses in Asia.

The Kuwait Finance House (Malaysia) Berhad has targeted healthcare as one of its core investment sectors, and has identified Pacific Healthcare as its strategic partner. The latter was formed through the amalgamation of several medical specialist and dental practices, and was incorporated in January 2001. In November 2005, it became a publicly-listed company on the Singapore bourse through a public offer of 48 million shares, and raised S$14.4 million. Last year, it streamlined its operations by disposing of 10 of its total 13 general practitioner clinics for S$8 million, so as to focus on its higher-margin specialist healthcare and wellness businesses. Currently, the Singapore-based healthcare provider has operations in the Lion City, Hong Kong, India and China.

The partnership with Pacific Healthcare is, in fact, a very small undertaking of Malaysia-based Kuwait Finance House (Malaysia) Berhad, compared to the other deal that it is currently pursuing. It is mounting a fierce battle to access RHB Capital, the fourth-largest bank in Malaysia which is 65%-owned by the debt-ridden Rashid Hussain Bhd.. At the end of September, Rashid Hussain Bhd is estimated to be shouldering a debt pile of 4.5 billion ringgit (US$1.32 billion). The private equity investment arm of Kuwait Finance House has already agreed to pay 2.16 billion ringgit or US$618.9 million for the 33% stake in Rashid Hussain Bhd. which is currently being held by Utama Banking Group, being the single largest shareholder in Rashid Hussain Bhd .

Middle East investors are displaying strong interest to access Asia’s banking assets. The Hong Kong-based Primus Pacific Partners had earlier received approval from Malaysia’s central bank to enter into negotiations with Utama Banking Group as well. With a focus in the banking sector, one of Primus Pacific Partners’ shareholders is the Qatar Investment Authority.

By mid February, it would appear that Kuwait Finance House, the largest Islamic investment bank in the Persian Gulf, has succeeded in eliminating Primus Pacific Partners. But the domestic EON Capital Berhad has emerged as the financial institution that is at the opposing side of the negotiations table for this deal. Both bidders are flagging towering investment sums to the seller. The Malaysian arm of Kuwait Finance House indicated that it could be mobilising as much as US$3.4 billion when it succeeds in taking control of RHB Capital to create the target company into a leading Islamic bank, while EON Capital has tabled an 8.75 billion ringgit or US$2.73 billion takeover bid.

The interest to subsequently gain control of RHB Capital has even enlisted expression of interest from the country’s largest pension fund, Employees Provident Fund. At the beginning of March, the target bank has become the most sought-after financial institution in Malaysia, with interested parties adjusting their bid price in order to win control of it. According to market analysts, there is no quick solution to this high profile buyout.

Enriched by revenues coming from soaring oil prices, this surging pool of Islamic capital has placed Malaysia as the immediate beneficiary. In 2006, a number of funds sponsored by organisations from the Middle East have helped to shore up Malaysia’s private equity pool. Among them is the US$250 million South East Asian Strategic Assets Fund LP which seeks opportunities in infrastructure projects; as well as the Regional Ummah Investment Fund that has a pan-Asian focus in all situations. The latter also has a target size of US$250 million .

Global institutions are also warming up to the idea of taking positions in Malaysian stocks. Goldman Sachs has recently taken up a 7.06% position in Stemlife, a stem cell bank currently listed on MESDAQ, the second board of Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange). Green Packet, a wireless internet broadband company, has also enlisted international institutional investors such as Fidelity Investment, as well as Saudi Economic and Development Corporation.

Since late last year, the Kuala Lumpur composite Index has risen by more than 30%, and has emerged as one of the best performing stock markets in the Southeast Asian region.

Malaysia’s neighbour, Indonesia, could also be the recipient of a huge undertaking from the Islamic Development Bank. According to sources, the giant financial institution could be sponsoring a US$1.5 billion infrastructure fund for Indonesia, with EMP Global LLC being the appointed fund manager. The Washington-based fund management firm is not only known for its expertise in infrastructure investments, but also for its strong connection in the Islamic world. It has long established an office in Bahrain.

India Corner - Funds

Infrastructural Deployment

India welcomes one of its most significant infrastructure initiatives

Since 2002, India has clocked up an average annual economic growth rate of 8%, according to the Economist. For India to sustain such an illustrious record, global institutional investors are united in their belief that India’s infrastructure development must be addressed. In mid February, the world’s second most-populated nation launched one of its most significant programmes for infrastructure development when the government announced its joints efforts with foreign institutions to establish a US$5 billion initiative.

The Indian government-sponsored Infrastructure Development Finance Corp. (‘IDFC’), together with India Infrastructure Finance Company Ltd. (‘IIFC’), will team up with Citigroup Inc. and The Blackstone Group Holdings LP in launching “The India Infrastructure Financing Initiative”, a collaborative effort to deploy approximately US$5 billion in capital for infrastructure projects in India. The IDFC, Citigroup and Blackstone will contribute the initial US$250 million, with the remaining portion of the capital expected to come from both international and domestic investors.

The US$5 billion will be jointly managed by IDFC and IIFC. The government-sponsored IDFC will set up a separate unit to be responsible for the US$2 billion in equity capital. It will principally seek projects that are primarily in roads, power, airports, ports and industrial, as well as commercial, infrastructure. The projects could be in early or development stages that would provide a stable return of capital.

The remaining US$3 billion shall be deployed as long term debt financing with maturities exceeding ten years. This portion of the capital will be managed by IIFC, which was created in January 2006 by the government of India. In addition to its access to local banks, the IIFC has been granted the mandate to float bonds and raise capital from multilateral organisations for the purpose of financing infrastructure projects in India.

For both Citigroup and Blackstone, their respective commitment to this India Infrastructure Financing Initiative is an extension of their prevailing activities in India. Citigroup, through its Citigroup Venture Capital International, is one of the most active foreign private equity investors in India. The Blackstone Group has committed to two private equity deals since it was established in 2005 in India. Concurrently, it has established a listed fund that seeks investment opportunities in India. The India Fund Inc. is listed on the New York Stock Exchange, and enlists Infosys Technologies, Reliance Industries and Bharti Airtel Ltd. as some of its portfolio companies.

India recorded the launch and formation of a long list of infrastructure funds in 2006. The IDFC Private Equity Fund II, which achieved a final closing at US$430 million, is the largest infrastructure fund raised for the country. It is managed by IDFC Private Equity, the private equity investment arm of IDFC. Another infrastructure fund management firm, IL&FS Investment Managers, has also launched a number of funds with foreign institutions including Japan’s ORIX Corp. Most recently, IL&FS Investment Managers is known to be teaming up with the Abu Dhabi Investment Authority to form a US$1 billion fund for infrastructure investment opportunities in North Africa, as well as West Asia.

India’s pressing need in the infrastructure sector is pulling in additional commitment from the Asian Development Bank (‘ADB’). In early January, the ADB announced an additional US$2 billion lending to India and said that “India’s changing needs point to the need for strengthening infrastructure….”. The ADB’s programme will focus in the transport and energy sectors, with transport taking up 34% while energy 19.5%.

In a speech delivered in May 2006, Dr Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission of India, said that India’s public sector would still rely on Public-Private Partnership for infrastructure development in the country. Indian government is taking several initiatives that would leverage on budgetary resources and multi-lateral assistance for promoting Public-Private Partnership; as well as standardising processes to reduce transaction costs and to accelerate investment flows. Dr Ahluwalia also estimated an investment amount of US$72 billion will be necessary in the development of transportation sector for India till 2012.