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May 2007 Issue
In Brief

Failed Bid for Qantas Evidences target companies are now commanding deal status as independent firms receive the backing of institutional investors Feature
A New Marketplace in Global IPOs s taking shape in China Analysis
Gulf State Investors Accelerate investments and assuming their profile Institutional Corner
Varying Status for Deals Down Under as Oz’s allure to buyout investors continues Buyouts
MMI Holdings Takes a Buyout Drive with new investors Buyouts
Local Firms Govern China’s Buyout Funds pool which is swelling Greater China - Funds
Investors Renew Attempt to Buy listed subsidiary of China’s largest meat processor Greater China - Buyouts
Venture Investors Use Different models in China Greater China - Venture Capital
Grand Exits for Investors as bourses gesture to China IPOs Greater China - Divestments
Global Profile of India Funds Pool is growing fast India Corner - Funds
Multiple Rounds of Financing to Indian companies is the norm India Corner - Funds
IPO is the Favoured Exit Route as listing hopefuls wait for their debuts India Corner - Divestments
Foreign Investors are Renewing their thrust to gain footholds in Japan India Corner - Investments
Rhythm Concludes Its Partnership with private equity investors Japan Corner - Divestments
Content

Analysis
Wall Street in the East

Pan Asia
Institutional Corner
News
Funds
Buyouts

Greater China
News
Temporarily Uninsured
Kuwait's Sino Address
Funds
Buyouts
Venture Capital
Divestments

India Corner
News
Funds
Perching on the Gate of India
Investments
Growth/Expansion
Venture Capital
Divestments

Japan Corner
News
Investments
Growth/Expansion
Divestments

Summary
Market Watch
Index & Exchange Rates

Growing Pains

It has to be the most eventful buyout in private equity. In the hours and days that followed the close of the takeover bid for Qantas Airways Ltd. (‘Offer’), the status of this attempted takeover, largest in the airline industry, invited controversies and captured global media headlines. In a dramatic U-turn, on the morning of 8th May, four days after the official conclusion date of the Offer, Airline Partners Australia (‘APA’) conceded that the Offer had failed. It was a wise move. For APA, led by Macquarie Bank, Texas Pacific and joined by Allco Finance Group and Onex Corp., to continue its pursuit to become the new pilot of Qantas, it would not only be fighting for the airline’s shares, but would also be taking on Australian regulators, as well as the public. Since APA first announced its audacious plan to take control of Qantas, it had achieved a Herculean task in removing walls of barriers. Despite its flawless takeover modus operandi, and the high profile bid, at the end of the eight-week long intense Offer period, APA failed to command a winning margin of shares tendered by Qantas’ shareholders. The drama associated with the Offer is the latest that evidences the testing environment that is unfolding in Asian private equity. Ironically, it is the potential selling shareholders of target companies that are asserting control over the fate of prospective deals, rather than the providers of funds. When The Carlyle Group (‘Carlyle’) was barred from taking up an 85% stake in Xugong Group Construction Machinery Co., it was one of the very first statements made by a selling party. Since then, it is no longer...

Analysis

Wall Street in the East

China’s bourses have made speedy progress

When the combined market capitalisation of the Shanghai and Shenzhen exchanges exceeded that of Hong Kong’s bourse, the world’s sixth largest, a new paradigm emerged on the global initial public offering (‘IPO’) markets. On 10th April, at the close of that day, the market values of China’s two domestic exchanges tallied up to US$1.8 trillion, a notch ahead of the US$1.772 trillion registered by the territory’s bourse.

Parallel Listing

It all began in October last year when the Industrial & Commercial Bank of China (‘ICBC’) became the first state-owned enterprise to stage simultaneous debuts on both the Hong Kong and Shanghai stock exchanges. China’s largest lender’s public offering remains the world’s largest IPO on record, as it raised a towering US$21.9 billion. Through two landmark debuts in 2006, ICBC and that of Bank of China, which together raised US$11 billion, China has firmly anchored its position among the global IPO markets. According to Dealogic, China led all other markets in terms of the amounts raised. There were 1,000 IPOs in 2006, which raised US$213.9 billion from public investors, and China accounted for 155 and US$53.5 billion respectively.

China’s ability to secure a lion’s share of the 2006 global IPO market has propelled Asia. It surpassed the USA in terms of the amount raised, and was only second to Europe. Hong Kong also benefited, and led all the other bourses in the world in accounting for 17% of the US$213.9 billion raised during the 2006 IPO year.

Pulling Power

In the fleeting six months since China implemented its revolutionary dual stock listings policy, fuelled by Beijing’s arduous efforts to create its own Wall Street in the country, both Shanghai and Shenzhen exchanges have become powerful magnets. The two are drawing a growing list of private equity/venture capital-backed companies to their respective listing platforms. Until early April, ICBC and Bank of China were the two H-share companies that had earlier received private equity funds and which are also quoted on the A-share market. Prior to ICBC’s public offering, Goldman Sachs had pledged US$2.58 billion to ICBC. Similarly, Bank of China also received funds from the Asian Development Bank, Och-Ziff Capital Management Group, and Spinnaker Capital Ltd., before its debut on the Hong Kong Stock Exchange (‘HKSE’) in June 2006.

In late April this year, the list grew to include Weichai Power Co. Ltd., which was backed by Shenzhen Investment Limited. Weichai Power was listed on the HKSE in 2004.

Once, listing on NASDAQ or HKSE, or the latter’s second board, was regarded as a necessary credential for Chinese companies. This criteria no long holds. Since Coship Electronics Co. Ltd. became the first domestic venture capital-backed technology company to go public on the Shenzhen Stock Exchange, the number of companies, which had earlier received venture capital financing that then followed Coship Electronics Co. Ltd.’s IPO path has escalated to 25.

The recent comments by Mr Liu Chuanzhi, chairman of Legend Holdings, the sponsor of both Legend Capital and Hony Capital, were telling statements. He indicated that Legend Holdings’ venture capital and buyout investment arms will seek A-share listings for their yuan-dominated private equity portfolio.

There are compelling reasons for investors to favour China’s burgeoning bourses, at least for now. The shares on both the Shanghai and Shenzhen exchanges command far higher price per earnings ratios compared to other markets. At a range between 53.24 times to 47.12 times, this is well ahead of the 18.42 benchmark multiple established by the MSCI Emerging Market Index .

There are clear indications that foreign private equity investors are warming up to the idea of purchasing A-shares, even though the yuan remains inconvertible. Goldman Sachs is an advocate. Since mid 2006, it has taken stakes in four A-share companies, Guangdong Midea Electric Appliances Co, Fuyao Glass Industry Group Co., Ltd., AUPU Group Holdings Company Limited and Henan Shuanghui Investment & Development Company. Most recently, CVC Asia Pacific joined Goldman Sachs in taking up a stake in the listed Zhuhai Zhongfu Enterprise Co., Ltd.. So far, the trading prices of those companies backed by private equity/venture capital investors have demonstrated impressive performance, with virtually all having exceeded the benchmark indices applicable to the stocks.

Comments

With China’s foreign reserves swollen to over US$1.2 trillion at the end of March this year, liquidity is no longer an issue in China. In the beginning of March, China-based companies have raised US$16.7 billion from markets, with 80% coming from the two domestic bourses.

But, a growing gap of the price differentials between the trading platforms of the mainland and that in Hong Kong is beginning to challenge this dual listing scheme. At the end of April, the shares of ICBC was trading at HK$4.34 each on the territory’s exchange. But in Shanghai, its shares were changing hands at 5.41 yuan each. With both the yuan and Hong Kong dollar bearing virtually the same exchange rate to the greenback, this development clearly indicates that A-share investors are prepared to purchase shares at a premium. In the case of ICBC, it was a hefty 26% premium, but compared to other stocks, it is in fact a small percentage. The share price differential for Datang International Power Generation Co., Ltd, for example, is a frightening 109% .

Critics believe China’s two exchanges are close to encountering a painful correction. While a shake-up may be inevitable, preparing for portfolio companies to raise capital from the A-share market is now a reality for private equity/venture capital investors.

Greater China Corner - News

Temporarily Uninsured

The Carlyle Group and Prudential Financial Ltd. have received approval from China Insurance Regulatory Commission to sell their holdings in China Pacific Life Insurance Co., Ltd. (‘China Pacific Life’) back to the latter’s parent company, China Pacific Insurance (Group) Co. Ltd. (‘China Pacific Group’). Following this sale, the two foreign investors will re-establish their future shareholding in China Pacific Group.

In December 2005, Carlyle, teaming up with Prudential Financial, one of the largest life insurance companies in the USA, and took up a combined 24.97% stake in China Pacific Life. The transaction amounted to 3.3 billion yuan (US$410 million) for a total of 499 million shares. However, the foreign investors have decided to return their shares to China Pacific Group in order for the latter to claim a 97.5% ownership in its subsidiary. In a statement in response to the public, China Pacific Group elaborated that the two foreign investor groups will have a stake in the parent company, in exchange for releasing their holdings in China Pacific Life. The statement fell short on the details of foreign shareholders’ future equity holdings in China Pacific Life.

Since late 2005, there have been reports that China Pacific Group was planning to seek an offshore public offering. Its ability to gain full control of its subsidiary is seen as a necessary passport for its impending initial public offering.

Kuwait’s Sino Address

Kuwait Finance House has recently teamed up with Belanie Management Ltd. and Chongqing Risun Industry Group to establish what is believed to be the first Sino-foreign real estate joint venture corporation in Chongqing, the capital city of the Sichuan province. The undertaking by Kuwait Finance House highlights Middle East investors’ keen interest to establish footholds in the inner west of China.

Kuwait Finance House has led other investors from the Arab Gulf States in establishing its Asian arm in Malaysia. It is conducting its activities in the region through Kuwait Finance House (Malaysia) Bhd.. Most recently, the latter was engaged in the fierce battle to take control of RHB Capital.

India Corner - Funds

Perching on the Gate of India

Global institutions are planning to launch funds for India

India is witnessing investors from all parts of the world coming to its market, as they seek to seize opportunities arising from one of the fastest growing economies.

After having committed no less than US$250 million in India since 2005, 3i Group plc, the largest UK-based venture capital firm, announced its intention to set up a strategic partnership with India Infrastructure Finance Co. Ltd. (‘IIFCL’) in order to broaden its investment scope in India’s infrastructure-related projects. It remains unclear whether 3i is joining The Blackstone Group and Citigroup in the Indian government’s recently established US$5 billion “The India Infrastructure Financing Initiative”.

IIFCL was incorporated in January 2006, and is sponsored by the Indian government to provide financial support or facilities to infrastructure projects in India. It will be taking a key role in the India Infrastructure Financing Initiative by providing loan facilities.

The Indian government estimates that the country would need as much as US$320 billion over the next five years to fund its infrastructure development. Through its strategic partnership with IIFCL, 3i is poised to reap benefits coming from infrastructural-related investments in the country. To the west of India, two new funds are on the drawing boards of two financial institutions. Both the Oman-based BankMuscat, and The Bahrain-based Khaleej Finance and Investment, are planning for their respective funds for India.

The BankMuscat, which had merged its Indian operations with the Centurion Bank, has ambitious plans for India. According to local reports, BankMuscat will launch a US$500 million private equity fund for India, while establishing another one with a US$250 million target that is Shari’ah-complaint. BankMuscat has been one of the most active investors from the Arab Gulf States in India. In addition to having taken a stake in Centurion Bank, it was also vying to take up a substantial minority holding in Mangal Keshav, an Indian brokerage firm.

Separately, Khaleej Finance and Investment is wrapping up its fund raising activities for its US$200 million Indian Private Equity Fund, with committed capital of US$200 million. It is teaming up with India’s largest bank, ICICI Bank, which will act as the finance partner for Khaleej Finance and Investment. The fund will focus on private equity opportunities, as well as those in the real estate sector.

In the first four months of this year, India’s new funds pool has grown to an aggregate of US$448.45 million. Of this, non-domestic private equity firms account for 40.9% of this pool of fresh capital, further underscoring the increasingly internationalised profile of India’s private equity fund management community.