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August 2007 Issue
In Brief

Failure Rate in Clinching Deals rises as investors face a myriad of issues as independent firms receive the backing of institutional investors Feature
Buyout of Fu Sheng Shows Rules to take over quoted companies in Taiwan Analysis
Family Offices’ Presence builds up following recent entry of Auda Institutional Corner
Global Houses’ Asian Funds further fuel growth of the region’s fund pool Funds
Malayan Peninsula Attracts investors’ attention Growth/Expansion
Sale of Unza Proves Patience has paid off Divestments
Myer’s Iconic Properties Sold as TPG embarks on separate exit phases for Myer as TPG embarks on separate exit phases for Myer Divestments
Two Banks, Two Prices but one structure formula Greater China - Investments
Nineyou’s Public Dream Gone days before due to be listed Greater China – Divestment
Public Exit Avenues for China-based companies grow and define a new trend Greater China – Divestment
India’s First Billion Dollar Fund underscores a new set of dynamics in the countryIndia Corner– Funds
Earlier Buyouts Return Capital and set a new tone for Indian private equity India Corner– Divestments
Principal Investment Firms record outstanding exits Japan Corner – Divestments
Kito Regains Its Stock Code through private equity Japan Corner – Divestments
Content

Analysis
Game Rules

Institutional Corner

Pan Asia
News
Funds
Buyouts
Growth/Expansion
Divestments

Greater China
News
Funds
Investments
Buyouts
Growth/Expansion
Venture Capital
Divestments

India Corner
News
Funds
Market for Funds Investors
Buyouts
Growth/Expansion
Venture Capital
Divestments

Japan Corner
News
Buyouts
Growth/Expansion
Divestments

People on the Move
Summary
Market Watch
Index & Exchange Rates

The Casualties

Atelling statement is being conveyed to the Asian private equity community as another impending billion dollar buyout collapsed. After more than six months of intense courtship, Pacific Equity Partners’ pursuit of Australia’s Flight Centre Ltd. ended when shareholders cast their ballots against the innovative proposed leveraged structure. It was the second most devastating set back to investors in Asia’s most buoyant buyout market. It was only few months ago when a consortium of investors bidding for Qantas Airways Ltd. also encountered a crushing defeat in the largest takeover attempt in the airline industry. Private equity investors, especially those focusing on buyout disciplines, were once welcomed by Asian countries, and cash-strapped companies, with open arms. But the king of capital is no longer enjoying this same kind of reception. While investors continue to shower private equity fund managers with capital, those that are managing buyout funds, in particular, are finding the Asian deal terrain increasingly rugged.

Rugged Deal Terrain

Since the beginning of 2006, the total value of deals that could not be completed is estimated to have reached US$47.85 billion, with the first seven months of this year accounting for the lion’s share. Between January and the end of July this year, there were 22 deals, adding up to US$38.9 billion in aggregate value, that failed to win a seal of approval. This, compared to the six that added up to US$8.96 billion in the entire 2006, is an alarming failure rate that warrants soul searching attention from the industry (fig. 1). The Greater China region and Australia dominated the deal casualty landscape in these 19 months ending July 2007. Of the 28 unconsummated deals, these two markets accounted for 64.3%. Significantly, in 2006, the People’s Republic of China took up 67% of the failed deals, but the uncompleted deal zone has expanded into other markets during the first seven months of this year, now enlisting Australia, New Zealand, Japan, South Korea, Taiwan, as well as Malaysia. Among these, Australia has witnessed a change of its buyout market dynamics. Having first emerged as the most favoured buyout market in late 2005, Down Under has now become the waterloo of uncompleted buyout deals. In the first seven months of the year, there were seven unsuccessful deals ...

Analysis

Game Rules

The principles for clinching deals in Taiwan

The spotlight is on Taiwan. Four weeks into the third quarter of the year, the island of Taiwan is recording a string of commitments, from a growing list of foreign private equity firms, to local companies. President Chen Shui-bian’s government has also demonstrated its readiness to join all other markets, when its regulators approved the island’s first public-to-private buyout transaction. On 26th July, Fu Sheng Industrial Co (‘Fu Sheng’), the world’s largest golf club head manufacturer, confirmed its completion of enlisting Oaktree Capital Management LLC (‘Oaktree Capital’) as its largest single shareholder, in a deal that valued the company with a market capitalisation of just under US$1 billion. From August this year, Fu Sheng will embark on a new corporate track upon which no other public company in Taiwan has ever ventured. It will no longer be a quoted stock on the Taiwan Stock Exchange, but will assume private company status. Under the new structure, Oaktree Capital will be taking up a 48% stake in Fu Sheng, members of the Li family, which founded Fu Sheng, will hold a 47%, with management taking up the remaining 5%.

Oaktree Capital’s success, by becoming the first foreign private equity firm to privatise a publicly-listed company in Taiwan, has now erased doubts that privatisation is an illusory concept which private equity investors have been entertaining. This changed view is particularly relevant following The Carlyle Group’s (‘Carlyle’) failed bid to assume full control of Advanced Semiconductor Engineering Inc. (‘ASE’).

For more than five months from the beginning of this year, the global private equity house’s intent to deploy US$5.5 billion, in order to become the controlling shareholder of the world’s largest integrated circuit packaging service provider, had captivated the attention of the private equity community. If Carlyle had succeeded in adding ASE to its Asian buyout portfolio, it would have been seen as an endorsement by the Taiwan government to allow foreign financial investors to gain access to the island’s marquee assets in its semiconductor industry. Taiwan is home to two of the world’s largest customised chip makers, Taiwan Semiconductor Manufacturing Company and United Microelectronics Corp.

Reflecting on Oaktree Capital’s success in joining the board room, along with founding family members of Fu Sheng as well as its management, Mr Bill Kerins, managing director of Oaktree Capital (Hong Kong) Ltd., saw Fu Sheng and ASE as two deals with “very few parallels”. Fu Sheng is engaged in a relatively traditional business, while ASE is in a “sensitive” technology sector, which could have been the stumbling block that stalled the buyout.

Mr Kerins also pointed out that, unlike ASE, the market capitalisation of Fu Sheng is just under US$1 billion. The delisting of Fu Sheng hardly dented the market value of the Taiwan Stock Exchange. ASE, on the other hand, boasted an estimated market capitalisation of US$6.1 billion, as at the end of July. Mr Kerins surmised that Taiwan’s policy makers are reluctant to encourage foreign buyout investors to cut out companies with significant market value from its domestic bourse, especially those that are valued at over US$1 billion each. But as Rome was not built in a day, Oaktree Capital’s ability to persuade the founding members of Fu Sheng to agree on this landmark privatisation scheme took root more than four years ago, when Mr Kerins himself had already established a relationship with the target company. In 2004, when Mr Kerins was a managing director at Lombard Investments Inc., he was charged with the responsibility to monitor the latter’s investment in Fu Sheng.

The consummation of the Fu Sheng deal is yet further testimony to some of the investment maxims in Asian private equity, especially when the market is awash with capital. It takes established relationships and a deep understanding of the local market environment, as well as of regulatory issues in order to clinch deals.

But private equity investors are fast learning the rules of the deal game in Taiwan fast, as evidenced by a growing list of deals being completed or waiting to be consummated on the island. In the eight weeks ending July, investors have clinched nine deals in Taiwan representing a transactions value of US$3.13 billion. Significantly, the number of “privatisation” stories in Taiwan is adding up. In June, H&Q Asia Pacific joined hands with Merrill Lynch & Co., as well as the domestic FAT Capital Management, to assume full control of the company. In early August, CVC Asia Pacific announced its general offer for Nien Made Enterprise Co. Ltd.’s shares, in a deal that amounted to an estimated US$549 million. Significantly, no transaction sum committed by foreign private equity firms has exceeded the US$1 billion mark, suggesting that investors have already identified investment parameters applicable to Taiwan.

India Corner Funds

Market for Funds Investors

Funds of varied sizes have been established in India

Aside from China, India has to be the next most vibrant market for limited partners seeking to invest in promising fund management firms. In the first half of 2006, eight fund management firms’ fund raising efforts added an additional US$1.12 billion to the market. In recent weeks, the closing of a number of funds brought in yet an additional US$1.62 billion of fresh capital. With the additional US$1.16 billion also currently being raised, the private equity funds pool in India is set to swell to a new level during the year.

The Billion Dollar Fund

For the first time, India has become home to a US$1 billion fund. In late July, ChrysCapital Investment Advisors announced the final closing of its latest fund, which received US$1.25 billion. ChrysCapital V is now the largest an India-focused fund for the country. With an original target size of US$1 billion, ChrysCapital V attracted 75 global investors as its limited partners, and was oversubscribed. The closing of ChrysCapital V brings the fund management firm’s funds pool to US$2.25 billion, the largest in India. ChrysCapital V has an investment period of four to seven years, and will focus mainly on growth capital and also buyout opportunities, with deal sizes ranging between US$30 million to US$300 million.

The Million Dollar Funds

However, ChrysCapital V remains an isolated fund to boast such a size. The majority of fund management firms prefer to raise relatively modest fund sizes. Nexus India Capital, a venture capital fund managed by the India-based Nexus India Capital Advisors Pvt Ltd, has attracted US$100 million from a list of institutions and strategic family offices from North America, Europe and Asia as its limited partners. This is the first fund raised by the young fund management team, which commenced operations in December 2006. The founders have rich backgrounds in the information technology investment industry, and the firm is expected to focus on investing in Indian technology firms that are in the start-ups stage.

Another domestic firm, Atherstone Group, has indicated that it will be launching a US$75 million fund that will focus on small and medium enterprises in India. The fund has already received commitments from investors in Europe, and will make at least 20-25 investments with deal size ranging from US$1 million to US$4 million.

Ahterstone Group is a boutique financial services firm. It is currently engaged in real estate investments through its Belgrave Atherstone India Real Estate Fund, which has a target size of US$200 million. The Domestic Venture Funds

Even though a variety of funds by size, are being established for the Indian private equity market, GVFL Ltd., one of the oldest venture capital fund management firms in the country, continues its investment focus with unwavering commitment. The Gujarat-based venture capital firm announced its plan to launch two new venture capital funds that will chalk up an additional 3 billion rupees (US$73.8 million) to its current funds pool.

This newly launched SME Technology Venture Fund has a target fund size of 2.5 billion rupees, and will invest in early and growth stage technology companies in India. Mr. Vishnu Varshney, Managing Director of the GVFL Ltd., told the press that the new fund has already started its fund raising exercises, with the first closing expected to receive 500 million rupees of commitments from domestic investors. The fund’s final closing is expected to take place in January 2008.

GVFL also plans to raise a 500 million rupee fund to target India’s tourism business. It will be a joint venture capital fund between GVFL and the Indian government.

The Indian government continues to play an active role in the country’s venture capital sector. Most recently, the Andhra Pradesh government’s Andhra Pradesh Industrial Development Corporation has teamed up with Ventureast Fund Advisors India Ltd. to launch a venture capital fund, Ventureast Tenet Fund II. It will invest in early-stage companies which focus on providing technology services to the SME, IT and communications technology plus environment oriented technology sectors. Google, Inc. is reported to have taken a 30% stake in this fund which has already received US$15 million in commitments.

The Foreign Venture Funds

In parallel with the domestic venture investor interest in seeking a opportunities in early stage technology companies are those coming from Silicon Valley. Bessemer Venture Partners is the latest to declare an allocation to the Indian venture capital market. The revelation came following the final closing of the firm’s seventh global fund, Bessemer Venture Partners VII (BVP VII), which attracted US$1 billion of committed capital. Out of the US$1 billion fresh capital, Bessemer Venture Partners, one of the oldest names in the US venture capital industry, will allocate US$350 million to India from BVP VII.

Comments

The next wave of funds that will be established for opportunities in India are those that will target infrastructure opportunities. There are local reports that suggest IL&FS Investment Managers Limited and Standard Chartered Private Equity Limited are in discussions to set up a 50:50 joint venture US$1 billion India-focused infrastructure fund. The signing of this agreement is expected to be announced by the end of July. This hardly comes as a surprise, especially in light of recent comments made by Finance Minister Chidambaram. For India to sustain its current economic boom, according to the Minister, India will need US$475 billion for infrastructure development over the next five years. The launch of an infrastructure fund could thus not be more timely for India.