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September 2007 Issue
In Brief

Solid Financial Strength Shields Asian private equity from subprime loan woes, at least for now Feature
A-shares In Vogue but Realisation remains a distant reality Analysis
Southeast Asia Shines with Deals as investors turn their attention to this market Investments
Seoul Proves Its Allure as investors clock handsome returns there Divestments
CITIC Builds Its PE Funds portfolio Greater China – Funds
Opportune Timing in Digital China deal as all parties benefit Greater China – Buyouts
India’s Infrastructural Needs attract launches of mega funds India Corner – Funds
Deals with Big Tickets recorded in India as global firms make their splashes there India Corner – Investments
Edelweiss Capital Prepares for its public life after more than five years of partnerships with private equity investors India Corner – Divestments
Troubled NIWS Seeks Private Equity for its resurrection Japan Corner – Buyouts
Vantec’s Listing Marks a New chapter for the company after having partnered with two groups of private equity investors Japan Corner – Divestments
Content

Analysis
Reality & Mirage

Pan Asia
News
Funds
Investments
Buyouts
Divestments
A Showcase of Exits

Greater China
News
Funds
Buyouts
Growth/Expansion
Venture Capital
Divestments

India Corner
News
Funds
Funding India’s Infrastructures
Investments
Growth/Expansion
Venture Capital
Divestments

Japan Corner
News
Buyouts
Divestments

People on the Move
Summary
Index & Exchange Rates

Déjà Vu

History appears to be repeating itself as financial woes of the US housing market continue to send jitters to the Asian stock markets. It was exactly ten years ago that the region was afflicted by the Asian Financial Crisis, but, this time, the ill winds are coming from the world’s most powerful economy. With consumer spending accounting for 70% of US gross domestic product, the subprime loan problems, if unchecked, could eventually erode such consumer purchasing power. The looming debacle could also be the catalyst for a financial tidal wave. Are there similarities between the current loss of confidence in the US financial markets, and the 1997-1998 Asian Financial Crisis? Will Asian private equity be spared from, or face trying times ahead as a result of capital market volatility caused by the subprime loan situation?

Debt/Equity Exposure

In the near term, it would appear that Asia and its private equity industry are in a solid position to ward off any financial ills arising from an economic downturn in the USA. Between January 2005 and August 2007, Asian private equity investors have committed to deals with an aggregate value of US$90.7 billion, in which buyouts took the lion’s share accounting for US$52.7 billion. In an analysis undertaken by the Asia Private Equity Review on debt/equity ratio against enterprise value of buyout transactions, it has been able to cover 58.8% of the buyout deal value. On average 62.5% of the transaction sum came in as loans, with the residual committed by investors as equity capital. This percentage is very close to the 65:35 ratio benchmarked by one of the leading institutional debt providers to Asian buyout deals. Using this debt range of 62.5% to 65%, it is estimated that, since 2005, buyout investors have committed an aggregate between US$32.9 billion and US$34.2 billion as leverage. It is far from being a threatening exposure. Unlike in the days after the Asian Financial Crisis when buyout investors ...

Analysis

Reality & Mirage

A-shares are in vogue but investors see little realisations

It was not long ago when China’s A-share market was described as the world’s worst performer on the global market. In a study undertaken by ABN Amro released in February 2006, it revealed China’s stock market lagged behind all of its global counterparts and was the only market that recorded negative returns. It was a short page in China’s A-share history. Since Beijing engaged in earnest efforts to revitalise its domestic stock market over the past year, this new direction in the pursuit of market economy bore the fruits of success. In August, the Shanghai Composite made its imprint on the global stock market. While share prices in both Europe and the USA suffered volatile trading movements, in response to the US subprime loan crisis, those in China’s A-share market showed no signs of wobbling and continued to climb. During the month of August, share prices of companies in the Shanghai and Shenzhen Composite Indices were trading 20% higher than their counterparts in Dow and FTSE.

The Effervescent Market

In the first eight months of the year, the Shanghai Composite has risen 88%. On average, stocks trading on the Shanghai bourse are currently trading, on average, 60 times the 2006 earnings. The A-share market boom has reshaped the Greater China stock market, which was once dominated by Hong Kong’s H-share market. As a result, a growing list of domestic enterprises is currently favouring the quoted status at home bourses. In 2006, there were 5 companies, backed by private equity investors, which chose to trade their shares within China, including those H-shares returning to the A-share market. The first eight months of the year saw the number swell to 12. It has also been nothing but an uninterrupted celebration party for companies making their debuts on the A-share market.

For these 12 private equity/venture backed companies, negative first day performance is an alien reality, as an average 204.3% surge on the first day of trading price has been recorded for their debuts. This dwarfs the 25.2% for those listed in the USA. In the first eight months of the year, these 12 companies continue to show exhilarating after-market performance. So far, none has recorded a decline of their respective share price since being listed. In fact, overall, their share prices have risen by 273% since securing “publicly-listed” status on the A-share market. This, when compared to companies such as China Sunergy Co. Ltd., which was backed by Prax Capital and Credit Suisse Private Equity, and listed on NASDAQ, is a sharply different story. In May, China Sunergy saw its share price surge by 50.5% on its first day of trading, but since then, its share price has slumped to US$5.45 at the close of 31st August. This followed a disappointing earnings released and represented a staggering 67% drop after the stock closed at US$16.56 on its debut trading day.

Signs of Independence

Foreign private equity names were once regarded as integral to a successful public debut outside of China, but this is no longer applicable. Two of the private equity-backed banks, the Industrial Bank and Bank of Nanjing were listed on the Shanghai Stock Exchange during the year. Since being listed in January, the Industrial Bank’s share price has soared by 264.8% while Bank of Nanjing recorded a 94.7% jump after having made its debut in July. Their respective first day and after market performances underscore a new set of dynamics that is now governing the listing destination of China’s enterprises. Bank of Beijing, backed by the International Finance Corp., is to follow its peers and offer its shares to the public at home.

As the A-share market rallies, the Shenzhen Stock Exchange has evolved to become a powerful magnet to technology companies that could rival NASDAQ one day. So far during the year, the bourse in Southern China has attracted nine technology companies that had earlier received funds from venture investors. Compared to those on NASDAQ, their individual market capitalisation is only a fraction to their counterparts listed on NASDAQ. The amounts that these companies were able to raise from the public is in the range of between US$20 million and US$40 million, which is about a quarter of the amount raised by their counterparts in the USA. With the exception of Weichai Power Co. Ltd., backed by Shenzhen Capital Group, that raised 513.42 million yuan (US$65.8 million), the rest of the public offerings raised no more than US$45 million each from the market.

Comments

China’s buoyant A-share market has demonstrated an impressively appealing performance, but is only for those that are prepared for a tortuously lengthy 36-months moratorium during which investors are forbidden to dispose of their holdings. The only investor that is known to have been able to divest a portion of its holdings is IDG Technology Venture Investment. It sold half of its holdings of Guangdong Ygsoft and returned 50 million yuan to its coffers, a hefty return of 45 times the invested capital. This exit is an exception rather than the norm. Investors of companies that choose to be quoted on other bourses witness a handsome return of capital. In the first eight months of the year, while investors of those companies listed on the A-share market recorded a modest US$52 million in realised capital, investors of those Chinese companies listed on both the USA and Hong Kong clocked up US$1.21 billion. The current effervescent A-share market’s performance is hard to resist, as long as investors also acknowledge the return of their invested capital is a mirage that will last for at least 36 months after their invested company’s debut.

Pan Asia

A Showcase of Exits

Investors are disposing assets in South Korea with beaming results

Lone Star’s plight in selling Korea Exchange Bank (‘KEB’) might have conveyed a negative message to foreign investors, but the inflow of capital from direct equity investors to the country is unlikely to taper. The sale of Hanmi Capital and divestiture of Megabox Cineplex as well as a number of impending exits are powerful testaments and reminders of the outstanding returns that can be achieved in South Korea.

In late August, MBK Partners sold its 52.5% stake in Hanmi Capital to Woori Financial Group, the second largest financial company by asset size in South Korea, for 271.1 billion won (US$290 million). The transaction concluded a brief 12 months investment holding period and MBK Partners is estimated to have reaped a return of 4.6 times its invested equity capital.

In July 2006, MBK Partners deployed US$96 million to take up a 52% stake in Hanmi Capital, South Korea’s second largest leasing company, from Citibank Korea. The acquisition valued Hanmi Capital’s shares at 9,574 won each, a 29% premium over the then prevailing share price. Under MBK Partners’ control, Hanmi Capital boosted its assets through the acquisition of an auto-financing arm of Ssangyong Capital. Investors responded well to Hanmi Capital’s new direction as its share price closed at 16,650 won at the end of August, more than double its trade price 12 months ago.

Woori Financial is eager to consolidate its position in the market after having lost out in the auction of STARLease to Hyosung Corp. Although Hanmi Capital’s assets jumped from 391.7 billion won to 1.72 trillion won in the nine months between March and December 2006, its long-term liabilities have also more than doubled from 1.02 trillion won to 2.8 trillion won. The 271.1 billion won transaction price that Woori Financial has committed valued Hanmi Capital’s shares at 31,900 won each, virtually double its prevailing trading price of 16,650 won.

On the heels of MBK Partner’s sale of Hanmi Capital was Standard Chartered Private Equity (‘SCPE’)’s disposal of its holdings in Megabox Cineplex. The global private equity investment firm along with its partner shareholder in Mediaplex, have sold their joint holdings in Megabox Cineplex to Macquarie Bank for 270 billion won (US$285 million). In February 2002, SCPE and Mediaplex acquired a 50% stake of Megabox from Loews Cineplex for US$70.7 million. It has been an extremely rewarding investment experience for SCPE. HiMart, South Korea’s electronics retailer controlled by Affinity Equity Partners, Temasek Holdings and Intermediate Capital Group (‘consortium’), is another impending divestment. According to Bloomberg, a party of private equity investors, including The Blackstone Group LP, The Carlyle Group and CCMP Capital Asia, is seeking to become the new owners of HiMart. Market sources suggested that the interested buyers are prepared to commit US$2 billion.

In April 2005, the consortium took control of HiMart for 788 billion won (US$833 million). When the exit is completed, it shall be a windfall for the outgoing investors. It will be Affinity Equity Partners’ first divestment since its management team assumed an independent status.

Even though Lone Star’s exit of KEB has been held up for more than a year and it is unlikely to divest itself from the investment for some time, HSBC Holdings’ agreement to pay US$6.3 billion for Lone Star’s stake in the lender is another awe-inspiring divestment record, at least on the books. When the exit is eventuated, Lone Star is estimated to have returned US$8.0 billion to its coffers after having committed close to US$2.0 billion in KEB.

There is also the impending sale of C&M Co. by Goldman Sachs to MBK Partners. In March 2004, Goldman Sachs Capital Partners bought a 30.48% stake in the form of both ordinary and preferred shares. MBK Partners is to join Macquarie Bank in paying US$971 million for Goldman Sachs’ holdings in C&M, South Korea’s second largest cable TV operator.

South Korea has proven its ability to return capital to its investors. In the first half of 2007, Asian private equity investors realised returns totalling US$7.84 billion, of which South Korea accounted for US$3 billion. The return results are powerful forces that will motivate investors to pursue investment opportunities in Seoul and overcome even the most formidable investment barriers.

India Corner Funds

Funding India’s Infrastructures

Investors at home and abroad are raising funds for India’s infrastructure projects

In order for India to sustain a growth rate of 9% per annum, it would require US$475 billion to be deployed during the next five years, according to Finance Minister Chidambaram. But the world’s second most populous nation faces the sombre reality that it can only contribute US$5 billion to the required towering capital.

In response to India’s pressing needs, two institutions have recently launched their respective infrastructure funds to tap into this new set of opportunities arising from India. The country’s Power Finance Corp. is the latest to launch an infrastructure fund. Its India Power Fund has a target size of US$1 billion.

The Power Finance Corp. is a public financial institution under the auspices of the Indian government. It will commit 2 billion rupees (US$49 million) and maintain an equity position between 25 % and 29% in this fund. The fund already has commitments from domestic institutions, including The Life Insurance Company of India as well as Oriental Bank of Commerce. The Power Finance Corp. is broadening the profile of the fund’s investors and is currently in discussions with Goldman Sachs and The Blackstone Group to solicit their participation in the fund.

The India Power Fund was in fact announced in February 2004 by the government with an initial target of 10 billion rupees or US$246 million. It has the mandate to alleviate the power shortage that India is facing.

Coinciding with the announcement of the India Power Fund is the UK-based 3i plc’s launch of its first infrastructure fund for India. The 3i India Infrastructure Fund also has a target size of US$1 billion. The fund shall be advised by 3i Investments plc, a subsidiary of the UK-based venture capital firm. 3i will contribute half of its Indian infrastructure fund’s capital through two separate entities within the group. 3i itself will invest US$250 million, while the publicly-listed 3i Infrastructure Ltd. will subscribe US$250 million. The balance of the 3i India Infrastructure Fund will come from third parties.

3i India Infrastructure Fund is the first established within the framework of the strategic partnership agreement announced by 3i and the India Infrastructure Finance Company Limited (IIFCL) in April this year. The first billion dollar infrastructure fund launched by a foreign institution, the 3i India Infrastructure Fund will primarily focus on power, ports, airports and road projects in early-stage and mature infrastructure operations.

Private equity investors are expected to play a significant role in India’s pursuit to build up a reservoir of funds for its infrastructure project. Finance Minister Chidambaram indicated that India will need between US$18 billion to US$20 billion each year.