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February 2008 Issue
In Brief

Asian Inc Is Central To Trade Exits as they account for more than half of industrial sales Feature
Mezzanine Finance Takes Its Role as capital drought persists while infrastructure financing booms Analysis
Natixis Builds its Asian PE portfolio Institutional Corner
Suzhou Ventures Group Emerges as a central force in China’s burgeoning venture capital industry Institutional Investors
Southeast Asia Returns to Investors’ radar screens Funds
Foreign Investors’ 3rd Capital Injection to BankThai has advanced their position Investments
Mando Returns to Chaebol’s Fold as buyout investors dispose of their holdings Divestments
Government Factor is Strong in China funds Greater China - Funds
Powerful Families in Taiwan are sources of substantial deals Greater China - Investments
Launch of Technology Board signals Beijing’s first step in global road map Greater China - Divestments
Blackstone’s Year-Long Quest of Ushodaya looks increasingly shaky India Corner - Growth/Expansion
Telling Times for India Bourses as a star-cast of companies seek their debuts India Corner - Divestments
Shinsei’s New Shareholder propels the lender’s share price Japan Corner - Growth/Expansion
Investors Pare Down Holdings in Pokka with sweet taste Japan Corner– Divestment
Content

Analysis
The Best of Times
Institutional Corner

Pan Asia
News
Funds
Investments
Divestments

Greater China
News
Brain Power
Funds
Investments
Divestments

India Corner
News
Growth/Expansion
Venture Capital
Divestments

Japan Corner
News
Investments
Divestments

Subscriber Weekly Summary
People on the Move
Summary
Index & Exchange Rates

Buyers in the East

It was an auspicious beginning of 2008 for private equity investors. The sale of one of the longest held investments, and most entangled divestitures, was confirmed. In the third week of January, CCMP Capital Asia and Affinity Equity Partners entered into agreement with South Korea’s Halla Engineering & Construction (‘Halla’)to dispose of their holdings in Mando Corp. for an estimated US$691 million. The divestment marked the conclusion of a partnership that dated back in 1998, one of the very first buyouts undertaken in Asia. Halla’s success in claiming full ownership of Mando along with a consortium of domestic investors was the second private equity trade sale in South Korea since the beginning of December. In that month HiMart, which was financed by Affinity Equity Partners and Intermediate Capital Group Asia Pacific, was sold to Eugene Corp., a domestic construction company. Both Halla and Eugene Corp. represent an emerging pool of Asian investors that are prospective buyers of private equity assets. In China, the NASDAQ-listed Focus Media Holdings Ltd. intercepted CGEN Digital Media Company Ltd. (‘CGEN’)’s public offering plan, when it agreed to acquire CGEN for US$350 million. The four-year old CGEN had earlier received funds from a prestigious list of domestic and international private equity investors, including Shanghai Industrial Technology Venture Capital, JAFCO Asia, KPCB China, Redpoint Ventures, Merrill Lynch and Sumitomo Corp.

Organ to Asian Trade Sales

Over the three years ending 2007, Asia’s home-grown establishments have firmly established themselves as a central pool of investors seeking private equity-backed assets, both in terms of the number of exits, as well as the realised capital. In 2005, 59% of the US$9.45 billion capital returned to investors through trade sales came from Asian buyers. The percentage rose to 62% of the US$10.17 billion being returned to private equity investors through trade sales during 2007 . Among these Asian buyers of private equity-backed assets, it is the corporations that have been assuming an increasingly active profile. In the three years ending 2007, there were 117 corporations in the region known to have bought assets from private equity investors, overshadowing financial investors. Significantly, these Asian corporations have also built a fortress for their steadfast appetite for private equity assets, such that financial investors found it impossible to access private equity assets. Although the number of trade sales to Asian industrial buyers has been on the rise during the period under survey, increasing steadily from 45 to 53, private equity investors have failed to inch forward as buyers of their counterparts’ portfolio companies, maintaining an average 13% position only. The development underscores a fiercely competitive environment in which Asian corporations are far from being hesitant in acquiring quality private equity assets... ...

Analysis

The Best of Times

Mezzanine finance finds its role

It is the worst of times, at least in recent years, for buyout investors. As the private equity industry braces for an unprecedented level of scrutiny and suffers negative press coverage, the situation is aggravated by the prevailing credit crunch that has also slowed the deal consummation pace. Even though Asia was believed to be largely immune from the liquidity woes that envelope the USA and Europe, the 2007 Asian private equity transaction record evidenced otherwise. In the 12 months ending December, transactions aggregated to US$42.2 billion. This, compared to the US$53.2 billion for 2006, is a significant 20.8% decline. Private equity investors’ previous ability to access a colossal capital fund pool for debt financing for their billion dollar deals was humbled. There were only four transactions known to be over the US billion dollar mark in 2007, compared to 12 in the preceding year.

At a time when the darkening clouds over the private equity skies show no sign of soon dissipating, it is ironically the best of time for the mezzanine financiers. The UK-based and publicly-listed Intermediate Capital Group plc (‘ICG’), a leader in providing mezzanine finance in leveraged buyouts (‘LBOs’), was quick to respond to the market demand. In early January, it announced a £175 million (US$344.47 million) rights issue to finance opportunities “resulting from the unparalleled changes in debt markets…”. In documents pertaining to this rights issue, ICG further purported that “there also appears to be a renewed interest in using attractively priced and structured mezzanine debt in buyouts”. ICG’s comment was not only applicable to Europe and the USA, but to Asia as well. According to market sources, its Asia arm Intermediate Capital Asia Pacific Ltd. (‘ICG AP’), is making plans to launch a US$1 billion mezzanine fund, the largest for the region and double that of its predecessor fund.

Taking on a Middle Role

Dr Chris Heine, managing director of ICG AP, believes a convergence of factors has presented a unique environment for mezzanine finance providers. Despite recent severe corrections in stock markets, there has been no apparent downward adjustment of valuations, as entrepreneurs have maintained high valuation bars for their companies, a legacy of the recent buoyant stock market movement. But lending terms have become increasingly unfavourable to investors. Referring to multiples on earnings before interest, tax, depreciation and amortization required by banks before a loan is granted, Dr Heine pointed out that “the multiple has increased by between one to two times”. At the same time, he also acknowledged that interest rates for senior debt would rise by 100 to 200 basis points. “You would expect pricing would start at 275 to 325 basis points”, a banker wrote in his email to a colleague on the prevailing LBO debt market condition. With mounting difficulties accessing subordinated debt and high yield bonds, and investors at the same time trying to minimise their equity commitments to companies, mezzanine finance could be likened to the manna from heaven for investors, especially at a time when the debt drought is expected to persist.

Australia, where a record list of prospective buyout transactions were known to be have been aborted during 2007, affirmed Dr Heine’s assertions. Of the 11 of proposals from buyout investors being rejected by companies, five were known to be related to the valuation issue. At the same time, in a number of buyout deals clinched during the last quarter of 2007 in which the debt and equity ratios were known, financial investors were prepared to commit equity sum amounts no less than 40% of the enterprise value of the companies. In the impending US$2.2 billion buyout of Arysta LifeScience Corp. by Permira, according to various reports, the buyout firm has pledged 44% in equity capital. This is much higher than the average 33.8% in equity contribution in LBOs committed by European buyout firms during the first half of 2007 . Permira is widely being reported to be seeking to raise between ¥4.0 billion to ¥4.5 billion (US$37.55 million to US$42.24 million) in mezzanine finance to scale down its equity percentage in this deal .

There are early examples that affirms that mezzanine finance has indeed embellished performance results of leveraged buyout transactions. In the recent divestment of South Korea’s HiMart, in which ICG provided US$80 million in mezzanine finance, the divestiture posted a returns multiple of 5.3 times to the financial sponsors. This would have been reduced to 4.2 times if mezzanine finance had been removed from the capital structure. Under the latter circumstance, the internal rate of return would have dropped to 73%, instead of the 91% that has been achieved. Where the investment holding period is relatively short, such as in the Singapore Yellow Pages deal, in which buyout investors held the company for some 18 months, mezzanine finance helped to shore up the internal rate of returns to 114%, whereas it would have been 64% if mezzanine finance were absent.

Infrastructure Financing

Within the direct equity investment cosmos, mezzanine finance has multiple roles. In addition to LBO situations, mezzanine finance is also commonly used in infrastructure projects and investments. For example, Darby Asia Investors Ltd., the Asia subsidiary of the Washington-based Darby Overseas Investments Ltd., is known for its expertise. In March 2002, when Darby Overseas Investments assumed full control of the US$246 million Asia Infrastructure Mezzanine Capital Fund, Mr Richard Frank, managing director, explained that infrastructure mezzanine funds serve as “gap fillers”. The Asian Development Bank, in a document related to mezzanine finance, commented that mezzanine finance “is particularly well-suited” for funding infrastructure investments.

With Asia witnessing the renaissance of infrastructure financing, especially in India, mezzanine finance will have a unique role in developing economies. Darby Overseas Investments has launched a global fund with a target size of US$1 billion which will focus on an array of situations in emerging markets across the globe. This global fund came on the heels of the firm’s recent final closing of its Darby Asia Mezzanine Fund II, which secured institutional commitments of US$300 million.

Comments

Mezzanine finance took root in Asia in 1998, and began to gather momentum in 2004 when four fund management firms launched their respective funds. Together they ushered in US$283.7 million to the industry during that year. By the following year, mezzanine funds had firmly established their profile in the Asian private equity fund pool when over US$1.3 billion of fresh capital came into the market, largely fuelled by the final closing of ICG’s maiden Asia Pacific fund, at US$500 million. After a decade of growth, the mezzanine fund pool in Asia stood at US$2.82 billion. The concept is filtering into developing economies. In India, ICICI Venture Funds Management is raising the country’s first mezzanine fund with a target fund size of US$110 million, half of which has already been committed by limited partners. It is by far the single largest country-focused mezzanine fund in Asia’s emerging markets .

In 2008, the mezzanine fund pool in Asia is expected to reach a new milestone. It will be the first time when a number of mezzanine funds with varying geographic focuses on Asia, are in the market, such as ICICI Venture Funds Management’s India Advantage Fund VII, ICG AP’s second fund, Darby Investment Overseas’ global emerging market fund, and Kendall Court Capital Partners’ second fund.

This rising pool of mezzanine funds may be a timely phenomenon for Asian private equity investors. In 2007, buyout funds accounted for 41% of the US$36.8 billion fund pool. For this marquee list of fund management firms, the clock for capital deployment has begun ticking. Mezzanine finance may be one trump card that such billion dollar buyout fund management funds have to play, in order to succeed in clinching deals in a high valuation investment climate, while still attaining desired returns.

At the same time, with 11 infrastructure funds that have an aggregate target fund pool size of US$9.5 billion, the demand for mezzanine funds in infrastructure investments is set to soar . In Asia, mezzanine finance has evidently come of age.

Greater China Corner - News

Brain Power

China’s burgeoning private equity/venture capital industry is luring some of the most outstanding chief executives in the country’s information technology sector. The latest is Mr Lei Jun, the former chief executive officer of Kingsoft Corporation Ltd., which is backed by Legend Capital, Intel Capital, GIC Special Investments Pte Ltd., SBI Holdings Inc. and JAFCO Asia. Mr Lei is embarking on a new identity as an angel investor to seek opportunities among promising technology companies. One of his very first investments is vancl.com, an online shopping website operator.

Mr Lei’s decision to turn his back on the industry where he has spent more than 16 years highlights the magnetic pull of venture investing in China. It illustrates the growing trend wherein senior executives with operational backgrounds are seeking to capitalise on their expertise through venture investing. The catalyst behind such a trend is the growing pool of operationally experienced partners who are managing some of the most successful China funds. Among them are Mr Neil Shen, a founding partner of Sequoia Capital China. Prior to joining the Silicon Valley venture capital firm, Mr Shen had founded a number of online operating companies, among them Ctrip.com, which had earlier received funds from The Carlyle Group and is currently listed on NASDAQ.

Then there is Mr Edward Tian, former chief executive of China Netcom, also another well-respected name in China’s telecommunications industry. Two years ago, he decided to set up his own China Broadband Capital Partners to focus on investing in broadband-related companies. With a substantial portfolio, Mr Tian is known to be planning his second fund, which will be denominated in yuan .