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April 2008 Issue
In Brief

First Test for Asian PE since it has proven to be a profitable investment model as uncertainties cloud over global market conditions. A study on Asian private equity's ability to endure the prevailing ominous test Feature
Fund Investors in China and India are beginning to dominate the Asian LP universe, but each has differing focuses Analysis
Fund of Funds Prosper in China with strong level of government participation Institutional Corner – Funds
Asian Sovereign Funds are Proving their savvy investment skills and their political clout does not appear to lend them privileges Institutional Investors
Fund Size Growth is the norm for Asian private equity Funds
Light Dims on Carlyle's Boto as a six-year long investment comes to an end Greater China - Investments
Foreign PE Propels Investment activities in Taiwan Greater China – Investments
Exit Performance of China Portfolio comes under test as the number of IPOs plunges Greater China – Divestment
Funds for Growth/Expansion situations in India maintain their position, yet to be overshadowed by infrastructure funds India Corner – Funds
Financing India's Development enters a new horizon for some of the development finance institutions India Corner – Investments
Investment Momentum Returns to Japan, with deals in billion dollars being clinched, but only for the domestic players Japan Corner – Investments
Content

Analysis

Institutional Corner
News
Funds
Institutional Corner

Pan Asia
News
Funds
Growing in Sizes
Investments

Greater China
News
Investments
Growth/Expansion
Divestments
Test of Strength

India Corner
News
Funds
Investments

Japan Corner
News
Funds
Investments

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

Reading the Signs

A tsunami of speculation struck the shores of the global financial world when JPMorgan Chase hurriedly declared its intent to acquire the financially beleaguered Bear Stearns & Co. for US$2 per share, when the 89-year old institution was tottering on the brink of bankruptcy. Is the fire sale of Bear Stearns the last episode in this meltdown, which began last year with defaults of US subprime loans, or will more calamities continue? For the Asian private equity industry, this is the test that the burgeoning industry is facing, after an envious four-year spell of growth since 2004. It is the first speed bump encountered by the industry after years of glossy investment records. Its ability to endure such an ominous test will be an ultimate statement on the industry's long-term sustainability as a viable asset class. During the past four years, private equity in the region has been an enchanting chime of surging capital pool, a breakneck investment pace, and a proud record of capital being returned to investors. In this first golden era of Asian private equity, the number of private equity firms has increased by 30.2% to 2,145. Since the 1997-1998 Asian Financial Crisis ('Crisis'), the debacle that is now plaguing the global financial industry is the fourth major test for private equity investors in Asia. After the Crisis, the then-battered industry turned to follow the new rays of hope beaming from the technology bubble, which was then punctured by the tragic September 11 incident in 2001. As the financial community in both Europe and USA began to implement damage controls, the then feeble and disillusioned private equity community in Asia had to cope with the deadly SARS that brought economies in the region to a standstill. This time, will the shadow of the bear in Bear Stearns dissipate following the revised bailout plan proposed by JPMorgan Chase and the US Federal Reserve, or it will linger on? What is the contagious impact on private equity in Asia?

Silhouette of a Bear

The Asian private equity industry had in fact embarked on the path of adjustment during 2007. For it is the second time since the Crisis that there had been no substantial percentage growth of the overall fund pool in the region. The last time when such a record took place was in the years between 2001 and 2002 when private equity and venture capital investors were frozen in the “nuclear winter” caused by the burst of the technology bubble and then further exacerbated by the September 11 incident. In 2001, the US$5.2 billion of fresh capital coming into the market, was an alarming 50.7% drop compared to the US$10.3 billion recorded for 2000. In 2002, the decline plunged further to US$3.7 billion. The negative percentage was reversed in 2003 and reached a high in 2005, when US$22.4 billion of fresh capital was known to have come into the Asian private equity market, representing a near 140% growth, compared to the preceding 12 months. The brake on the exponential growth rate came in 2006. The US$29.4 billion of fresh capital was in fact a modest 31% increase and 2007 maintained a similar growth percentage. The investment segment followed a similar pattern as the fund pool. The negative growth in investment pace appeared three times in the past decade's investment cycle, first in the 2001 and 2002 period, then in 2004 and again in 2007. The downward adjustments, that in 2007 was much more menacing, at 19.7%, while it was minus 3% in 2001 and minus 10.8% in 2004.

The Overweighted Buyouts

However, a telling picture emerged when both the growth or decline profiles for fund pools and transaction aggregates are segregated into buyout and non-buyouts. The corrections that Asian private equity has been experiencing have largely been confined to the buyout sector. Since 2004, the gap between the median and average size of buyout funds has widened at an alarming...

Funds

Growing in Sizes

The target size norm for a successor fund is to triple its predecessor

There appears to be a benchmark that some fund management firms are using to determine the size of their next funds. That is to triple the size of a predecessor funds. The recent final and first closings two funds, one in Australia and another in Vietnam, validate such an observation.

In late March, Australia's Pacific Equity Partners ('PEP') announced the final closing of its latest and fourth fund at A$4 billion (US$3.68 billion), three times larger than PEP Fund III which had a capital pool of A$1.3 billion.

PEP has always been a forerunner to take the crown as manager of the largest fund in Australia. In January 2006, the final closing of PEP Fund III was then the largest fund for Australia. But, in the following year in June, its status was replaced by Archer Capital's Archer Capital Fund 4 which closed in June 2007. PEP has now regained the position, as PEP Fund IV now leads Archer Capital Fund 4 by a wide margin, and is also the second largest fund in the region.

In Vietnam, BankInvest Group, the Denmark-based asset management bank, is set to see its second private equity new market fund, BankInvest PENM 2, meet its target size of US$250 million to US$300 million. Its first fund, PENM, had a capital fund pool of US$80 million. In early March, BankInvest Group confirmed the first closing of PENM2, after having received capital commitments from fund investors to the tune of US$200 million. The fund is expected to achieve its final closing during the first half of the year.

Significantly also, the interim period between a final closing and the launch of the successor fund respectively is short. For both PEP and BankInvest Group, it was just a bit over 24 months. Yet both funds are oversubscribed, suggesting that the prevailing subprime loan crisis has not yet in any way dampened investors' interest to seize opportunities in the region.

Greater China - Divestments

Test of Strength

Exit performance of China portfolio comes under test

It was a bleak first quarter for China investors. The Shanghai Composite Index has lost more than 34% of its value during the first three months of the year, its worst slump in 15 years. During the same period, Hong Kong's Hang Seng Index also recorded a drastic slide by 17.85%. With initial public offerings and sales of shares on the public market ('public offering route') being the principal source of realised capital for private equity investors, the prevailing stock market condition has an immediate impact on exit performance of China portfolios.

During the past few years when the global, and particularly the Greater China stock market, has been enjoying an unprecedented rally, the public offering route held the key to China portfolio returns. In 2006, over US$3.3 billion of capital has been returned by companies with principal operational revenues in China that were backed by private equity investors. Of this, US$2.8 billion or 82%, was derived through the public offer route. In 2007, this divestment avenue accounted for US$3.0 billion, or 83%, of the year's US$3.7 billion realised capital. The figures underscore the paramount importance of a healthy and vibrant stock market movement for those investors with China portfolios.

Even though the A-share market was one of the best performers during 2007, sombre reality now faces some of the investors that had earlier joyfully toasted the successful initial public offerings of their respective companies. Among them, China Pacific Insurance (Group) Ltd. ('China Pacific Insurance'), which was listed in early December on the Shanghai Stock Exchange, has become the biggest casualty of the prevailing sell-off in China's A-share market. Its share price has fallen by over 43% since it made its illustrious debut. On 28th March, the share price of this third largest insurer in China closed at 27.57 yuan (US$3.93), compared to its offer price of 30 yuan. The Carlyle Group ('Carlyle') can only hope the prevailing negative market sentiment will soon dissipate.

Between 2004 and 2006, Carlyle and Prudential Financial Holdings committed an aggregate US$735 million to the insurer.

In a sharp contrast to the past, the roaring first day trading success of companies is no longer the common story. In early March, when Honghua Co. Ltd. ('Honghua'), backed by Carlyle, iD TechVentures and the Netherlands Development Finance Co. (FMO), went public, its first day share price closed at an 8% discount to the offer price. In late March, when Solargiga Energy Holdings Ltd., to which Baring Private Equity Asia had made a commitment, made its debut, its share price closed at HK$2.93, a cent above the offer price of HK$2.92.

As private equity-backed companies have decided to shelve their initial public offering ('IPO') plans, the number of IPOs in the first quarter of 2008 became the worst since the fourth quarter of 2006, falling to six. The winners are those that can weather the current stock market blizzard.