This online issue of the Asia Private Equity Review is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.

June 2008 Issue
In Brief

May 12 Earthquake in China inflicts indescribable pain to untold number of victims but some private equity’s portfolios are set to gain from the rebuilding of the quake-affected areas Feature
Winds of Protectionism Blowing strong in Asia as evidenced by a series of actions taken by various governments Analysis
A High Flyer Faces Legal Charges from his limited partners Focus
Asian Institutional Dynamics Face changes as voices for reforms gather momentum Institutional Corner
China & India Capture Institutions’ unfaltering interest Institutional Corner - Funds
Cambodia Attracts Private Equity as the region enjoys economic prosperity General Section - Funds
Malaysia Captures the Spotlight that signals an increasingly investor friendly environment General Section - Investments
Final Sale of Parkway by Its First financial investor General Section - Divestments
Investors Log Control Deals But clearly define their geographic boundaries Greater China - Buyouts
Domestic Infrastructure Fund Managers hold broader vision than infrastructure investing India Corner – Funds
Focus on Infrastructure and Drugs is the recent theme India Corner – Investments
Focus on Infrastructure and Drugs is the recent theme India Corner – Investments
Content

Analysis
Focus

Institutional Corner
News
Institutional Investors
Voices for Reform
Funds

General Section
News
Funds
Investments
Divestments

Greater China
News
Funds
Buyouts
To Control the Territories
Divestments

India Corner
News
Funds
Investments

Perspectives

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

China Grieves

A t 2:28 p.m. on 12th May, the earth below Sichuan province moved. Within seconds, China witnessed its most catastrophic natural disaster since the current political regime came into power nearly six decades ago. The earthquake, measured at 8.0 on the Ritcher scale, has inflicted excruciating pain beyond description on millions. As this harrowing event unfolded, China unreservedly demonstrated its competent ability to alleviate the pain caused by this gargantuan calamity. It was also a powerful display of the economic strength and political will that China has attained since embarking on economic reform some three decades ago.

Hard Facts

Known for its spicy food and home to the precious pandas, the mountainous region is one of the most densely populated provinces in China. An inner- west industrial base for China, in 2007, Sichuan province ranked ninth in output of the nation’s gross domestic product. Three weeks after the May 12 earthquake, the death toll was climbing close to 70,000 while over 18,830 remained missing. According to the China Insurance Regulatory Commission, an estimated 2.1 billion yuan (US$29 million) has already been paid out to victims of this earthquake. It is perhaps the largest pay-out that China’s insurance industry has ever undertaken. The banking industry is expected to be hit hard. According to Shenyin Wanguo Securities (H.K.) Ltd., some 50 billion yuan would have to be written off as millions are no longer able to meet their mortgage payments, not to mention that their property assets had been destroyed by the deadly tremor.

For private equity investors, the exposure of their portfolios has been relatively small. Since 2005, they have invested in 24 companies that are based in Sichuan, with US$961.6 million.in aggregate. This, compared to the overall total of US$25.9 billion, is negligible. Significantly, with the exception of three companies that are located close to the epicentre of the earthquake, all are based in either Chengdu, the capital city of Sichuan province, or Chongqing, a special administrative region.

A Powerful Boost

As China sets a three-year goal to rebuild the area that crumbled under the quake, a new economic dawn arrived for Sichuan, one of the most prosperous inner west provinces. According to market analysts, in the next three years Sichuan will need 40 million tons of cement ...

Institutional Investors

Voices for Reform

Institutional changes are on the horizon as calls for reform gain momentum

A new era is in the making as Asia’s institutions seek to liberalise their investment programmes, with private equity and venture capital expected to benefit from such reforms.

Ms Wu Xiaoling, former deputy governor of the People’s Bank of China and currently a member of the finance and economics committee of the National People’s Congress, has recently voiced her suggestions to Beijing at a public event. She argued that China’s banks ought to be allowed to invest in private equity funds, in order to promote the domestic private equity industry. At the same time, she suggested that measures ought to be taken to promulgate private equity guiding funds that have been established by a string of local government bodies.

Ms Wu’s comments came as Beijing passed a series of laws in favour of the domestic venture capital industry. However, local authorities are encountering difficulties in promoting them. One of the impediments is the lack of clear guidelines as to how deployment could be exercised in order to benefit from the newly-implemented laws. Thus, it hampered local officials from accepting applications from local venture capitalists. Since the beginning of the year, China has witnessed a growing list of local government bodies that announced the launch of their respective venture capital funds.

In an uncanny coincidence, Ms Franceska Banga, chief executive of the New Zealand Venture Investment Fund (‘NZVIF’), also recently aired her concerns at the lack of government’s commitment to venture capital investment activities. In a survey conducted by NZVIF, it revealed that nearly NZ$50 million (US$39.4 million) of early stage investments had been deployed to 63 companies in the 24 months between February 2006 and February 2008, with over 80% of the companies receiving less than NZ$1 million. Ms Banga noted that, although early-stage investment activity in New Zealand is growing, the deployment rate in fact is a far cry from international levels. The daunting challenge facing New Zealand is the lack of institutional investor support for not just venture capital but across the full spectrum of private equity, according to Ms Banga. She added that it would be ideal for New Zealand to receive NZ$100 million of private equity investment each year.

The NZVIF is sponsored by the New Zealand government. Through the VIF Venture Capital programme and Seed Co-Investment programmes, NZVIF has already committed NZ$111 million to 61 companies and six venture capital funds.

The New Zealand government is taking measures to promote private equity in the country. In early May, the country’s Limited Partnership Act 2008 came into force with the goal to “facilitate sustainable growth” for New Zealand’s venture capital and private equity industry. Part of the Act embodies the Overseas Limited Partnerships that is designed to assist New Zealand’s businesses to compete internationally for venture capital funding on a level playing field.

However, the change that could redefine Asia’s institutional scene would only come when Tokyo agrees to overhaul its Government Pension Investment Fund. The latter is the biggest public pension scheme in the world, with over US$1.5 trillion in assets. Japan’s Council on Economics and Fiscal Policy (‘Council’), which advises Prime Minister Yasuo Fukuda, is reportedly seeking an overhaul of the Government Pension Investment Fund, including replacing existing officials managing this fund. Yet, market sentiment has been cautiously optimistic. However, the country’s powerful industry association Keidaren, a staunch guardian of its club members, are expected to object to such a radical movement.

The road ahead for institutional reforms in Asia’s financial world will not be smooth, as newer concepts seek footholds in such an archaic world, but such voices that call for reforms are encouraging first steps.

Greater China - Buyouts

To Control the Territories

Foreign and domestic investors have clearly marked their ‘control deal’ boundaries

With assets of companies in the Greater China region now becoming a must for fund managers’ portfolios, private equity investors are using an array of approaches to build up their Greater China portfolios. Their recent investment movements are a telling display of their depth of understanding of the investment dynamics in this region. In so far as taking control of companies are concerned, foreign investors have come to recognise that it is nearly impossible for them to implement such a structure in an unlisted domestic company in mainland China. It is a privilege accorded only to domestic players. But outside of the People’s Republic of China, private equity investors have been actively taking over listed companies that either have substantial operations in China or that would bolster their existing China assets.

In Control - Outside PRC

In May, both MBK Partners and HSBC Private Equity (Asia) successfully gained control of their respective target companies, AsiaPharm Group Ltd (‘AsiaPharm’) and Sing Lun Holdings Ltd. Both are listed on the Singapore Stock Exchange.

At the close of the general offer, MBK Partners had secured a 77.20% stake in AsiaPharm, representing a deployment of S$275.8 million (US$201.9 million). However, AsiaPharm is not expected to be privatised, as the buyer has not been able to secure the requisite percentage of shares to compel AsiaPharm from being delisted from the Singapore Stock Exchange.

AsiaPharm is a maker of pharmaceutical drugs, and also distributes products of other pharmaceutical manufacturers in China. Its core activities are in the People’s Republic of China.

As MBK Partners prepares its final phase of taking control of AsiaPharm, HSBC Private Equity (Asia) became another private equity firm to successfully win management control of a Singapore-listed company. On 22nd May, the private equity investment arm of HSBC Holdings held or agreed to acquire over 97% of Sing Lun’s shares. The transaction would mean a deployment of S$119.59 million, and Sing Lun is expected to be delisted from the Lion City’s bourse.

Although Sing Lun is headquartered in Singapore, China is a key factor in its corporate structure, as it is the only country to house two factories of the garment provider. Significantly, in claiming ownership control of Sing Lun, the latter would complement Bosideng International Holdings Ltd. (‘Bosideng’), a maker of winter padded jackets. In September 2006, HSBC Private Equity (Asia) invested US$70 million in Bosideng which was listed on the Hong Kong Stock Exchange in October 2007. Earlier this year, when China was blanketed by one of its most severe snow storms in recent history, Bosideng, which specialises in making padded and winter jackets, could not meet the surging demand.

In Taiwan, foreign private equity investors have been relentlessly pursuing buyout opportunities. On the heels of having recently completed the Ta Chong Bank transaction, The Carlyle Group (‘Carlyle’) is currently bidding for a 67% equity stake in Cable-Giant CATV Co. Ltd. (‘Cable-Giant’). When completed, it will be a deployment of some NT$20 billion (US$654 million).

The acquisition of Cable-Giant is seen as a strategic move employed by Carlyle to increase its market share of Taipei’s cable TV market, even though the target company has a relatively small subscriber base. Between 2006 and 2007, Carlyle had invested an aggregate US$1.5 billion for a 59.3% stake in kbro Co., Ltd., formerly known as Eastern Multimedia Company.

At the same time, Carlyle is reportedly seeking to obtain ownership of another bank in Taiwan. It is bidding for Chinfon Bank, with MBK Partners being its rival at the other end of the negotiations table.

In Control - Inside PRC

In the People’s Republic of China, the names of global buyout investors associated with control deals are conspicuously absent. The recent deal consummated by CITIC Capital Holdings Limited (‘CITIC Capital’), the buyout investment arm of the state-owned CITIC Group, must be an envy to foreign investors. CITIC Capital has taken a 100% stake in Hunan AVA Holdings Co., Ltd.’s (‘Hunan AVA’) infant formula & dairy business for an approximate 570 million yuan (US$81.7 million).

Hunan AVA is the fifth largest domestic dairy manufacturer in China and is weaning off its infant formula and dairy businesses, despite enjoying an annual growth rate of 20%. The seller is to instead focus on real estate development.

CITIC Capital is expected to log another transaction in which it can exercise control over the management of one of the largest confectioneries in China. For home-grown private equity firms that advocate the ‘control’ strategy, deal flow has been strong.

Comments

With both Taiwan and Beijing displaying earnest resolve to close the political chasm that had set both economies apart for nearly six decades, the territorial demarcation in the Greater China scene will perhaps become increasingly blurry as the icy relationship between these two political foes begins to thaw.