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Septemebr 2008 Issue
In Brief

Asian Institutional Investors Are pursuing direct investments, testifying their readiness to take on more than fund allocations Feature
PE in OZ Braces For Adjustments as credit crisis deepens. A review on crisis management skills of some LPs and an analysis on major GPs’ recent investment movements Analysis
Asian Institutional Investors Assert their profile outside of their respective domestic boundaries Institutional Investors
A Signature Deal in Japan Derailed by a throng of macro economic factors General Section – Investments
SE Asia Fell Prey to a Host of political and economic issues, only shortly after this region has regained investors’ confidence since the financial crisis in 1997 General Section – Investments
PE Plays a Crucial Role as political relationship between Taiwan and mainland China warms up Greater China– Analysis
The Largest Corporate Takeover in China initiated by Coca-Cola could see its private equity investor exit with one of the best returns records General Section – Divestments
Shenzhen Stock Market Firmly establishes its position as the exit platform for investors with China portfolios Greater China – Divestments
SpiceJet’s Recent Fund Raising underscores woes plaguing India’s airline industry that requires more than just capital, but turnaround specialists India Corner - Investments
Content

Analysis

Institutional Corner
News
Institutional Investors
Beyond Domestic Boundaries

General Section
News
Investments

Greater China
News
Analysis
Divestments
The A-Market

India Corner
News
Investments

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

The Asian Partners

For weeks, Wall Street has been in anxiety as two of its leading bankers were locked in discussions with institutions from the East. Merrill Lynch was seeking an additional US$3.4 billion capital injection from Temasek Holdings after the latter had already committed US$4.4 billion. Lehman Brothers, which has raised close to US$14 billion during the year, was courting funds from Korea Development Bank. The final decision of these institutions from Asia would not only govern the future fate of these two blue chip names, but also that for Wall Street. In one of its most recent comments on the Lehman Brothers’ plight, the Financial Times poignantly emphasised the critical importance of securing funds from powerful lenders in the East. It said that “these days, if you cannot cut a deal with Asian government-backed investors, alternatives look scarce”. This is by far one of the most direct acknowledgements of the rising dominance of these institutional investors from Asia.

Investment Focus Broadened

As a host of leading financial houses in the US have invited institutions in the East, and the region’s sovereign wealth funds (‘SWFs’), to become their shareholders, Asian financiers have shown that they were ready to assert their position in the region.

In less than a year since institutions such as Temasek Holdings and China Investment Corp. have agreed to provide a cash life raft to some of the most respected names in the US financial industry, these guardians of state or public funds have emerged from their past more subdued identities. In private equity, they are no longer the passive limited partners (‘LPs’) that in the past have been making allocations to their chosen general partners (‘GPs’); instead, they have been actively pursuing direct equity investments. Since the beginning of this year, Asian institutional investors are known to have committed to 48 direct investments both at home and abroad, representing a transaction total of US$13.5 billion.

This emerging crop of Asian investors in the institutional cosmos has displayed a varying appetite for deal size. The largest transaction in which they were known to have participated was the US$2.98 billion commitment to Japan’s Ashikaga Bank, in which Nomura Holdings was the principal investor, joined by JAFCO Co. Ltd. and Next Capital Partners. The smallest venture was the US$0.44 million commitment by the Hangzhou Government Venture Capital Guidance Fund to Zhejiang Lian Zhong Leisure Holiday Co. Ltd.

Overall, Asian LPs have been astute as they focused largely on...

Institutional Corner - Institutional Investors

Beyond Domestic Boundaries

Asian institutions are no longer focusing on investment opportunities at home

For quite some time, with the exceptions of those based in Australia, Japan and Singapore, Asia’s institutional investors have largely maintained their investment focus on their home territories. This is changing. A growing pool of them is seeking opportunities outside of their respective domestic boundaries.

Among them, those from Southeast Asia have been particularly active. The Malaysian government’s Khazanah Nasional Berhad (‘Khazanah’) has been actively making its pan-Asian footprints. It recently announced the formation of a joint venture with Beijing China Sciences General Energy & Environment Co., Ltd. to develop municipal waste-to-energy projects in China. Under the terms of the agreement, Khazanah will commit up to US$150 million, and will also be a majority shareholder in this joint venture. Over the next three years, this environmental project will invest in at least eight projects.

Another institution in Southeast Asia that is quietly building its investment platform outside its home turf is the Brunei Investment Agency. This investment arm of one of the richest oil nations continued to partner with Thailand’s Government Pension Fund of Thailand (‘Government Pension Fund’) to launch their second hybrid fund. The Thailand Prosperity Fund II has a capital pool of 2.53 billion baht (US$187.4 million) with a 10-year life cycle. It will invest in both listed and unlisted equities. Each institution will subscribe 800 million baht to the fund, with the remaining sum coming from eight local financial institutions. Brunei Investment Agency’s alliance with the Government Pension Fund dates back to 2003 when both institutions jointly launched their maiden hybrid fund.

Most recently, China’s Suzhou Ventures Group Co. Ltd. took a giant step to consolidate its position. It announced plans to form a joint venture with Japan’s Elpida Memory, Inc., a manufacturer of DRAM. The joint venture company will build a 300-mm wafer fabrication facility in Suzhou Industrial Park. The venture will have an equity investment of US$720 million. Suzhou Ventures and other investors will take a majority position of 61%, while Elpida will hold the remaining 39% of the shares. Backed by Intel Capital, Elpida Memory is one of the largest integrated circuit companies.

For both Temasek Holdings and Japan’s Mizuho Corporate Bank, Ltd. (‘Mizuho’), their horizon is expanding in the West. After having injected a total of US$4.4 billion into Merrill Lynch, the latter’s declining share price did not dampen Temasek’s interest to increase its allocation to the blue chip investment banking house.

In a press meeting, Mr S. Dhanabalan, chairman of Temasek, reiterated the sovereign wealth fund’s staunch support to Merrill Lynch. The position taken by Temasek underscores Asian institutions’ growing interest to scout for opportunities in the West, where prized assets could be more easily purchased as the credit crisis continues to spread and deepen.

Mizuho is taking a similar position. In mid August, it announced a commitment that could amount to US$270 million to Evercore Partners Inc. (‘Evercore’). The latter is a US-based investment firm which manages a basket of financial products including private and public equity funds. Mizuho will also subscribe to 5.5 million warrants issued by Evercore at US$22 per share. In addition, Mizuho has also earmarked up to US$150 million that it will invest in funds managed by Evercore.

Interestingly, Asian institutions displayed no inhibitations in their allocations to companies abroad, a development that further bespeaks the level of confidence that they have achieved during the past few years’ of active investment activities.

Institutional Corner - Funds

The A-Market

Shenzhen stock market is gaining dominance in the China divestment profile

Three quarters into the year, private equity investors with China portfolios continue to register the listings of their companies, even though the global stock market was clouded with pessimism. With the exceptions of ATA Inc. and China Distance Education Holdings that were listed on US bourses, both the Stock Exchange of Hong Kong (‘HKSE’) and the Shenzhen Stock Exchange (‘Shenzhen SE’) have dominated listing movements of China portfolios during these months. But there are clear signs that indicate the Shenzhen SE, despite its relative nascent history in the Greater China stock market, has firmly established its position as the venue for those companies that had earlier received funds from private equity or venture capital investors.

Competing for the Lion’s Share

In the first eight months of the year, there were 27 private equity-backed companies with core assets in China that went public on both the HKSE and Shenzhen SE, a virtually identical number to that recorded for the same period in 2007. While the Shenzhen SE led by a small margin, capturing 53.6% of the number of public offerings during the first eight months last year, a year later, it has increased to 66.7%. It is the latest affirmation that the southern bourse in China’s A-share market is winning the lion’s share of public offerings momentum. Even though the general lock-up period for companies that have successfully attained a public status is a lengthy 36 months and China’s yuan remains an inconvertible currency, there appear to be compelling reasons for investors to favour the A-share market.

Hong Kong’s Hang Sang Index greeted 2008 at a mesmerising 27,561, and was expected to breach 30,000. But as the credit crisis debacle in the US deepened and widened, the territory’s benchmark index dived. At the end of August, its value has been shaved off by 23%. For the Shenzhen SE, the bourse that is situated in the city just next to Hong Kong, it was not immune to the global stock market downturn as well. Its Shenzhen Composite Index, which stood at 17,856 at the beginning of the year, has lost more than half of its value by the end of August, reaching 8,004.

Even though the loss of value sustained by the Shenzhen Composite Index has been much greater than that encountered by the Hang Sang Index, the Shenzhen SE demonstrated its edge over HKSE as the two bourses locked in fierce competition to increase the number of quoted stocks on their respective exchanges.

The Decoloured Bauhinia

The HKSE, the third largest in Asia by market capitalisation at the end of 2007, is bracing for one of its most challenging periods. In addition to a plummeting Hang Sang Index, so far this year, more than a third of the 25 planned public issues have been cancelled or postponed. In this list are those few companies that boast private equity investors as their shareholders. China Pacific Insurance (Group) Co., Ltd., in which The Carlyle Group is one of the two principal foreign investors, was known to have earlier postponed its planned HK$24 billion (US$3.0 billion) H-shares public offering. In early July, Xdlong International, in which Goldman Sachs had committed US$39.27 million, called off its public offering just days before its scheduled public debut, temporarily deferring its plans to raise HK$990 million from the public.

Different from the past, however, for the first time, there were no records of capital realisation by private equity investors at their respective companies’ initial public offerings (‘IPOs’) on the HKSE. Investors’ return coffers have been bone dry. It is significant to note that even though some of the commitments were made well before the companies’ IPOs, such as those to Honghua Group Ltd., Little Sheep Group Ltd. as well as A8 Digital Music Holdings Ltd., investors have chosen not to sell and instead hold their equity shares. It suggests a “long-term position” is the preferred strategy at a time when market volatility reigns.

With no immediate capital realisation being the priority of the agenda, the Shenzhen SE provided a much more attractive divestment performance record, at least on the books.

Winning by the Books

With the exceptions of Solargiga Energy Holdings Ltd. and China South Locomotive & Rolling Stock Corporation Ltd., in which Baring Private Equity Asia and GE Capital Equity Investments Ltd. have committed capital respectively, virtually all other private equity portfolio companies that went public on HKSE since the beginning of the year have been trading below the territory’s benchmark Index.

The picture was reversed for those listed on the Shenzhen SE. With the exception of Guangdong Weihua Group, backed by Goldman Sachs that has been trading below the Shenzhen Composite Index, stocks backed by private equity investors were well received by domestic investors. At the end of August, Anhui USTC iFlytek Co. Ltd., a speech technology company, which had raised funds from Intel Capital, Legend Capital, and Infotech Pacific Ventures, was among the best performers in Shenzhen stock market. Its share price outperformed the Shenzhen Composite Index by 131 percentage points, a feat that none of its counterparts on the HKSE have been able to accomplish.

As a result, companies that were listed on the southern bourse of China’s A-share market were able to boast much more alluring paper gains. On average, they recorded 5.82 times of invested capital, virtually double the 2.2 times recorded for those listed on HKSE. For those companies listed on the latter that are within the top quartile, the return multiples ranged between 3.05 to 4.03 times, a far cry from the 5.31 times to 24.67 times range attained by those on Shenzhen SE.

Comments

With Beijing requiring its domestic enterprises to seek listing on home bourses, and the September 2006 mergers and acquisition regulation that has virtually blockaded China-based companies from seeking non-A-share listing, it is no coincidence that the Shenzhen SE has emerged as the key listing platform for private equity-backed companies. This shift of divestment paradigm would call for a new set of investment approaches for foreign private equity investors seeking to build their China portfolios.

Although so far this year, private equity-backed companies that were listed on the HKSE failed to return capital to its investors at their respective IPOs, a few that were listed in 2007, including Belle International Holdings, Ltd., China Dongxiang (Group) Co., Ltd., and China High Speed Transmission Equipment Group Co., Ltd. have defied market sentiment during the year and have embellished their respective investors with returned capital that aggregated US$504 million. Yet such an illustrious divestment record was conspicuously absent from the books of those investors with listed companies on the Shenzhen SE. It shall be a balancing act for investors to build a China portfolio while achieving liquidity within the horizon of less than three years.

Editor’s note: Bauhinia flower is the emblem of Hong Kong