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October 2008 Issue
In Brief

Value Creation and Preservation critical in the wake of extensive global stock market corrections Feature
Values of China Food Portfolio plunge as toxic chemicals found in milk-related products Analysis
Future Fate of Asian PE Operations of three US financial institutions to face changes Focus
Private Equity and Real Estate to become staple income for Partners Group Institutional Investors
A Model Investor in China is Mired in fraudulent scandals Institutional Investors
A New FoF With Old Links to Asia is the latest entrant Institutional Investors – Funds
Mushroom of Asian Fund of Funds as investors fund promising managers Institutional Investors – Funds
Consolidation in Japan’s Building industry renders opportunities General Section – Investments
A BPO Co. in the Philippines rewards its investors General Section – Investments
LP and GP of an ASEAN-China fund are not shying away from the fund raising market Greater China – Funds
China’s Online Industry Sees signs of corrections Greater China – Investments
Underground Shopping Malls developer to go public with strong private equity support Greater China – Divestments
India’s Talented Managers are Moving to greener pastures India Corner
Sizeable Deals Done Only with those that have established associations with private equity India Corner - Investments
Content

Case Study
Analysis
Food for Thoughts
Focus
Tidings of the Affair

Institutional Corner
News
Institutional Investors
Funds

General Section
News
Investments

Greater China
News
Analysis
Investments
Divestments

India Corner
News
India Corner
Investments

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

Value Management

Twenty-hours and US$1.1 trillion dissipated. Such was the might of the stock market when investors’ confidence was at its lowest ebb. On 29th September, the Dow Jones Index suffered its worst fall in history, when it lost 778 points, erasing the value that had commanded 13-digits from the world’s largest stock market.

Since the beginning of the year, the global stock market has been most volatile. For those quoted companies whose share price movements are intertwined with public investors’ sentiment, the relentless decline of their values could be extremely sobering. Asia Private Equity Review surveyed 155 companies (excluding those in Japan) that had all previously received funds from private equity investors and were listed during the two years ending December 2007. This prescribed period marked an era in which Asia’s stock market enjoyed one of its strongest and longest rallies. This survey examined share price movements of this pool of companies from 1st November 2007 to the end of September. The 11-month period encapsulated the zenith and nadir of Asia’s stock market.

Overall, this pool of private equity-backed companies witnessed more than half of their share values being erased during the period under survey. The alarming fall of stock values was even worse than the MSCI Asia Pacific ex-Japan Index’s performance during this corresponding period, which registered minus 41.7%. The sombre reality is that, out of these 155 companies, 39 have been able to sustain their share prices above the MSCI Asia Pacific ex-Japan Index.

During the past few months, publicly-listed institutions and quoted companies have engaged in a multitude of strategies to stay afloat, to preserve or increase their enterprise value. Share Buy-backs One of the most popular methodologies employed was the share buy-back scheme, especially in Asia. According to Thomson Reuters, in the first seven months of the year, share buy-backs in Asia reached US$3.6 billion, almost triple the US$1.3 billion for the same period in 2007. Asia’s share buy-back trend defied the prevailing global record which has, in fact, registered a 45% decline of such activities by US companies over the same period. In Australia, where the sub-prime mortgage debacle is eroding share prices of some of the largest financial institutions at frightening speed, the Australian stock market witnessed vibrant share buy-back activities by listed institutions. Allco Equity Partners, the private equity investment arm of Allco Finance Group, has employed share buy-back as a methodology to improve its performance. In announcing its annual results for the year ending June 2008, Allco Equity Partners revealed having distributed over A$40 million (US$32.8 million) to its shareholders from profits ...

Analysis

Food for Thoughts

China’s food industry heads for massive correction

China’s food industry will never be the same, as the current contamination scare continues to widen and consumers are gripped with fear.

It all started in mid September when the New Zealand government responded to a request from the Fonterra Co-operative Group (‘Fonterra’), a dairy company owned by more than 11,000 New Zealand dairy farmers. Fonterra alerted its government that it had reason to believe the baby milk formula made by Shijiazhuang San Lu Group Co. (‘San Lu’) was contaminated with melamine, an industrial chemical. San Lu Group is a joint venture between Fonterra and the local Shijiazhuang government. In December 2005, San Lu entered into a joint venture agreement with Fonterra which took a 43% interest for NZ$152.3 million (US$107.0 million). San Lu is one of the largest milk product manufacturers in China and, for the past 15 years, it had consistently captured close to 20% of China’s milk powder market.

National Treasures

As this milk scandal continues to reveal those producers that could have used melamine in their products, one of the largest and most recent private equity investments was engulfed in the vortex of this food scandal. The famed White Rabbit candy, the signature sweet of the Shanghai-based Guan Sheng Yuan (Group) Co. Ltd, has been a household name for decades. On 21st September, the Singapore government found the industrial chemical melamine in the candy. It led to an immediate halt of sales and export of White Rabbit. The move underscored the severity of the depth and breadth of worry caused by melamine.

White Rabbit candy holds a special position in the history of China’s food culture. In 1972, when President Richard Nixon made his landmark visit to China to restore relationship with the world’s most populous nation, Premier Zhou Enlai presented his guest with White Rabbit candies.

Earlier in the year, CITIC Capital Holdings Ltd. (‘CITIC Capital’) had injected US$70.96 million to take a significant stake in Guan Sheng Yuan (Group) Co. Ltd. It was one of the largest investments in milk-related products by private equity investors in China. As domestic sales of White Rabbit have been halted while the ban of its export is in force, uncertainty clouds this maiden investment undertaken by a joint venture fund between CITIC Capital and Bright Food Group.

In 2007, CITIC Capital teamed up with Shanghai-based Bright Food Group to launch a 2 billion yuan (US$264.4 million) fund. It was among one of the earliest yuan-denominated funds established in China.

Food Glorious Food

China’s food and beverage industry has been one of the most popular target industries for private equity investors in recent years, as the country’s middle class has grown. Since 2006, investors have allocated no less than US$1.9 billion to 47 food and beverage producing companies. Among them, Hunan Taizinai Group, to which Morgan Stanley Private Equity Asia, Actis and Goldman Sachs have jointly committed US$73.0 million and Warburg Pincus’ aggregate US$96.0 million commitment to Synutra International Inc. (‘Synutra’) are by far the largest. While Hunan Taizinai Group was not among the list of companies found to have used melamine to raise the protein level of its products, Synutra, which is currently listed on NASDAQ, is facing testing times.

Contaminated

On 16th September, Synutra, which is a producer of infant formula as well as other milk powder products, revealed that it “has been informed by China’s Administration of Quality Supervision, Inspection and Quarantine that certain lots of its U-Smart series of products have been contaminated by melamine…..”. As a result, Synutra was recalling all of the affected products. The incident has eroded investors’ confidence in the company. Between 15th and 30th September, Synutra’s share price has lost 40.1%. At the end of the ninth month of the year, its share price closed at US$20.13. To add salt to the wound, a Pennsylvania-based law firm announced that it was investigating potential claims against Synutra “concerning possible securities violations related to the Company’s (Synutra) business and operations”.

Even the legendary China Mengniu Dairy Co. Ltd. (‘Mengniu’), which had helped to define the private equity investment landscape in China when its investors began to pare down their holdings back in June 2004 with envious returns results, was wrapped in this melamine contamination scandal. On 17th September, Mengniu’s trading was suspended, when around 10% of the 28 baby milk powder samples that were tested were found to be tainted with melamine. A day later, some additional 12 liquid milk products made by Mengniu were tested positive for the toxic chemical. It led to the Inner Mongolia-based milk producer announcing that it would halt productions of these contaminated milk products and will shoulder all costs associated with the recalls. It was a costly experience for Mengniu. On 23rd September, when its trading resumed, it share price slumped by 60%, a far cry from its past glorious days.

Mengniu was one of the earliest dairy products enterprises to be backed by private equity investors. Between December 2002 and September 2003, Morgan Stanley, CDH Investments and Actis had committed an aggregate US$61.23 million to the company. At Mengniu’s initial public offering as well as at later dates, private equity investors had disposed of virtually all of their holdings in Mengniu, reaping an impressive return of 4.6 times their combined invested capital. It was the first illustrious investment performance of a China play that opened the floodgates for private equity investors.

Comments

In 2007, San Lu was lauded as a model company of good quality by the domestic television programme “Weekly Consumer Report”. As Fonterra’s Chinese partner faces the grim reality of being taken over by its rival, Sanyuan Food Co., Fonterra had marked down the book value of this investment to about NZ$62 million.

For both Mengniu and Synutra, the scandal stripped off the elite status that both companies had previously attained. The “Famous Brand Certification” previously awarded to them by the government was revoked.

In an interview with Xinhua News Agency, Mr Ge Junjie, general manager of Guan Sheng Yuan (Group) Co. Ltd, maker of White Rabbit sweets, described the disgrace that the favoured candy has fallen into as “a good lesson”. Hopefully, all China’s food manufacturers will share the commitment expressed by Mr Ge to supply consumers with “healthy, safe and high-quality food”. Such gain can only come after much pain.

Focus

Tidings of the Affair

Questions hang over Asian private equity operations of US-based afflicted financial institutions

It took no more than three days for the Asian private equity portfolio companies of three celebrated names in the global financial investment industry to be thrown into uncertainty. The fall of Lehman Brothers, the takeover of Merrill Lynch by Bank of America, and the US government’s bailout of American International Group (‘AIG’), all happened in a matter of few days. In the US government’s scramble to restore market confidence, the future fate of these three institutions’ Asian private equity portfolios is a waiting game.

AIG was among the first group of US-based institutions to help sow the seeds of direct equity investment in Asia. Its earliest direct investment activities can be traced as far back as three decades ago.

Compared to AIG, both Lehman Brothers and Merrill Lynch were the new boys on the block. Both began actively building their respective Asian private equity portfolios only at the beginning of this decade.

Today, these three institutions are estimated to have participated in deals that aggregated to no less than US$7.7 billion. AIG has played a substantial role in shaping the development of Asian private equity. For, until recent years, AIG boasted one of the most active direct investment networks across Asia, spanning from the Philippines to India. In China, it had long been active in making direct investments, dating as far back as 1995.

The world’s largest insurance company has its genesis in the East, in Shanghai, in 1919. With its strong roots in Asia, AIG was among the first institutions to allocate capital to some of the earliest Asian private equity funds, such as Grand Cathay Venture Capital II Co., Ltd., TCW/ICICI India Private Equity Fund and funds managed by General Enterprise Management Services International Limited. While its US head office has been the decision maker for allocations to funds, its Tokyo office, AIG Global Investment Corp. (Japan) took on a dual role in making allocations to Japan-focused funds, as well as seeking direct investment there.

However, it is funds sponsored by AIG that have come to define the evolution of private equity in Asia. In 1994, it sponsored the first Asian infrastructure fund. AIG Asian Infrastructure Fund, managed by EMP Global (formerly known as Emerging Markets Partnership), was the first Asian billion dollar fund in the annals of Asian private equity. The fund was a testament to global institutional investors’ interest in opportunities in Asia, as it enlisted University of California and Government of Singapore Investment Corporation. Since then, AIG has sponsored the second Asian infrastructure fund which raised over US$1.67 billion in 1997.

In 1999, when Asia was still nursing the wounds inflicted by the 1997-1998 Asian Financial Crisis, AIG sponsored the US$750 million AIG Asia Opportunity Fund to seek opportunities in distressed situations. It was then the largest Asia-focused fund for distressed assets.

For a period of time during the early years of this decade, AIG’s direct investment operations in Asia went through a structural overhaul as Mr Caesar Zalamea, the founding father of AIG’s direct investment operations in the region, relinquished his responsibilities. At that time, Mr Maurice Greenberg, the principal founder of AIG, also vacated his position in the insurance company.

In 2007, AIG resumed an active role. AIG Global Investment Corporation (Asia) Ltd. raised the AIG Asia Opportunity Fund II that has a capital pool of US$410 million. Since then, the managers of this fund have been assiduously deploying capital from this fund, with a portfolio of companies in India, PRC and South Korea. Since the beginning of 2000, AIG’s Asian private equity investment arm is known to have participated in deals that aggregates over US$3.5 billion in companies across the region. Given the extensive network that AIG has been able to establish in the region and a fund pool with investible capital, AIG Global Investment Corporation (Asia) Ltd. could be an enticing proposition to its existing management team or for those institutions that are seeking to enter the Asian market.