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November 2008 Issue
In Brief

Risk Mitigation Measures Being adopted as investors seek to minimise negative exposure under the current inclement investment climate Feature
Structural Changes in Two Oz institutions that acknowledge flaws in past structures and seek to become less reliant on the public market Institutional Investors
Japanese Investors Look West for opportunities, but invest with prudence Institutional Corner - Investments
CMH Vacates PBL Media Board Seat that distances the Packer family from the media business it founded General Section – News
Buyout of Family Business in Japan is possible but requires deep understanding of the background and the right price General Section – Investments
Beijing Shows Its Will to Pursue reform in its stock market Greater China – Analysis
Budget Hotels in China to Prosper as investors commit further capital Greater China – Investments
Skilled Entry in Deals Could Beat red tapes and witness handsome cash returns Greater China – Divestments
First Buyout of an Indian Energy company shows India’s nascent buyout market reaches a new milestone India Corner– Investments
Pakistan Gains Investors’ Attention at a time when the country’s economic health is being tested India Corner– Investments
Content

Institutional Corner
News
Institutional Investors
Models for Survival
Investmentss

General Section
News
Investments

Greater China
News
Analysis
Investments
Time to Budget
Divestments

India Corner
News
Investments

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

Risk Mitigation

The global financial industry entered a defining chapter in September when Lehman Brothers collapsed, and both Goldman Sachs and Morgan Stanley decided to relinquish their investment banking status. Since then, there has been an acceleration of events coming to light in Asian private equity that reflects the carnage of this most extensive meltdown in the financial industry since the Great Depression. Across the entire region, private equity investors have been swift to execute various risk mitigation measures, leading to a kaleidoscope of activities that mirrored earnest attempts to avoid, minimise or contain any negative exposure under the prevailing inclement investment climate.

Allocations Constrained

There are clear signs that institutional investors are tightening their purse strings. In a sharp reversal to the buoyant mood that enveloped Asian private equity only 12 months ago, the industry appears to have lost its pulling power. Buyout funds, which had enjoyed a reigning position in the region’s fund pool during the past few years, are receiving a much cooler reception from fund investors. The descriptive terminologies of “hard cap” and “over-subscribed” that were once used to boast of limited partners’ overwhelming response to buyout funds, are conspicuously absent. Some general partners have prudently decided to conclude their fund raising journey even though the target sizes of their respective funds had not been met. Even funds for growth/expansion situations, which had garnered feverish interest from limited partners, as Asia’s emerging markets growth story held investors spellbound, have lost their magic. After having attained a peak record during the second quarter of the year, when over US$12.5 billion of new capital had been raised, this category of funds has encountered a sharp decline in interest from investors. Since July, less than US$6.0 billion has been recorded, affirming fund investors’ conversative positions in ...

Institutional Investors

Models for Survival

Babcock & Brown and Macquarie revamped their structures

The demise of Wall Street heavyweights has sent a powerful message to their counterparts Down Under: unless changes are made, they could be on the road to their own Waterloo, with no path for return. In October, both Babcock & Brown Group (‘B&B’) and Macquarie Group (‘Macquarie’) announced extensive revamps of their existing structures. While B&B focuses on relinquishing its management rights or control over its host of listed funds, Macquarie has also streamlined its operations, and has been actively disposing of mortgage-related assets.

The announcements of B&B and Macquarie came at a time when the Australian investment banking industry has been reeling after a near year-long onslaught by the US subprime loan debacle. In late October, B&B confirmed that it was reviewing “expressions of interest” from a number of parties that were interested to establish a strategic relationship with the firm. During the same period, Allco Finance Group issued the grim statement that it may not be able to meet its debt obligations due later part of the year. Allco Finance Group’s operational model is similar to those employed by B&B and Macquarie, but has a smaller market capitalisation based on its share price.

Babcock & Brown

At the end of September, B&B had 24 funds under its umbrella. Back in late August, when B&B was battling to sustain investors’ confidence, its board assured investors that it would review existing management arrangements for Babcock & Brown Capital (‘B&B Capital’). The latter is one of B&B’s principal investment vehicles. In August 2006, when B&B committed to the US$2.2 billion buyout of Eircom, B&B Capital was the key participant, while other funds within the B&B group took a lesser financial role.

When October arrived, B&B decided to take swift action to address investors’ concerns. Within a space of three weeks, B&B announced a series of changes to its satellite funds. It has agreed to dispose of its Babcock & Brown Communities to the domestic Lend Lease Corp. In a deal that would return A$66.8 million to B&B, Lend Lease is to acquire the management rights of the target company that will bring its equity holdings in Babcock & Brown Communities to 41.2%. B&B will henceforth severe its ties with Babcock & Brown Communities.

For two of its infrastructure units, Babcock & Brown Infrastructure and Babcock & Brown Power, the investment banking house, known for its expertise in the infrastructure sector, will allow a greater level of autonomy to the management of these two funds, in return for their own “self sufficiency”.

Macquarie Group

Since April this year, Macquarie has been selling some of its listed assets. The sale of its Macquarie Private Capital Group to Bear Stearns Private Equity and the privatisation of its Macquarie Capital Alliance Group were amongst some of its major efforts to shift its focus from listed funds. In late September, in an attempt to contain any potential losses to the mortgage-lending businesses, Macquarie announced the potential sale of its investment lending business in Australia even though it has been a profitable venture. In addition it has also disposed of interest in the Hong Kong real estate platform, Macquarie Goodman Asia.

At the same time, Macquarie is to streamline its fund management structure. The public equities fund management will fall under Macquarie Securities Group which will combine its previous capital securities and a portion of the activities of its equity markets groups together. Another portion of the equity markets unit will fold into the Macquarie Funds Group, which will oversee fund management and capital products activities. The direct investment arm, now known as Macquarie Advanced Investment Partners, which had earlier enlisted a marquee list of global fund of funds, will be a separate unit with over US$650 million under management.

Comments

Both B&B and Macquarie are two of Australia’s leading players in structured finance. They have been central in propelling Australia’s private equity investment activities. The rapid and extensive changes that both institutions have implemented during the month of October only highlighted the depth and breadth of financial afflictions that have plagued both institutions. Only time will tell whether their earnest efforts to revamp their past models will help lead them to a new and promising horizon.

Greater China - Investments

Time to Budget

Budget hotels are expected to prosper in China

tightening their purse strings, the recent US$65 million commitment led by Actis to 7 Days Inn Group (‘7 Days’) was a resounding pledge of faith to the budget hotel industry in China. It was the largest allocation directed to this sector thus far into the year. The investment also represented a commitment to an industry that is at a cross road.

With the economic slowdown expected to curb travel budgets, Warburg Pincus is increasing its stake in 7 Days, with Actis being the latest investor to join the board of 7 Days. This is the third time that Warburg Pincus has made an allocation to 7 Days.

Founded in 2005, 7 Days has been aggressive in its growth plans. Between 2006 and the end of 2007, it raised over US$105 million from a handful of foreign investors. They included Merrill Lynch and Deutsche Bank, in addition to Warburg Pincus. This, together with the recent US$65 million from Actis and Warburg Pincus, would add up to a grand total of US$170 million. It is by far the largest commitment aggregate by financial investors in this industrial sector.

On the other hand, 7 Days has mapped out an ambitious growth plan. It currently has 187 budget hotels throughout China, and this number is expected to reach 600 by the end of the year, according to comments made by Mr Zheng Nanyan, chief executive officer of 7 Days, in a recent interview with the local press.

7 Days is also ready to assume a leadership role in China’s budget hotel industry. It has recently established a trans-regional alliance intended to provide a unified marketing platform for hotels that are in the small and medium size range.

Budget hotels first came into operation in 1997, but only began to take off in 2003 when this sector recorded a growth of 74% during that year. The percentage growth surged to a staggering 125% in 2007, with more than 1,000 new branded budget hotels coming into the market. In the three months ending September 2007 alone, according to the China Hotel Association, no less than US$230 million had been directed to this market .

But since the beginning of the year, there were signs that the winds of consolidation were blowing over China’s budget hotel industry. Home Inns & Hotels Management Inc. (‘Home Inns’), one of the largest economy hotel operators in China, reported substantial decline in net profit for the first two quarters of the year compared to the same period a year ago. Similar to 7 Days, Home Inns also owed its growth and development to foreign private equity capital. Between 2003 and 2005, IDG Technology Venture Investment, Sycamore Management Corp. and Susquehanna International Group invested US$9.2 million in Home Inns. In October 2007, Home Inns acquired Top Star Hotel for 230 million yuan (US$38.3 million), the first and the largest acquisition in China’s budget hotel industry.

Although there appears to be a glut of budget hotels in China, analysts believe that after a period of rationalisation, budget hotels are expected to flourish. On average, there is only one budget hotel among seven luxurious hotels in China, suggesting ample room of growth in the future.