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.
February 2009 Issue
In BriefCapital Returns in 2H Foretell testing times ahead as Asian private equity records its worst decline in realised capital since 2004 Feature
Cutting Losses and Preparing for new directions are initiatives taken by some investors Analysis
PE’s Core Values Needed as Asia’s economic well being comes under threat Focus
Domestic Assets are the Focus of China’s institutional investors following share disposals by foreign strategic investors Institutional Investors – Analysis
Investors from Europe Show Continued interest in Asian private equity Institutional Investors – Funds
TPG Cuts Its Losses in Japan but secures prized assets in China General Section– Analysis
ASEAN-China Theme Appeals to investors as evidenced by closing of a sizeable fund General Section– Funds
Largest Discount Retailer in Oz placed into receivership that vindicates the “market power” investment concept General Section– Divestments
Over 1.5 Billion Yuan Funds Come into the market that underscores the euphoria in China Greater China– Funds
Investors Display Clear Deal Focus as economic growth in China suffers Greater China– Investments
Impressive Returns Achieved despite adverse economic conditions Greater China– Divestments
Commitment and Cautions to India are the approaches taken by investors to the country India Corner– Analysis
Content
Analysis
FocusInstitutional Corner
News
Analysis
Home Assets
Funds
General Section
News
Analysis
Funds
Investments
Divestments
Greater China
News
Funds
Investments
Divestments
India Corner
News
Analysis
The Signals
People on the Move
Subscriber Weekly Summary
Summary
Index & Exchange Rates
Defining Moments
Under the dark clouds of the global economic storm, the first golden period for Asian private equity ended in 2008. With just over US$8.6 billion known to have been returned to investors’ coffers, it is the industry’s worst returns record since 2004. In that year, as Asia recovered from the attack of the deadly Severe Acute Respiratory Syndrome (SARS), its private equity investors were able to clock an impressive US$10.2 billion in returned capital.
In a sharp contrast to the 2007 exit performance, the US$8.6 billion recorded in the 12 months ending December 2008 was a chilly 57% decline compared with the exhilarating US$20 billion boasted by investors 12 months earlier. On average, investors secured a 2.77 times return on the entry value in those companies from which they have been able to achieve realisation. It was among the worst, and is a far cry from the 3.76 times attained in 2005. Even the median internal rate of return (‘IRR’) result in 2008, at 33%, paled against the 66% achieved in 2007.
By all measures, the 2008 capital realisation record testified to the severity of the prevailing economic downturn, and foretells grim exit results for 2009. It is, however, the divestment pattern during the second half of 2008 that would shed light on the daunting challenges facing general partners in their endeavour to distribute capital back to their limited partners...
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.
Institutional Corner - AnalysisHome Assets
China’s institutional investors are buying home assetsAs the global financial malaise escalates, and spreads like a bush fire fanned by winds of heightened intensity, China’s institutional investors took a U-turn to focus on deploying capital to domestic assets. This became evident as an increasing number of foreign investors have pared down their positions in China’s major banks listed on the Stock Exchange of Hong Kong. Since the last quarter of 2008, China Investment Corp. (‘CIC’), through its affiliate, Central Huijin Investment Ltd., are known to have been pumping capital into the Industrial and Commercial Bank of China, the China Construction Bank and the Bank of China as their share prices plunged in response to the demise of Lehman Brothers and the inevitable dismembering of American International Group. The development suggests the beginning of a period in which China’s institutions are guarding the values of home assets as the global slump shows no signs of abatement.
Foreign Expeditions on Hold
In a veiled allusion to such a new investment direction, in December last year at a high profile public forum, Mr Lou Jiwei, chairman of CIC, unreservedly commented that he was “too scared” to invest in foreign financial assets. CIC and its fellow institutional investors in China have every reason to take stock of their spate of offshore investments.It has been more than 18 months since CIC first invested in The Blackstone Group which made its debut on the New York Stock Exchange in June 2007. At the end of January, its share price was trading at US$4.51, a fraction of its initial public offering (‘IPO’) price of US$31. For CIC, the value of its US$3 billion holdings in the investment firm has been slashed by 85.5%.
Before the end of 2007, CIC had also subscribed to US$5.6 billion worth of convertible equity units (‘instruments’) issued by Morgan Stanley in the latter’s first round of fund raising exercise to ease its liquidity crunch. At the time of making this investment, Morgan Stanley’s share price was US$47.9 per share. Yet the instruments bought by CIC will have to be converted into Morgan Stanley common shares at a hefty conversion price of US$48.07 at the end of a three-year maturity period. With Morgan Stanley’s share price trading at US$20.23 at the end of January, and as consolidation continues in the US financial industry, CIC can only hope that Morgan Stanley’s share price will rebound when the conversion date of these instruments arrives.
The State Administration of Foreign Exchange (‘SAFE’) also suffered the same plight as CIC. After having parked US$2.5 billion in TPG’s latest global buyout fund, it then joined the buyout firm in taking a stake in Washington Mutual, Inc. This investment sum, made before the collapse of the savings and loans institution in September 2008, was reportedly US$5.0 billion.
SAFE also became one of the major shareholders in the UK-based insurance giant Prudential plc., when it deployed an estimated US$244 million to take around 1% equity stake in the large insurer. Within these fleeting five months, Prudential plc’s share price has declined by 38.1% since the end of August last year.
In the same period the China Development Bank teamed up with the domestic Aluminum Corporation of China and Alcoa Inc. to write out an awesome US$14 billion cheque to Rio Tinto plc back in January 2008. A year after having invested in the mining giant, its share price on the London Stock Exchange closed at 1,506 pence sterling (US$21.7), at the end of January this year, representing a 73.1% decline during the past 12 months.
Staying Home
In the wake of such massive book losses suffered in their foreign portfolios, China’s institutions have been returning home and injecting capital into home assets. In addition to its earlier commitments to the Industrial and Commercial Bank of China, China Construction Bank and Bank of China, CIC was known to have invested a further US$3.73 billion to these three banks since September 2008. Its most recent undertaking was the US$19 billion capital injection into Agriculture Bank of China Ltd., in preparation of the latter to go public that is expected to take place some time in 2009.The National Council for Social Security Fund, the backbone of the China private equity institutional framework, broke its past records when it allocated 2 billion yuan (US$288.1 million) each to the yuan-denominated fund managed by CDH Investments and Hony Capital respectively.
The China International Capital Corp. Ltd., the first Sino-foreign joint venture investment bank, has adopted an active collaborative profile with private equity firms. It was known to have made two direct investments during 2008, both with private equity houses. In the US$35 million investment in Shenzhen Aohua Medical Services Co. Ltd., China International Capital’s partner was The Carlyle Group; while in the US$44 million commitment to South Beauty Catering Management, it teamed up with CDH Investments.
Comments
With the mushrooming of guidance funds, which act in a similar capacity as fund of funds, China’s institutional community has become increasingly active in making pledges of capital to domestic assets or engaged in direct investments. In 2008, Chinese institutions are known to have made 13 direct investments amounting to close to US$900 million. This, compared to the US$214 million recorded during 2007, was a substantial rise. Until the global economic situation stabilises, this could be the governing investment trend of China’s institutional investors. India Corner - InvestmentsThe Signals
Fund Investors display continued commitment, but are not shy about showing dissatisfaction
Private equity in India faces a tenuous time. While the country shares the same burdens as all financial markets in the region and recorded a sharp decline in exports, India has also suffered a string of other unfortunate incidents. The terrorist attack on two of the country’s most prestigious hotels at the end of last year has kept foreign investors at home until it is deemed safe to return. But before that could happen, investors at home and abroad were devastated by the fraud committed by the founder of Satyam Computer Services, one of India’s most celebrated information technology service providers. The scandal has shaken investors’ confidence in India Inc. Although investors continue to demonstrate interest in exploring opportunities in India, they, especially fund investors, are also ready to exert their power, even to the point of liquidating their holdings in a fund.
Funds – the Committed
The final closing of Jacob Ballas Capital India Private Limited’s latest fund, NYLIM Jacob Ballas India Fund III, LLC (‘NYLIM III’), was the latest pledge of faith in India by investors. At a final closing size of US$440 million, NYLIM III is among one of the largest private equity funds in India that seeks companies in growth/expansion stages. NYLIM III is in fact three times larger than its predecessor fund, with New York Life Insurance Co. as the anchor investor of this latest fund.Standard Chartered IL&FS Asia Infrastructure Growth Fund (‘SCI Asia’) is among one of the first pan-Asia infrastructure funds to be managed by an India-based fund management firm. Sponsored by Infrastructure Leasing & Financial Services Ltd. and Standard Chartered Bank, SCI Asia raised US$568 million, with these two cornerstone investors contributing US$300 million to the fund pool.
IL&FS Investment Managers Ltd., one of the oldest names in India’s fund management industry, is the manager of this fund, and has already enlisted two companies in its portfolio: China Water Holdings Pte. Ltd. and IL&FS Transportation Networks.
At a time when Indian corporations are facing declines in revenue, Aditya Birla Group, one of the country’s leading conglomerates, has decided to add private equity to its sprawling business empire. It announced the launch of a private equity fund with a target size of US$250 million. Aditya Birla itself will commit US$100 million to this fund.
The latest party to inject capital into India’s private equity fund management industry is a consortium of development financial institutions. The International Finance Corp. has joined forces with FMO and Deutsche Bank to commit an undisclosed sum to Aavishkaar Goodwell India Microfinance Development Co. Ltd. (‘Aavishkaar Goodwell’), a microfinance private equity company.
An Indian-Dutch initiative, Aavishkaar Goodwell is a for-profit business development company that invests in entrepreneurial microfinance organisations in the country. It is the manager of Aavishkaar India Micro Venture Capital Fund, which has a capital pool of US$11 million and is currently building up a US$25 million portfolio.
Investments – the Long Term Players
The turmoil hitting the Indian market has not deterred long-term investors, especially corporate investors at home and abroad.Both Intel Capital and the domestic Aditya Birla Capital Advisors, the private equity investment arm of the Aditya Birla Group, have separately announced their respective commitments in India. The venture investment arm of Intel Corp. has earmarked US$23 million for three companies: One97 Communications Pvt. Ltd., IndiaMART.com, and Global Talent Track.
One97 Communications is India’s largest privately-owned mobile value-added services provider; IndiaMART.com is India’s largest online B2B marketplace; and Global Talent is a vocational institute.
Aditya Birla Private Equity, on the other hand, has taken a stake in the Bombay Stock Exchange for an undisclosed amount. This is its second investment, as it had earlier invested in V Mart Retail Pvt. Ltd.
The Dissatisfied
But the investors in two India-focused funds listed on the Alternative Investment Market (‘AIM’) of the London Stock Exchange have been unreserved in expressing their dissatisfaction with the performance of these two funds. While one fund has been liquidated, another fund’s management’s corporate governance is being questioned by its investors.In late January, the shareholders of KSK Emerging India Energy Fund (‘KSK Energy Fund’) passed a resolution to have their capital commitments in this fund returned to their coffers. Listed in June 2008, KSK Energy Fund had successfully raised £101 million (US$200 million at the then prevailing exchange rate) and was among one of the largest offerings hosted by AIM last year. It was promoted by KSK Energy Group, which is headquartered in Hyderabad.
Despite its glamorous debut, KSK Energy Fund only made one investment, acquiring a 3% stake in Konaseema Gas Power Ltd. According to its admission document, the fund signed an agreement in March 2008 to acquire a 25% stake in Athena Infraprojects for approximately US$25 million, but it is believed that the transaction was never consummated.
After a short listing history on AIM, KSK Energy Fund was delisted before the end of January, and the liquidation of shareholders’ interests came into effect a day after shareholders had passed the applicable resolution.
In the boardroom of The Indian Film Company Ltd., which is also listed on AIM, the disagreement between shareholders and management of this listed investment vehicle continues. In mid January, shareholders of The Indian Film Co. proposed the removal of two directors of the company following the dismal performance of the fund. When The Indian Film Co. was listed on AIM back in June 2007, it offered its shares at 100 pence (US$1.41) and raised £52.8 million. At the end of December, its share price was trading at 27.0 pence. Shareholders voiced their frustration when they were denied sufficient information to properly assess the company’s performance and prospects.