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MARCH 2009 Issue
In Brief

Secondaries as a Solution to Liquidity is in vogue as investors seek funds Feature
First Back-door Listing in A-Share market by a Taiwan company is a milestone Analysis
Emerging Market Institutions Take bold moves in management overhaul Institutional Investors - Analysis
Asian SWFs Go Global through leading private equity houses Institutional Investors - Funds
Institutions Seek Opportunities Abroad and become increasingly global Institutional Investors - Funds
Reducing Holdings in Private Equity By two institutions, long known in Asia Institutional Investors - Divestments
Investing in the Known Is a Feature of capital deployment General Section - Analysis
Liquidity is Hard to Come By as exit takes multiple phases General Section - Divestments
REX’s Disposal of a Major Asset reveals drastic steps needed to contain losses General Section - Divestments
Fall of China’s Richest Man Underscores critical importance of adhering to strict governance codes Greater China – Case Study
Policy Makers Propel China Funds that is an envy to all Greater China – Funds
Government Breathes New Life to Taizinai which is choked by mounting debt Greater China – Investments
Investors’ Soured Relationship with Subhiksha casts light on treacherous investment terrain India – Analysis
Funds that Focus on SMEs continue to receive backings of investors India – Funds
Content

Analysis
Institutional Corner
News
Analysis
Funds
Beyond Home Turf
Investments
Divestments

General Section
News
Analysis
Divestments

Greater China
News
Case Study
Funds
Investments
The Milk of Life

India Corner
News
Analysis
Funds

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

Liquidity Solutions

The buzzword in private equity is now “secondaries”. With key players in the secondary market estimating that the volume of such transactions will reach over US$100 billion in the next three to five years, “secondaries” are carving out their position in the future profile of private equity. In February, the UK-based Coller Capital, a specialist in purchasing private equity interest on a secondary basis, advanced to become a substantial shareholder of SVG Capital Plc. One of the more pristine institutional names in the UK private equity industry, SVG Capital’s decision to dispose of a parcel of its assets at a substantial discount is a piercing indicator of the depth and breadth of the prevailing economic ills.

Yet, to the comfort of investors, there is a ready pool of buyers that are prepared to purchase exiting limited partners’ interest in funds on a secondary basis, albeit with a substantially-reduced valuation. A subset of the private equity investment class, the unique feature of a secondary fund is the ability to provide a solution for investors desiring unscheduled liquidity. Thus, at a time when liquidity is a rare commodity, secondary funds are increasingly taking the centre stage.

History of Secondaries

Secondary transactions grew two-fold from US$8 billion in 2005 to more than US$16 billion in 2007, according to Coller Capital being the latest statistics available. Transactions undertaken by such funds have long been active in the US and Europe, dating back to the mid 80’s. The leading fund of funds houses, such as HarbourVest Partners LLC, AlpInvest Partners, Adam Street Partners LLC and Pantheon Ventures Limited were among the earliest and most active buyers of other limited partners’ interest in funds. The 90’s witnessed the emergence of a pool of dedicated secondary fund managers, such as Lexington Partners, Landmark Partners Inc., Coller Capital and Paul Capital Partners, as well as Pomona Capital which has now come under the ING Asset Management umbrella.

Unlike in the US and Europe, purchases of institutional interests in Asian private equity funds have largely been kept out of the public eyes, as such, little is known on movements of these “secondaries” in the region. Coller Capital’s decision to set up a representative office in Asia in late 90’s marked the introduction of this concept into Asian private equity. Last year, the US-based Paul Capital hoisted its flag in Asia when it recruited a team of professionals to head up its Hong Kong office. It is a statement on the size of the Asian private equity primary market that has grown sufficiently large to support the entry of another dedicated secondary fund management firm....

Institutional Corner - Funds

Beyond Home Turf

Institutions attracted by opportunities outside of home base

At a time when institutions are assessing their exposure to alternative investment, private equity in Asia displays its magnetism in securing commitments from institutions, at home and abroad.

Despite being deep in financial quagmire after having taken over HBOS, the UK-based Lloyds Banking Group has not recoiled from its earlier decision to invest in Asian private equity. In early February, the US$30 million commitment made by its private equity investment arm, Lloyds TSB Development Capital (‘LDC’), to China New Enterprise Investment Fund II became known. The latter is managed by Hong Kong-based China New Enterprise Investment Co. and has a target fund size of US$250 million that will focus on opportunities in China.

Mr Craig Wilkinson, managing director of LDC’s Hong Kong office, pointed out that this commitment represented the long-term view adopted by his institution for its Asian expansion. New Enterprise Investment Fund II is one of the strategic platforms chosen by LDC to help lead its UK portfolio companies to expand to Asia, particularly to China. Lloyds Banking Group’s maiden commitment to an Asian private equity fund came when the leading banking institution in UK announced a higher than expected loss of £10 billion incurred by its newly-acquired unit, HBOS, a record for the UK banking industry.

A leading name in the UK private equity industry, LDC has been investing direct in companies at home for the past 28 years. As LDC seeks strategic Asian partners for its portfolio companies, it has decided to take on the role of a limited partner to Asian funds. As part of its strategy to gain further insights into investing in Asia, Mr Wilkinson said that LDC “will consider other strategic fund investments” as well. “We are looking to build a profitable, sustainable business in Asia for the longer term - our success will be measured over a 5 to 10 years time horizon”, he added.

In Japan, Sumitomo Mitsui Banking Corporation (‘SMBC’) is the latest to join the pool of institutions that are seeking opportunities outside the country. It has recently acquired a 20% equity stake in Alternative Investment Capital Limited (‘AIC’), the first institutionalised fund of funds house in Japan. SMBC has purchased an aggregate 1,600 shares from Mitsubishi Corporation and Daido Life Insurance Company, the existing shareholders in AIC. The transaction sum was not disclosed. Following completion of this re-organisation of its shareholder structure, the two founding shareholders of AIC will see their holdings reduced to 51% and 25% respectively.

AIC was established in 2002, and currently has an approximate ¥300 billion (US$3.2 billion) assets under management. Since coming into operation, AIC has assiduously built up a global portfolio. In addition to having a joint venture partnership with the US-based Pacific Corporate Group in order to access companies in the world’s largest economy, AIC has also established more than 130 partnerships across the globe, with both the USA and Europe accounting for the lion’s share of its allocations, while Asian markets outside of Japan take up 10%.

Although SMBC’s ultimate parent, Sumitomo Mitsui Financial Group, also has another private equity investment arm, Daiwa Securities SMBC Principal Investments, Co. Ltd, the latter focuses its investments on home territory. With Japan facing its worst economic decline in three decades, SMBC is turning to private equity as one of the avenues to help it search for opportunities outside the Land of Rising Sun.

Greater China Corner - Investments

The Milk of Life

Taizinai continues to operate with the milk of life coming from the government

Within the ideology of the free market concept, government participation is taboo. Ironically, without the help of the domestic government of Zhuzhou, where Taizinai Group is located, the future of one of the best known milk products company in China would be bleak.

In January 2007, when a consortium of investors including Goldman Sachs and Morgan Stanley, led by Actis, invested US$73 million in Taizinai Group, it was seen as financial investors’ attempt to replicate the success story of Mengniu Dairy Co. Ltd (‘Mengniu’). The latter was one of the earliest private equity investments in China and had returned more than five times of the original US$24.4 million commitment by investors.

Taizinai showed all the promises to be the next big winner in China’s private equity industry. In an interview given by the then managing director of Actis, Mr Chin Bay-chong affirmed that the private equity firm would not have invested in Taizinai if the latter had shown no prospects of being listed outside of China. By August 2008, when the global stock market witnessed roller coaster movements, there had been no new developments in Taizinai’s expectations to become a publicly-listed company. At the same time, there were reports that suggested Taizinai was seeking a second round of financing, as the company faced a debt burden that amounted to over 1 billion yuan (US$146.8 million). A month later, in September, China’s dairy products industry was enveloped in the toxic chemical, melamine, scandal. The tainted milk products claimed the lives of infants and young children. Consumers’ confidence was shaken to the core, as evidenced by the share prices of Mengniu, and Synutra International Inc., in which Warburg Pincus has an interest. Both were on free fall. Yet Taizinai’s products were clear from having such toxic chemicals. While Taizinai was not embroiled in the melamine scandal, reports on its lack of liquidity continued to circulate in the market, suggesting that some of the workers had not been paid for more than four months, while some production plants had had to cease operations.

On 21st November 2008, to quell market speculation, Taizinai issued a statement indicating that, assisted by the local Zhuzhou government, shareholders of Taizinai had agreed to inject further capital into the company to help ease its liquidity crunch. It was also the first time that the Zhuzhou government was known to be involved in planning Taizinai’s future fate. It was subsequently revealed that the foreign investors were to pump an additional US$30 million into Taizinai as well.

Three months had passed before it became known that Taizinai will come under the control of the Zhuzhou government. In an interview with the local Zhuzhou media to clarify the whole matter, Mr Wen Dibo, who will be the chairman of a new company that will oversee the future operations of Taizinai, made it known that it is the Zhuzhou government’s mandate to “save” Taizinai. He further added that the government is obligated to interfere, as Taizinai has not been able to pay its workers and it now falls under the government responsibilities to resolve this labour issue.

In this open dialogue with the local press, Mr Wen confirmed that a host of circumstances have arisen since November that has had led the authorities to believe that the three foreign investors would no longer be able to meet their commitment to inject US$30 million into Taizinai. The latter’s liquidity pressure has since been temporarily relieved when a group of domestic enterprises from various provinces have provided an aggregate 70 million yuan loan to Taizinai. According to an audit report, Taizinai’s assets currently add up to 2.5 billion yuan, while its total liabilities amounted to 2.6 billion yuan.

Despite Taizinai’s debt load, the Zhuzhou government is determined to keep the milk of life flowing for the company. Taizinai has not only solidly established its brand, but has come to symbolise the economic successes of Zhuzhou.

Until Taizinai’s debt mountain has been reduced or taken over by a strategic investor, it will come under the control of Zhuzhou High Tech Milk Enterprise (‘Zhuzhou Milk’), which is a joint venture between two units within the Zhuzhou government. Mr Wen said that Zhuzhou Milk will first inject some 100 million yuan into Taizinai to assist it to meet its production schedule.

In the meantime, Mr Li’s primary task will focus on reducing Taizinai’s debt load. While the Zhuzhou government has drawn up a clear charter for Taizinai, it fell short of revealing whether the three foreign firms will take board seats in Zhuzhou Milk and share the future management of Taizinai.