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May 2009 Issue
In Brief

Investors Achieve Liquidity for portfolio companies despite adverse market conditions. An assessment of exit results since September Feature
Cross Strait Activities Mount with private equity expected to play a key role Analysis
Tax Policies on PE Points to growing importance of private equity in the region Focus
Fund Sponsors are Revising their investment blueprint as part of the cost-cutting measures Institutional Investors – Funds
Management Control of CITIC Pacific returns to the State and marks a new phase in the institution Institutional Corner - Analysis
Policy Makers Dominate Funds recently launched Institutional Corner - Funds
Turmoil in Thailand Leads to boom in other markets in SE Asia General Section - Analysis
Buyout of USJ is a Win-Win for Goldman Sachs which first invested in the company General Section - Investments
Hong Kong and Shanghai Locked in a race to become China’s leading financial centre Greater China Corner-Analysis
Viable Business Models Inspires capital deployment from investors Greater China Corner -Investments
Back-door Listing Plan by Meihua marks a new trend in exit direction for investors’ China portfolio companies Greater China Corner -Divestments
JV Fund Partnership Gains momentum as institutional capital becomes scarce India Corner –Funds
Past Positive Track Records Entice investors to make repeated capital deployments India Corner –Investments
Content

Analysis
Focus
Institutional Corner
News
Analysis
Strait Flush (p 5-7)
Funds

General Section
News
Analysis
Stormy Siam
Investments

Greater China
News
Analysis
Investments
Divestments

India Corner
News
Funds
Investments

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

Against All Odds

The financial markets watch and wait as the biggest initial public offering of the year is set to debut on the Stock Exchange of Hong Kong on 8th May. China Zhongwang Holdings Ltd. (‘Zhongwang’), China’s largest aluminum extrusion manufacturer, has received committed capital from investors that tallies up to US$1.26 billion. It is the first billion dollar public offering in Asia since China South Locomotive & Rolling Stock Corp. raised over US$1.57 billion in August last year. Zhongwang’s bold initial public offering (‘IPO’) gambit marks an end of, or at least a hiatus from, a grave period in the global economy in which investors’ confidence plunged to historical lows. Its public float has come to symbolise a return of investors’ confidence, as its institutional tranche was two times oversubscribed.

The months following the collapse of Lehman Brothers and the implosion of American International Group last September (hereinafter referred to as “Crisis”) , have been labelled as one of the darkest periods in the global financial industry. The overall exit performance in the eight months since September last year paled against that for the preceding eight months. From January to August 2008, the median internal rate of returns (‘IRRs’) achieved by completed or partial divestitures was 57%, while that for the return multiple was 3.63 times, whereas it is 26% and 2.29 times respectively for the period post Crisis.

Despite an adverse investment climate, private equity investors in Asia have been able to achieve liquidity for their commitments, with some attaining brilliant results. There are encouraging signs that the capital realisation process is regaining momentum in the region. In the month of April alone, a host of general partners with portfolio companies in China, India and South Korea have successfully disposed of their holdings, with results that should delight their limited partners. Before the close of the second quarter, another major exit in Southeast Asia is expected to take place that will return more than three-fold of invested capital to the controlling financial investors. The exit of this buyout transaction will be a highlight of the 2009 Asian private equity divestment record.

In the eight-month period ending April, with liquidity eluding financial investors, there have nevertheless been exit results that pleased limited partners. This initial assessment of fund managers’ ability to dispose of their holdings for cash, despite prevailing conditions, punctuates the viability of the private equity investment model in Asia....

Analysis

Strait Flush

Mainland business leaders set Cross-Straits itinerary

It has been nearly a year since President Ma Ying-jeou led the Kuomintang Party to electoral victory on the island of Taiwan. With his political party firmly behind him, President Ma has been able to advance a more conciliatory policy agenda toward mainland China. Perhaps the most visible sign of this thaw in relations has been the sight of mainland tourists in Taiwan.

While travel restrictions were first relaxed between Taiwan and mainland China in 1987, it was not until December 2008 that direct flights were inaugurated. The historic flights broke the six-decade-long ban on direct air travel between the two economies. Three months later, in mid-March, the first luxury liner with passengers from mainland China arrived in Taiwan. The increasing flow of traffic across the 120-mile stretch of water that long separated the two bitter political rivals marks the dawn of a new era of tourism for the world’s most vibrant economic zone. There are signs that suggest Taiwan could become a magnet for China’s nascent private equity investment activities.

Executive Shuttle

On the evening of 12th April, a delegation of five leading mainland businessmen arrived in Taiwan; each member of the group has played an important role in shaping China’s travel industry. Coincidentally, all have been associated with private equity, in one form or another. The presence of Mr Neil Shen, founding managing partner of Sequoia Capital China, dispelled any ambiguity regarding the intentions of the delegation. Prior to entering into the private equity industry, Mr Shen had long proven his business mettle as one of China’s most savvy entrepreneurs. He co-founded Ctrip.com, one of the country’s largest online travel agencies. Since its inception, Ctrip.com has received at least two rounds of financing, first from Orchid Asia Group and IDG Technology Venture Investment, and subsequently from The Carlyle Group (‘Carlyle’). In late 2003, the online travel agency became one of the first technology-related companies from China to list on NASDAQ. For both of its private equity investors, Ctrip.com was one of their earliest and most celebrated investments. Carlyle was estimated to have recorded a return multiple of between 14 and 15 times.

Joining Mr Shen were the chief executives of some of China’s most inspiring enterprises, including Mr Charles Chao, president and CEO of Sina.com, one of China’s leading media and internet services companies, Mr David Sun, CEO of Home Inns & Hotels Management Inc., (‘Home Inns’), the nation’s largest economy hotel chain; Mr Min Fan, a co-founder and CEO of Ctrip.com, and Mr Xin Zhou, chairman and CEO of E-House (China) Holdings Limited, a leading China real estate services company. Each of these companies counted on private equity capital to help grow their businesses.

For this delegation of mainland China business heavyweights, Taiwan holds much economic promise. There were local reports that suggested Home Inns could soon be partnering with one of the major brands in Taiwan’s travel sector. The union, if it materialises, will be a significant step in the development of the Cross-Strait travel market.

Digital Diplomacy

Taiwan government officials and business leaders have greeted a veritable parade of visiting mainland business titans. Another prominent mainland business figure had in fact travelled to Taiwan in early 2008. At that time, Mr Liu Chuanzhi, president of Legend Holdings, the parent company of China’s largest domestic personal computer maker, toured Taiwan’s Hsinchu Science Park. The Hsinchu Science Park is home to two of the world’s largest original equipment manufacturers of chips, Taiwan Semiconductor Manufacturing Corp. and United Microelectronic Corp. A year passed before Mr Liu commented on his visit. At the National People’s Congress this March, Mr Liu revealed that both Legend Holdings and The Chinese Academy of Sciences have been sending scientists to Hsinchu Science Park to gain experience and learn ways to commercialise their findings. Mr Liu also indicated that future cooperations between Legend Holdings and Hsinchu Science Park will be forthcoming. The man who has been the main engine behind China’s leading state-owned technology company made no secret of his eagerness to harness Taiwan’s expertise.

Mr Liu’s comments were consistent with those made by another Legend Group stalwart, Mr Yang Yuangxing, who was first known to have travelled to Taiwan in 2005 to assess the island’s technology industry. Mr Yang, who recently returned to the helm of Lenovo Group Ltd., a Hong Kong-listed subsidiary of Legend Holdings, said at the time that Lenovo desired to learn successful business management practices from Taiwan and apply them to mainland China’s technology sector.

Both Legend Holdings and Lenovo Group have been closely associated with private equity. Legend Holdings is a pioneer in China’s private equity and venture capital investment industry. It is among a handful of state-owned enterprises that have established a comprehensive alternative investment arm, with buyouts, venture capital and real estate units.

Lenovo Group’s association with foreign private equity investors dates back in 2005 when it received a US$350 million capital injection from TPG and its Asian arm as well as General Atlantic LLC.

As one of the foremost supporters of China’s private equity industry, Mr Liu’s visit, along with that by Mr Yang, could be interpreted as one of the first assertive undertakings by this leading technology group to sow the seeds for future private equity activities from mainland China in Taiwan.

Brain Gain

At this moment in the short history of China’s private equity industry, Taiwan, as a pioneer of direct equity investment, offers immeasurable value.

China Development Bank’s recent appointment of senior managers for its direct investment arm is by far the most telling development. Formerly a policy bank, China’s State Council agreed in principle last year to allow China Development Bank to take on a commercial lender mandate. Since then, the bank has recruited the old guards of Taiwan’s China Industrial Development Bank (‘CIDB’) to manage the investment unit. Mr Benny Hu, previously the president of CIDB, leads the unit. He is joined by Messrs Brian Keng, Xavier Lee and Thomas Lee, all of whom toiled at CIDB. It is a smart move by a Chinese institution, underscoring its readiness to learn from seasoned managers who once resided across the Strait.

Comments

The economic integration between Taiwan and mainland China has been moving at lightning speed. From May this year, Chinese companies will be allowed to purchase Taiwanese assets, the Ministry of Commerce declared. Just days later, China Mobile Ltd., the world’s largest mobile carrier by users, unveiled its US$512.8 million investment in Taiwan’s Far EasTone Telecommunications Co. Ltd.. For the first time in six decades, a state-owned enterprise from China proposed injecting capital into a Taiwan-based company that will allow it to have a board seat and a 12% shareholding.

The line separating the two economies is becoming increasingly blurred. Earlier this year, Taiwan’s Chunghwa Picture Tubes made a backdoor listing on the Shenzhen Stock Exchange. The cathode ray tube and flat display maker, which had earlier raised US$250 million from Warburg Pincus in a private-placement of convertible bonds, was the first Taiwan-based company to secure an A-share listing using this structure.

The economic alliances between mainland China and Taiwan comes at a time when both economies are facing challenges. For the first quarter of 2009, China recorded an aggregate US$21.8 billion in foreign direct investment, representing a 20.6% drop compared to the same period in 2008. At the same time, investments from Taiwan into mainland China also registered a sharp decline. In the first quarter of 2009, only US$778 million flowed across the Strait. This, compared to US$2 billion for the same period last year, is a precipitous drop.

The arrival of mainland China’s leading business luminaries in Taiwan is a bold sign that economic integration in the Greater China region has now advanced to a new level. This latest development not only indicates a new investment direction, but also points to a key role for private equity as both mainland China and Taiwan seek greater cooperation in the business sphere.

General Section - Analysis

Stormy Siam

Investors watch, wait and wonder

For more than 30 months, Thailand has been in a state of political unrest. During this period, the country has witnessed the departure of three prime ministers. In March, the ASEAN Summit was aborted due to the threat of violence and the world watched as political leaders were plucked from their hotels and ferried to safety. Despite the turmoil that has beset Thailand since the ouster of Prime Minister Thaksin Shinawatra in October 2006, the Land of Smiles did not suffer the sharpest fall in foreign direct investment in the region. In 2008, both the Philippines and Singapore saw their respective foreign direct investment fall by 47.9% and 28%, while Thailand’s was only negative 17.9%. While the figures may indicate foreign investors’ lingering optimism on the future prospects of Thailand, there are signs, especially from the private equity sector, that years of political instability and social unrest, aggravated by the prevailing global economic ills, are souring investors’ appetite.

Unfaltering Faith

In the years after the 1997-1998 Asian Financial Crisis, the Thai government began to actively promote the health of local industries, and venture capital funds served as platforms. Although the series of government-sponsored funds launched were modest in size, with the 8 billion baht (US$186.7 million) Thailand Prosperity Fund launched in 2003 being the largest, they nonetheless provided capital to a pool of aspiring companies that were thirsty for funds.

As Thailand set out to restructure its economy, foreign institutional investors were also eager to play a role. In 2003, the Thailand Equity Fund, managed by the San Francisco-based Lombard Investments Inc. was launched. The US$245 million fund secured commitments from a marquee list of global institutions, including the California Public Employees’ Retirement System and the International Finance Corp.. The final closing of Thailand Equity Fund helped propel Thailand’s fund pool to a new high, with US$595.6 million in fresh capital coming into the market that year.

In the waning days of 2004, just as the Thai economy was beginning to gain momentum, the Indian Ocean Tsunami struck, killing over 8,000 people, many of them tourists on holiday. The catastrophe dealt a devastating blow to an economy whose bread and butter is tourism.

However, the tsunami did not sweep away investors’ confidence in Thailand. In the months leading up to the September 2006 military coup that led to Thaksin Shinawatra’s self-imposed exile, and in the following year, Thailand’s currency actually appreciated against the US dollar. Ironically, in the three years ending December 2008, Thailand recorded its best years in attracting private equity since the 1997-1998 Asian Financial Crisis, adding up to an aggregate US$355.6 million. In the first quarter of 2007, a mere six months after Mr Thaksin was ousted, the Texas-based TPG joined its Asian private equity arm, along with another financial investor, to make their first commitment to BankThai pcl., then the eighth largest bank in the country. Their combined transaction sum in two rounds of investing, with the second round occurring in the first quarter of 2008, added up to US$154 million. It was one of the largest undertakings by a foreign group in Thailand’s banking sector.

Confidence Shaken

By mid 2008, the toll from political unrest at home, coupled with the global economy downturn, began to erode the earnings of Thai enterprises, especially those that had relied on tourism and foreign income

In 2006, Lombard Investments Inc., deployed US$15 million in Central Plaza Hotel Public Company Limited (‘Central’), a hospitality company which operates Centara Hotels & Resorts, a chain of 14 hotels and resorts throughout Thailand and the region. Although its revenue for 2008 rose to 8.2 billion baht, net profit for the year dropped by 16.7%. By March this year, Central was trading at well below the SET Index.

Another case in point is Bumrungrad Hospital Public Company Limited (‘Bumrungrad’) one of the best known multi-specialty hospitals in the region. Located in Bangkok, Bumrungrad offers a wide range of medical services. Nearly half of its income has been derived from non-domestic patients. Bumrungrad was one of the earliest proponents of medical tourism.

In January 2006, Temasek Holdings and the Dubai-based Istithmar invested US$55.3 million in Bumrungrad in the same round. For the 12 months ending December 2008, Bumrungrad’s revenue fell to 8.9 billion baht, compared to 9.4 billion baht in the preceding 12 months. Its net profit also dropped to 1.2 billion baht compared to 1.6 billion baht a year earlier.

Comments

As Thailand searches for a way out of the current political imbroglio, private capital has largely shied away. Between 2007 and 2008, Thailand saw a 35.7% decline in the inflow of private equity capital, to US$139.1 million. Of the US$6.5 billion recorded for Southeast Asia in 2008, Malaysia accounted for over 54% of this year’s investment aggregate, even though its government imposed a strict foreign exchange policy. Even the Philippines, which saw a declining inflow of foreign direct investment in 2008, was able to attract an aggregate US$326.3 million in 2008.

Vietnam has emerged as a favoured investment destination during the past few years, and its 2008 investment aggregate, which stood at US$318.9 million, surpassed that for Thailand. Vietnam’s stock market is among the first in Southeast Asia to woo the return of investors. In March, Phu Nhuan Jewelry Joint Stock Co. a portfolio company of Mekong Capital was listed on the largest bourse in Vietnam. Most recently, VinaCapital announced a successful exit from Masan Trading Corp. which returned over US$20 million to its investor, according to the private equity firm.

For Thailand, the competition for foreign capital is mounting. In early April, Leopard Cambodia Ltd. announced the final closing of one of the first private equity funds to focus on Cambodia. At a time when fund raising is mission impossible, the general partners of Leopard Cambodia Fund LP have achieved a Herculean task in securing US$27.2 million in commitments. It is also an expression of investors’ growing interest to seek opportunities in the Southeast Asia market.

China sees Southeast Asia as an integral part of its plans in the region. In April, Foreign Minister Yang Jiechi announced plans to establish a US$10 billion “investment cooperation fund” with the Association of Southeast Asian Nations, in addition to US$15 billion in credits and loans to members of the ASEAN to help aid their growth in the region. Thailand is set to benefit from this capital pledge. But until it elects a leader who can bring political and social cohesion to the nation, it may be side-stepped by investors and beach-goers alike.