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June 2009 Issue
In Brief

Maximising Portfolio’s Values and risk protection are investors’ priorities as they remain hesitant to deploy capital to new deals Feature
Building Home Market Share is the strategy employed by portfolio companies to shore up their revenue Analysis
Seoul Institutions Take Global Vision and are making pragmatic moves Institutional Corner - Analysis
SMBC Broadens Its PE Platform that underscores Japanese institutions’ readiness to go global Institutional Corner – Funds
Capital Market is No Longer IFC’s sole mandate for Asia Institutional Corner – Investments
JAIC Opts Alternative to Receivership as it faces mounting debt and depleting returns General Section– Funds
Buyouts Return in NE Asia that signal financiers are warming up to providing leverage General Section – Investments
Capital Injection is Sole Solution to some existing distressed portfolio General Section – Investments
The Burden of Debt Weighs down two companies indicating market conditions remain rough General Section – Divestments
Focused Capital Deployment is the investment theme India Corner– Investments
Investors’ Patience Pays Off as signified by two illustrious divestment results India Corner– Divestments
Content

Analysis

Institutional Corner
News
Analysis
Seaol Seeking
Funds
The Makeover
Investments

General Section
News
Funds
Investments
Divestments

India Corner
News
Investment
Divestments

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

Asset Restructuring

A deficit of confidence continues to influence financial markets despite widespread belief that the worst of the economic storm has passed. JP Morgan Chase & Co. is the latest financial institution to draw the curtains on its direct equity investment activities. With the exception of its Asian private equity arm, the institution’s regional hedge fund and buyout units will be dismembered. It is the latest manifestation of the level of caution being taken by global financial institutions. Even those that have been able to demonstrate their strength at the height of the financial crisis last year, they are now exercising prudence. Private equity investors in Asia are in an equally cautious mood. In the first five months of the year, 128 transactions worth US$6.1 billion have been recorded, a far cry from the US$29.3 billion and 431 deals for the same period in the preceding 12 months. Investors have been hesitant to loosen their purse strings to new investments, as evidenced by the capital deployment pattern during the first five months of the year. Of the US$6.1 billion transaction total recorded, excluding the exceptionally large US$1.8 billion for Oriental Brewery Co. Ltd., more than 53% of the capital committed since the beginning of the year can be classified as post first-round financing. This, compared to 46% of the transaction total during the same period in 2008, is a significant increase. Similarly, during the same period, there has been a 6% increase in the number of companies that have received subsequent rounds of financing from investors (fig. 1). Capital preservation and value retention are investors’ priorities.

A Capital Toy

In 2007, TPG became a major shareholder in Tomy Company, Ltd. (‘Tomy’), Japan’s number two toy maker. The buyout firm deployed an aggregate ¥16.7 billion (US$139 million) for an equity stake of 15% plus ¥7 billion worth of convertible bonds in Tomy, which is listed on the Tokyo Stock Exchange. With TPG’s international network and acclaimed record in retail store investments, it was a deal in which the financial investor brought both capital and strategic support to the table. However, the shrinking global consumer market is taking a toll on Tomy’s performance. For the financial year ending March 2009, Tomy’s net income dropped by 76% to ¥1.4 billion, compared to the same period in the preceding year. At the same time, Tomy’s debt piled up to ¥35.6 billion. Its debt to equity ratio reached an uncomfortable 116%. (fig. 2). In the period since TPG first wrote its cheque to Tomy, the value of the toy making company’s share price has lost over 26%, closing at ¥567 at the end of May, compared to ¥785 back in March 2007....

Institutional Corner - Analysis

Seoul Seeking

South Korean institutions are eager to make their mark

South Korea’s institutions are eager to flex their muscles as the won regains strength. After having touched a low of 1,570.8 won to a US dollar in March, the won has since appreciated 25% against the greenback, as at the end of May. The country’s appreciating currency has powered the National Pension Service (‘NPS’), the world’s fifth largest pension fund with an estimated US$189 billion in assets under management, to declare its intention to resume overseas investment activity. At a public forum in Hong Kong, NPS chief executive Mr Park Hae-choon said that the pension fund will begin deploying capital overseas again, albeit with a cautious pace.

One of the most audacious plans being announced by the government of President Lee Myung-bak is a 1 trillion won (US$802.5 million) resource development fund. This investment vehicle, sponsored by the Korea National Oil Corporation and Korea Resources Corporation, will invest in overseas natural resources, according to reports citing the Ministry of Knowledge Economy (‘Ministry’). In this 1 trillion won international fund, Korea National Oil will commit 100 billion won while Korea Resources will commit 10 billion won.

The fund will operate for 10 years. At this juncture, the Ministry is seeking two companies or consortia to manage the fund. In addition to managing this fund, the selected manager(s) will be expected to contribute monetary commitment to this fund, with 3 billion being the minimum contribution amount.

The Ministry is playing a key role in promoting venture capital and private equity investment activities on a global scale. As part of the South Korean government’s “New Growth Momentum”, it is an anchor investor in STIC Investments Inc.’s STIC Asia Mid-market PE Fund II. The fund was launched late last year and has a US$500 million to target cross-border opportunities between South Korea and the rest of Asia.

Another government-affiliated institution that is making its mark on the region’s private equity scene is the Korea Development Bank (‘KDB’). The policy bank is adopting a new charter after the National Assembly approved its privatisation plan in late April.

One of KDB’s first movements is to set up an alliance with Kohlberg Kravis Roberts & Co. to tap into its global resources. The partnership has let to speculation that the two parties will form a joint venture fund seeking opportunity in distressed assets.

KDB has also recently anchored its regional foothold in teaming with Japan-based CSK Venture Capital Co. Ltd. The two investors are forming an initiative to deploy capital to South Korea-based companies, assembling Japanese manufacturing and financial firms to discuss opportunities to deploy capital in manufacturing companies on the peninsula.

There have also been reports suggesting that KDB may buy Korea Exchange Bank (‘KEB’). The purchase, if successful, is seen as a strategic move by the policy financing institution to bolster its customer base. The transaction, if consummated, will conclude one of the most contentious divestment processes in Asia private equity.

KEB is currently 51%-owned by Lone Star. The Texas-based investment firm has been trying, in vain, to sell its holdings on two separate occasions last year. KEB first garnered the interest of Kookmin Bank which subsequently decided not to pursue with the acquisition. HSBC Holdings also followed a similar route as Kookmin Bank. Since 2003, Lone Star has invested more than 2.1 trillion won in KEB.

A decade has passed since South Korea joined Thailand and Indonesia in seeking help from the International Monetary Fund, after having fallen victim to the 1997-1998 Asian Financial Crisis. Its institutional investors have come a long way. Despite the prevailing global financial storm which is much more severe than the 1997-1998 Asian Financial Crisis, South Korean institutions are seizing the opportunity to throw their anchors in foreign waters.

Institutional Corner - Funds

The Makeover

SMBC strengthens its position in the global financial market

It was not a coincidence. Days after Sumitomo Mitsui Banking Corporation (‘SMBC’) announced its ¥573.5 billion (US$5.8 billion) takeover of Citigroup Inc.’s securities business in Japan, the banking behemoth was party to a proposed restructuring of Daiwa SMBC Capital Co., Ltd. (‘Daiwa SMBC’), a joint venture private equity investment unit between SMBC and Daiwa Securities Group Inc. (‘Daiwa Securities’).

In early May, Daiwa Securities, a major shareholder in Daiwa SMBC, announced its proposal to privatise the latter through a tender offer bid process. The proposed final structure of Daiwa SMBC suggests that both SMBC and Daiwa Securities, which have been united as owners of Daiwa SMBC, could be separating their private equity assets.

Daiwa SMBC is currently listed on Jasdaq Securities Exchange, a subsidiary of the Osaka Stock Exchange. Both Daiwa Securities and SMBC hold a combined 86.18% stake in the venture capital investment firm, with Daiwa Securities holding 46.18%; and SMBC 40%.

Daiwa SMBC, which was first known as Nippon Investment & Finance Co. Ltd., was renamed NIF Ventures Co., Ltd. after a merger with Daiwa Finance Co. Ltd. in 2000. In 2005, when its assets were enlarged through a merger with SMBC’s venture capital arm, then known as SMBC Capital Co., Ltd., it adopted the current name.

Under the tender offer proposal, Daiwa Securities will acquire from the public some 5.9 million shares of Daiwa SMBC Capital at ¥563 apiece, representing an approximate 30.32% premium on the average closing price on the Jasdaq Securities Exchange for the month prior to the announcement of the takeover bid. Upon completion of the tender offer, Daiwa SMBC will cancel its listing status.

In explaining its proposed privatisation plans for Daiwa SMBC, Daiwa Securities cited its private equity investment arm’s deteriorating performance and the prevailing difficult economic environment.

Starting in 2007, the shareholders of Daiwa SMBC witnessed a steady decline of its assets, from ¥138.6 billion in March 2007 to ¥107.8 billion for the 12 months ending March 2009. During this period, its debt load has also increased to ¥43 billion, from ¥34.6 billion. The macro economic situation only aggravated Daiwa SMBC’s lacklustre financial statements. In the twelve months ending March 2009, the number of initial public offerings in Japan plunged to 34, from a high of 187 24 months ago. The stock market inertia has been one of the major impediments for venture investors seeking to achieve liquidity for their portfolio companies and return capital to their limited partners.

With only 13.8% of its shares held by the public, Daiwa Securities’ plan to privatise its private equity investment arm is not expected to meet any obstacles. Under the proposed plan, as a private entity, Daiwa SMBC will be 60% held by Daiwa Securities and 40% held by SMBC. Of interest, the percentage will be identical to that held by both institutions in Daiwa Securities SMBC Principal Investments Co. Ltd., a principal investment arm sponsored by both Daiwa Securities and SMBC, with an investment focus on assets based in Japan.

On the heels of making the announcement of its intention to privatise Daiwa SMBC, Daiwa Securities unveiled its plans to buy the financial advisory business of the UK-based Close Brothers for £75 million (US$101 million). The acquisition of Close Brothers Corporate Finance is seen as Daiwa Securities’ move to build a comprehensive investment banking platform, not only at home, but also overseas.

For SMBC, however, in addition to its existing shareholdings in both Daiwa Securities SMBC Principal Investments and Daiwa SMBC, SMBC entered into the fund of funds management arena when it took a stake in the management of Alternative Investment Capital Ltd. earlier in the year.

The largest corporate takeover in Japan’s banking industry has enabled SMBC to become one of the country’s biggest financial institutions. When SMBC unveils the full structure of its direct and private equity investment arm, it shall be an exhibit of how institutional investors in Asia’s largest economy seek to bolster their position in the financial industry through a variety of private equity investment vehicles.