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July 2009 Issue
In Brief

Mixed Returns Results Show difficulty of achieving liquidity, with buyout investors worst hit Feature
Asian Institutions Go Global in activities that mark a break with past customs Analysis
Family Offices Take Shape in Asian private equity as India’s Singh family gets active Institutional Corner - Analysis
Temasek on Home Turf to invest in Olam for a second time, pointing to a new direction Institutional Corner – Investments
Determination Pays Off as CPPIB closes in on its acquisition of a Macquarie communications asset Institutional Corner – Investments
Jaya in Talks with Creditors as global shipbuilding hits rough seas General Section – Analysis
New Frontiers on PE Radar with funds for virgin markets gain momentum General Section – Funds
Billion Dollar Funds Return but institutional investors are prudent General Section – Funds
Deal-Making Rebounds but private equity investors still face hurdles to clinch deals General Section – Investments
Debt is Frustrating Suzlon’s bid to keep its corporate back to the wind India Corner – Analysis
Responsible Investing takes on added importance as incoming capital declines dramatically India Corner – Analysis
Content

Analysis

Institutional Corner
News
Analysis
Investments

General Section
News
Analysis
Funds
Investments
Green Shoots

India Corner
News
Analysis
Conscientious Consummation

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

Illusive Realisations

I f the divestment results of the first half of 2009 are a measure of the marco economic state of the region, then it would appear, at first glance, that an economic recovery has arrived. In the first half of 2009, an estimated US$3.2 billion is known to have returned to investors’ coffers. This, compared to the US$2 billion recorded for the preceding six months, represents an encouraging 60% increase. The numbers speak volumes about the quality of Asian assets, which continue to entice global investors. But a deeper analysis of the exit record during the period suggests that it may be too early to break out the champagne.

Of the US$3.2 billion returned, a sizeably portion, US$1.9 billion, was achieved by the Goldman Sachs Group Inc. when it released a portion of its holdings in the Industrial and Commercial Bank of China (‘ICBC’). This amount accounted for 59.4% of the realisation record in the six months under survey. When this extraordinary sum is subtracted from the return total, a more accurate and less heartening picture of general partners’ ability to achieve liquidity becomes apparent. The US$1.3 billion remainder is in fact 35% less than the US$2 billion recorded for the second half of 2008, a time when the global financial industry was thrown into turmoil. The talk of revival of the stock market and improved liquidity in the capital market may just be so much rhetoric .

The Central Players

China and India are central components of the liquidity performance record of Asian private equity. Together, they accounted for US$2.74 billion or 85% of the US$3.2 billion. But their respective divestment results illustrate the severity of the liquidity drought during the period under review.

In recent years, China has been the driver behind private equity returns. But China’s 2009 results may not be as attractive as they appear. China continued to command the lion’s shares in returned capital, accounting for US$2.5 billion or 78%. However, when the US$1.9 billion achieved by Goldman Sachs is excluded, the remaining US$622.54 million is in fact a decline from the US$806.38 million recorded for the same period in 2008.

In the second half of 2008, with the stock market at a virtual standstill and the global financial industry in deep trouble, private equity investors with China portfolios nevertheless managed to clock US$775 million in returned capital. Without Goldman Sachs’ stunning exit from ICBC, it would have been a somewhat lacklustre period.

The divestment picture for India during the period under survey gave little reasons to rejoice. The estimated US$242.3 million of returned capital, although 13.9% higher than that achieved in the preceding six months, is a 57.3% drop compared to the same period 12 months ago. In the first half of 2008, before the impact of the US subprime loan debacle was felt by Asia’s growing economies, investors with portfolio companies based in India managed to pocket US$567 million in returned capital. Despite the global stock markets’ volatility, public markets have proven to be vital liquidity channels for private equity. In China, the five largest realisations, including Goldman Sachs’ partial exit in ICBC, brought in US$2.27 billion, accounting for 91% of the US$2.53 billion recorded. With the exception of the US$99.84 million that SAIF Partners has been able to derive through a share re-purchase scheme by one of its portfolio companies, the remaining US$2.17 billion was realised through the disposal of shares on the secondary market.

The trend applies to India as well. Although trade sales were the preferred exit mechanism by private equity investors, the actual cash being returned came from the secondary market. Of the US$242.3 million of realised capital in India, over 53% came from this avenue.

No Control Over Exit

Buyout investors faced a harsh reality. In the first half of 2008, investors engaged in buyout transactions recorded an exhilarating US$5.2 billion in returned capital. A year later, with debts seen as an unacceptable item on companies’ balance sheets, the market conditions have been bleak for buyout investors to exit from invested companies. In fact, during these six months, there have been a number of high-profile releases of assets in which financial sponsors recorded little or no actual return of capital. TPG completed its exit from Japan’s NIS Group, after ....

General Section - Investments

Green Shoots

Investment activity shows signs of a rebound

After a six month lull, the prospects of logging substantial deals look brighter. The 2.3 trillion won (US$1.8 billion) commitment to Oriental Brewery Co., Ltd. by Kohlberg Kravis Roberts & Co. (‘KKR’), the largest buyout transaction since March 2008, is by far the surest sign that deal size is trending upward. But the market conditions have not been entirely favourable for private equity investors.

Facing Rejection

After months of discussions with private equity groups, reportedly including The Carlyle Group, KKR, TPG and Global Infrastructure Partners, Australia’s Asciano Group decided to raise its required capital from the public market. The response was so encouraging that Asciano has been able to increase its capital raising objective from A$2 billion (US$1.58 billion) to A$2.35 billion.

Japan’s Unison Capital suffered a similar setback. Its quest to take a stake in Aderans Holdings Co., Ltd. (‘Aderans’) was foiled when it insisted on securing three seats on wigmaker’s board before it would commit capital. Aderans’ board declined the request and Unison Capital terminated its tender offer for Aderans’ shares. Back in mid-April, Unison revealed its plan to implement a tender offer bid for a minimum 35.2% stake in Aderans, representing a deal size of approximately ¥14.7 billion (US$148.4 million). To appease Aderans’ major shareholder, Steel Partners Japan Strategic Fund (Offshore), L.P., Unison Capital increased its bid price by 20%, but to no avail.

Finding Reception

Warburg Pincus prevailed over rival bidders to take a stake in Transpacific Industries Group Limited (‘Transpacific’). As a demonstration of its commitment to Transpacific, the private equity firm agreed to sub-underwrite a portion of the company’s Entitlement Offer and Placement Offer which would represent a commitment of up to A$492 million (US$392.27 million), or 65% of the capital Transpacific hopes to raise.

Transpacific is an environmental waste management service company providing integrated industrial solutions. It is seeking to raise A$800 million. As a going concern, Transpacific has enjoyed growth in revenue and net earnings. For the six months ended 31st December, 2008, its revenue grew to A$1.190 million, a 12% rise compared to the same period 12 months ago. Also in this six-month period, Transpacific’s cash from operating activities surged by 47% to A$106 million.

But in the six months leading up to December 2008, it reported an A$52.6 million after-tax loss, largely due to a mark-to-market adjustment from its hedging instruments and public stock investments. In its public statement, Transpacific also warned that in the second half of its current fiscal year, ending in June 2009, it will record further losses, as much as A$225 million. Despite the red ink, Transpacific was courted by a number of global buyout firms, including TPG and KKR. According to market analysts, Warburg Pincus’ constructive approach in preserving Transpacific’s assets instead of selling them off in order to pare down debt was welcomed by the target company’s board.

In South Korea, there are encouraging signs that companies are responding positively to courtship by foreign private equity investors. Following KKR’s acquisition of Oriental Brewery, Standard Chartered Private Equity Ltd (‘SCPE’) became the second non-domestic investor group to clinch a deal in the country. The private equity arm of the global financial institution announced its first investment in the environmental sector in South Korea. It has committed US$40 million to Environmental Facilities Management Corp. (‘EFM’), a wholly-owned subsidiary of South Korea’s Kolon Group. In this venture, SCPE will take a 40% stake for US$32 million, while an additional US$8 million has been earmarked for the expansion of EFM’s water treatment business.

Kolon Group is a 50-year old company that is principally engaged in the manufacturing of synthetic fibers. In 2007, it acquired EFM which was founded in 1998. EFM currently operates over 75 facilities throughout South Korea and provides management, development and other services in the water sector.

Fuelling Competition

As the green shoots of deals appear, competitive sparks start flying.

The bid to acquire the Queensland-based renewable and remote-area energy supplier Energy Developments Limited (‘Energy Developments’), is heating up. A consortium of private equity investors led by Archer Capital Pty Limited (‘consortium’) is seeking to acquire 100% of Energy Developments, while another party has indicated its intent to purchase the company’s landfill gas power operations in the UK and France. Energy Developments did not disclose the identity of the latter party, but noted that it had earlier discussions with a “…international infrastructure specialist fund manager.” There were reports suggesting that this might be a reference to 3i Group plc.

Following this, Energy Developments recently disclosed that the consortium is proposing a price of A$2.8 per share for 100% of the company. The tempo of the disclosures points to an intense competition between the consortium and the unidentified infrastructure specialist to seal this deal.

Comments

Investors have a nose to the ground for quality assets. After bowing out from the bid to acquire Oriental Brewery, Affinity Equity Partners (‘Affinity’) is in talks with the brewer’s new owner, KKR, for a stake in the beverage company. The deal size could be around US$400 million, and Affinity would become the second largest shareholder of Oriental Brewery. Despite scorching competition for quality assets, green shoots of large deals are sprouting on the private equity landscape, and investors are showing a willingness to participate in the long-awaited Spring.

India Corner - Analysis

Conscientious Consummation

Investment focus narrows as capital contracts

By all accounts, the first half of 2009 has been a difficult period for the Indian private equity industry. Once flush with private equity capital, only US$2.1 billion has trickled in during the first six months. This, compared to US$5.1 billion that flowed in during the same period in 2008, is a withering statement on the extent to which the fund pool has dried up.

On the investment front, the trend is equally sobering. During the first six months of the year, a measly US$935.6 million in known transactions occurred, a chilling decline of nearly 80%.

In the face of the acute capital shortage, private equity investors have exercised extreme caution and narrowed their focus to three principal investment sectors: infrastructure, healthcare and information technology (inclusive of telecommunications). Together these sectors accounted for 55% of the US$935.6 million transaction total recorded for the first half. In particular, business operations that fall within the category of Socially Responsible Investing (SRI) have managed to secure funds in this time of capital drought.

The 2 billion rupees (US$42.6 million) commitment by IL&FS Investment Managers to Ramky Enviro Engineers Limited (‘REEL’), a waste management company, is the largest deal in the SRI sector. At a time when investors are hesitant to loosen purse strings, the commitment to REEL speaks to investors’ belief in the present and potential value of the waste management sector. REEL focuses on industrial, municipal and biomedical waste management. It has 12 subsidiaries with projects across India, West Asia and Singapore.

Since its establishment in 2008, Axis Private Equity Limited (‘Axis PE’) has been singing the praises of environmental investing. It teamed up with IL&FS Financial Services Limited (‘IL&FS Financial’) and invested an aggregate 900 million rupees in Shalivahana Green Energy Limited (‘Shalivahana Energy’), a clean energy company. Shalivahana Energy is a renewable energy company focused on biomass and small hydro power projects. It has four such projects with a combined capacity of 35MW. Shalivahana Energy was Axis PE’s second deal in the environmental industry. Last year, the firm committed an approximate US$15 million in Vishwa Infrastructure and Services, a water treatment operation.

More recently, there have been reports that Green Infra Ltd., a joint venture between IDFC Private Equity and Emergent Ventures India, is in talks with British Petroleum to acquire the giant petroleum company’s wind assets in India for 4.6 billion rupees.

The fact that IDFC Private Equity has set up a separate unit for SRI underscores the potential market size of this industry sector. It is significant to note that SRI accounted for US$103.9 million of the transactions which took place in the first half of 2009, represented 11% of the total. For the same period a year before, SRI was only 4% of the transaction total. In addition to the clean tech sector, microfinancing has been successful in attracting private equity capital during the period. Although the transaction sums have not been significant, a fairly typical example being the US$4.25 million committed to Grama Vidiyal Microfinance Private Ltd. by Elevar Equity, MicroVest and the Amar Foundation, India has become the hub of microfinancing thanks to private equity. Investing in the microfinance segment is no longer considered philanthropy. According to local reports, the two largest microfinance institutions in India, SKS Microfinance and SHARE Microfin, are planning public listings in the next two years. Both had earlier raised funds from private equity investors, including Sequoia Capital India, Elevar Equity and Khosla Ventures and Aavishkaar Goodwill India Microfinance Development Company.

While the dramatic drop in capital directed at Indian private equity in the first half is unwelcome news, it is encouraging to see that, in a time of adversity, investors are nonetheless directing capital to operations that not only promise sizeable capital returns but also endeavour to improve the future living standards of India’s population.