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November 2009 Issue
In Brief

Differing PE Dynamics in Asia’s two most developed economies that underscore the complexities of private equity investing in the region. A review of Oz and Japan a year after the fall of Lehman Brothers and two pertinent case studies that highlight risks and rewards in these two markets Feature
Institutions - Key to Clean Energy drive in this third part of the Green Agenda Special Report Special Report
LPs’ Crusade for Changes Takes momentum as their central organ advances a long list of revisions in partnership terms. But some remains skeptical Institutional Investors – Analysis
Japanese LPs Take Global outlook as illustrated in Itochu’s recent commitment Institutional Investors – Funds
SWFs Buying Up Properties across the globe with Asia being a favoured destination that shed light on sovereign wealth funds’ broadening scope Institutional Investors – Investments
Timing Launches of Funds is crucial in successful fund raising efforts as illustrated in recent closings of funds General Section – Funds
PE Capital Flows to SE Asia while abstaining from markets in Oz and Japan General Section – Investments
Microfinancing Gains Attention as India prepares for listing of its largest microfinancing company that will help investors to better understand this sector India Corner– Analysis
Investors Loosen Purse Strings as economic indicators in India portend to robust economic growth ahead India Corner– Investments
Content

Case Study (1)
Case Study (2)
Special Report

Institutional Corner
News
Analysis
On the Threshold of Change Funds
Investments

General Section
News
Funds
Investments
North and South

India Corner
News
Analysis
Investments
Divestments

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

One Economy
Two Markets

It was the largest single one-time exit in Australia for a private equity investor, and the biggest initial public offering in that country since April 2007. On 2nd November, Myer Holdings Ltd. (‘Myer’), controlled by TPG, made its debut and raised A$2.1 billion (US$1.8 billion). The global private equity firm clocked a return of capital of over A$1.5 billion and set a new performance record for Asian private equity. Myer’s listing was not only a roaring success for the fund management firm, but was also a powerful injection of confidence into the industry. It is particularly meaningful as the global economy emerges from the worst financial crisis in a century.

Yet just weeks before Myer’s listing, in Japan, Willcom, Inc.’s (‘Willcom’) application for Alternative Dispute Resolution (‘ADR’) process had been accepted by the Japanese Association of Turnaround Professionals. The ADR programme is a corporate rehabilitation scheme for ailing companies. In 2004, The Carlyle Group took control of Willcom in a transaction that placed the enterprise value of the personal handyphone system operating subsidiary of KDDI Corp. (‘KDDI’) at ¥220 billion (US$2.0 billion). It was the largest buyout transaction for that year.

The contrasting events taking place in Australia and Japan underscore the sharply different private equity dynamics in these two markets, even though both share many similarities. They are two of Asia’s most developed economies and have firmly established themselves as the region’s most fertile buyout markets. Despite Australia’s relatively smaller economy, it overshadowed Japan in its ability to attract private equity investors to commit capital to the country. In the three years ending December 2008, on average each year the private equity transactions total accounted for 1.08% of Australia’s gross domestic product. That percentage dwarfed the average 0.24% recorded by Japan. It is a striking statement of investors’ choice of investment destinations.

A year after the fall of Lehman Brothers, and as the globe observes signs of economic recovery, Myer’s listing has further differentiated the dynamics of Australia’s private equity market from those in Japan. Within the Asian economies, no two buyout markets that are both members of the Organisation for Economic and Co-operation Development (‘OECD’) could be so different....

Institutional Corner- Analysis

On the Threshold of Change

Limited partners ask for change in fund management

It takes a destructive power of the magnitude of the recent global financial crisis to bring about a united voice from limited partners. The US-based Institutional Limited Partners Association (‘ILPA’) has recently tabled a detailed proposal (‘Proposal’) seeking a host of changes that advocate greater alignment of interests between the limited and general partners.

The Ideals

One of the major issues that has long ignited controversy is the prevailing management fee structure. The ILPA, the organ for US-based limited partners, appears to acknowledge that the prevailing fee management structure is no longer an equitable framework for limited partners that are, in fact, the providers of capital. It is suggesting a revised structure that would only “cover reasonable operating expenses”, whereas the current fee structure is deemed as “excessive”. It also champions that a larger portion of capital in the fund come from general partners, to avoid an imbalance of interest between investors and managers of a fund.

The Proposal mirrors the swelling discontent among limited partners in citing the inconsistency of investment focus as one of the governance issues. It would appear that the trend of general partners failing to adhere to the investment strategy described by them when raising funds is becoming a disturbing issue to members of ILPA. As such, it is asking for “stronger rights” be given to limited partners “to suspend, terminate or dissolve a fund” .

ILPA’s Proposal has received powerful backing. In September, the largest US public pension plan sponsor, California Public Employees’ Retirement System (‘CalPERS’), issued its endorsement of the Proposal made by ILPA.

The Heavy Weights

CalPERS has every reason to support the Proposal. A recent report by Bloomberg revealed that three of the largest US state pension funds have not been able to record any paper gains from their investments in private equity since 2000, with CalPERS being one of them.

Since 2000, US pension funds had contributed a record US$1.2 trillion to private equity firms. In addition to CalPERS, the Washington State Investment Board and the Oregon Public Employees’ Retirement Fund have been the other two largest public pension fund investors. Since the beginning of this decade, the three had allocated a staggering US$53.8 billion to private equity funds. So far, these three state pension funds have just managed to rake in US$22.1 billion, less than half of that they have put in since 2000. The report is just one of the many that have been unreserved in painting the massive losses suffered by the US pension industry after a decade of generous allocations to private equity funds.

The Real World

In theory, ILPA’s Proposal could revolutionalise private equity as an asset class. In reality, it would be more than a Herculean task to rewrite the industry’s management fee codes. One of the forces behind the Proposal, a leading corporate pension fund, has decided to conceal their own identity, so as to maintain cordial relationships with general partners. “It is very frustrating”, remarked a member of ILPA who has been a proponent of management fee changes. “Considering what we have struggled for over the terms (management fee terms)……we are disappointed that we can’t get better support for this initiative”, this member stated.

A veteran institutional investor, who was previously an investment manager at a large US institution and is currently heading the private equity programme of an Australian institution, observed that the Proposal is an illusory set of goals. Citing past efforts to bring in a “fairer” management fee structure, in a resigned tone this limited partner described the latest effort by ILPA as “ideals that are detached from the reality”. He explained that, as fund investors are eager to partner with top quartile funds who are in a commanding position, this effectively cripples limited partners’ ability to bargain for better fund management fee terms. To him, it is a mere chanter to demand fund management to adhere to strict governance codes.

But Mr Hugh Dyus, managing director of the fund of private equity funds in Macquarie Funds Management Hong Kong Ltd., does register seeing changes since the fall of Lehman Brothers in September 2008. “Whilst there remains strong resistance to changing the headline magnitude of management fees and carried interest, general partners have become much more flexible in respect of the details around these terms and other non-price terms” Mr Dyus commented. This is particularly significant, as Macquarie Funds Group is a relatively small investor compared to US institutions. Its commitments to Asian private equity funds range between US$5 million to US$25 million.

Comments

As of mid-October, more than 50 institutions have endorsed the Proposal. One institutional investor who began to invest in Asian private equity more than 15 years ago believes that while institutional investors will not be able to enforce all of the suggested guidelines with one partnership, it is nonetheless a “starting point.” It could also be interpreted as an indication of limited partners’ continued interest to make allocations to private equity. In their opinion, with such an all encompassing overhaul there is definitely room to improve private equity’s returns.

General Section - Investments

North and South

Deal dynamics differ in Asia’s fragmented markets

In all aspects, it has been a rather testing year for private equity investors. For those that are searching for deals outside of the China and India markets, the challenges have been quite daunting. Both Australia and Japan, two of the most developed economies, despite different levels of development in their own private equity markets, are set to record their most modest transaction totals in recent years. But in Southeast Asia where investors have largely abstained from deploying capital for the past decade, a revival of investors’ interest is conspicuous.

Since the beginning of the year, Australia and New Zealand recorded an estimated US$1.1 billion in transaction total, excluding those undertaken by institutional investors, a record low since 2004. This, compared to US$3.3 billion for the entire 12 months in 2008, indicates that investors did not have much success in clinching deals. On a comparative basis, private equity investors have greater success in deploying capital in public equities, or in private investment in public equity (‘PIPE’) situations. In the first ten months of the year, 26 deals representing US$1.1 billion were known to have been completed in Australia. Nearly 60% of the transaction numbers were consummated with those that were or still are publicly-listed. Significantly, PIPE deals accounted for almost 70% of the aggregate transaction amount.

During the year, both Warburg Pincus and Archer Capital with HarbourVest Partners were the largest investors in two separate PIPE deals, the A$375.9 million (US$312.2 million) in Transpacific Industries Group Ltd. and the A$405.7 million in MYOB respectively.

But as the Australian Ordinary Index commenced an obvious rebound by the end of October, the tune of selling companies has changed. Catalyst Investment Managers Pty. Ltd.’s A$23.4 million recapitalisation proposal to PearlStreet Ltd. was rejected when the target company decided to journey with a strategic buyer. It will be a Herculean task for Pacific Equity Partners to win control of Energy Developments Ltd. (‘Energy Developments’). The estimated A$409.2 million deal is already being rebuffed by the board of the target company, an unfriendly prelude to this impending takeover.

In Japan, Asia’s largest economy, the deal landscape has been equally bleak. The first ten months of the year clocked a transaction total that aggregate to US$1.6 billion, also a record low since 2005. At the end of October, the much-anticipated consummation of Bellsystems24 has yet been finalised, which could have shore up Japan’s transaction total by around an additional US$1 billion according to reports. Even when The Carlyle Group made known of its recent acquisition, the takeover of Broadleaf Co., Ltd. (‘Broadleaf’), one of the largest auto after-market software providers for the repair and inspection industry in Japan, the buyout firm has left the market to guess the deal size. All these point to the rather sharp change in Japan’s deal market which boasted US$13.5 billion in transaction aggregate last year.

Enchanted by SE Asia

For the first time, the transaction total garnered by the Southeast Asia market rivals that recorded in Australia and is close to that for Japan. Since the beginning of the year, this economic region in the south region logged around 28 deals that amounted to US$1.1 billion. On average, each transaction attracted US$38.6 million and speaks to the level of optimism that investors are displaying to the region.

First Reserve Corp. having announced its maximum US$500 million allocation for KrisEnergy Holdings Ltd, the commitment that brought Indonesia to the limelight was the US$1.9 billion pledged by China Investment Corp. to purchase PT Bumi Resources Tbk. debt. It was by far the largest debt commitment undertaken by the sovereign wealth fund for a Southeast Asian company.

In this revival of interest in Southeast Asia, Vietnam is a clear favourite. In the weeks leading up to the listing of Masan Group Corporation (‘Masan Group’), the country’s leading bank and food conglomerates, TPG and BankInvest invested a total of US$50 million in Masan Group. It is the largest transaction sum for a Vietnam-based country by a group of foreign investors and is an unwavering show of confidence on the growth opportunities in Vietnamese companies.

The varying different market dynamics is another affirmation of the complexities of Asia’s rather fragmented economy.

One Economy Two Markets