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January 2010 Issue
In Brief

Monumental Changes to Asian PE landscape in 2009, during which institutional investors took steps to be more engaged in private equity; while general partners demonstrated their crisis management skills. A review of 2009 in which capital realisation record was among one of the best that further enhances Asian private equity Feature
2009 Calender of Major Events – a review of major events in each of the 12 months in 2009, that sheds light on the immense changes during the year as the shadow of the global financial crisis began to wane 2009 Summary
Canadian Institutions Attracted to Oz as the bid for Transurban Group with a value of A$6.78 billion could be revived that suggests a special bond between the two economies Institutional Investors
Oz Taxman Rules PE Income assessable that will redefine the future return results of private equity investment in Australia, especially for foreign investors G eneral Section – Commentary
Buyout Life Cycle in Japan closely resembles the fate of Shinsei which will be merged with Aozora Bank during the year General Section – Analysis
Resource Rich SE Asia has attracted capital with assets in the commodity sector accounting for 73% of the 2009 transaction total in this economic region General Section – Investments
Infrastructure Financing in India encounters setbacks caused by global economic woes and delays in project schedules as well as cost overruns India Corner– Analysis
Content

Major Events in 2009

Institutional Corner
News
Analysis

General Section
News
Commentary
Analysis
Buyouts and Shinsei
Investments
Divestments

India Corner
News
Analysis
The Potholes
Investments

Subscriber Weekly Summary
Summary
Stock Watch
Index & Exchange Rates

12 Months

In finance, 12 months is a long time. By all accounts, 2009 was a momentous year for Asian private equity. It began with consolidation of funds, portfolio companies appointing voluntary administrators, and high level management turnovers; and ended on a high note with a long list of divestitures, with some recording exhilarating returns of capital. While fund raising and investment activities recorded substantial declines, down by 55% and 57% respectively, return of capital at US$14.7 billion, has not only surpassed the US$10.2 billion for 2008, but was also the third best year since 2004. No 12 months have witnessed such monumental and extensive changes of the fortunes of private equity in Asia.

The Institutions

In all past crises, the 1997-1998 Asian Financial Crisis, the period after the burst of the technology bubble beginning in 2000 and the deadly severe acute respiratory syndrome in 2003, Asia’s institutions have taken a subdued role. But since the onslaught of the global financial crisis, Asia’s institutions began to assume a more assertive role. Yet it was those institutions affiliated with their respective governments that have been most active, suggesting private equity has successfully gained the attention of Asian governments.

In February, Australia’s Future Fund joined hands with its Singapore counterpart, GIC Special Investments, to make the strategic move of taking a combined 7% interest in Apax Partners LLP. Through such a partnership with one of the best known global private equity firms, both institutions now have access and knowledge of the global private equity landscape.

During the year, the Korea Investment Corp. (‘KIC’) conferred upon Partners Group the mandate to manage its global secondary private equity programme. KIC also formed a strategic partnership with QIC Ltd, one of Australia’s largest institutional investors with a global focus. The Korea Development Bank adopted a similar strategy. It announced a partnership with Kohlberg Kravis....

General Section- Analysis

Buyouts and Shinsei

Shinsei’s journey has been representative of buyout development in Japan

It was exactly a decade ago when Japan entrusted its collapsed Long Term Credit Bank of Japan to a consortium of investors led by the US-based Ripplewood Holdings LLC (‘Ripplewood’). The restructured bank, in which Ripplewood put US$1.1 billion in equity capital, was appropriately renamed as Shinsei Bank, Ltd. (‘Shinsei’), meaning “new life”. Ironically, Shinsei’s journey bears similarity to buyout development in Japan. That Shinsei has been dragged into the vortex of the US subprime and faces the prospect of being merged with Aozora Bank, Ltd., signals that a new era in private equity is waiting for Japan.

Life in Buyouts

Following Ripplewood’s high profile takeover of Shinsei, the concept of buyouts began to stir, but did not gain real momentum until 2004 when Shinsei was listed on the Tokyo Stock Exchange. A year later, in 2005, foreign private equity investors completed their exit from Shinsei and clocked a return of more than six times their original commitment. Shinsei became Asia’s symbol of buyout success.

Buyouts in Japan first approached US$10 billion in 2006 when the fund pool for this investment segment surged to US$2.67 billion; while its transaction aggregate towered to US$9.97 billion. In the same year, Carlyle Japan Partners II, LP, which had raised US$1.9 billion, was not only the largest buyout fund raised for Japan, but also for all of Asia during that year. Skylark Co. Ltd., which commanded US$3.3 billion in enterprise value, was among the largest transactions undertaken by buyout firms. Despite its nascent history in adopting the concept of taking control of assets, Japan has firmly consolidated its position as a leading buyout market in the region. Coincidentally, in April 2006, Shinsei’s share price reached its peak, with its shares changing hands at ¥888 (US$7.4) each.

Shinsei’s success has also attracted a herd of global firms arriving in Japan to scout for opportunities, with Unitas Capital Pte. Ltd., then known as J.P. Morgan Partners Asia and CVC Asia Pacific being the pioneers. In the years that followed Shinsei’s spectacular listing, Kohlberg Kravis Roberts & Co. as well as Bain Capital Partners LLC also joined the growing pool of foreign investors in the Land of the Rising Sun. In the past six years, on average, more than half of the amount committed to Japan’s buyout transactions were participated by foreign investors, either in partnerships with their local counterparts or without the domestic parties.

Sun Dims

When the US subprime unravelled, Shinsei revealed its exposure amounted to no more than US$500 million. Shinsei’s plight appeared to coincide with foreign investors’ less optimistic assessment on the future of Japan. In early 2008, the UK-based Intermediate Capital Group plc, the leading mezzanine finance provider, had decided to bolt its doors in Japan, indicating a lack of business opportunities. In the second half of 2008, CVC Asia Pacific abstained from refinancing Skylark, suggesting the global firm’s rather grim assessment of the future economic prospects of Japan. Last year, when Shinsei confirmed that it would be merging with Aozora Bank, coincidentally Unitas Capital also concluded its ten-year presence in Japan and deleted it from its regional network. In 2009, foreign firms had committed US$2.3 billion in Japan’s buyout market, the third lowest amount since 2004. Foreign investors participated in US$1.1 billion and US$1.3 billion in controlled deals completed in Japan in 2005 and 2007 respectively.

Comments

Yet Japan has been home to some of Asia’s best returns. In addition to Shinsei, when Lone Star sold the Tokyo Star Bank to Advantage Partners, it clocked a return of more than US$2.4 billion, representing an estimated 6.8 times its invested capital. Despite the economic downturn, Panasonic Corp.’s impending acquisition of Sanyo Electric Co. Ltd. (‘Sanyo’) will help its existing private equity investors to clock over US$4.5 billion for their partial divestment.

When the curtain fell on 2009, one of Japan’s oldest fund management firm, MKS Consulting Ltd. (‘MKS’) will be history. It had long ceased its investment programme and had completed its exit programme during the year. Once the pillar of Japan’s buyout market, MKS’s withdrawal from the market signalled an end to an era in which Mr Nobuo Matsuki, a founder of MKS, had been the prime force.

Yet as Shinsei is to merge with Aozora Bank, it symbolises a new lease on life is awaiting for Japan’s direct equity investors to seize. The country is a frontrunner in clean technology, which is one of the industries that is expected to chalk up very healthy growth rates in the coming years. According to the Ministry of Environment, Japan’s environment market will reach US$422 billion this year, representing a 58% increase over that recorded for 2000. Prime Minister Yukio Hatoyama has made climate change policy his signature topic on the world stage.

The country’s corporate giants are counting on energy-efficient technologies to shore up their balance sheets. Sanyo has been producing and supplying automobile giants such as Ford Motor Company and Honda Motor Co., Ltd. with its nickel-metal hydride batteries for hybrid electric vehicles. This is one of the reasons that Panasonic decided to acquire Sanyo. Panasonic itself has been a champion of green technology. As far back 1972, it established its Environmental Management Office and has been ranked as the “most environmentally friendly manufacturer” in Japan by Nikkei. In his first policy speech delivered in the Diet after his election victory, Prime Minister Hatoyama promised changes for Japan, on a scale similar to the 1868 Meiji restoration in which feudalism was abolished and a new social system began for the land know for its cherry blossoms. The next “Shinsei” in Japan’s private equity industry rests with Prime Minister Hatoyama’s policy.

India Corner - Analysis

The Potholes

Hiccups in India’s infrastructure financing agenda

India, Mr P. Chidambaram, was frank when he pointed out that “the most glaring deficit in India is the infrastructure deficit…”. In the following year, his nation began in earnest to pursue improvement of its crippling infrastructure. Its 11th Plan, which will end in 2012, stated that the country would need US$500 billion to develop its infrastructure. Since 2007, the private equity community has positively responded, and announced the launches of related funds: if all their intended target sizes were to materialise, it would bring in a staggering US$16.1 billion to help finance infrastructure development in the world’s second most populous nation.

Building Capital

Since 2007, infrastructure funds have been the main feature of India’s private equity fund pool. Yet, in the past 36 months less than one-third, or around US$5.5 billion, has been actually raised, suggesting India’s road to sufficient infrastructure financing has been full of potholes.

One of the factors that has substantially derailed India’s infrastructure budget estimates was the onslaught of the global financial crisis. The ambitious US$5 billion India Infrastructure Financing Initiative (‘Initiative’), sponsored by Infrastructure Development Finance Corp. (‘IDFC’) had to curtail its lofty goals. A consortium of investors, including Citigroup Inc. and The Blackstone Group, was unable to fulfill its original plans in providing US$250 million in total to this fund. The Initiative had the grand scheme of enlisting India Infrastructure Finance Company Ltd. (‘IIFCL’) to provide loan facilities of up to US$3 billion. But the financial crisis has also depleted IIFCL’s coffers. In the later part of 2009, it sought assistance from the Asian Development Bank (‘ADB’) and World Bank which then provided an aggregate US$1.9 billion in loans to IIFCL.

Rugged Investment Path

Despite all the fanfare about infrastructure financing, infrastructure investment accounts for an average of 28.5% of India’s investment aggregates for the three years ending 2009. The infrastructure sector regained the trophy to become the most popular destination for private equity investors in India in 2009 (fig. 16). There are encouraging signs that private equity investors are prepared to deploy substantially large investment amounts to India’s infrastructure projects. In 2009, the average deal size for infrastructure projects was US$40.6 million, a 16.8% increase to the US$36.8 million recorded for 2008.

The investment path for infrastructure projects can be quite rugged. In 2006 IDFC Private Equity (‘IDFC PE’) took a stake in the Delhi International Airport Pvt. Ltd. (‘Delhi Airport’) which had suffered delays in expanding its facilities. In May 2009, IDFC PE decided to swap its shares in Delhi Airport for shares of the latter’s parent company, the US$2.6 billion GMR Infrastructure Ltd. (‘GMR’), and currently holds less than a 1% stake in this infrastructure behemoth. In GMR’s latest financial results for the six months ending September 2009, it revealed a 54% plunge in its net profit to 761.4 million rupees (US$15.4 million), from 1.6 billion rupees for the same period in 2008.

Adani Power Ltd., which had earlier received US$242 million from 3i Group plc and was the first energy company backed by the private sector to successfully gain a quoted status on the Indian stock market, has yet to be profitable.

Comments

A recent report by McKinsey & Co. on Indian infrastructure financing revealed that 60% of India’s infrastructure projects are plagued by time and cost over-runs. It warned that, if such trends continue through to 2017, India could suffer a loss of US$200 billion representing around 10% of its gross domestic product. Neither the ADB nor World Bank were optimistic that capital from the private sector could help to propel India’s enormous appetite for infrastructure financing. In echoing the ADB’s sentiment, the World Bank pointed out that since the onset of the global financial crisis in late 2008, “long-term financing to sustain the development of infrastructure has become difficult to obtain”.

There are however pleasing developments of late. In the last quarter of 2009, Emergent Ventures India and IDFC PE committed over 1.7 billion rupees and assumed full control of BP Energy India Pvt. Ltd. It is a reassuring sign that India’s domestic infrastructure investors are now ready to undertake substantial deployments, and to assume full control of an alternative energy company. Significantly, the transaction was able to garner a number of banks to finance this deal, which portends a rising level of commitment from financiers.

The five-year old clean energy maker, Greenko Group plc (‘Greenko’), is astute. It first sought seed capital from the France-based Aloe Private Equity S.A.S. before enlisting the KSK Energy Ventures Pvt Ltd. as a strategic investor. So far, it has raised an aggregate US$64.5 million from both financial and strategic investors that would provide it not only capital, but also industrial expertise. Its listing status on the Alternative Investment Market of the London Stock Exchange also provides opportunities for it to raise capital from the public. It is steps such as this taken by small companies like Greenko that will help to shore up the pool of private capital to finance Indian infrastructure projects.