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February 2010 Issue
In Brief

Intra-Regional Activities Grow as the world’s biggest economic block was established that signals a new era of investment movements Feature
Volcker Rule’s Impact Minimal on Asian private equity industry as US banks account for small portion of Asian fund sources Analysis
Seoul’s Institutions and Chaebols remain closely knitted as illustrated in Korea Development Bank’s role in Kumho Asiana Group’s current plight Institutional Investors - Analysis
Axiom II’s Final Closing Affirms institutional faith in Asia’s emerging pool of independent fund of funds Institutional Investors – Funds
Control Deals with Substantial sizes clinched that portend a year of vibrant activities but the past billion dollar deal size is conspicuously absent General Section – Investments
Mixed Exit Results Indicate varying fortune encountered by some of the most seasoned investors General Section – Divestments
India’s Auto Industry Poised to grow although so far negligible amounts from private equity investors India Corner– Analysis
Valuation of a ‘Green’ Co. Escalates that underscores environment-related companies are gaining investors’ favourable assessment India Corner– Investments
Content

Analysis
Banking on the Banks

Institutional Corner
News
Analysis
Funds

General Section
News
Investments
Divestments

India Corner
News
Analysis
The Next Road to Growth
Funds
Investments
Divestments

Subscriber Weekly Summary
Summary
Index & Exchange Rates

Paradigm Shift

The world’s biggest free trade zone was formally launched at the beginning of the year. The ASEAN-China free trade area (‘FTA’), a concept that was first conceived more than eight years ago, will eliminate trade barriers and bring about greater economic integration between China and the six founding ASEAN nations, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. This latest trade block to emerge on the Asian economic map is formidable. It will cover a market of 1.7 billion consumers, with a combined gross domestic product that exceeded US$6.2 trillion at the end of 2009. Between 2000 and 2008 trade between the ASEAN and China exploded from US$39.5 billion to US$192.5 billion.

In preparation for a new phase of economic collaboration with the ASEAN, China displayed its commitment through the launch of a US$10 billion China-ASEAN Investment Cooperation Fund (‘China-ASEAN Fund’). Already the Export-Import Bank of China has pledged US$300 million to this fund. The sheer size of this fund is an emphatic display of China’s determination to journey with the ASEAN as it advances further in its economic development.

At a time when the economies in both the USA and Europe are undergoing structural overhauls, and Asia is on the path to economic prosperity, the arrival of the FTA will only further accelerate a re-alignment of the region’s economic dynamics with those in the West. Increasingly, investors in Asia are pursuing opportunities within the region, instead of venturing abroad. In 2008, Asia-based private equity investors participated in 41 transactions that amounted to US$2.94 billion for those companies outside of Asia. But in 2009, the figures plunged to ten and US$180 million respectively....

Analysis

Banking on the Banks

Private equity funds can no longer rely on US banks for capital

If 2009 saw the beginning of regulatory constraints on private equity, then 2010 appears to signal that more of such policies will be forthcoming. In late January, United States President Barrack Obama announced the “Volcker Rule”, which advocates basic banking services, a focus on their core purpose, and avoidance of risk-taking products. Under this new guideline, US banks may no longer be permitted to own and invest in private equity and hedge fund groups. For the private equity industry in the USA, the proposed regulatory framework could not have come at a worse time, as institutional investors in the US remain handicapped by the shortage of funds caused by the financial storm in 2008. Citigroup Inc. could be among the first to act upon this axe wielded to private equity: it is reportedly planning to sell or split off part of its alternative investment units, including Citi Private Equity, Hedge Fund Management Group and the real-estate unit Citi Property Investors. While US banks have long been the pillar investors of private equity funds, the “Volcker Rule” is unlikely to have substantial impact in Asia.

Between 2006 and 2009, there were 150 allocations made by banks from all markets to Asian private equity funds. Of this number, US banks accounted for an estimated 11%, while institutions in the region took up the lion’s share, accounting for 74%. Thus US banks have not been a major source of capital for Asian private equity funds. In addition, thanks to a period of adjustments that followed the technology bubble, a number of Asian private equity fund management firms that were previously affiliated with US banks have either become independent or are no longer operating in the market.

Weaning Period

Currently, there are 37 funds of funds operating in Asia, with three known to be sponsored by US banks: Goldman Sachs, JP Morgan Chase & Co. (‘JP Morgan’) and Morgan Stanley. Among them, only Goldman Sachs has been making allocations to funds in the region through its dedicated Asian fund of funds, while capital allocations from the other two come from either their global accounts or from their own balance sheets.

In the general partners segment, with the exception of Morgan Stanley Private Equity Asia, virtually all have successfully assumed independent status in recent years. In 1999, Citigroup partnered with the London-based CVC Capital Partners to form CVC Asia Pacific. Ten years later, in 2008, the joint venture relationship was dissolved. Currently, CVC Asia Pacific is a wholly-owned subsidiary of CVC Capital Partners.

In January 2009, the Hong Kong-based Unitas Capital completed its final phase of becoming an Asian independent fund management firm, concluding a decade of affiliation with JP Morgan, directly and indirectly. In 1999, sponsored by JP Morgan, Unitas Capital was the Asian unit of the bank’s global private equity arm, then known as JP Morgan Partners, LLC. In 2005, JP Morgan spun off its private equity division. The management team of the then JP Morgan Partners, LLC formed CCMP Capital Advisors LLC, with CCMP Capital Asia being its affiliate in the East. At that time, JP Morgan also committed to invest 24.9% or up to US$1 billion into a new fund that CCMP Capital Advisors plans to raise.

Making Deposits in Asia

The US banks have long been active investors in Asian private equity funds. Among them, Goldman Sachs has been the most audacious in making allocations to funds, especially to China funds. When Hopu Investment Management Co. was formed back in 2008, there were reports that suggested Goldman Sachs accounted for US$300 million of the US$2.5 billion Hopu USD Master Fund I, LP. As one of the earliest foreign banks to enter the China fund market, Goldman Sachs possesses commanding knowledge of the China fund landscape. It is known to be one of the earliest investors in NewMargin Ventures, which first commenced to raise funds from foreign investors in the late 90’s. When Hony Capital began to beckon foreign investors when it launched its second fund in 2004, Goldman Sachs was also among the small party of foreign investors.

Comments

In the global banking sector, Asian banks have long been one of the staunchest champions of private equity. India’s ICICI Venture Funds Management is perhaps the oldest fund management firm backed by a banking institution, not only at home, but also for the region.

For more than 15 years, Singapore’s United Overseas Bank Group has been a loyal disciple of private equity. It recently broadened its private equity activities into the fund of funds area, in addition to having its private equity investment arm. The Lion City’s DBS Group Holdings Ltd. returned to private equity after a hiatus. In the late 80’s, it was a principal investor of Transpac Capital. In February 2009, it launched its own private equity fund.

Currently, China’s banking groups are among the most active in setting up private equity arms. Among them, the US$10 billion China-ASEAN Investment Cooperation Fund sponsored by Bank of China is the most ambitious undertaking by an Asian bank.

In a recent interview with the Financial Times, Dr Tony Tan, chairman of the Government of Singapore Investment Corp., said he believes that Asian banks are presented with a “once in a lifetime chance” to assert their position in the global financial industry. While President Obama’s latest chide to the US banking industry will start a wave of structural overhaul activities in the US private equity industry, it is also an opportune time for Asian banks to learn from the blunders of their US counterparts.

India Corner - Analysis

The Next Road to Growth

India’s car industry poised to grow

In a recent article authored by Mr Kamal Nath, India’s Minister of Road Transport and Highways, and published by The Wall Street Journal, Mr Nath pointed to good roads as a central agenda in improving the country’s infrastructure. “We need to build them (roads) quickly to maintain our edge as Asia gets set to lead the world to economic recovery”, Mr Nath said as he encouraged the inflow of foreign capital to India. By June this year, Mr Nath’s ministry hopes to award US$20 billion worth of contracts and in the subsequent 18 months, an additional US$50 billion.

Ironically, India boasts the second largest road network in the world, with approximately 3.3 million kilometers. However its national highways constitute only about 2% of the road network but carry about 40% of the total road traffic. India’s national road networks account for 65% of the freight and 80% of the passenger traffic. According to the World Bank, for every one rupee invested in the highways sector, it would yield seven rupees in economic value.

With New Delhi’s focus on improving its roads, there are signs that the country’s automobile industry could be the next driver of its economic growth. According to Mr Pawan Goenka, president of the industry association, the Society of Indian Automobile Manufacturers, in 2007 India’s automotive manufacturing was a US$34 billion industry, but by 2016, it is expected to soar to US$145 billion, accounting for more than 10% of the country’s gross domestic product.

Significantly, when Tata Motors Ltd. launched its Tata Nano, which sells at US$2,250 each, the world’s cheapest four-wheel automobile, it revolutionised the global car industry. The arrival of Tata Nano also coincided with an adjustment of the global economy in which small cars are favoured by increasingly budget conscious consumers. At home, small cars are making up nearly two-thirds of the total car sales in India. Today, India has become the second largest market for small cars, overtaking Brazil.

Driven by Private Equity

Despite the fact that India allows a foreign auto manufacturer to own 100% of its subsidiary in the country, only a small pool of foreign private equity investors have committed capital to India’s automobile industry. Between 2005 and 2009, US$777.2 million was recorded, representing a petite percentage of the transaction aggregate for this period. Yet private equity capital has played a key role in providing the vital fuel for some of India’s leading home-grown auto makers to advance into the global network.

In December 2006, when the subject of the deteriorating environment began to grip the minds of political leaders, Draper Fisher Jurvetson and Global Environment Fund committed an aggregate US$20 million to Reva Electric Car Co. (‘Reva’). Headquartered in Bangalore, Reva is a joint venture between Maini Group of India and the US-based AEV LLC. Reva can accommodate two adults in the front and two children in the rear. Last year, Reva extended its franchise to the globe when it joined forces with General Motors to manufacture an electric version of General Motor’s Spark compact cars. It could also soon drive Fiat SpA’s manufacturing plant in Sicily into its corporate garage. Currently, Reva is in discussions with Cape-Natixis SGR SpA, an Italian private equity firm, to jointly bid for Fiat SpA’s plant in Sicily. The investors want to convert the plant to make electric vehicles for the local market

Among the group of automobile companies that had earlier raised funds from private equity investors, the Amtek Group, through its two flagship subsidiaries, Amtek Auto Ltd. (‘Amtek Auto’) and Amtek India Ltd. (‘Amtek India’) had garnered an impressive aggregate US$225.7 million from a handful of investors.

Between 2006 and 2008, ChrysCapital and Warburg Pincus invested over US$150 million in Amtek Auto. Then between 2006 and 2009, ChrysCapital, Kotak Mahindra Capital Company, New Vernon Capital and Warburg Pincus invested a total of US$75.7 million into Amtek India. While Amtek Auto makes auto components in engine, transmission and suspension systems, its sister company, Amtek India manufactures auto components with a special focus in iron castings.

Of the two subsidiaries within the Amtek Group, Amtek Auto has been leaving its tire prints in the USA and UK where it had made acquisitions as well as streamlined its operations. In 2008, Amtek Auto took control of the German-based Zelter GmbH, one of the three largest manufacturers of turbocharger housings in Germany that boasted a marquee list of customers, including Ford, Audi and Volkswagen.

Amtek Auto has been steadily enlarging its market share at home. In the fiscal year ending June 2008, India accounted for 52% of Amtek Auto’s revenue. The percentage grew to 58% in the following 12 months.

Comments

India’s automobile manufacturing industry, especially in the small car sector, is poised to enter a period of boom. According to the India Brand Equity Foundation, a non-profit organisation that tracks recognition of the country’s products, despite the global economic slowdown, India has been attracting a growing list of foreign investors to commit capital to its automobile industry, especially in the manufacturing of small cars. Nissan is to shift the production of its small car, Micra, from the UK to India. Toyota Motors has chosen India as its hub for making small cars, from where it shall export to other markets across the globe. Ford Motor Co. has earmarked US$500 million to transform its existing India operation into a centre for making small cars.

India has established its credentials as a specialist maker of small cars. In the six months ending September 2009, it registered a 53% surge in the export of small cars, compared with the corresponding period a year ago.

Yet for the automobile industry to account for a tenth of India’s economy by 2016, it must develop its market at home. In its favour is the rising personal disposable income which reached 40,000 rupees (US$818) in 2009. The future course of India’s car industry will hinge on its ability to meet its infrastructure development schedule which has been plagued by delays. It now rests with Mr Nath’s ministry to ensure speedy and quality road developments in India.