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APRIL 2010 Issue
In Brief

Sure Signs of Recovery but they portend a fiercely competitive landscape as each market jostles for their position and beckons private equity capital. A review of the first quarter of a year after the global financial crisis Feature
Asia IIs Display Venturing Spirit as they enter into new markets, both in fund allocations as well as in direct investment Institutional Investors – Analysis
Korea IIs Shed Off Past Image and have successfully advanced onto the global stage. A case study of the transformation of one of Asia’s biggest institutional investors Institutional Investors – Analysis
Investors Seize Secondary opportunities following fall of Willcom that highlights increased secondary interest in Japan General Section – Investments
Parkway Improves Health of its investors’ returns in the latest sale of a private equity investors’ holding in the healthcare company General Section – Divestments
Sale of Kito Shows Timing the disposal of shares is critical that will have substantial impact on performance General Section – Divestment
Retail Industry in India faces monumental changes that render opportunities to private equity investors India Corner– Analysis
Microfinance Funds are Gaining profile as the investment concept is gaining overwhelming support from investors India Corner– Funds
Infrastructure Deals Dominate India’s deal landscape as the country witnesses buoyant investment activities India Corner– Investments
Sale of FSS Highlights Tenacity required in achieving return of capital India Corner– Divestments
Content

Analysis

Institutional Corner
News
Analysis
Investments

General Section
News
Investments
Divestments

India Corner
News
Analysis
Spending Habits
Funds
Investments
Divestments

Subscriber Weekly Summary
Summary
Index & Exchange Rates

The First Spring

Signs of spring are in the air. By all accounts, after the worst financial crisis in a century, the first quarter of the new annum has confirmed the worst for Asian private equity is over. Although the fresh pool of capital coming into the market, transaction totals and divestment results are far cries from those numbers attained during the first quarter of 2008, just before the fall of Bear Stearns, they represented a healthy surge for the corresponding period in 2009. Behind all these encouraging signs of recovery are suggestions that a host of dynamics are at work, with each of the markets jostling for their position in the increasingly competitive Asian private equity landscape.

In the first three months of the year, close to US$4 billion of fresh capital has come into the market. This, compared to the same period of 2009, represented an encouraging 52.6% increase, albeit a fraction of the US$10.6 billion for the first quarter of 2008. Unlike in the past in which regional funds would account for the lion’s share of the fresh fund pool, that for 2010 underscored a shift in investors’ allocation directions, and displayed their absolute faith in country funds (fig 1).

The fund pool profile for the first quarter of 2010 sets itself apart from all previous records in that it is dominated by one country, China, which accounted for 84% of the US$4 billion. Significantly, renminbi or yuan funds took up the lion’s share, chalking up over 66% of the China fund pool. The development highlights China’s undisputed position in Asia’s private equity fund pool make-up and that renminbi funds are assuming an increasingly pronounced profile (fig. 2).

Outside of China, the residual US$619 million was spread among funds that focus on the pan-Asia, India and South Korea markets. Even though India is the second-largest emerging market, in the first three months of the year it saw a petite US$89.9 million coming into the market, representing a chilling 81.5% decline from the same period in 2009.

The final closing of the US$858.6 million Asian Infrastructure & Related Resources Opportunity Fund that took place during the first quarter of year gave a hint that pan-Asia infrastructure plays could soon be the investment focus. This is the largest pan-Asia focused infrastructure funds formed since the Standard Chartered IL&FS Asia Infrastructure Growth Fund was launched in mid 2007 that has a target size of US$1 billion. At the end of December 2009, the fund has secured an estimated US$640 million in committed capital. The trends point to infrastructure as the latest dimension in the Asian fund pool ....

India Corner - Analysis

Spending Habits

India’s retailing industry faces monumental changes

When Pantaloon Retail (India) Ltd. (‘Pantaloon’), one of India’s biggest retailers, decided to merge its retail chain, Home Solutions Retail (India) Ltd. (‘Home Solutions’) into the parent company, it signalled a new dawn had arrived for India’s retail industry. The fifth largest on the globe, India’s retail industry has been enjoying an annual growth rate of 28% for the past five years. According to India Brand Equity Foundation (‘IBEF’), a government sponsored trade organisation that tracks India’s consumer products, by 2010 its country’s retail market is forecasted to command US$570 billion.

Yet unlike other markets, India’s retail market is uniquely different in that even though it is home to one of the largest pool of consumers on the earth, organised retailers accounted for only a petite 3% market share at the end of 2006 (fig. 28). For private equity investors, India’s organised retail segment represents a virgin market with budding opportunities.

The Seasoned Investor in Retail

TPG, which has firmly established its credentials as one of the most savvy investors in the organised retail industry, as evidenced by its outstanding performance achieved through the sale of Australia’s Myer Pty., Ltd., is currently courting assets in India’s retail industry. It recently submitted its proposal to take an interest in the financially beleaguered Vishal Retail Ltd. (‘Vishal Retail’).

Headquartered in Kolkata and founded in 1986, Vishal Retail focuses on budget fashion retailing and targets second and third tier cities. It is saddled with debts and there are reports that suggested Vishal Retail faces difficulty to pay off its 7.3 billion rupees (US$161 million) loan pile.

In early 2007, when stock markets across the globe enjoyed one of the best rallies in recent history, Vishal Retail made its debut on the Indian stock exchanges and raised 1.1 billion rupees. It then immediately embarked on an expansion drive. A year before the advent of the global financial crisis, it had the grand plan to open an additional 130 stores, bringing the number of its stores to 180. To fund such an expansion drive, Vishal Retail borrowed heavily. For the fiscal year of 2008-2009 which was ended on 31st March 2009, its long and short term debt towered to 9.4 billion rupees (US$208 million). But when consumers tightened their purse strings with the onslaught of the global financial crisis, Vishal Retail was left with an inventory that was valued at 5.5 billion rupees that it is still trying to sell off.

Vishal Retail put on a brave face. Last year, in an interview with the local press, Mr Ambeek Khemka, its group president, said that Vishal Retail’s creditors supported “its business model” but admitted growing the business “through short-term debt” was a mistake. But in early February, Mr Khemka tendered his resignation and is no longer associated with Vishal Retail.

With its proven skills to turn around retailers including Debenhams in the UK and in the process of restructuring Neiman Marcus in the USA, TPG appeared to be the suitable candidate to steer Vishal Retail out of its troubled waters. There were local reports that suggested the financial investor could be providing a US$53 million life raft to Vishal Retail.

TPG had been building a comprehensive Indian retail industry portfolio. In 2008, it deployed over 3.1 billion rupees and took a 39% stake in Shriram Retail Holdings Pvt. Ltd. (‘Shriram Retail’), the holding company of Shriram City Union Finance. The latter is a non-banking finance company that specialises in small-sized retail finance. Most recently, TPG further increased its exposure in Shriram Retail when it converted the warrants attached to an earlier commitment. The conversion represented a deployment of around 1.8 billion rupees. Following completion of the conversion, and with an aggregate 5.3 billion rupees pledged to Shriram Retail, TPG currently holds a 49% stake in Shriram Retail (fig. 29).

Market Model in Transition

The IBEF believes India’s retail industry is entering a period of consolidation, during which the winds of consolidation are relentless (fig. 30) As Prime Minister Dr. Manmohan Singh’s government prepares to withdraw the stimulus package, India’s consumers are expected to adopt a prudent disposition in making their purchases. This is further aggravated by the skyrocketing retail rentals that are corroding India’s retailers’ profit margin. According to the Jones Lang LaSalle Meghraj Report on India Retail 2008, in 2003, rentals took away 52% of retailers’ profit margin, but in 2008, the percentage was as high as 80%.

In response to corrections that are taking place in the market, Pantaloon, arguably one of India’s biggest retailers with over 1,000 stores across the country, has been taking steps to streamline its operations and dispose of its non-core assets. It spun off its private equity investment arm that has now become an independent management firm, with Everstone Capital Management being its new identity. After granting the fund management team of its previous private equity investment arm an independent status, Pantaloon proceeded to acquire Sports Retail Business from its wholly owned subsidiary, Winter Sports Ltd. in order to bolster its retail assets.

Pantaloon’s decision to merge Home Solutions represented a major structural overhaul within its corporate paradigm but is also a win-win formula. In bringing Home Solutions into its parent company’s fold, Pantaloon has also ushered in a party of private equity investors as its shareholders. For between 2006 and 2009, ICICI Ventures Fund Management, Kotak Private Equity Group and SEAF Management LLC invested an estimated US$68 million in total to Home Solutions. The group of financial investors now holds not only the publicly traded shares of Pantaloon, but also saw the value of their investment increase by 50%. Based on Pantaloon’s closing share price at the end of March, their combined 6% stake in Pantaloon represented US$103 million in value.

Comments

Since 2006, private equity investors have pumped more than US$388 million into the organised retail sector. With domestic consumption accounting for two-thirds of the Indian economy and a pool of 300 million in the middle class, India’s retail industry holds mesmerising promise, especially for private equity investors that scout for organised retailers. Yet a 2009 KPMG report on the India retail industry warned that the traditional retail model, being the Mom and Pop stores, have a strong hold on consumers’ spending habits. This together with poor supply chain management and feeble infrastructure support are factors that will test even the most seasoned investors.

India’s Retail Market

Currently, the India government does not allow foreign direct investment in the retail trade, with the exception of those falling within the category of “single brand product retailing” and allows international investors to hold up to a 51% stake. However, foreign retailers have been able to access India’s retail market and assume full control of its Indian operations through the following three routes-

franchise agreement, such as Pizza Hut and Marks & Spencer
cash and carry wholesale trading, such as Germany’s Metro AG
strategic licensing agreements, such as Mango, a Spanish apparel brand, has been able to gain its foothold in India and assume controlling position over its Indian operations. It has entered the India market through a partnership agreement with Piramyd Retail Ltd., a department store in Mumbai