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June 2010 Issue
In Brief

Independents Steal Fund Raising limelight at a time when institutions remain cautious in making allocations Feature
Asian Institutions Show their Savvy by engineering proprietary and associated deals Institutional Investors – Analysis
An Institution’s Pursuit of a healthcare asset unveils a new set of dynamics taking place in the institutional community Institutional Investors – Investments
Energy Assets in the West Draw unabated interest from Asian institutions Institutional Investors – Investments
Recent Political Turmoil in Thailand exposes risks associated with investing in emerging markets. A review of recent trends in South and Southeast Asia General Section – Investments
Bid for Leading Healthcare Co. in Oz shows intensity of interest for quality healthcare assets General Section – Investments
Investment Scene in Japan Changes as capital deployments committed by private equity investors are substantially smaller General Section – Investments
Vibrant Fund Raising Activities in India with institutions setting ambitious fund sizes while independents score excellent results in raising capital India Corner– Funds
Healthcare Industry Favoured by investors as evidenced by substantially large deal sizes India Corner– Investments
Speedy and Profit Exit Results in Indian private equity market further enhance the country’s attractiveness India Corner– Divestments
Content

Analysis

Institutional Corner
News
Analysis
The Deal Markers
Investments

General Section
News
Investments
In Search of Political Stability
Divestments

India Corner
News
Funds
Investments
Divestments

Subscriber Weekly Summary
Summary
Index & Exchange Rates

The Independents

A new month, a new fund is raised by an independent firm. In May, it became known that CX Partners concluded its fund raising exercise for its maiden fund. It has successfully secured US$515 million from international investors. The final closing of CX Partners Fund Alpha Ltd. came on the heels of another recently established independent fund management firm, Multiples Alternate Asset Management, which has recently achieved the first closing of its first fund, at US$250 million. Weeks earlier, China’s Tripod Capital International, Ltd. proudly announced the final closing of its first foreign currency fund which had secured US$350 million of commitments, exceeding its original target of US$230 million by nearly 52%.

At a time when institutions continue to be cautious in making allocations, the establishment of these first time funds by Asia’s home-grown independent fund managers bespeak of global investors’ unwavering pledge of confidence in Asia’s growing list of independent firms. Since the beginning of the year, over US$9.3 billion in fresh capital has been raised for the Asian private equity market, of which Asia’s home-grown independent fund managers accounted for US$3.7 billion, or 39.1%.

A Record that Attracts

Asian private equity’s ability to record return of capital since 2004 has been the premise that powered limited partners’ increasing willingness to back emerging and aspiring independent fund managers (fig. 1). As an illustration of global investors’ rising confidence in independent firms, in 2008, when fund raising results in Asian private equity reached a new peak, at US$51.3 billion, nearly half of the capital raised was accounted for by Asia’s home-grown independent fund managers.

The global financial crisis has nonetheless tamed institutional investors’ venturous appetite as the overall amount raised by such independent fund management firms began to decline. In 2008, Asia’s own independent managers commanded US$22.5 billion, or 44%, of that year’s fresh fund pool, while institution-backed funds took 30%, and the remaining portion was taken by the Asian affiliates of global independent management firms. But in 2009, institution-backed funds made substantial gains and were enjoying equal status as their independent counterparts. With clouds of uncertainty yet to dissipate in the institutional universe, during the first five months of the year Asia’s independent firms slipped and could only claim 39.1% of the US$9.3 billion raised during this period (fig. 2). ....

Institutional Investors - Analysis

The Deal Makers

Asia’s institutional investors have demonstrated their ability to cut deals

With the exception of those based in Australia and New Zealand, Asia’s institutional investors have mainly partnered with private equity investors when deploying capital to unlisted assets. The year before the global financial crisis, in 2007, 72% of the deals consummated by institutions were participated in alongside general partners. This equation has changed. The onslaught of the global financial crisis, which saw the faltering of US-based institutions, appears to have lent Asia’s institutional investors a new level of confidence. Since then, they have largely chosen to make commitments to unlisted assets without general partners. In fact, in the first five months of the year, of the 19 deals known to have been committed to by institutions, general partners managed to secure a petite 4% representation (fig. 6). Asia’s institutional investors are demonstrating their ability to generate proprietary deals as well as broadening their roles into the investment banking and consulting areas.

One Investment, Three Deals

The recent commitment made by Temasek Holdings (Pvt.) Ltd. (‘Temasek’) along with Hopu Investment Management Co. Ltd. (‘Hopu’) is by far the most telling example. In their US$600 million investment in Chesapeake Energy Corp. (‘Chesapeake’), both investors are provided another round of opportunity to invest further capital as well as taking on the role as placement agent.

Chesapeake is to place up to US$500 million in additional preferred stock that has been earmarked for “certain non-US institutional investors”. Both Temasek and Hopu could acquire such shares as well as placing these shares. For placing such shares, Chesapeake has agreed to pay both Temasek and Hopu, via their respective investment holding vehicles, “a placement fee equal to 2.5%”.

In addition, Temasek will also provide consulting services to Chesapeake for a period of three years, during which the Singapore government’s investment arm will receive a US$1.25 million consulting fee per annum. Temasek’s services to the US-based energy company would cover “Asian energy markets and opportunities” (fig. 7).

Deal Generation

The formula of agreeing to two separate undertakings at the time of entering into an initial round of investment appears to be a deal making method increasingly used by Asia’s institutional investors. In the recent C$435 million (US$425.3 million) commitment to the Canada-based Penn West Energy Trust (‘Penn West’) by China Investment Corporation (‘CIC’), the capital deployment represents only one of the two transactions.

The C$435 million would allow CIC to take a 5% stake in Penn West’s trust units. The investment appears to be a prerequisite for CIC to take a 45% stake in a new joint venture with Penn West to develop the Alberta-based energy company’s bitumen assets that are located in Canada’s Peace River area. In this joint venture, CIC is to fork out C$817 million for its equity interest, with Penn West injecting assets worth C$1.8 billion for its 55% stake. Thus, CIC has successfully created another proprietary investment in the natural resources sector.

This is certainly not the first time that CIC has employed such a deal generation formula. When it invested in the Hong Kong-listed GCL-Poly Energy Holdings Ltd. (‘GCL-Poly’) back in December last year, it also used a similar methodology. As part of its HK$5.6 billion (US$713.3 million) undertaking to the leading polysilicon and wafer supplier, the sovereign wealth fund and GCL-Poly established a joint venture that invests in and develops photovoltaic and other solar energy projects. The partnership has an initial capital pool of US$500 million (fig. 8).

Comments

When the global financial crisis erupted, the active participation of sovereign wealth funds in deals lent a certain level of assurance to other investors. In late 2008, when Australia’s GPT Group, one of the country’s largest property groups, sought to raise A$1.55 billion (US$991.2 million) to pare down its leverage ratio and repay its debts, the real estate arm of the Government of Singapore Investment Corp. played a critical role. In addition to investing A$250 million to subscribe to a certain category of securities, it has also sub-underwritten a substantial portion of the securities issued by the publicly-listed GPT Group.

Like a double-edged sword, once such institutions have gained confidence through new ventures, they are broadening their investment horizon into areas that were once within the domains of investment bankers.

General Section - Investments

In Search of Political Stability

Thailand exposes the risks associated with investing in SE Asia

The recent political turmoil in Thailand, Southeast Asia’s second largest economy, came at a tenuous time. Foreign private equity investors were beginning to return to this region after an absence of more than a decade. Yet for such investors political stability is among the prime factors to consider before making capital deployments to emerging markets. Civil unrest in Thailand could reverse investors’ flow of capital to this block of emerging markets (fig. 15).

The Mushroom of Funds

Political stability is an essential ingredient for investor confidence. Since May 2008, a host of funds that either target the Southeast Asian market or a specific country in this regional block have been launched. The Aureos Southeast Asia Fund II, launched by the UK-based Aureos Capital, with a target size of US$250 million, is by far the largest pan-regional fund that seeks opportunities in the Southeast market. The Singapore-based Frontier Investment & Development Partners believes there is sufficient interest to warrant the launch of a US$250 million fund for Cambodia. Indeed, last year, when Leopard Cambodia Capital Ltd. raised its first fund it was oversubscribed. The fund management firm had to reopen the fund in order to allow additional subscriptions.

Even some of the countries long neglected by investors in South Asia were receiving attention from investors. Shortly after Sri Lanka ended its 25-year long civil war, two funds were known to have been launched to seek opportunities in the country, with target sizes ranging from US$50 million to US$100 million. There is also Bangladesh, which welcomed a due diligence tour by the UK-based CDC Group in November last year. The institution was on a mission to assess the conditions and appetite for businesses to receive private equity investment.

Ironically, the period after the global financial crisis saw investors directing resources to new frontier markets in South and Southeast Asia (fig. 16).

Buoyant Investment Activities

Buoyed by investors’ increasingly positive assessment of this economic region, Southeast Asia registered surge of invested capital coming into the market. For the first five months of the year, an aggregate US$1.4 billion was known to have been deployed in this region, with the US$835.1 million committed by CVC Asia Pacific Ltd. (‘CVC’) to PT Matahari Department Store Tbk by far the largest (fig. 17).

Despite its description as the Land of Smiles, Thailand has been unsuccessful in beckoning foreign private equity capital. Between 2008 and 2009, the capital directed to Thailand represented 2.2% of the transaction aggregate in the Southeast Asian region. Since the beginning of the year, no foreign private equity investors are known to have deployed capital there.

Instead Vietnam registered unfaltering faith from private equity investors. Last year, TPG joined The BankInvest Group in committing US$50 million to Masan Group Corporation. It was one of the largest undertakings by a foreign group in Vietnam. Although Vietnam takes up a small percentage in the overall investment amount due to relatively smaller deal sizes being completed there compared with other markets, the deal consummation pace has been constant. In 2009, Vietnam recorded a transaction aggregate that added up to US$94 million. An accumulated amount of US$8 million was known to have been committed by private equity investors to the country during the first five months of the year. Investors remain optimistic on the future prospects of the country that is among the youngest members of the World Trade Organisation (fig. 18).

Encouraging Results

It remains too early to assess returns from the Southeast Asia market due to the relatively short history since investors returned to this region. However, there have been isolated rewarding results. In 2007, TPG sold a portion of its interest in Vietnam’s FTP Corp. and garnered a return multiple of 4.6 times its invested US$21.5 million, on a realised and unrealised basis. More recently, CVC Capital disposed of GS Paper and Packaging Group (‘GS Paper’) in Malaysia and is known to have recorded a return multiple of no less than 2.5 times. For an investment that dated back to 2007, in which the private equity firm took control of the paper company for US$212 million, the exit has further bolstered investors’ confidence in the Southeast Asia market. In May, the Singapore-based Crescent Point Capital recorded its second known successful investment in Malaysia when it sold a portion of its interest in Masterskill Education Group Bhd. and returned an estimated US$114 million when the nursing school made its debut on Bursa Malaysia.

Comments

Political risks weigh heavily on investors. It has been difficult for the politically unstable Philippines to attract long term equity capital. Since 2009, only three investments were known to have taken place. The recent massacres and assassinations of political opponents in the build-up to the presidential election will only impede the inflow of foreign capital (fig. 19).

Most recently, the political scene in Indonesia has also changed. The departure of its former reformist Finance Minister Sri Mulyani Indrawati to the World Bank added uncertainty for investors. Between 2005 and 2010, she strengthened Indonesia’s economy, increased investment and steered the country through the 2007-2010 financial crisis. It now rests on her successor, Mr Agus Dermawan Wintarto Martowadojo, former chief executive of Bank Mandiri, to ensure that foreign investors’ confidence in the country does not wane following the departure of his predecessor.

In Vietnam, the founding partner of Mekong Capital, Mr Chris Freud is sanguine and believes investors’ confidence in the country remains rock solid. “We don’t expect any impact from Thailand’s political turmoil on investor interest in Vietnam. What’s happening in Thailand is very much a domestic issue….”, adding that Vietnam has enjoyed “a very high level of political stability since the war ended in 1975”.

Despite having formed an economic block, the Southeast Asia market remains fragmented due to varying political factors. The region is an embodiment of the risks and rewards of emerging markets.