Asia Private Equity Review - Greation China Edition

This online issue of the Asia Private Equity Review - Greater China Edition is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.

October 2009 Issue
 二零零九年十月號

Content 內容提要


Feature
 封面文章

Focus
 焦點

Case Study
案例研究

News
動態透視

Institutional Corner
機構投資者

Funds
基金動向

Investments
投資聚焦

People On The Move
人物花絮

Divestments
資金套現

The Lens
圈內透視

  • A Friend and Now a Partner

    Review
    評論

    Window of the world
    世界之窗

    Summary : Subscribers’ weekly
    每週摘要

    Summary : Deal
    交易摘要

    Stock Watch
    股價表現

    Index & Exchange Rates
    索引及匯率

     

    • Replica of Success

    E ver since the advent of the global financial crisis, liquidity has largely eluded those investors with controlling stakes in assets. But, with exit structures crafted by skilled managers, and with patience, the barriers to liquidity can be lowered, as evidenced by the recent sale of kbro Co. Ltd. (凱擘股份有限公司)(‘kbro’). In early September, The Carlyle Group (‘Carlyle’) entered an elaborate agreement with Taiwan Mobile Co. Ltd. (台灣大哥大股份有限公司)(‘Taiwan Mobile’), the second largest mobile phone operator on the island. The accord has not only paved the way for Carlyle to subsequently recover cash for its holdings in kbro, but the divestiture could also be an encore to Carlyle’s earlier success in Taiwan’s cable TV industry.

    Seeking to Repeat Success
    In early 2006, after an investment holding period of six years, Taiwan Broadband Communications (台灣寬頻電視)(‘TBC’) was sold to Macquarie Media Group and Macquarie Bank Ltd. Carlyle is estimated to have clocked a return multiple of more than six times. The outstanding investment performance from TBC has been well profiled and remains as one of Carlyle’s proudest stories in its Asian private equity track record.

    Carlyle appeared to have been eager to return to the cable TV industry in Taiwan. In less than half a year after it had sold TBC, it committed to a US$1.5 billion transaction and acquired two major assets, kbro and Eastern Broadcasting Co. Ltd. (東森電視事業股份有限公司), from the Eastern Multimedia Group (東森媒體集團). It would not be a far-fetched conjecture to surmise that Carlyle had hoped to repeat the impressive performance that it had achieved with TBC. That, however, was 2006 when few would have foreseen the looming shadow of the financial crisis that began in mid 2008.

    Engineering an Exit
    The arrival of the global financial storm has changed the game rules in the financial investment industry. The one-time complete disposal of controlled assets, such as that enjoyed with TBC, is no longer attainable. After having built kbro into a leading TV services operator in Taiwan with direct access to more than one million households in the urban areas, Carlyle must commence to create an exit route for these assets acquired from Eastern Multimedia Group back in 2006.

    The notion of having kbro listed could have been deemed as premature, given that even a year after the fall of Lehman Brothers, Taiwan’s economy is only now beginning to recover. The Taiwan Stock Exchange Index (‘TAIEX’) has yet to regain its past spark, and it was trading at 7,566.67 on 2nd October, a far cry from the 9,757.93 back in 30th October 2007. With stock market volatility expected to continue for some time, the search for a strategic buyer for kbro appeared to be the more tenable option. While Carlyle has achieved an admirable result in securing Taiwan Mobile’s commitment to purchase kbro, it had less success in receiving an immediate cash payment from the trade buyer for its ownership of kbro.....

    This online issue of the Asia Private Equity Review is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.

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    Funds 基金動向
    Enterprising Minds
    Entrepreneurs seek to become financiers

    They were once financed by venture investors, today they have become the venture investors themselves. In early September Dr Kai-Fu Lee (李開復), formerly Google’s Greater China president, announced the establishment of Innovation Works which will provide financing to technology companies. Dr Lee’s first known endeavour to provide funds to promising technology companies has successfully raised US$115 million from a pool of corporate investors based in Greater China. The deal was led by the US-based venture capital firm, WI Harper Group (美商中經合集團). It is a statement of faith that, with Dr Lee’s credentials and in-depth operational and technical knowledge of the technology space, Innovation Works will be a passport to successful investments.

    While Innovation Works describes itself as a business creation platform, its core mandate is akin to a venture fund. The commitment to Innovation Works may well herald a revival of aspiring managers with operational backgrounds seeking to transfer their technical expertise into financing promising companies.

    Venture Spirit
    Currently, there are at least 10 fund management partnerships in China that have been formed by those entrepreneurs who had established or gained their expertise in the technology space (fig. 16). The founding partners of this pool of fund management firms were once forces or engines behind some of China’s most successful technology companies. For example, prior to helping Sequoia Capital China (紅杉資本中國)(‘Sequoia Capital’) raise its flag in China, Mr Neil Shen (沈南鵬) was the president and chief financial officer of Ctrip.com International Ltd. (攜程旅行網) which is China’s largest online travel agency. In addition, Mr Shen is a co-founder of Home Inns & Hotels Management Inc. (上海如家酒店連鎖), a leading budget hotel chain operator in China.

    Since the launch of Sequoia Capital, a growing list of fund management firms has been founded by enterprising managers. In the same year that Mr Shen attained the designation as the founding managing partner of his firm, Northern Light Venture Capital (北極光創投) also came into being. It was founded by four entrepreneurs who had previously held positions in technology-related companies.

    Similarly, GSR Ventures Management Co. Ltd. (北京金沙江創業投資管理有限公司)and Trust Bridge Partners (摯信資本)(‘Trust Bridge’), which began operations between 2006 and 2007, were also established by two separate groups of entrepreneurs.

    The two years ending 2006 witnessed some of the most audacious movements being undertaken by aspiring entrepreneurs. Perhaps the decision undertaken by Mr Edward Tian (田溯寧), who was then vice chairman and chief executive officer of China Netcom Group (中國網通集團(香港)有限公司)(‘Netcom’) in 2006, is the best to illustrate the intense pursuit to become venture capitalists. Formerly a co-founder and chief executive officer of AsiaInfo Technologies (China) Ltd.(亞信科技(中國)有限公司), Mr Tian was the driving force behind China Netcom’s growth, and its listing on the Stock Exchange of Hong Kong, until he launched China Broadband Capital Partners L.P. (中國寬帶產業基金) which is currently raising its second fund.

    In the same year, two former senior executives at Shanda Interactive Entertainment Ltd. (上海盛大網絡發展有限公司) (‘Shanda’) left China’s largest online game company to form Trust Bridge. Despite Shanda’s status as a listed company on NASDAQ, both Mr Shujun Li (李曙君) and Ms Donglei Zhou (周東蕾) were prepared to leave behind the cushion of comfort accorded to them in an established corporation to set up their own fund.

    Venture Pace Slowed
    By 2007, there had been a significant decline in the number of entrepreneurs aspiring to set up their own firm and raise their own fund. Instead, they preferred to join operations that had an established presence. When Mr Bo Shao(邵亦波), one of the founding members of EachNet (易趣網), which was acquired by eBay.com in 2002, joined Matrix Partners China (經緯中國) in 2007, this China arm of Matrix Partners had already commenced its investment programme in the country. Most recently, Cybernaut (China) Capital (賽伯樂投資)(‘Cybernaut’) was established by Mr Min Zhu (朱敏) who was formerly a founder of WebEx Communications, Inc.. At the time when Cybernaut was christened, it had already been entrusted with the mandate to manage two funds, Yangtze Technology Guidance Fund and Yangtze Industrial Fund.
    Comments
    The high profile launch of Innovation Works illustrates a new level of interest from some of Greater China’s most prominent entrepreneurs to seed the next generation of aspiring company builders. The US$115 million raised by Dr Lee for his maiden brainchild has enlisted investors from both sides of the Taiwan Strait. Both Legend Holdings (聯想控股有限公司) and New Oriental Education Technology Group (北京新東方教育科技(集團）有限公司) are enterprises from mainland China. The pool of investors coming from Taiwan is equally illustrious. It counts among its investors both Mr Steve Chen (陳士駿), co-founder of YouTube and a Taiwanese national, plus Foxconn Technology Group (富士康科技集團), the Hong Kong-listed subsidiary of Taiwan’s Foxconn Electronics Inc.. Interestingly, Mr Peter Liu (劉宇環), chairman and a founder of WI Harper that led this deal, and Dr Lee are both Taiwanese nationals.

    Innovation Works is the first major union of industrial heavyweights in the Greater China region. With the pension and endowment funds in the West adopting conservative approaches in making allocations to new funds, the pool of investors that are pledging capital to Innovation Works could well represent the next force to propel venture capital in Greater China to new heights.

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    Divestments 資金套現
    The IPO Show
    Hong Kong bourse upstaged by its neighbouring bourse

    The Shenzhen Stock Exchange has stolen the initial public offering (‘IPO’) show. For those investors with portfolio companies listed on the southern bourse in mainland China, the first day share trading performance of their investee companies has all the promise of rewarding investors with outstanding returns.

    In the month of September, there were altogether seven companies that had earlier raised funds from either private equity or venture capital investors and were listed on either the Shenzhen Stock Exchange or Stock Exchange of Hong Kong (‘HKSE’). While all of those listed on the A-share market witnessed enthusiastic responses from investors, the sentiment for those listed on HKSE was relatively subdued. In fact, on the first day when Peak Sport Products Co. Ltd. (匹克體育用品有限公司)(‘Peak Sport’) became a quoted stock on HKSE, it registered a 17% decline on its IPO price. It was the worst drop for a company that made its debut during year. Despite having enlisted a prestigious list of investors including Sequoia Capital China, Peak Sport fell victim to an “IPO fatigue” that began to shroud the Hong Kong bourse since late September when Metallurgical Corporation of China Ltd. (中國冶金科工股份有限公司) was listed.

    Yet there was no sign of such a lethargy clouding the A-share market. Just two days before the People’s Republic of China celebrated its 60th anniversary, Hunan Boyun New Materials Co., Ltd. ( 湖南博雲新材料股份有限公司) which is backed by Cowincapital Co., Ltd., went public. On its first day of trading, its share price skyrocketed by 107.4%. While Hunan Boyun’s spectacular first day trading performance bewildered market analysts, it was a testament to the level of IPO hysteria that is enwrapping China’s A-share market.

    Among the five venture-backed companies that went public on the Shenzhen bourse in the month of September, the first day trading movement of Foshan Saturday Shoes Co., Ltd. (佛山星期六鞋業股份有限公司), which had earlier raised funds from Legend Capital Ltd. (聯想投資有限公司), was most timid. Its share price closed at Rmb22.18 (US$3.26), representing a 23.22% premium over its IPO price. Yet it dwarfed the 13.13% achieved by China All Access (Holdings) Ltd. (中國全通（控股）有限公司), the other private equity-backed company that was listed on HKSE during the month of September.

    Overall, the median percentage achieved by these five venture-backed companies for their first day trading was 54.38%. The sharply differing sentiment on these two groups of companies that were listed on the two bourses in Southern China appear to suggest that a bubble is in the making in China’s A-share market.

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