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ASIAN VENTURE CAPITAL JOURNAL
PRIVATE EQUITY ASIA
M&A ASIA
Asia’s Private Equity News Source avcj.com June 12 2012 Volume 25 Number 22
FoCusdEal oF thE wEEk
Treasure huntingBoutique advisory fi rms seek China deals beyond the reach of others Page 7
Ad platform for AsiaMedia fi rm Komli gets expansion capital Page 12
VCs pimp their rideInvestors upgrade Indian taxi services Page 13
Singapore18 - 19 July 2012www.avcjsingapore.com
AVCJ Private equity & Venture Forum 2012
uSa10 July 2012avcjusa.com
AVCJ Private equity & Venture Forum 2012
What is the signi� cance of TPG’s tie-up with South Korea’s Vogo?
Page 10
Ontario Teachers gets one piece of Kyobo Life, PE � rms chase the other
Page 12
Data f ile Page 15
Renminbi funds discover that life isn’t so easy
Page 3
AMP Capital, Apax, Blackstone, DFJ, HarbourVest, IDG, Khazanah, Maui Capital, Morgan Stanley, Sequoia, Temasek
Page 4
dEal oF thE wEEk
aVCJ rEsEarCh
Editor’s ViEwpoint
nEws
FoCus
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Number 22 | Volume 25 | June 12 2012 | avcj.com 3
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“Do you know a company calleD [name redacted]?” the colleague asked on the phone. “Yes,” I replied. I had been familiar with the firm and its business model for several years. It is a relatively small outfit based in Shanghai, not widely known and not particularly relevant to private equity. So what about it?
“Well,” the colleague continued, “they want to raise a renminbi fund to invest in SMEs.”
I wasn’t particularly surprised – it seems that everyone in China has sought to leverage slivers of proprietary intelligence on companies into a capital-raising event. We all know how it works: Identify the target; corral a few business associates and get them to stump up some cash; invest in the company and, within 24 months, take it public; walk away with a 15x return.
Only it doesn’t work – or it doesn’t work nearly as well as before. A combination of rising entry valuations and lower exit multiples on the public markets have contrived to deflate the China private equity bubble. Those who can pick entrepreneurs with potential, put capital to work and deliver sustained growth will still make money. Those in it for a quick buck will not.
Unless there has been a smart bit of recruitment in recent months, this firm seeking to raise a fund falls into the latter category. Rather than ask, “Why?” I asked, “Why now?”
According to AVCJ Research, renminbi fundraising ballooned in 2010, as 162 vehicles attracted $17.7 billion, up 181% year-on-year. In 2011, a similar number of funds raised $28.1 billion. As we approach the midpoint of 2012, China fundraising is slower for renminbi and US dollar vehicles. A total of $11.8 billion has entered local currency funds, not a disgraceful showing but well off last year’s pace. The number of funds raised is more alarming: just 28.
Renminbi fundraising has been a thoroughly polarized affair – as we were reminded when sifting through the candidates for the 2012 AVCJ Private Equity & Venture Capital Awards China.
At one end of the spectrum sit the government-backed funds. Innovation Industrial Investment Fund is a good example. It is managed by a consortium of predominantly
government agencies and funds with a remit to turn Shanghai into an R&D hub. Its capital: RMB26.9 billion ($4.17 billion) from state coffers. This vehicle accounted for more than 25% of the total raised by the 70 largest renminbi funds that achieved a final close in the qualifying period for the AVCJ Awards (April 2011 to March 2012).
At the other end of the spectrum are the independent players, raising relatively small sums from groups of business acquaintances. The line between GP and LPs is blurred, the fund horizon is short and little thought is given to creating a sustainable PE franchise. Even the larger, more professional of these funds are seeing defaults as wealthy individuals lose interest in the asset class.
In the middle are a few established firms that operate in a more institutional manner. It just so happened that none of the big names – Hony Capital, CITIC Private Equity, et al – closed a renminbi fund in the relevant time period. However, full credit to award winner Cowin Capital and nominees CCB International Asset Management, NewMargin Ventures and South River Capital. Each one can point to a track record, brand name or marquee individual that stands out from the pack.
As for the next 12 months, we can expect this pack to thin out, which is no bad thing. Furthermore, it is to be hoped that a rebalancing of the domestic GP pool will ultimately be matched by the emergence of a broader class of LPs able to invest in PE. The development path may be bumpy, but there is every reason to expect that, domestically, the asset class can deliver in the long term. To ride out the peaks and troughs, and also to handle a more PE-savvy group of entrepreneurs, fund managers must envisage a world beyond multiple arbitrage.
“What do you make of their chances?” the colleague asked, referring to whether the aspiring GP would attract capital. “Close to zero,” I replied.
Tim BurroughsManaging EditorAsian Venture Capital Journal
Renminbi funds face a new reality
Managing Editor Tim Burroughs (852) 3411 4909
Senior Editor Brian McLeod (1) 604 215 1416
Staff Writers Susannah Birkwood (852) 3411 4908
Alvina Yuen (852) 3411 4907
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Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow
Senior Research Manager Helen Lee
Research Manager Alfred Lam
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AVCJ Group Limited. ISSN 1817-1648 Copyright © 2012
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avcj.com | June 12 2012 | Volume 25 | Number 224
ASIA PACIFIC
Vermont commits $75m to HarbourVestA HarbourVest Partners fund targeting Europe, Asia and emerging markets has received a $10 million commitment from the Vermont Pension Investment Committee (VPIC). The investment in HarbourVest HIPEP VII is part of a $75 million allocation by the committee, which represents pension funds with $3.33 billion under management, to vehicles operated by HarbourVest.
Blackstone to co-invest with HK hedge fundThe Blackstone Group has upped its exposure to Asia-focused hedge fund Senrigan Capital, injecting a further $50 million into the vehicle with a view to co-investing on a number of projects. Blackstone first backed the firm in 2009, when it seeded its fund with $100 million. It later provided an extra $50 million, and the vehicle’s assets grew to $1 billion in 2011 – making it one of only 5-6 Asian hedge funds to achieve this feat since 2008. Run by former Citadel trader Nick Taylor, Senrigan is an event-driven fund, which means it focuses on M&A and on strategies such as capital-structure arbitrage.
GREATER CHINA
NSSF to boost investment in PE fundsChina’s National Council for Social Security Fund (NSSF) will boost its commitments in private equity funds by more than 50% in 2012, in a move to enhance investment returns. Dai Xianglong, NSSF’s chairman, said the pension fund will increase its investment in domestic PE funds to RMB30 billion ($4.1 billion) by the end of 2012, compared to RMB19.5 billion in 2011. He expects the total to reach RMB50 billion by 2015.
Sage Capital backs Chinese shoemaker Baofeng Asia Equity Value (AEV), an investment vehicle advised by Sage Capital Global, has agreed to invest in Baofeng Modern International, a Hong Kong-listed Chinese footwear manufacturer. Asia Equity Value will subscribe to convertible notes issued by Baofeng worth HK$176 million ($22.7 million), subject to a conversion price is HK$1.31 per share. Baofeng will also issue
warrants to AEV, permitting the investor to subscribe to 62,026,431 shares at HK$1.53 apiece. AEV will own 16.47% of the company following conversion of the notes and warrants.
Aiyaya obtains $16m from Fortune CapitalChinese accessory chain Aiyaya has received RMB100 million ($16 million) from Fortune Venture Capital in what could be the largest investment in the domestic accessory industry. This is also Fortune Venture Capital’s first investment in the accessory market. Established in 2004, Aiyaya has thousands of stores across China and posts annual sales in excess of RMB1 billion. Revenue grew 40% and 30% year-on-year in 2010 and 2011 respectively. Ye Guofu, chairman of Aiyaya, expects the company’s sales to expand by 20-30% in 2012. The funding is expected to support Baofeng’s expansion.
Cooley hires two in Shanghai office US law firm Cooley has added Christina Zhang and Benjamin Qiu as partner and associate, respectively, in its Shanghai office. Both will join the company’s business and technology practice group and work closely with partners Brad Peck and Patrick Loofbourrow, who founded Cooley’s Shanghai office last year.
Chinese online store Meilele receives $40mChinese online home furnishings retailer Meilele has received $40 million in Series B funding. The round was led by Singapore’s Vertex Venture, alongside Lightspeed Partners, Xianfeng Huaxing Group, LionRock Capital, and KTB Ventures. Founded in 2008, Meilele started as a store within Taobao but went on to launch its own business-to-consumer service later and now has over 50 stores nationwide.
Russia-China fund to target $200m forestry deal The $4 billion investment fund set up by Russia and China is going to make its maiden investment in a Russian forestry company. The transaction – said to be around $200 million for a minority stake – is expected to be completed in the next month. The target is one of Russia’s largest forestry firms, which exports a substantial amount of wood to China. It will use the capital to improve margins on processed wood products in Russia.
PE-backed Xiaomi to get new fundingChinese smartphone maker Xiaomi Technology is nearing the close of a funding round that will value the company at $4 billion. The news comes after IDG Capital, Temasek Holdings and Qualcomm reportedly participated in a $90 million Series B round late last year, bringing the total raised since Xiaomi’s inception to $131 million and valuing the firm at $1 billion..
SOUTH ASIA
Temasek names Promeet Ghosh India MDTemasek Holdings has appointed Promeet Ghosh as its first managing director level appointment in India. Ghosh previously spent more than two decades at Merrill Lynch, before and after
Maui Capital closes fund at $190m hard-cap Maui Capital has closed its Aqua fund at the hard-cap of NZ$250 million ($190 million). The New Zealand-based private equity firm had to turn away some larger investors. Managing Director Paul Chrystall said that setting a hard-cap was a difficult decision but that raising too much capital could have distorted the firm’s investment strategy.
Maui, which spun out from JBWere in 2008, is considering two potential transactions, and expects to take 2-3 years to deploy the entire corpus.
In April it was reported that Maui had received commitments of NZ$92 million ($75.5 million) from institutional investors for the vehicle, which is the same size as its predecessor, the 2008 vintage Maui Capital Indigo Fund. LPs included a handful of fund-of-funds in Australia. Maui was intending to raise a further NZ$150 million from around 900 small-scale domestic investors located in New Zealand. Commitments ranged from NZ$100,000 to NZ$20 million.
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Number 22 | Volume 25 | June 12 2012 | avcj.com 5
the merger with Bank of America. He left the investment bank last year to join a private equity advisory firm set up by Rajeev Gupta, formerly India head for The Carlyle Group. It was reported in early 2011 that the firm was struggling due to a weak deal-making environment.
AMP Capital makes clean energy investment in IndiaThe AMP Capital Asian Giants Infrastructure Fund (AGIF) has bought a minority stake in Indian clean energy company Shalivahana Green Energy (SGEL) for almost $29 million. The Hyderabad-based energy company develops, owns and operates power generation assets across the agri-waste, hydro and wind sectors. Existing investors in SGEL include International Finance Corporation (IFC) and Infrastructure Leasing and Financial Services Group (IL&FS).
PubMatic raises $45m from VC playersIndia-based GPs Helion Ventures and Nexus Venture Partners have participated in a $45 million round of mezzanine financing for their portfolio company PubMatic. The round was led by US-based August Capital, with Draper Fisher Jurvetson (DFJ) and Silicon Valley Bank - both existing investors - also taking part. PubMatic raised $18 million from Nexus, Helion and DFJ through three previous rounds. The company’s next step is likely to be an IPO.
Ex-Apax India head tipped to join CarlyleNeeraj Bharadwaj, former India head of Apax Partners, is to become The Carlyle Group’s newest managing director, the Business Standard reported. Bharadwaj most recently worked at Accel Partners, joining the company from Apax in 2009. He started out with Apax in the US, focus on technology investments, having previously worked at McKinsey & Co, Goldman Sachs and Morgan Stanley.
Sequoia invests in India’s Citrus PaymentsSequoia Capital has invested an undisclosed amount in Mumbai-based Citrus Payment Solutions, which offers payment services such as online banking and credit card gateways. Mohit Bhatnagar, managing director of Sequoia, has joined the Citrus board as part of the transaction. The company claims to have partnerships with a string of institutions, including HDFC Bank, SBI, Axis Bank, ICICI Bank, Citibank and Visa.
Sequoia to reap 18% return on Cafe Coffee Day saleSequoia Capital India is targeting returns of 16-18% on its impending exit from Amalgamated Bean Coffee Trading, a unit of India’s Coffee Day Group. The private equity firm injected two tranches of $10 million in the company in 2006 and 2007. Last month it was reported that Coffee Day’s owner, V.G. Siddhartha, is planning to increase his shareholding, prompting speculation that an existing investor –Sequoia, Darby Private Equity, IFC or Deutsche Group – was to exit.
Samara injects $32m in Monte Carlo FashionsUS-based private equity firm Samara Capital has invested INR1.75 billion ($32 million) for an 18% stake in India’s Monte Carlo Fashions. Samara acquired 2,873,564 shares via a capital increase and a further 1,149,426 shares through the provision of replacement capital to the company’s promoters, who include JL Oswal and family. Ludhiana-based Monte Carlo is a unit
of the Nahar Group, which is in turn owned by Oswal Woollen Mills.
Khazanah, Baring offer $800m for Aegis Malaysian sovereign wealth fund Khazanah Nasional has teamed up with Baring Private Equity Asia to offer $800 million for Aegis, the business process outsourcing (BPO) arm of Indian industrial conglomerate Essar Group. KKR is said to be another bidder for the company. Khazanah and Baring are said to have bid below the $1 billion asking price, and so another Malaysian investor may join the consortium. Standard Chartered Bank is advising Essar on the deal process.
Morgan Stanley in talks to buy Lanco road assetsMorgan Stanley Infrastructure Partners, a $4-billion global infrastructure fund, is in early discussions with Lanco Infratech to buy its 401 kilometers of highway projects. Some other infra-focused private equity players are also undertaking due diligence for Lanco’s road assets, which have been valued at between INR10-12 billion ($180-215 million). Ernst & Young is advising Lanco on the sale.
SOUTHEAST ASIA
Investors back IPO of Khazanah’s healthcare armBlackrock, Capital Group and Och-Ziff Capital Management Group have agreed to become cornerstone investors in the proposed $2 billion IPO of Malaysia’s Integrated Healthcare Holdings (IHH), which is owned by Khazanah Nasional. Government of Singapore Investment Corp. (GIC), Fullerton Fund Management, AIA Group and Hwang Investment Management will also back the listing as cornerstone investors.
Nanostart ups stake in MINTNanostart Asia Pacific has increased its stake in Singaporean cleantech firm Membrane Instruments and Technologies (MINT) from 18% to 28%. The investment by the company, which was created by German-based nanotechnology VC investor Nanostart earlier this year, will be channeled via the Nanostart Early Stage Venture Fund I. It will help to fund the marketing of MINT’s membrane integrity sensor, as well as its global roll-out.
Global Environment raises $124m India-focused fundGlobal Environment Fund (GEF), a private equity firm that targets energy, resources and environment-related assets, has raised INR7 billion ($124 million) for a fund which will invest in small and medium enterprises in India. It is the first niche fund of its kind in the country.
The GEF South Asia Fund is likely to do 3-4 transactions in India a year, taking minority stakes of $3-15 million. It will also invest in Nepal, Sri Lanka and Bangladesh. The fund has already committed $11.5 million to Bangalore-based energy efficiency firm Kalki Communication Technologies alongside International Finance Corp. (IFC).
GEF has previously invested in India through its global vehicles, committing more than $100 million across eight deals. Current portfolio companies include Sai Sudhir Infrastructures and Greenko Group.
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“eVercore iS no lonGer a bouTique. We passed away from that category three, four years ago,” asserted Roger Altman, former deputy US Treasury secretary and co-chairman of Evercore Partners. “There are some folks who follow this industry that still classify us in that group. And if you look at it that way, we literally did fi ve times more M&A business this year than the second-most active [boutique] fi rm.”Altman made this remark in February as Evercore announced that 2011 revenues had eclipsed $500 million for the fi rst time in the US-based corporate advisory fi rm’s 16-year history. Business was boosted by lucrative mandates to work on the $58.9 billion restructuring of AIG’s preferred stock and Kinder Morgan’s $37.6 billion takeover of El Paso Corp. With other boutiques – Lazard, Blackstone, Rothschild, Greenhill, and so on – also climbing up the ladder, the whisper on Wall Street is that the bulge-bracket banks are losing their preeminence.
China, by comparison, remains in the Dark Ages. The country’s boutique corporate fi nance houses are barely a decade old. While rising stars have caught onto the potential of smaller or more specialized deals beyond the reach of traditional investment banks, most of the rest are still fl itting around the market, landing on transactions wherever they might emerge.
“Chinese corporate fi nance is 30 years behind the US,” says Hong Chen, CEO of the Hina Group, one of the country’s leading local PE and M&A corporate fi nance boutiques. “There are more than 100 boutiques, but we only see a limited number of quality ones.”
Changing landscapeIn China’s short history of corporate fi nance, it has been common practice for top-tier investment banks to advise on sizeable off shore deals, while onshore transactions are handled by local giants such as CITIC Securities and China International Capital Corporation (CICC). The latter tend to focus on large IPOs and transactions related to state-owned enterprises.
Among the boutiques that do exist, average headcount is 5-10 people, a far cry from the hundreds of investment professionals that Evercore and Lazar have on the payroll to handle clients as large as AIG. The emphasis is fi rmly on
guanxi, or personal networks, with CEOs and local fi nancial sponsors. Rather than provide high-quality advisory, certain small boutiques simply charge their clients introductory fees for bringing the right guy into the meeting room.
“There are thousands of them running around trying to connect all kinds of things. PE fi rms don’t like to admit that they are getting deals through brokers, but it’s true,” one pan-Asian GP tells AVCJ. “They don’t like LPs to know because the response will be: ‘I don’t pay you to use a broker; I could just do that myself.’”
The value of introductions has been plain in the past few years as China enjoyed a boom in pre-IPO deals. Private equity fi rms keen to capture the huge short-term returns obtained by guiding a company to the public markets required nothing more from intermediaries than meeting with a few relevant CEOs. According to anecdotal evidence, some GPs even paid a premium for access to IPOs regardless of the lack of professional advisory services.
“During the pre-IPO boom, some people did not partner with corporate fi nance advisors that were too rigid in procedures because they wanted to complete transactions within a short timeframe,” says Jim Tsao, a partner at Unitas Capital. “In some cases, local GPs didn’t even bother with due diligence if they were sure they could get the companies listed.”
With exit multiples on local exchanges a shadow of what they once were, private equity fi rms that invested in companies at relatively
high valuations are being given pause for thought. China dominates the Asian IPO market and in the fourth quarter of 2010 there were 127 PE-backed listings in the region, raising a collective $44.2 billion. In the fi rst three months of 2012, $7.5 billion was generated through just 30 off erings, a more than two-year low. Advisors whose business is heavily dependent on listings have suff ered as a result.
In addition, the China Securities Regulatory Commission (CSRC) has tightened rules in a move to encourage better quality listings. Most
recently, it introduced revised guidelines on new share issuance: The selling party is now required to disclose a tranche of more detailed information if it prices its IPO at a price-to-earnings (P/E) ratio 25% higher than the average for its listed peers.
“Capital markets in China have been evolving over the years,” says Kevin Xie, a partner at local corporate fi nance boutique China Renaissance. “The CSRC’s new pricing mechanism and the cooling down of IPO appetite clearly indicate that private equity players and other investors need to carefully analyze companies in order to understand if they are investable.”
As the pre-IPO story fades, more GPs are now looking for secondary and M&A transactions as alternative exit routes for their portfolio companies. For some, the pressure is mounting. In 2007, a record-high of 619 private equity and venture capital transactions were completed in China. Five years on, with the funds now
Innovative intermediariesBoutique corporate fi nancial advisors are expanding in China, taking advantage of deals that lie beyond the reach of global investment banks. In the absence of pre-IPO deals, future success relies on diff erentiation
Private equity-backed IPOs
Source: AVCJ Research
50,000
40,000
30,000
20,000
10,000
0
150
120
90
60
30
US$
mill
ion
No. o
f IPO
s
No. of IPOs Funds raised (US$ million)
1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012
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maturing, these investments must be exited. They are fortunate that a growing number of strategic investors – local conglomerates that want to boost market share of foreign players looking for China exposure – are on the M&A trail.
For corporate finance advisors, it is another source of deal flow. “After so many years of nurturing the market, we are seeing a lot of deals coming on the table concerning M&As,” says Hina’s Chen. “There have been fewer opportunities to go public and PE funds need
exits after investing heavily five years ago, so a new trend is emerging.”
Smaller transactionsWhile opportunities are expected to emerge alongside a maturing private equity and M&A market, top-tier global investment banks and local financial institutions have only advised a small portion of transactions in China, usually large IPO and cross-border transactions worth hundreds of million dollars. If a bulge-bracket bank is spending its time with the likes of KKR and the Carlyle Group and TPG Capital, smaller players tend to slip below the radar.
“There isn’t a rule of thumb for transaction sizes for Morgan Stanley or other larger investment banks – we frequently work on smaller transactions when the circumstances make sense for us and our client,” Stephen Seelbach, managing director and co-Head of Morgan Stanley’s regional financial sponsors division, tells AVCJ. “That said, many of our larger PE clients focus on transactions where they write a minimum equity check of $100 million.”
Deals of this size are the exception rather than the rule in China. According to AVCJ Research, the average PE transaction size was $72 million, up from $20-50 million between 2004 and 2010. For the year to mid-June, the figure has ballooned to $129 million, partly a result of rising valuations but largely driven by a few mega-deals. In April, for example, Temasek
Holdings paid Goldman Sachs $2.3 billion for a minority stake in Industrial and Commercial Bank of China (ICBC). A month earlier, the National Council for Social Security Fund (NSSF) and China Investment Corp. (CIC) participate in a $2.5 billion private placement by China Bank of Communications.
This means there is a large portion of the market uncovered by the bulge-bracket banks, creating an opportunity for local corporate finance houses. China Renaissance has an
average transaction size of $30-50 million, while The Hina Group generally advises deals in the region of $50 million.
“Similar to global investment banks, China Renaissance charges on a success fee basis but we are more flexible on the ticket size,” says Kevin Xie from China Renaissance. “If we think the business of a company is interesting, we can do as little as $5 million or as big as $200-300 million.”
There are other reasons, unconnected to deal size, for going with a boutique player. In certain circumstances, PE firms are wary about sharing their proprietary ideas with the major investment banks when there is no guarantee that they will work together. They might also have concerns that some deals, typically mid-range transactions that don’t generate huge fees, will be delegated to junior advisors. There is much to be said for relying on relationships with trusted local players.
“For Unitas’ pure China deals, around 80% of them are done through these Chinese corporate finance boutiques and individual teams,” says Tsao. “In many cases, company owners don’t want to be too open and transparent, and it is always local boutiques with whom they have relationships, that bring potential transactions on the table.”
Another attraction of boutique providers is the fee. A global bulge-bracket bank brings with it considerable deal infrastructure, such as access to larger capital markets, equity research and global experience, and it charges for the
privilege. However, Chinese firms that don’t necessarily have a global perspective are more likely to respond to a package offered by a local boutique that is 60% cheaper.
When foreign private equity firms are involved, the priorities are different. Aware that LPs want to see deals executed quickly and cleanly, GPs often insist on paying a premium for quality and many local advisors don’t make the grade. Several industry participants note that smaller Chinese boutiques don’t have the skill sets to work on complicated transactions such as IPOs or cross-border M&A.
Add up the total revenues of all local advisory boutiques and they still representation a tiny fraction of the fees generated by major financial institutions in China.
“We would like to see more big banks providing corporate finance advisory services because all funds in China are aiming at doing bigger and more complicated deals,” says one China-focused GP. “In terms of value-add, Chinese boutiques are too young to help and the big players can’t do everything. That’s why you see the emergence of smaller banks.”
The $650 million sale of Beijing Leader & Harvest Electric Technologies by Affinity Equity Partners and Unitas to Schneider Electric was a case in point. When the two private equity players wanted to exit the company last year, they opted for a dual-track sale process which targeted an IPO in Hong Kong as well as a buyout bid. Only large investment banks were considered for the advisory mandates because no local player was deemed sophisticated to handle the transaction.
“If a transaction is easy, local firms can tackle with it because that doesn’t require complicated expertise, but once the deal involves international sales process, local advisers always lag behind and hard to get the deal done,” says Unitas’ Tsao.
Getting specializedThe competitive advantage for local boutiques comes in leveraging their local expertise and focusing on certain kinds of deals or in specific sectors. Hina, for example, only advises on M&A transactions where it feels its on-the-ground knowledge and connections come to the fore. The company’s partners have been working with Chinese entrepreneurs for a decade, developing relationships on a professional and social level. As such, when a PE firm wants to sell a company, Hina might be able to close the transaction quickly.
“We don’t do IPOs and we don’t want to handle complicated pricing matters with mutual funds,” says Hina’s Chen. “Rather, we focus on relationships and dynamics in China. When
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PE/VC-backed investments in China, 2004-2012
Source: AVCJ Research
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No. o
f PE
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CoVEr [email protected]
people are looking for M&A opportunities, we can quickly search 40 companies and then screen the ones they like.”
China Renaissance, meanwhile, is a sector specialist. It focuses on tech, media and telecom, education, healthcare and consumer, and has developed sophisticated research processes for each one. In addition, it engages in daily dialogues with companies and fi nancial sponsors to share thoughts on execution plans, valuation and risks.
China Renaissance’s Xie adds that it is important for local advisors to support clients through both good and bad times. The company often targets start-ups and early-stage enterprises in order to develop long-term ties. This paid off with mobile networking services provider PICA. China Renaissance helped the company raise a $10 million funding in 2008, followed it for two years and then secured an advisory role when PICA was acquired by Chinasoft for approximately $100 million.
The company sometimes provides research and assistance to clients even if they aren’t involved in a transaction, a service the big banks don’t have the time to emulate. However, this only gets you so far, Xie cautions. ”Relationships are defi nitely important but there is always a limit to that. Looking forward, clients will
become more sophisticated and Chinese CEOs and PE funds start to understand the nature of investment banking. If it’s just about relationship building, we couldn’t ask the fee we are charging.”
The overseas angle Obliged to diff erentiate their services from the mainstream, cross-border deals represent a particular challenge for Chinese boutiques, given that they don’t have an overseas presence. Partnering with international investment banks appears to be the preferred option.
In 2009, when NASDAQ-listed AsiaInfo and Chinese-based Linkage Technologies, both providers of software solutions and IT services to the domestic telecom industry, decided to merge, Bank of America Merrill Lynch (BoAML) and the Hina Group advised AsiaInfo, while Barclays worked with Linkage. “We sourced the deal and thought it’s important for us to bring in a partner with global experiences,” says Chen from the Hina Group. “We split the fee 50-50 with BoAML – they did most of the valuation analysis and we did the relationship and negotiation work.”
China Renaissance opted for a similar strategy when advising US-based Thayer Hotel Investors V-A LP, a private equity fund sponsored by Thayer Lodging Group, on its joint acquisition of Interstate Hotels & Resorts with Shanghai-
based Jin Jiang International Hotels. BoAML and UBS also had a piece of the mandate but China Renaissance’s specifi c role was to help Thayer bridge the fi nancial, legal and cultural gap when communicating with Jin Jiang.
“For Chinese investors securing foreign assets, there is a need to hire Morgan Stanley or Credit Suisse but then you still need to have some Chinese advisers to navigate the process,” says Xie.
These partnerships are expected to proliferate. The reality that no single corporate fi nancial advisor or group of advisors can corner the entire China market acts as a natural diff erentiator. As it stands, global investment banks target the larger-scale deals while their counterparts at the boutique end leverage their local knowledge and particular areas of expertise to capture the small- to mid-size space. In some cases, their skills complement one another.
How long this balance endures depends on the depth to which global players are willing or able to penetrate China and whether the boutique operators are capable of scaling up their business and becoming more sophisticated at the same time. The prospect of China emulating the US model and giving birth to Evercore clones is not beyond the realm of the possibility, but it won’t happen just yet.
Where do these funds come from? How are they being invested? In which sectors? What regulatory changes are making an impact on investment strategies?
AVCJ provides the answers and more in its series of pan-Asian industry reviews. The reports provide an independent overview of the private equity, venture capital and M&A activities in the region, including the latest statistics and analysis by AVCJ’s research team. The annual reviews also deliver insights on investments made, capital raised, sector-specific figures and more—making them essential reading for all private equity investors, investment bankers, accountants, lawyers, corporate financiers and management consultants looking at the Asian market.
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avcj.com | June 12 2012 | Volume 25 | Number 2210
The Tie-up beTween TpG capiTal anD South Korean GP Vogo Investment was buried at the bottom of the story, sacrificing top billing to a reshuffling of the US private equity firm’s senior management in Asia. Already responsible for Australia and Southeast Asia, Managing Partner Ben Gray has now added Japan and South Korea to his remit, with counterpart Stephen Peel focusing on China and India.
However, the Vogo partnership may turn out to be just as significant as the personnel changes. Not only does it have the potential to improve the Korean GP’s prospects, but it also represents
a novel approach to a market that is attractive to investors yet notoriously difficult to operate in. Success hinges on just how deep the relationship goes.
“If you look at the last five or so years, there have only been about two decent-sized buyouts by foreign firms each year – and there is a perception that Korea favors local firms and local private equity players,” says Bob Partridge, managing partner for Greater China transaction advisory services at Ernst & Young. “There are a lot of local firms that tend to see more dealflow, so establishing an affiliate relationship seems logical.”
Tried and testedTPG is no stranger to this approach in Asia. Much of its early activity in the region was channeled through Newbridge Capital, a joint venture with Blum Capital that was absorbed into TPG
in the early 2000s. In 2007, the private equity firm established a relationship with Indonesia’s Northstar Pacific Partners, backing its first two funds and co-investing in certain deals. Last year the two firms formalized ties, with TPG taking 10-20% of Northstar, which received less than 0.5% of TPG in return.
“Northstar started as an informal alliance and then TPG seeded the fund and got co-investment rights,” says one pan Asian GP. “It worked out well so maybe Vogo thinks it could be the next Northstar.”
But comparisons between Vogo and
Northstar are as deceiving as those between Northstar and Newbridge. While it could be argued that Northstar wouldn’t be where it is today without TPG’s support, the firm – unlike Newbridge – has always been independent and is expected to remain that way. And then Vogo is no Northstar. It can claim to be an established player however, having raised a debut fund of KRW607 billion ($514 million) in 2005 and a KRW537 billion follow-on vehicle last year. Vogo is one of few Korean GPs to attract capital from overseas investors.
Furthermore – and as sources close to TPG are keen to point out – there is no economic relationship between the US private equity firm and its Korean counterpart. They have one thing in common: Byungmoo Park, who joined Vogo last year as a managing director, formerly held the same role with Newbridge.
According to one source familiar with Vogo’s
investor base, the GP has promised LPs that they will get precedence over TPG when it comes to allocating co-investment opportunities. A local fund manager, citing conversations with his own investors, adds that Vogo has been using the TPG alliance to pitch its global connections to domestic LPs.
What purpose?Given that there appears to be no formal agreement for deal-sharing on either side, it begs the question of what this alliance is supposed to achieve. Several observers are somewhat cynical about the arrangement, suggesting it amounts to little more than a marketing ploy for two firms on the fundraising trail.
TPG is said to be approaching a first close of $1.5 billion on a pan-Asian vehicle that is seeking $4 billion, while Vogo has been marketing its third fund, which has a target of $650 million, for about a year. About 20% of the firm’s first fund came from overseas investors, and Jason Shin, Vogo’s managing partner, told AVCJ earlier this year that a larger portion of foreign capital is being targeted for the latest vehicle.
An LP familiar with Vogo describes the performance of the firm’s first fund as “okay, but not great.” He sees the ties to TPG, however loose, as a positive factor in the fundraising efforts. “If I were Vogo, I would have tried to get a deeper, more formal relationship,” the LP adds.
For TPG, the arrangement appears to provide access to Korean dealflow that it otherwise might not have, with relatively little offered in return. The firm no longer maintains an office in Korea and hasn’t made an investment there since 2003, when Newbridge participated in the $1.1 billion buyout of Hanaro Telecom, which was exited in 2007.
Newbridge’s landmark investment came in 1998, with the restructuring of Korea First Bank. The consortium led by the private equity firm bought the bank for KRW500 billion and sold it seven years later for KRW3.4 trillion. The size of the returns prompted a public backlash against foreign investors, who were accused of exploiting Korean enterprises while they were weak in the wake of the Asian financial crisis.
“Lone Star has overpowered everyone following the problems with Korea Exchange Bank, but TPG still doesn’t have a great reputation
TPG secures pact with Korea’s VogoComparisons between TPG’s tie-ups with Northstar and Vogo are flawed – one is fully formalized, the other is loose. But the private equity firm does appear ready to re-engage with South Korea after a long absence
PE investments in South Korea
Source: AVCJ Research
8,000
6,000
4,000
2,000
0
150
120
90
60
30
US$
mill
ion
No. o
f dea
ls
No. of deals Value (US$ million)
2000 2002 2004 2006 2008 2010 2012YTD
here,” says the local GP. “In that context, maybe having a local partner makes sense.”
Back in vogueThe tensions that followed the Korea First exit saw foreign private equity firms steer clear of buyouts in the country. A quick scan of the largest foreign-backed Korean control deals since 2000 shows little activity after 2005. Morgan Stanley broke the deadlock with its $835 million acquisition of Jeonju Paper Corp. in 2008, although it did have a local partner. A year later Affinity Equity Partners and KKR secured the $1.8 billion buyout of Oriental Brewery.
Ernst & Young’s Partridge believes that the investment environment is becoming easier, and it could be argued that TPG’s willingness to reengage through Vogo is evidence of this.
“In the last year there has been a clear increase in interest in Korea – you just have to catch the Cathay Pacific flight to Seoul on Monday afternoons to see that,” says Partridge. “There are a lot of assets for sale, including secondary deals from international PE firms. Although the data doesn’t show any change, the sense on the ground is that the hostility towards foreign private equity has dropped.”
He sees foreign private equity firms targeting two kinds of deals: succession opportunities
where one generation of family owners wants to retire and their children don’t want to retain the business; and joint ventures between foreign and Korean entities, where the foreign party is unhappy and wants out.
Others are more circumspect. The size and skill of the economy and the opportunities – relatively rare in Asia – to put large amounts of capital to work in a single deal are seen as the principal highlights. These are tempered by latent concerns about the risks of regulatory nationalism and draconian tax policies, and
competition for deals from domestic strategic investors.
Then there is the fact that private equity works in cycles, and when valuations or exits become a problem in one country, fund managers must seek to deploy their capital elsewhere. “Five years ago people didn’t worry about Korea; it was all China and India,” says the pan Asian GP. “Now there are concerns about Chinese growth slowing, combined with rising competition, and India is unpopular, so suddenly Korea makes a lot of sense again.”
Leading foreign PE buyouts in South Korea, 2000-present
Date Value
(uS$m) investee investors industry
May-09 1,800.0 Oriental Brewery Affinity Equity Partners; KKR Consumer
Aug-03 1,192.9 Korea Exchange Bank Lone Star Financial services
Sep-03 1,100.0 Hanaro Telecom AIG; Newbridge Capital; Telecom Venture Group Telecom
Jun-08 835.0 Jeonju Paper Corp. Morgan Stanley; Shinhan Private Equity Industrials
Apr-05 769.7 Hi-mart Affinity Equity Partners; GIC; Temasek Retail
Dec-00 446.0 Mando Corporation Affinity Equity Partners; JP Morgan Transportation
Sep-00 392.0 KorAm Bank Carlyle; CDP Asia; JP Morgan Corsair; PPM Ventures; Prudential Asset Management
Financial services
Jun-01 384.0 Haitai Confectionery & Food
Affinity Equity Partners; CVC; JP Morgan; UBS Capital
Consumer
Oct-00 330.7 Daewoo Telecom - IT unit
Carlyle; CVC; PPM Ventures IT
Source: AVCJ Research
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avcj.com | June 12 2012 | Volume 25 | Number 2212
inDia-baSeD komli meDia, a proViDer of online advertising solutions across mobile, video, social networks and search engines , has attracted $39 million in Series D funding from venture capital firms, in a move to expand its presence across Asia.
The latest round was led by Norwest Venture Partners, a global venture capital firm that manages more than $3.7 billion in capital. Existing investors Nexus Venture Partners, Helion Venture Partners and Draper Fisher Jurvetson (DFJ) also participated, alongside one new arrival, Western Technology Investment.
Komli secured its first venture capital funding from these three firms in December 2007, when the company launched a solution combining the features of search and display advertising. One year later, current CEO Prashant Mehta joined the company from Yahoo. Since then, the company has completed several acquisitions in India,
Australia and Southeast Asia. Norwest Venture Partners only came on board in 2011, when it led a $15 million Series C round, with Helion also participating.
Komli’s revenues have grown at an annual rate of 150% for the last three years.
Its advertising platform reaches over 270 million users on a monthly basis and services more than 1,000 advertisers across the region.Headquartered in Mumbai, it employs over 400 staff across 18 offices in India, Australia, New Zealand, Southeast Asia, the Middle East, Hong Kong,
North America and the UK.“With early investments in superior talent
and its innovative platforms, the company has completely transformed its business,” says Norwest’s Shah. “Today, it is well positioned to capture a much larger share of digital media within some of the fastest-growing markets in the world.”
Asia Pacific is currently the fastest-growing media advertising market in the world, with digital advertising set to grow by 30-50% per annum for the next 10 years. Online advertising is expected to expand particularly fast in Southeast Asia, on the back of rising broadband penetration. Broadband has currently only reached 100-125 million of the population, providing ample room for further growth.
The latest financing will allow Komli to scale up its platform and operations across the Asia Pacific region by investing in real-time bidding, a technology that allows advertisers to bid in real-time for placements on pages. It will also enhance the company’s data, analytics and retargeting solutions for advertisers, agencies and publishers.
“Audiences are getting more sophisticated, from owning phones to iPads and other gadgets. It is important for marketers to target them in the right manner,” Prashant Mehta, CEO of Komli, tells AVCJ. “Having more real-time data can only benefit the advertising market by giving it a wider audience.”
The Sale of a one ThirD inTereST in Kyobo Life, the smallest of South Korea’s Big Three life insurers, was always going to be a two-phase affair. The first phase – Korea Asset Management Corp. (KAMCO) exiting its 9.9% stake in the company – is now all but over. The second phase, which will see Posco-owned Daewoo International sell off a 24% holding, is still very much alive.
“The Daewoo process is much more involved than KAMCO,” says one GP who participated in the bidding. “The KAMCO stake is one of the few remaining assets from the wave of restructuring in the late 1990s. They set a deadline and reach a decision quickly because it’s a government-mandated auction.”
Kyobo has already been subject to a private equity carve-up since KAMCO assumed control of the asset in 1999 after parent company Daewoo slid from being Korea’s second-largest conglomerate to its most infamous bankrupt. A Corsair Capital-led group bought a 7.41% stake for $299 million in 2007, shortly before Standard Chartered Private Equity picked up 5.30% from
two family shareholders for approximately $230 million.
Steelmaker Posco acquired 68% of Daewoo International for $2.8 billion in 2010, allowing KAMCO to exit its holding in the company. Posco wanted Daewoo International’s raw materials trading business and came to own part of Kyobo as a by-product.
KAMCO first considered exit-by-auction from Kyobo as far back as 2003, prompting interest from private equity firms, but nothing came of it. This time around the PE firms have lost out again, as Canada’s Ontario Teachers’ Pension Plan was last week named as the preferred bidder, having reportedly agreed to a KRW470 billion ($398 million) valuation, or KRW230,000 per share for the 9.9% stake.
Investors including Affinity Equity Partners and The Carlyle Group were left empty-handed, but they remain in the running for Daewoo International’s 24% interest, with bids having
reached a reported KRW1.2 trillion. According to the GP that is participating in the process, Carlyle and Affinity are competing with Corsair, which already owns 5.28%.
With Korean regulations preventing foreign investors from owning more than 10% of an insurance company, the GPs have recruited
partners. The Carlyle- and Affinity-led groups are said to include a Middle East sovereign wealth fund and Government of Singapore Investment Corp., respectively.
The successful private equity bidder’s exit route is obvious. Samsung Life Insurance and Korea Life
Insurance, the other two of the Big Three, are publicly listed and so Kyobo is ultimately expected to go the same way. “Several Korean life insurance companies have gone public in the last few years and this remains the trend,” says the GP.
Macquarie and Woori Investment & Securities are advising Daewoo on the transaction.
dEal oF thE [email protected] / [email protected]
India’s Komli raises $39m in Series D round
PE firms remain in the hunt for Kyobo Life
Insuring Korean lives: Kyobo Life
Web advertising is growing in India
Number 22 | Volume 25 | June 12 2012 | avcj.com 13
picTure The Scene. you work unTil midnight to close a deal and when you leave the office, you find your car has broken down. You then have to wait 45 minutes before you’re able to hail a cab.
This kind of frustration had occurred on more than one occasion to Fazal Ahad, director of Merisis Capital Advisors, and so was already at the forefront of his mind when Ola Cabs, a Mumbai-based online car rental start-up, approached the corporate finance adviser for on a Series A funding round last year.
Ola runs a platform that connects customers with small-scale taxi operators, allowing the former to book services online or using a mobile device. The need for an alternative to the Indian habit of hailing taxis on the street – and waiting for up to an hour in the process – appeared all too evident to Ahad. Merisis was happy to act as the exclusive adviser to the firm, which raised INR10 million ($180,000) from Tiger Global in April 2011.
Ola Cabs is one of several Indian companies offering taxi-related services to have attracted investment from venture capital firms of late. Last month, Accel Partners, Helion Venture Partners and seed investor Blume Ventures backed a Series A round for Serendipity Infolabs, which runs online taxi booking site Taxiforsure.com. Also in May, Anand Prasanna, an angel investor and investment director at Squadron Capital, injected INR2.5 million in car rental booking portal Taxiguide.in, while in April, Inventus Capital Partners made a sub $1 million investment in online chauffeur rental service Savaari Car Rental.
“This is a space which offers huge potential,” says Merisis’ Ahad, who had to turn down two other taxi-related companies seeking assistance in fundraising due to potential conflicts of interest. “Whether it is a taxi or a rental car, people need it all the time. So depending on who you believe, the market size is $2.5-4 billion.”
Taxi! Taxi!VC interest in the automobile services segment isn’t a new phenomenon, however. Two of the sector’s largest players – Meru Cabs and Easy Cabs – were both backed by venture investors several years ago, when they were the first entrants into the Indian radio taxi sector. The breakthrough was enabling Indian consumers to
telephone for a cab for the very first time. In 2007, Meru’s parent company, V-Link Group,
launched a fleet of cabs that has since grown to 5,600 with the support of India Value Fund, which became a majority owner of the brand. Meanwhile, Carzonrent – the owner of Easy Cabs, which itself owns 6,500 vehicles – received its first round of VC investment from SIDBI Ventures in 2005.The following year, Westbridge Capital Partners entered the capital structure, with BTS Investment Advisors following suit last year. Easy Cabs is now looking to raise INR400 million in new funding..
The major difference between these two sector heavyweights and the more recent start-ups is that the former own and operate
their fleets while the latter are online platforms that simply work with firms and individuals who have their own vehicles. This makes their business model highly asset-light and frees them from the burden of having to bid for permits in certain states, such as Mumbai. “It’s also easy for someone to scale up if they have the technology,” says Ahad.
With Ola, the technology is clearly one of the factors that attracted Tiger Global. Presenting a stark contrast to hailing a cab at the road-side, their platform allows users to see exactly where vehicle they have booked is located via GPS tracking to their phone, as well as specifying what car will arrive, who the driver is and the driver’s cell phone number. Each Ola car’s tracking device also doubles up as a meter, run by the company rather than the driver, which reduces the likelihood of meter tampering taking place.
Ola is one of several companies to have introduced technology to this space, and with organized players holding a mere 10% of the market, it is clear that consolidation will need to take place over the coming 2-3 years. Will
superior technology be what separates the wheat from the chaff? According to Parag Dhol, a managing director who co-led Inventus’ investment in Savaari Car Rentals, the ability to ensure a uniform standard of quality across a range of operators could prove to be more of a differentiator.
“I wouldn’t say that optimizing the website and the customer experience online aren’t problems to be solved, but they are secondary problems,” he says. “The principal game is to create word of mouth for yourself as a uniform quality provider. It’s not an easy business. Savaari goes to [taxi operators] whose standards of service aren’t generally very high and convinces them to try out the company, giving them some volume and ensuring that they perform to our standards.” Those standards include providing newspapers in the cars, having uniformed drivers and opening doors for passengers.
Multiple exit optionsThe companies that manage to instill more of a service culture, as well as fully optimizing their technology platform, could find themselves with an array of options when the time comes to exit their stakes in 4-5 years time. The biggest opportunity for VC firms is likely to come in the form of a strategic sale to a global corporate: Hertz (of which Carzonrent was formerly a franchisee), Avis and Enterprise Rent-A-Car are all interested in expanding their foothold in India, while Japan’s Orix Corporation recently executed a share purchase agreement with IL&FS to enable it to start car rental business Orix India.
An online travel company such as MakeMyTrip – which already offers airport pick-up and drop-off and car rental services – could also be the instigator of a future buyout. Meru and Easy Cabs represent yet another alternative as the services offered by a number of these aggregators are complementary to the point-to-point transportation to which these firms are currently restricted.
Says K. Srinivas, managing partner at BTS Investment Advisors, backers of Easy Cabs: “We would like to look at how to enhance the value-add of Carzonrent. We will look at ancillary or related services to the cab business but would like to look at it as a value-add – a forward or backward-integration for Carzonrent.”
VCs park their cash in Indian taxi firmsVenture investment in Indian taxi companies is no new phenomenon, but the profile of the firms which are commanding capital appears to be changing
“Whether it is a taxi or a rental car, people need it all the time...The market size is $2.5-$4 billion” – Fazal Ahad
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Number 22 | Volume 25 | June 12 2012 | avcj.com 15
PRivATE EqUiTY DATA FiLE | aVCJ [email protected]
priVaTe equiTy in aSia
Investment Breakdown by Country From 1 January to 31 May 2012
investee country amt. invested uS$m no. of Deals (Disc.) no. of investees
China (PRC) 9,651.0 135 73 135
India 5,326.4 173 130 167
Australia 4,309.3 30 19 30
Hong Kong 1,703.7 10 9 10
Japan 747.0 139 110 139
Malaysia 433.8 7 7 7
South Korea 327.8 45 43 44
New Zealand 272.5 8 5 8
Thailand 100.0 4 1 4
Singapore 93.1 9 2 9
Vietnam 30.0 6 2 6
Taiwan 5.2 3 1 3
Sri Lanka 2.0 1 1 1
Indonesia - 4 - 4
Closed Fund
location: India
Fund name: ChrysCapital VI, LLC
Closing Amount: US$510 million (final close)
launch date: November 2011
Fund Manager/Advisor: ChrysCapital Management Co.
stage Focus: Buy-outs (MBO/MBI/LBO), Expansion/ Growth Capital, Mezzanine/ Pre-IPO
Industry Focus: Consumer products/services, Financial services, Information technology, Infrastructure, Manufacturing - Heavy, Manufacturing - Light, Medical
Geographical Focus: India
Contact: Ashish Dhawan
Phone: (91) 11- 4129-1000
email: [email protected]
Website: www.chryscapital.com
update: ChrysCapital has raised US$510 million for ChrysCapital VI. The Fund will concentrate on making investments with a US$20-100 million equity ticket, with most falling into the US$30-50 million bracket. It will focus exclusively on growth capital transactions in India, taking equity stakes ranging from 5-45%, although the occasional buyout is to be expected. It received half of its investment from US endowments and pension funds, and half from sovereign wealth funds and institutions based in Asia and Australia.
neW Funds
location: Hong Kong
Fund name: KKR Asian Fund II, L.P.
Target Amount: US$6,000 million
launch date: May 2012
Fund Manager/Advisor: KKR Asian Limited
stage Focus: Buy-outs (MBO/MBI/LBO), Expansion/ Growth Capital, Privatization, Turnaround/ Restructuring
Industry Focus: Agriculture/Fisheries, Computer related, Conglomerates, Construction, Consumer products/services, Ecology, Electronics, Financial services, Information technology, Infrastructure, Leisure/Entertainment, Manufacturing -Heavy, Manufacturing - Light, Media, Medical, Mining and metals, Retail/Wholesale, Services - Non-Financial, Telecommunications, Textiles and clothing, Transportation/ Distribution, Travel/Hospitality, Utilities
Geographical Focus: Australia, China (PRC), Hong Kong, Japan, New Zealand, Taiwan
Contact: Joseph Y. Bae
Phone: (852) 3602-7300
Website: www.kkr.com
update: KKR has launched US$6 billion for its second Asian buyout fund. KKR Asian Fund II has already attracted commitments of US$2 billion which US$400 million is from Washington State Investment Board, US$200 million is from the Oregon Public Employee Retirement Fund (OPERF), and US$25 million from the Oregon Common School Fund. The fund is planning to announce a first close in June 2012.
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