focus the pe poverty play · 2013. 5. 10. · asian venture capital journal private equity asia...
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ASIAN VENTURE CAPITAL JOURNAL
PRIVATE EQUITY ASIA
M&A ASIA
Asia’s Private Equity News Source avcj.com June 26 2012 Volume 25 Number 24
Focus Deal oF the Week
The PE poverty playInvestors gradually rediscover their appetite for Indian microfinance Page 7
Asia’s pricing powerSecondary investors seek fair value deals Page 10
Hopu exits MengniuThe China PE firm continues divestment Page 12
CVC completes $59m investment in Chinese ladies footwear chain
Page 12
VC investors target deals beyond India’s e-payment mainstream
Page 13
Deal oF the Week
Focus
Roy Kuan, managing partner of CVC Asia
Page 15
Direct investors need a local presence in Asia
Page 3
Asia Alternatives, Bain, Carlyle, KKR, MBK Partners, Milestone, NewMargin, RRJ, Saratoga, Singtel Innov8
Page 4
eDitor’s VieWpoint
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Number 24 | Volume 25 | June 26 2012 | avcj.com 3
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The wAy in which globAl bUyoUT firms have built up their local expertise in Asia in recent years so as to compete more effectively with smaller regional and single-country funds is a clear reminder of the value of having people on the ground. Although some teams have enjoyed more success than others, the fly-in, fly-out dealmaker is increasingly the preserve of marginal geographies.
As investors that have traditionally served as fund investors look for more direct and co-investment opportunities in the region, the same lesson applies. You need a stable, local presence to make it work.
Talking to AVCJ about the California Public Employees’ Retirement System’s (CalPERS) Sacramento-based approach a couple of months ago, one industry participant put it thus: “We see these guys come off the plane and they’re half dead. They are here to do due diligence on co-investments but are in no state to work productively. If you can’t invest in the infrastructure, you will make mistakes.”
This message was reinforced last week during an FT conference panel on institutional investors’ strategies. Participants included Mark Delaney, CIO of AustralianSuper, and Peter Chen, senior principal at Canada Pension Plan Investment Board (CPPIB).
Explaining why AustralianSuper decided to open an office in Beijing, Delaney made two points. The pension fund already has considerable exposure to equities in the US and Europe and is considering a rebalance in favor of China, and executing this strategy responsibly means relying on more than the word of third-party advisors and fund managers. AustralianSuper also has sizeable domestic investments, many of which are resource-related, and understanding how these might perform means understanding China, the primary source of demand.
CPPIB, meanwhile, is known for its willingness to put resources on the ground in Asia and for having a proactive attitude towards direct investment. Strip out the large-scale infrastructure transactions from the pension fund’s corporate private equity activities and
it seems that only one of these reputations is merited. Yes, CPPIB does employ about 20 investment professionals in Hong Kong, but so far the co-investment deals it has pursued have been limited to transactions executed in tandem with portfolio GPs.
Nevertheless, CPPIB offers competitive compensation packages and doesn’t appear to be hemorrhaging talent. Chen told the conference that taking an appropriate long-term view towards investment in Asia wouldn’t be possible without having resources in Asia.
Coller Capital’s latest global private equity barometer found that there is no shortage of interest in direct investment among LPs. Two-thirds of respondents said they now commit capital to companies on a co-investment or stand-alone basis, up from 35% six years ago. Over 40% expect their direct investment levels to increase in the next three years. Only 6% envisage a decrease.
The underlying logic is sound – lower costs and potentially higher returns – but every time the size of a commitment to one particular deal goes up, so does the risk factor. In these circumstances, it is really wise to rely on a fund manager’s word alone when looking at a co-investment opportunity? There have been situations in which GPs have pushed deals onto LPs in order to finish off a fund, stepped outside their investment comfort zone and needed bailing out, or become so focused on a transaction that they are blind to flaws that emerge during negotiations.
Even if an LP knows it has to make a tough call on a deal, can the investment professional responsible get it right after a 14-hour flight from its headquarters and with little background information picked up from local sources?
Everyone wants to do direct investments but not everyone has figured out how to do them right.
Tim BurroughsManaging EditorAsian Venture Capital Journal
Before going direct, go local
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avcj.com | June 26 2012 | Volume 25 | Number 244
ASIA PACIFIC
Robin Bell-Jones to lead Permira Asia TMT coveragePermira has redeployed Robin Bell-Jones from London to Hong Kong as part of efforts to expand the firm’s investment activities across Asia. Bell-Jones will be the third partner at Permira’s Hong Kong office, which is led by Henry Chen and Alex Emery, co-heads of Asia. He will be responsible to lead Permira’s technology, media and telecoms (TMT) sector coverage in the region.
Nomura appoints head of Asia investment bankingNomura has promoted Mark Williams to head of investment banking for Asia ex-Japan, to replace Patrick Schmitz-Morkramer. Williams joined Nomura from UBS as regional head of equity capital markets in August 2010, when the Tokyo-based securities firm was seeking to expand its equity capital markets business. His predecessor Schmitz-Morkramer is leaving Nomura to take a sabbatical.
PE-backed M&A picks up in second quarterPrivate equity-backed M&A in Asia Pacific recovered during the second quarter of 2012, as deal value increased 32.9% to $5 billion from last quarter. This comes after consecutive quarterly declines since the start of 2011. However, the value of PE-backed deals so far this year amounted to $8.8 billion, according to data compiled by Thomson Reuters, which represents a 54.9% drop from the first half of 2011.
PSERS commits $50m to Asia Alternatives fundThe Pennsylvania State Employees’ Retirement System (PSERS) has committed $50 million to Asia Alternatives’ third fund-of-funds, which was launched early last year with a target of $1 billion. As of September 2011, it had attracted $375 million, according to regulatory filings.
AUSTRALASIA
Billabong poised for takeoverAustralian surfwear retailer Billabong International saw its stock slump 36% when it
resumed trading on Monday following a heavily discounted $225 million rights issue. The firm is now worth less than one third of the value of TPG Capital’s A$841 million ($904 million) buyout offer, made in February. According to The Sydney Morning Herald, strategic and private equity players are considering moves for the company.
KKR puts Bis Industries on the blockKKR has reportedly put its mining services and logistics business Bis Industries on the block. The Australian company has been valued at around $1.8 billion including debt. The attempt to sell the firm comes after negotiations failed to refinance loans used to buy Bis back in 2006. KKR is liable to pay back the A$905 million ($922.06 million) in leverage it borrowed by June 2013.
Australian businesses don’t trust PEOnly 5% of small- to medium-sized enterprises (SMEs) in Australia that are currently seeking funding would consider private equity as a source of capital, according to a survey published by PricewaterhouseCoopers (PwC). The problem is perception rather than lack of awareness.
Just over two thirds of the 1,000 businesses interviewed said they had some or good knowledge of PE, although only one in 10 gained this information through first-hand experience.
Asiasons buys Australian pre-school showSoutheast Asian private equity firm Asiasons Group has acquired Australian pre-school television show Hi-5 from Nine Network Australia and Southern Star Entertainment. Nine Network is owned by the debt-laden Nine Entertainment Group, which is backed by CVC. The acquisition by Asiasons includes production, licensing, touring and merchandising rights for the brand.
Singtel Innov8, Optus launch Oz start-up programSingTel Innov8, the venture capital arm of SingTel, has teamed up with Australian telco Optus to start a seed program to help Australian digital startups grow and expand into Asia. The program gives startups access to seed funding, mentoring, networking and dedicated co-working spaces to support their business growth and progression to Series A funding.
GREATER CHINA
CITIC Securities launches buyout fund China’s CITIC Securities has received regulatory approval to establish its first buyout fund, which will be managed by Goldstone Investment, the brokerage’s direct investment arm. CITIC Buyout Fund is a temporary name subject to change, the brokerage said in a regulatory filing, adding that institutional investors will be targeted to participate as LPs in the fund.
Milestone backs China restaurant chain IPOMilestone Capital Partners has agreed to become a cornerstone investor in Chinese restaurant chain Xiao Nan Guo’s Hong Kong IPO. The company is looking to sell 341.25 million shares at HK$1.50 to raise HK$511.5 million ($65.9 million). A Milestone subsidiary will buy $22 million worth of shares, which would give it a 7.7% stake in the listed company.
China’s NewMargin leads $36m Majestic Gold roundShanghai-headquartered NewMargin Ventures
Bain buys into Japanese TV shopping channel for $1.3bBain Capital will buy a 50% stake in Jupiter Shop Channel (JSC), a television shopping company, from Japan-based Sumitomo Corporation. Industry sources noted that the deal is worth JPY100 billion ($1.3 billion), which might be Japan’s largest private equity transaction of the year.
JSC, a subsidiary of Sumitomo Corporation, is currently the largest TV shopping company in Japan with a 30% market share.
Sumitomo said that Bain’s knowledge and network would help increase JSC’s corporate value through the broadening of its customer base, improvement of cost competitiveness, and promotion of expansion into Asia.
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avcj.com | June 26 2012 | Volume 25 | Number 246
has agreed to lead a $36 million financing round for China-focused minerals company Majestic Gold. The private placement will take place through the sale of 197 million units at the price of $0.18 per piece. Each unit will consist of one common share of Majestic Gold and one common share purchase warrant, which entitles the holder to purchase one additional common share at a price of $0.20.
NORTH ASIA
MBK named preferred bidder for Korea’s Hi-MartMBK Partners has been chosen as the preferred bidder for South Korean electronics retailer Hi-Mart. The company said in a statement to the Korean Stock Exchange that its largest shareholder, Eugene Corp, had made the decision. Reports of Hi-Mart’s imminent sale have been circulating since early in 2012.
O’Melveny to open office in South KoreaO’Melveny & Myers is going to open an office in Seoul, South Korea, in a move to deepen their services for Korea-based clients. As part of the expansion, Sungyong Kang and Jinwon Park recently joined the firm and will be resident in the new office upon receipt of regulatory approval.
SOUTH ASIA
Baring increases its stake in Manappuram FinanceBaring India Private Equity has increased its stake in Manappuram Finance, a non-bank financial company (NBFC) specializing in loans based on gold. According to a statement, Baring India has raised its holding from 4.99% to 5.94%. The majority of the stake - 4.46% - is held by Baring India Private Equity Fund III, with the remainder owned by Fund II.
Carlyle hires Neeraj Bharadwaj as India MD The Carlyle Group has appointed Neeraj Bharadwaj as a managing director for its Asia operations in Mumbai. It emerged last week that he was the private equity firm’s preferred candidate for the role. Bhardwaj joins from Accel Partners, where he was responsible for making growth capital investments in India. Prior to that,
he spent nearly 10 years with Apax Partners in New York and India.
Morgan Stanley invests $210m in Continuum WindMorgan Stanley Infrastructure Partners has agreed to buy a majority stake in Continuum Wind Energy for INR12 billion ($210 million). The Singapore-based company, which was set up Essar Group executive Vikas Saraf and investment banker Arvind Bansal, runs wind farms in India. Continuum will issue preference shares to Morgan Stanley which will convert to equity at a later date, giving the US firm a 50% stake.
MineralTree in $6.3m round led by Fidelity IndiaFidelity Growth Partners India has led a $6.3
financing round for Boston-based MineralTree, which provides cloud-based secure payments services for small- and medium-sized enterprises (SMEs). Existing investor .406 Ventures also participated. The funding will be used to enhance the company’s service platform and, accelerate partnerships with banks and improve distribution to customers.
ASK Property closes $175m real estate fundASK Property Investment Advisors (ASKPIA), a subsidiary of financial services firm ASK Group, has announced a final close of its second real estate fund on INR10 billion ($175 million). The ASK Real Estate Opportunities Fund claims to have amassed the largest corpus raised by an Indian real estate investor over the last 4-5 years.
IFC, Proparco, Mount Kellet invest in EducompEducomp Solutions, India’s largest education company, has received $155 million in financing from International Finance Corporation, French development finance institution Proparco, PE firm Mount Kellett and the company’s own promoters. A total of $70 million was received under external commercial borrowings, with the remainder to come through foreign currency convertible bonds and allotments of preferred shares and warrants.
SOUTHEAST ASIA
RRJ Capital targeting $5b Asia fundRRJ Capital, the private equity firm set up by former Hopu Investment Management executive Richard Ong, is reportedly looking to raise at least $5 billion for its second pan-Asian fund. The vehicle will follow its predecessor in focusing on China- and Southeast Asia-related deals. RRJ has already received more than $3 billion in commitments from LPs. and is targeting a first close in September.
KKR to establish Singapore investment teamKKR will open an office in Singapore as a base for its investment activities across Southeast Asia. AVCJ understands that an announcement is forthcoming, with about eight investment professionals working out of the new office, although Ming Lu, the firm’s head of Southeast Asia, will continue to operate from Hong Kong.
Indonesia’s Saratoga closes fund three at $600mSaratoga Capital has closed its third fund at $600 million, according to sources familiar with the situation. It took the Indonesia-based firm about six months to close the new vehicle, which will make investments across Southeast Asia. The initial fundraising target was $450 million but industry participants expected the GP to reach or exceed its hard cap of $550 million. UBS acted as placement agent.
Starling Group, a Dubai-based investment firm owned and managed by the Jawa family, has confirmed that it is among the LPs in Fund III. Investors in Saratoga’s second fund, a $152 million vehicle that closed in 2009, included UK development finance unit CDC Group and University of Texas Investment Management.
Founded by Edwin Soeryadjaya and Sandiaga Uno (pictured) in 1998, Saratoga is one of few established GPs in Indonesia. The firm made its name with investments such as Adaro Energy, which became the country’s second-largest coal company and raised $1.3 billion through an IPO in 2008.
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Number 24 | Volume 25 | June 26 2012 | avcj.com 7
coVer [email protected]
“There iS no one wAy To help The poor. Poverty is like cancer - you need a cocktail of activities to fight it,” says Vineet Rai of Aavishkaar Venture Management, India’s first rural-focused venture capital firm.
In November 2010, though, it seemed as though that cocktail had lost one of its core ingredients. More than 70 recipients of microfinance loans committed suicide in the South Indian state of Andhra Pradesh, after being unable to repay what they’d borrowed. Debt collectors employed by microfinance institutions (MFIs) were accused of encouraging poor entrepreneurs to take their own lives, kidnapping family members and boarding up people’s homes.
The state government reacted by introducing legislation intended to curb over-aggressive debt collecting tactics. What it actually did – in attempting to protect borrowers from harassment – was create hurdles for MFIs in recouping the money they had advanced to customers.
After the stormThe impact on the sector was devastating, and not just in Andhra Pradesh. Almost overnight, banks, including heavyweight lenders such as ICICI and HDFC, stopped providing financing to MFIs, freezing an estimated $133 million of credit. About 90% of borrowers in Andhra Pradesh halted their repayments, which resulted in some MFIs seeing their entire loan portfolios wiped out. And investors, who up until that point had looked at Indian microfinance as a sector with the potential to generate supernormal returns, got rather a sharp reality check.
Return expectations, which in some cases had exceeded 80% ROE at the height of the boom, were readjusted downwards to the range of 16-18%. This didn’t result in a complete withdrawal by PE firms though – despite the skepticism, India still saw 19 deals worth a collective $88 million close in 2011, compared to 10 transactions valued at over $45 million the previous year.
A number of the deals that took place following the crisis succeeded International Finance Corp’s (IFC) provision of $29.6 million for West Bengal-focused Bandhan Financial
Services in September 2011. This was the biggest investment realized since October 2010, and though it had been agreed a year prior to its announcement, news of IFC’s move sparked interest among observers keen to determine if capital would start to flow back into microfinance.
Returning confidenceThat is precisely what appears to have happened. Despite continued reverberations from the Andhra Pradesh tragedy in the final months of last year – the founder and chairman of
embattled micro-lender SKS Finance, which allegedly lent money to one of the suicide victims, resigned from his post last November – Indian MFI Ujjivan Financial Services successfully raised ($25.5 million) in February from seven investors. Wolfensohn Capital Partners and Dutch development finance company FMO committed INR400 million and INR326 million to the round, while existing backers Lok Capital, Sequoia Capital, Mauritius Unitus Corporation, Elevar Equity and Caspian Advisors also participated.
The company, which does not have a presence in Andhra Pradesh, went on to raise a further INR500 million from IFC in May, while Chennai-based Equitas Microfinance received INR1 billion, also from IFC. I
Such was the renewed appetite for the sector that Mumbai-based Lok Capital managed to close its $65 million fund focused on microfinance and related companies – albeit six months later than expected – in January. Two months later IFC announced plans to roll out a
$100m microfinance debt fund in India.Regulatory clarity emerging from the long-
awaited proposal of a national microfinance bill is partly responsible for the improved sentiment. The bill, which was drafted in July 2011, aims to make the Reserve Bank of India (RBI) the only regulator of the sector and cap the maximum annual interest rate MFIs can charge at 26%.
It has not been a smooth process – the late inclusion of a provision to increase in the loan credit ceiling for MFIs from INR50,000 to INR500,000 sent shockwaves through the industry last month – there is hope. Measures
to facilitate the creation of microfinance development councils to advise governments on the sector, for example, will help in promoting the continued health of the MFIs still in operation.
“The clarity that was emerging on the regulatory front gave us comfort as to the sustainability and viability of the sector,” says Sanjiv Kapur, managing director at Wolfensohn. “We were certain that with the RBI taking a very active role in the industry, adapting to the reality of the marketplace, there would only be a few players remaining in the industry in the next 2-4 years.”
Indeed, consolidation has already begun to take place, and has a part to play too in the cautious optimism witnessed among PE firms. More than a quarter of the Indian microlending industry is concentrated in Andhra Pradesh, and given that the debt repayment rate in this state continues to be as low as 5%, virtually none of the MFIs are lending there, concentrating their
Back from the brinkThe dust is finally starting to settle on the suicide scandals that rocked Indian microfinance in late 2010. Is the industry still an attractive proposition for private equity?
India median and average forward price-to-book value, 2009-2011
Source: CGAP Research, Global Microfinance Equity Survey 2012
2009 20112010
2.1
1.61.7
2.11.92.0
2.5
2
1.5
1
Average forward P/BV Median forward P/BV
avcj.com | June 26 2012 | Volume 25 | Number 248
efforts instead on recouping the cash from delinquent accounts.
“There used to be around 10-12 players, this has now shrunk to 4-5,” estimates Venky Natarajan, managing partner at Lok Capital. In addition to Ujjivan, the firm’s MFI portfolio
features BASIX, which saw its assets fall from $326 million in September 2010 to $22 million today. “The liquidity is pretty much drying up beyond the top 4-5 institutions; they haven’t received any refinancing, or very little over the last 12-18 months.”
Investors into the top five MFIs, which include Equitas, Ujjivan and SKS, can feel secure in the knowledge therefore that their market is growing at the same time as the competition withers.
Another important factor which no doubt boosted last year’s deal totals was a lowering in valuations among the MFIs that attracted capital. One reason for this has been the depreciation in the rupee since August 2011, while the distressed nature of a number of MFIs’ portfolios, particularly those focused on Andhra Pradesh, will also have caused promoters to lower their fundraising expectations. The average Indian price-to-book value dropped from 2.0x in 2010 to 1.9x last year.
“On a risk-adjusted basis, there’s absolutely been a fairly dramatic compression in valuations,” says Wolfensohn’s Kapur. “We did not look at the sector in the past because valuations were stratospheric and the nature of the business did not give us great comfort.”
Doing goodWhat has provided comfort to some investors is the realization that their capital could end up furthering the alleviation of poverty. A form of financial inclusion, microfinance works by providing small loans to people who have no access to traditional means of credit.
As Lakshmi Venkatachalam, vice-president of private sector and co-financing operations at the Asian Development Bank, explains, “Financial inclusion is a very vital component of sustainable and inclusive growth, and has a significant impact on increasing general economic prosperity. Why? Because financial inclusion helps people to generate income, invest in opportunities, build assets and mitigate risks. It enables households and enterprises to manage cash flow to meet their capital and consumption needs and fosters productive activity at all levels of society.”
As micro-enterprises rely mainly on family labor, use their homes as work places and have minimal legal costs as they operate in the informal economy, those borrowing $200-300 can ostensibly earn very high returns in India – beyond 50%, according to SKS. The question is: can private equity firms also earn strong returns from their investments in microfinance?
“MFIs, while socially very beneficial, can be a massive sham from an investment standpoint,” an industry source tells AVCJ. “People only repay their loans because they know that when they pay back loan one they can get the same for loan two plus a bit extra. I would be surprised if there wasn’t more investment, but a lot of PE firms don’t know what they are doing in this area.”
Plenty of other investors disagree with this perspective though, as Wolfensohn’s backing of Ujjivan this year and CLSA Capital Partners’ $24
coVer [email protected]
Are microfinance interest rates too high?A criticism often directed at Indian microfinance institutions (MFIs) is that the interest rates
they charge to borrowers are too high. People barely living above the breadline are being exploited by having to pay rates of up to 26% is the argument. Muhammad Yunus, the Nobel peace prize winner credited with coming up with the concept of microfinance, has even proposed that MFIs charging more than 15% above their long-term operating costs should face penalties.
However, calculations made by Equitas Microfinance, a portfolio company of Aavishkaar Venture Management, CLSA Capital Partners and IFC, shows how – if they cap their rates at 26% – Indian MFIs only stand to be able to keep a fraction of the interest rate as profit.
As show in the table below, the interest rate is typically divided up as follows:6.3% - salary and incentives for the staff (average field staff salary is INR8,500)3.7% - overheads and other admin-related costs13% - Cost of commercial bank financing1% - Loan loss provisioning for hardship cases2% - Profit
“It is costly for MFIs to reach out to their potential customers, to process the paperwork and to make collections,” comments Miranda Tang, managing director at CLSA. “Only the most efficient MFIs can generate ROEs of 15-20% under these conditions, which is what private sector banks can earn. Other sources of money for this unbanked population are local money lenders which lend at much higher interest rates, touching 100% or more at times.”
In 2010, the largest Indian MFIs with strong business models were providing 97% of loans to 86% of clients – and today their market share is surely even more prolific. By capping the rate at any lower than 26%, India’s governments would have risked disenabling these firms from covering their costs, thereby choking off the supply of credit to those who need it most.
The MFIs that charge lower interest rates may make the lives of their customers somewhat easier, but their reach is far more limited.
Cost to MFIs of providing loan capital
Source: Equitas Micro Finance India
Personnel cost Admin cost Cost of funds Loan lossprovision
Prot Cost to borrower
6.3%
3.7%
13%
1% 2%26%
coVer [email protected]
million bet on Equitas in 2011 attest. Neither of these PE firms had any prior track record of investing in Indian microfinance, and yet each decided that now was the right time to look for opportunities among the players that had managed to keep afloat in a tough market.
Aavishkaar’s Rai argues that returns around the 20% benchmark are easily achievable by the healthy MFIs; it is the PE firms that were seeking the inflated profits of the pre-crisis period that will come away from the sector disappointed. “Around 2008-2009, people thought that microfinance was going to give returns that were extraordinary, but the fact of the matter is, it cannot give those kinds of returns,” he says. “If we look at the returns of most VC funds in India, microfinance firms can deliver reasonable returns from that perspective; 20% is the right return.”
Hands-on approachThese positive – if modest – return expectations come with one caveat, however. In order to achieve them, PE and VC backers need to help the MFIs in their portfolios become more organized and transparent. One way to do this is, advises Miranda Tang, managing director at CLSA Capital Partners, is by introducing a code of conduct stipulating the kind of credit and risk assessments that should be carried out
on customers, loan collection practices, and transparency on interest rates and repayment schedules. A database that allows MFIs to pool their data could also be a useful resource for the sector.
“Korea has a comprehensive and shared
database where it shows the credit history of any particular customer so a lender with have information to assess its own credit risk,” says Tang. “When a similar platform is in place in India, it will help to provide detailed data points to MFIs in assessing their own credit risk.”
GPs can also enhance their effectiveness in this sector by realizing the need for longer holding periods than previously forecasted. Whereas investors into MFIs in 2007 might have hoped to exit by 2010 or 2011, five- to six-year
holding periods are going to be more the norm in today’s environment. Trying to force an exit will have its repercussions. Hopefully, though, PE firms are now appreciate this is a different type of investment from that to which most of them are accustomed, and the fact that the end-users
of these companies are the poor means they require a more tailored investment approach.
“Microfinance is not the silver bullet for dealing with poverty, though, and neither is social venture capital. We believe you need to be realistic,” concludes Rai. “We are not really going to change the way the world operates just because you want to change the lives of the poor; these are long-term interventions and everybody – the economists, the government, investors – has to play a role.”
Where do these funds come from? How are they being invested? In which sectors? What regulatory changes are making an impact on investment strategies?
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“There’s absolutely been a fairly dramatic compression in valuations. We did not look at the sector in the past because valuations were stratospheric and the nature of the business did not give us great comfort” – Sanjiv Kapur
avcj.com | June 26 2012 | Volume 25 | Number 2410
privATe eqUiTy execUTiveS Are understandably sensitive about LPs selling down fund interests on the secondary market because they no longer consider them a core part of their portfolios. Asian GPs are no exception. Indeed, an overall lack of familiarity with the process can lead to a wide variety of responses.
“Last year we advised on the sale of a portfolio of 12 fund interests, including some Asian assets,” recalls one Europe-based advisor. “For a number of these funds, it was the first time they had a real secondary in their LP base. Some said, ‘Let me know what I can do to help,’ while others said ‘Oh my God, no – I only want to work with certain people’. Another response was, ‘You can sell the interest to me, the GP,’ but of course that creates conflict of interest issues.”
Fortunately for Asian GPs, such experiences remain few and far between. Investors are generally disposed to hold on to their Asian assets at the expense of European and US interests. It is both a response to recent macroeconomic concerns and a bet on which region will likely drive global growth in coming years.
Willing sellersThere is no shortage of activity in the secondaries market worldwide. Campbell Lutyens projects transaction volume will pass $30 billion for the first time this year, up from $22 billion in 2011. Lexington Partners is more conservative, predicting that 2012 will match but not exceed 2011, although it recorded deal volume of $25 billion last year.
“This volume is still materially driven by very large deals out of Europe and the US,” says Thomas Liaudet, a partner at Campbell Lutyens. “The principal sellers are banks and insurance companies, and pension funds and endowments, in each region respectively.”
The summer 2012 instalment of Coller Capital’s Global Private Equity Barometer appears to concur. Of the 101 investors polled, 60% have engaged in secondary transactions; in the next 2-3 years, more investors will access the market than ever before, albeit joining the fray in a trickle.
However, the number of North American LPs with more than 10% of their PE commitments in Asia Pacific will nearly double in the next three
years. Europe is expected to witness an even sharper hike.
One of the challenges for secondary investors targeting assets in Asia is high pricing – largely a result of the limited supply of LP interests.
“In Asia, sellers’ pricing expectations have been high, as is the case in a number of emerging markets globally,” says Andreas Baumann, partner and co-head of the Singapore office of Partners Group. “People don’t necessarily want to get rid of their emerging markets exposure; if anything, they continue to price in very optimistic growth scenarios for these markets.”
Other secondary investors broadly agree with this thesis, but add that pricing secondaries remains a complicated issue. Pricing is expressed as a percentage discount to the latest net asset
value (NAV) of the portfolio, although some Asian funds are sufficiently popular that they trade close to par, but it’s rare. While convenient for GPs, this measure isn’t necessarily the most useful to investors.
The problem with NAVFirst of all, NAV is often outdated or overly volatile. Furthermore, as a reflection of the GP’s own perception of the value of its portfolio, it is also subjective.
“NAV is calculated on a quarterly basis by GPs and it can rise and fall in accordance with valuation processes,” says Jason Sambanju, a Hong Kong-based managing director with Paul Capital. “Most US dollar funds follow FAS 157,
which requires that a portfolio should be valued as close to its fair market rate as possible, but there is still subjectivity in its interpretation.”
The use of mark-to-market techniques has resulted in greater movement in NAV between quarters. Problems within the portfolio or poor public market performance can have a significant impact on valuations. Asian GPs might be particularly affected by this, given the tendency to hold onto a portion of portfolio companies after IPO. Secondary investors, meanwhile, are primarily interested in their own independent assessments of a portfolio’s current value.
The result is a mismatch between an acceptable buying price and NAV, which means discounts can vary considerably in the space of 3-4 months, despite no comparable change in the underlying assets.
“The real dollar price for a specific portfolio might stay the same, but how it’s expressed as a percentage of NAV will move as new NAVs become available at quarter end,” says Javad Movsoumov, executive director in UBS’ private funds group in Asia Pacific. “Ironically, you sometimes come across situations where sellers are more willing to accept an offer after a dip in NAV. The same dollar offer value will result in a smaller NAV discount after such a dip. This may help to narrow expectation gap and increase the chances of transactions closing.”
Those who understand the market can adapt. For some sellers, though, the prospect of offloading assets at a 50% discount to NAV because, for example, there may be some
Asia LP interests: The price factorGlobal LPs have no intention of reducing their exposure to Asia. This has put upward pressure on secondaries prices, but assessing fair value is more difficult than it seems
LPs' expectations for Asia Paci�c exposure
Source: Coller Capital Global Private Equity Barometer, Summer 2012
100
80
60
40
20
0
Resp
onde
nts (
%)
Now In 3 years Now In 3 years Now In 3 yearsNorth American LPs European LPs Asia Paci�c LPs
uncertainty over future commitments becomes a psychological and perhaps a fiduciary difficulty. Transactions often have to go through approval procedures and boards might not fully grasp how the system works.
In other cases, inexperienced secondary investors have entered the market, drawn in by reports of massive NAV discounts, without considering the groundwork required. The likes of Lexington, Paul and Coller devote considerable resources to producing real-time valuations of portfolios.
“People put too much emphasis on the number of the discount, which oftentimes has little meaning because it refers to an outdated NAV,” adds Partners Group’s Baumann. “We are more interested in assessing the quality, future potential and cash generation capacity of the underlying assets.”
Judgment callsAssessments of a portfolio’s value and its relationship to NAV are not the only consideration. Much like their counterparts on the primary side, a secondary investor is also required to make a call on the stability of the management team. Again, this has particular relevance to Asia, where private equity firms tend to be younger and have experienced fewer
market cycles.Unfunded commitments are naturally
factored into pricing. Assume a $10 million LP commitment of which $8-9 million has been drawn down trades at a single-digit discount. A similar-sized commitment that is only $4 million drawn down is priced at a lower level even if the quality of the underlying assets in both positions is comparable. This reflects the fact that investor has to take a risk on if, when and how lucratively
the unfunded commitment is invested. Most specialist secondaries buyers prefer to consider LP positions that have been at least 50% drawn down.
If a fund is performing poorly, there is an added danger that the team will break up. The worst-case scenario is that this leads to a key-man clause or no-fault divorce clause being activated, the fund being wound down and existing assets jettisoned quickly. A secondary investor might have paid $250 million for exposure to a pool of assets worth $300 million, but this means little in the event of a fire sale.
Less drastic but equally frustrating for the investors, the fund could continue in a weakened state, perhaps unable to invest in new assets or manage portfolio companies as effectively as before, and weighed down by the knowledge that LPs are unlikely to re-up for a successor vehicle. The investor interests are on the market but might trade at a substantial discount.
“When you talk to a secondary buyer, their perception of a manager is often in line with that of the primary investor,” says UBS’ Movsoumov. “There is one pan-Asian fund that hasn’t been doing so well lately and this is reflected in the pricing on the secondary market. The concern is: Will the key members of the team depart and the value of the assets deteriorate?”
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“This volume is still driven by very large deals out of Europe and the US. The principal sellers are banks and insurance companies, and pension funds and endowments, in each region respectively” – Thomas Liaudet
avcj.com | June 26 2012 | Volume 25 | Number 2412
over The coUrSe of 17 yeArS, c.bAnner Holdings has become China’s third-largest ladies footwear retailer, building up a network of more than 1,800 outlets and four self-developed brands. Growth has been entirely organic: Chinese retailers habitually engage in M&A sprees in order to turn regional positions into national ones, but C.Banner doesn’t have an acquisition to its name.
“It always struck us as a good business – it has at least 10 years of net profit growth, steady margins and strong like-for-like sales growth,” says William Ho, a partner at CVC Asia, which last week invested $59.8 million in the company. “And we really liked the fact that growth has been organic. When you do acquisitions in China, you can hide a lot.”
CVC has purchased RMB138.6 million ($21.8 million) in convertible bonds and HK$294.5 million ($38 million) in exchangeable bonds issued by the Hong Kong-listed Chinese company. The private equity firm has a significant minority stake, Ho will join the C.Banner board. As part of the transaction, the two parties also
agreed on a business plan to take the company forward.
China Consumer Capital Partners and MouseeDragon invested alongside CVC, using a similar package of convertible and exchangeable bonds. They committed $24.8 million and $9.9 million, respectively.
CVC has identified a number of value creation initiatives to further improve C.Banner’s business. These are likely to foucs on areas such as management reporting, efficiency and inventory controls. The latter is an area upon which Chinese retailers in general are increasingly focused, having initially concentrated on building out their businesses.
C.Banner designs, manufactures and distributes its products under five brands: C.Banner, Eblan, Sundance, Mio and Naturalizer. The first four are self-developed. The company has a 7.4% share of China’s mid-to-premium women’s footwear market and is far smaller than industry rivals Belle International (13,100
branches) and Daphne Holdings (6,100 branches). However, the expectation is that C.Banner is still far from saturation point. Revenue came to just over RMB2 billion in 2011, up 29.8% year-on-year, while profit rose 70.8% to RMB290.2
million. “We have agreed to run the
business in a way that’s more suited to institutional shareholders,” Ho adds. “They are entering a new phase in China. The economy isn’t doing as well as before and retail overall is seeing headwinds. They have managed to grow quite well, but there is a new environment.”
One factor that may work in C.Banner’s favor is store ownership.
The company doesn’t own any of the retail sites from which it operates; they are all department store concessions, with rent tied proportional to sales. As such, capital expenditure on premises and long-term leases can’t overburden C.Banner’s cost base. It may come to be thankful for this arrangement in the event of a slowdown.
foUr yeArS on from The TAinTed milk scandal that cost the lives of six infants and hospitalized hundreds more, the memories still loom large over the dairy industry.
When China Mengniu Dairy admitted late last year that high levels of a toxin that can lead to liver cancer had been identified in products before they could reach the shop shelves, it was a PR and IR disaster. Between December 26 and December 30, the Hong Kong-listed company’s stock plunged more than 31%. Even now, it remains down 24.6% on a six-month basis.
However, Denmark’s Arla Foods offered the Chinese company a vote of confidence, paying DKK1.7 billion ($289 million) for a 6% stake. A joint venture (JV) partner of Mengniu since 2005, Arla may also have calculated that, as proved to be the case a year or so after the 2008 dairy crisis, a market-leading company in a high-growth, consumer-oriented
industry wouldn’t stay in the doldrums forever.The investment also facilitated the exit of
Hopu Investment Management, which paid HK$6.12 billion ($790 million) for a 20% stake in Mengniu in 2009, alongside state-owned grain
trader COFCO Group. At that time the Chinese company was still in recovery mode and trading at a more than 20% discount to its pre-crisis levels.
Hopu Master Fund I, a $2.5 billion vehicle established in 2008 that counts Temasek Holdings and Goldman Sachs among the investors, contributed $236 million to the transaction. Hopu, which promised so much when
it was established, disbanded in late 2010 amid reports that founders Richard Ong and Fenglei Fang couldn’t get along. The fund is now in divestment mode.
Under the latest transaction, Hopu will transfer Arla Foods its 30% stake in COFCO Dairy, which in turn holds approximately 19.66% of the
total issued shares of Mengniu. The $289 million exit – which indicates an average selling price at HK$21.6 per piece – has netted a skinny return of $53 million for Hopu’s three-year investment.
“If Mengniu doesn’t introduce a high quality partner like Arla, its share price will still be under pressure because consumers still have concerns of its product quality.,” Charlie Chen, head of China consumer coverage at BNP Paribus, tells AVCJ. “Even if Hopu does not exit now, there is no guarantee it can achieve better returns in the near future.”
Arla, however, remains bullish about its own prospects. The Danish dairy firm’s China turnover came to DKK700 million last year and it expects this figure to rise five-fold by 2016. Mengniu is its primary distribution channel and the JV will be folded into the Chinese company. Arla also plans to help Mengniu introduce international standards in quality control.
“With the growth rates that are driving the country forwards, it is crucial for Arla to gain a solid foothold in the Chinese market,” says Arla Foods’ CEO Peder Tuborgh.
Deal oF the [email protected] / [email protected]
CVC buys into C.Banner’s organic growth story
Hopu sees slim return on Mengniu investment
C.Banner operates out of 1,800 outlets
Mengniu has been hit hard by dairy scandals
Number 24 | Volume 25 | June 26 2012 | avcj.com 13
yoUr blAckberry cAlendAr iS A detailed reminder of busy – and sometimes expensive – days: confirm the air ticket to Beijing; transfer money to business partners in order to pay the contractors; alter the bank standing order for monthly rent; book a resort for the coming summer holiday in Phuket.
The ability to complete these tasks securely in a matter of hours using that same device is testament to the how online payment gateways have transformed 21st century consumption. For many in emerging markets, paying the bills isn’t so easy. In India, where cash and checks still account for the bulk of wallet share, transactions must often be executed on foot and in person.
Private equity investors are trying to change this, motivated by the high cost of paper transactions and the low penetration of modern payment gateways. Capital is saturating the e-payment space, from early movers such as BillDesk and Techprocess to start-ups that want to bring mobile solutions to the unbanked.
“Retail consumer spending in India has increased at over 15% year-on-year to $900 billion in the last fiscal year, of which more than 90% being in cash,” Amit Behl, Investment director, Intel Capital India, tells AVCJ. “Hence, it provides a big market opportunity for converting parts of this cash spending into electronic payments.”
Leading players BillDesk and Techprocess Solutions were established in 2000 and have grown into sizeable players by cultivating exclusive relationships with banks, major merchants and institutions. While BillDesk has been backed by TA Associates, Bank of Baroda, SBI and Clearstone Ventures, Techprocess Solutions has also received investment from Greylock Partners, Battery Ventures and ICICI Ventures.
Given the traction of these market leaders, industry participants argue that early-stage investments in similar businesses will face strong headwinds. A highly differentiated approach or cutting-edge technologies are the only means of achieving substantial market share.
“It is difficult for other emerging players to evolve to what BillDesk has become because of its early mover advantage,” says Dhiraj Poddar, director at TA Associates, which invested in
BillDesk in April. “Rather, the current challenge for the investment is how to help a payment processing company broaden the coverage of market segments served and continually evolve economical product offerings for the customers.”
While the likes of BillDesk and Techprocess can expect further rounds of PE funding, venture capitalists are looking for opportunities among the 350 million in India that are not yet part of the mainstream financial system.
As these consumers start to appreciate the advantages of cashless transactions, pre-paid electronic accounts – travel cards, payroll cards, multi-purpose cards – have emerged. Given the
scattered nature of the unbanked population, no single provider has managed to corner the market, leaving plenty of room for new entrants.
According to The Boston Consulting Group, India’s pre-paid credit and debit card market is expected to reach $59 billion in 2017, a sevenfold increase on 2011. Axis Bank is currently the market leader with a more than 39% market share, while Itz Cash Card is on 22%. Other participants include ICICI Bank, ICash Card, OxiCash Card and Done Card Utility.
Although Axis Bank and ICICI Bank can leverage their established branch networks to dominate certain segments of the market, they don’t necessarily have the reach into smaller towns and villages. Itz Cash Card, which has been around for seven years, is attempting to fill the gap by establishing more than 50,000 franchisees across 2,500 towns and villages.
Bejul Somaia, managing director of Lightspeed India, cites Itz Cash Card’s distribution and cash acceptance network as one of the major reasons for investing in the company in 2009. “There are a lot of technology companies in India, but investors need to evaluate whether
a solely technology-based approach is defensible and can capture meaningful value in the payments segment in India,” he says.
Mobile venturesRetaining a competitive edge in a fast-developing market depends on providing products and technologies that meet customers’ needs with optimum efficiency. One key area is mobile payment. Companies such as Nexus Capital-backed mChek led the way in allowing consumers to make payments by connecting credit cards to mobile devices. Now ItzCash Card is trying to follow suit, securing a license from the State Bank of India in 2010 to introduce a Mobile Wallet with pre-paid facilities.
It would be naïve to think that telecom providers will allow the financial services sector a free run at this market. Just last year, Airtel announced the launch of its own mobile payment system and others will no doubt follow suit. Using the Airtel mWallet, any subscriber can upload money to his or her mobile phone and use it to make purchases from affiliated retailers.
“Probably the biggest possible fillip to this [payment] sector is going to come from mobile payments,” says Intel Capital’s Behl. “How mobile operators work on creating partnerships and alliances to build the mobile payments market in India is going to be critical in terms of bringing in a much larger base of customers to the ambit of electronic payments quickly.”
However, not all forays into the payment space have been successful. Nokia’s partnership with Obopay is an oft-cited example of what happens when you enter a market too soon and at too high a point. Since 2009, the European handset manufacturer has reportedly invested around $70 million in Obopay and oversaw the launch of Nokia Money. The idea was to provide a secure wallet for transactions without the necessity of having a bank account, but the venture closed after one year.
“So the biggest challenge lies with the number of people who are eager to make e-payments and whether they have a payment instrument that they are comfortable with,” says Behl. “One should be patient enough because any investment into the young payment sector takes fairly sizable resources and time to effectively address the market.”
India embraces e-paymentWith established market leaders in India’s mainstream e-payment space, VCs are targeting opportunities in the unbanked and mobile payment markets
“Investors need to evaluate whether a solely technology-based approach is defensible” – Bejul Somaia
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Number 24 | Volume 25 | June 26 2012 | avcj.com 15
Q: Following C.Banner International last week, you’ve now completed five deals in six months. Why so active?
A: Our target is 4-5 deals per year. Each of the five completed this year was a proprietary transaction. Some started off last year and have taken a while to close; a few have taken years to groom and develop. There are a few trends emerging: Firstly, valuations are more attractive now in Greater China than 2010-11. C.Banner would have been valued at a price-to-earnings ratio of 20-25x last year. Secondly, liquidity in China is less because, unlike last year, firms have less access to bank debt, bonds, or IPOs. Thirdly, as a result of the above two factors, terms of deals have improved including better governance terms.
Q: How active is CVC in different geographies? Your activities in Southeast Asia, particularly Indonesia, have received a fair amount of coverage...
A: We have been active across the region, and in fact, we have invested more in Greater China than Southeast Asia but we didn’t advertise the deals. We believe in the long-term prospects of the region, but the countries in the region do go through swings in valuations and liquidity. Indonesia is at the higher end on both, while China is on the lower end now.
Q: The Hong Kong Broadband deal was unusual in terms of size and sector. How did it come about?
A: This was a proprietary deal that I started brewing three years ago. I marketed the idea to the parent company, CTI, but there was no
deal at the time – Hong Kong Broadband was 95% of the company’s business. CTI more recently decided to focus on free television and needed to raise capital for that. We were a logical solution and did a classic management buyout. Over 70 managers will be investing cash into the company with us. It’s the nature of our business is to unearth these kinds of deals.
Q: Two of the three China investments – Asia Health Century and Venturepharma – are in the healthcare sector. What makes it attractive?
A: These deals were originated and led by our Beijing team. Asia Health Century is the leading drug retailer and wholesaler in Heilongjiang province, with 500 outlets. Venturepharma is different from most pharmaceutical companies in China because it started off in research, not sales and marketing. Venturepharma was doing contract research for multinationals and about five years ago began developing its own drugs. The company focuses on anti-allergy and central nervous system drugs, which are the two highest growth areas in China because of urbanization, allergies and stress. We believe it might be one of the top patent holders in China. We have a significant minority stake and an agreed business plan.
Q: You’ve completed one deal in Japan, Technopro Holdings. Isn’t it a particularly unfriendly market right now?
A: When investing in Japan or anywhere else, we look at industry growth rate, the multiples we pay – particularly the multiples of cash flow – as well as management’s business plan. With Technopro, the industry is growing 5% per annum, there is good cash flow conversion, a reasonable multiple and a solid business plan. Technopro is the second-largest engineering staffing company in Japan, dispatching 10,000 engineers to more than 1,000 companies. At $450 million it’s a pretty big deal and there haven’t been many buyouts in Japan this year. However, we think there continue to be opportunities.
Q: Also in Japan, CVC exited shoe repair business Minit Asia Pacific to Unison Capital. How did that investment perform?
A: It’s a pretty cash generative business, with 300 stores in Japan and an equal number in Australia, New Zealand and Southeast Asia. We acquired it in 2006 and the department
store sector probably fell at an annual rate of as much as 10% in some years. Although Minit is based in department stores, sales and profit remained stable. We paid down the debt and got a higher multiple than when we entered, so we did quite well.
Q: You have three operational executives in an Asia team of 32. How has their role changed compared to CVC’s first Asia fund?A: It’s completely different. In our first Asian fund we,
like most of the industry, did not have an operations team. Now they are involved in almost everything, pre-deal and post-deal. We don’t bet on a higher exit multiple; often we bet on a lower exit multiple and look at how we are going to achieve our earnings numbers through concrete operational improvements.
Q: What do you look for in an operations executive?
A: We look for people with both operating experience and consulting backgrounds. It’s not good enough to have just operational experience because you have to convey ideas and persuade people to do things. Allen Han worked at Honeywell, General Electric and Booz & Company. Our other Ops team members worked at Booz & Company, Henkel, John Deere, Boston Consulting Group and Philip Morris International. Consultants have the ability to frame things in a very organized way that everyone can understand.
ROY KUAN | inDustry Q&a [email protected]
Window of opportunity Roy Kuan, managing partner of CVC Asia, looks back on a busy first half of 2012 in which the firm closed five deals. Falling valuations, planning and patience are among the key factors
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