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Asia’s Private Equity News Source avcj.com November 05 2013 Volume 26 Number 42
IPO challenges in Asia Page 11 Weijian Shan on China Page 15 Behind SE Asia’s hype Page 41
conference special issue aVcJ priVate equity and Venture capital forum Hong Kong 2013
How the other half livesWhy bifurcation is the most overused word in Asia private equity fundraising Page 17
Jag Dhal iwal l
+65 6329 9658
jag.dhaliwall@principle -partners.com
Will Tan
www.princ ip le -partners .com
+65 6329 9659
will . tan@principle -partners.com
Asset Management Hedge Funds Private Equity
Premier buy-side executive search
Number 42 | Volume 26 | November 05 2013 | avcj.com 3
Jag Dhal iwal l
+65 6329 9658
jag.dhaliwall@principle -partners.com
Will Tan
www.princ ip le -partners .com
+65 6329 9659
will . tan@principle -partners.com
Asset Management Hedge Funds Private Equity
Premier buy-side executive search
Contents
editor’s Viewpoint 05 Five trends to watch out for in 2014
news 07 Apollo, Blackstone, Carlyle, Hony, IFC,
Oaktree, Sequoia, Warburg Pincus
exits Quiet day on the bourse11 The longer term implications of China’s
public markets exit drout
11 Alternative routes: Tech sector trade sales
13 Gridlocked: What’s next for domestic IPOs?
Fundraising Haves and have nots17 The big GPs and LPs are getting ever bigger.
A cyclical or a systemic phenomenon?
19 Creating an institutional GP platform
pe and pension reform23 DB pension plans, one of PE’s biggest
backers, lose ground to liquidity-friendly DC
angels flock to asia VC31 As LPs narrow their focus to a handful of
big-name VCs, angels swoop for the outliers
33 Will crowdfunding take off in Asia?
the direct route34 What the JOBS Act means for private equity
fundraising, in the US and in Asia
the sources’s mouth36 LPs of all varieties on how their attitude
towards the asset class is evolving
inVestmentKeep it in the family41 As GPs look to Southeast Asia for deal flow,
getting to know local conglomerates helps
43 Vietnam: Ownership structures in transition
industry interViews15 Weijian Shan of PAG
29 Brent Nicklas of Lexington Partners
46 Sigit Prasetya of CVC Capital Partners
Unlocking liquidity for private equity investors
www.collercapital.com London, New York, Hong Kong
Anything is possible if you work with the right partner
Number 42 | Volume 26 | November 05 2013 | avcj.com 5
Unlocking liquidity for private equity investors
www.collercapital.com London, New York, Hong Kong
Anything is possible if you work with the right partner
editor’s [email protected]
WHen We looK bacK on 2013 it Will probably be described as a slow year for Asian private equity. Statistics on all major PE activities in the region have fallen substantially.
According to AVCJ Research, around $45 billion has been invested so far this year, compared to more than $66 billion for 2012 as a whole. The 2007 peak of $98 billion lingers as a distant memory. Fundraising has also fallen, with $34 billion committed to 233 funds in the first 10 months, short of the $53 billion that entered 313 vehicles in 2012.
These are indeed difficult times, leading more than a few observers to predict a gloomy future for private equity. I take the contrarian view. Based on conversations with many LPs and GPs, here are some bright spots to watch out for in 2014.
The stabilization of the Chinese economy: It is clear that China will continue to be one of the greatest creators of private equity returns in the next decade. Although the recent slowdown has caused a few problems and numbers coming out are decidedly mixed, the worst seems to be over. GPS are on the prowl and there is more optimism over exits…
The return of the Chinese IPO: At time of writing, China’s securities regulator had yet to resume IPO approvals, although we’re told there may be some developments during or after the Communist Party Central Committee meeting, which is scheduled to begin on November 9. Hopefully not long after reading this, you will hear some good news. Meanwhile, there are signs of life in Hong Kong and the US, with VC-backed companies such as Boyaa, Qunar and 58.com all getting listings off the ground. Alibaba Group’s IPO is eagerly anticipated. This is good news for any investor with an interest in China’s venture capital and minority growth capital spaces.
Buyouts in Japan: For a number of years, GPs have been hoping that Japan would recover and open up more to private equity investment. Guided by the three arrows of Abenomics –
although the third, which involves restructuring, has arguably yet to take flight – events of the past few months do not seem like another false dawn. We have already seen a few significant secondary buyouts and exits. Here’s hoping that KKR’s $1.67 billion purchase of Panasonic Healthcare is the first of many bumper control deals in the Land of the Rising Sun.
Opportunities in transitional markets: A number of Asia’s hottest markets such as Australia, Indonesia and India have cooled in recent years. In the case of Indonesia and India, a revival does not appear imminent. This is not, however, necessarily bad news for private equity. India, in particular, could be a contrarian’s dream. With its devalued currency lowering entry prices and the departure of many local GPs from the market easing competition, the current vintage could be a favorable one for those with dry powder. Indonesia needs to see more GPs rather than a consolidation of existing participants. That will come with time. Meanwhile, recent volatility may draw some heat from valuations.
Governments courting private equity: Over the years, private equity has increased its influence on Asian business and the industry’s largely successful track record has not gone unnoticed by governments. Malaysia, Korea, Taiwan are but a few of the markets that have seen some form of stimulus. While not necessarily related, these three jurisdictions are seeing an increase in the number of indigenous local GPs with international LPs.
It is my hope that these are five of many bright spots that emerge over the next 12 months. It is true that many GPs need to spend some time tending the troubled parts of their portfolios, but they also see opportunities on the horizon that are not to be missed.
Allen LeePublishing DirectorAsian Venture Capital Journal
Five trends worth watching
Managing Editor Tim Burroughs (852) 3411 4909
Staff Writers Andrew Woodman (852) 3411 4852 Mirzaan Jamwal (852) 3411 4821
Winnie Liu (852) 3411 4907
Creative Director Dicky Tang Designers
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Research Manager Alfred Lam
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Number 42 | Volume 26 | November 05 2013 | avcj.com 7
ASIA PACIFIC
Carlyle buys global real estate platform The Carlyle Group has completed the acquisition of Metropolitan Real Estate Equity Management (MREEM), a real-estate fund-of-funds business with more than $2.6 billion in capital commitments. Equity for the transaction came from Carlyle’s balance sheet and financial terms were not disclosed.
AUSTRALASIA
Apollo, Oaktree-owned Nine targets $658m IPOAustralian TV network Nine Entertainment is looking to raise up to A$697 million ($658 million) in its December IPO. Nine plans to sell 131 million new shares and 179.7 million existing shares at A$2.05-2.35 apiece. Investor Oaktree Capital will reduce its stake from 28% to 14%, while Apollo Global Management will retain all shares but see its holding diluted from 26% to 22%.
New Zealand, Taiwan cross-border fund ups target A cross-border fund launched by New Zealand-based Pan Pacific Capital and Taiwan’s state-run Institute for Information Industry (III) has raised its target from $40 million to $70 million and is nearing a first close. The Pan Pacific Capital Fund has received $12 million commitments from the New Zealand Venture Investment Fund (NZIF) and its Taiwanese counterpart, the National Development Fund (NDF).
GREATER CHINA
58.com sees shares close up 42% on US debutChinese classifieds website 58.com, backed by Warburg Pincus, SAIF Partners and DCM, raised $187 million in its IPO and saw shares close up 42% on the first day of trading on the New York Stock Exchange. Its American Depository Shares sold via the IPO were expected to price in the $13-15 range but the final price was set at $17.
China Asset Management reduces iSoftStone bidA consortium, comprising China Asset
Management’s ChinaAMC Capital Management and iSoftStone’s CEO and chairman, has reduced its offer for the take-private of US-listed Chinese IT services provider iSoftStone Holdings. This follows a second-quarter loss and warnings of more difficulties to come. The revised offer values iSoftStone at approximately $310 million, at $5.45 per American Depository Share, down from $5.85 per share.
Blackstone buys into shopping mall developerThe Blackstone Group and ICBC International will acquire stakes of 40% and 6% respectively in Chinese shopping mall developer SCP. Blackstone’s investment is reported to be worth $400 million. SCP currently owns and manages 19 shopping malls under three brands - Incity, SCP Plaza and One City.
Hony-backed Hydoo raises $200m in HK IPOHydoo International Holdings, a Chinese commercial real estate developer backed by Hony Capital, has raised more than $200 million in a Hong Kong IPO. Hydoo sold 768 million new shares at HK$2.15 apiece. The Shenzhen-based company develops and operates large-scale trade centers in third- and fourth-tier cities.
Central Asia oil producer sells Kazakh assets to PETethys Petroleum will to sell half of its Kazakhstan oil and gas assets to Sino Oil and Gas Investment (SinoHan), a subsidiary owned by Beijing-based HanHong Private Equity Group. There will be an initial $75 million cash payment and additional performance bonus payments for the further discovery of proven and probable reserves. Tethys will continue to operate the assets.
CNEI invests $25.4m in drug developerChina New Enterprise Investment (CNEI) has acquired a 17% stake in Hong Kong-listed Fudan-Zhangjiang Bio-Pharmaceutical (FDZJ) for $25.4 million, becoming the second-largest shareholder in the Shanghai based bio-pharmaceutical firm. The company has developed diagnostics products, photodynamic therapy drugs and nano-drugs.
Kaiwu nears $100m mark on debut fundKaiwu Walden Capital, a China-based VC firm, has so far raised $98 million for its debut fund. The launched last September with a target size of $150 million. The firm invests in technology, media and telecom, cleantech, healthcare, new materials, consumer and education.
China Everbright, Catalyst Equity to launch fundChina Everbright and Israel-based Catalyst Equity
Warburg Pincus in $540m Transpacific exitWarburg Pincus has exited its holding in Australian waste management firm Transpacific Industries Group via the public market, generating proceeds of around A$570 million ($540 million). The PE firm sold its entire 33.9% stake at A$1.05 per share, a 6.7% discount to the previous closing price.
Warburg Pincus’ investment - its first in Australia - came in June 2009, when Transpacific was struggling to service its debts. The GP
bought 35.8 million shares at A$1.80 apiece for a consideration of A$64.5 million and later participated in a rights issue in 2011, putting its total commitment to Transpacific at A$521.5 million. Transpacific specializes in recycling, waste management and industrial services. It has more than 300 sites and depots in Australia and New Zealand, including 50 technical treatment and processing plants and 45 resource recovery, recycling and baling facilities.
Warburg’s exit came as Transpacific announced plans to divest its New Zealand waste management business in order to further pay down debt and focus on growth opportunities in Australia. The company has also refinanced A$290 million of syndicated facilities due to mature in November 2014, reducing its overall debt burden from A$1.4 billion to A$1.2 billion.
The company posted a net loss of A$200.4 million for the 2013 fiscal year, compared to a profit of A$32.2 million for 2012. Revenues were reasonably flat at A$2.3 billion but there was a substantial increase in non-cash impairments linked to the proposed sale or closure of non-core or underperforming assets and weaker performance from subsidiary Cleanaway.
news
avcj.com | November 05 2013 | Volume 26 | Number 428
Management have teamed up to establish a PE fund that will invest in Israeli companies. The jointly managed fund is seeking to raise $200 million, and China Everbright will commit up to $75 million. The fund will focus on mid-to-late stage companies with plans to expand in the Greater China market.
NORTH ASIA
Taiwan’s Chinatrust to buy Tokyo Star Bank CTBC Financial, the parent company of Taiwan’s Chinatrust Commercial Bank, is to buy a 98.16% stake in Tokyo Star Bank for JPY52 billion ($530 million). US-based GP Lone Star is Tokyo Star’s largest shareholder with a 33% stake. Others include Shinsei Bank, Crédit Agricole and Aozora Bank, who assumed control of the bank in 2011 after the previous owner, Advantage Partners, defaulted on debts tied to its acquisition three years earlier.
SMBC, NEC-backed fund backs semiconductor firmNEC Capital and SMBC Venture Capital’s Innovative Venture Fund has a led a round of investment in SiTime Corp, a US-based analog semiconductor company. Additional participants in the round included Hercules Technology Growth Capital, which provided debt financing. Financial details were not disclosed. SiTime makes components, such as clock generators, oscillators and embedded resonators, used for producing timing signals in electronic products.
Ant Capital acquires shoe maker MoonStarAnt Capital has acquired a majority stake in Japanese shoe maker MoonStar from the founding family and other shareholders. The company has operations in Japan, China and Vietnam. In addition to making shoes under its own brand, it also does contract manufacturing for brands such as K-Swiss, Kappa, Hi-tec, Burberry and Disney.
Globis backs online stock photo siteGlobis Capital Partners has invested JPY70 million ($700,000) in Pixta, the Japanese company behind stock photo and online storage service site Pixtastock.com. Globis previously committed JPY70 million to Pixta in September 2011. Pixta claims to be Japan’s largest stock photography
site, with over 5 million images and 120,000 contributors. It will use the funds to expand its Asia footprint.
SOUTH ASIA
Sequoia leads $16m round for Cloudnine hospitalsSequoia Capital has led INR1 billion ($16.3
million) investment into Bangalore-based infant and maternity care hospital chain Cloudnine. Existing investor Matrix Partners also participated in the round. Cloudnine runs a network of five specialty hospitals and will use the funds to set up 10 new centers over the next two years.
IFC to back Gaja Capital’s $250m India fundThe International Finance Corporation (IFC) plans to investment $25 million in Gaja Capital Partners’ second fund, which has an overall target of $250 million. The fund will commit $15-30 million per investment in 6-10 fast growing companies as equity and equity-linked securities. A first close of at least $75 million on Gaja II is expected to take place by 2013 end or in early 2014.
Matrix backs Shotformats Digital WorksMatrix Partners India has provided a Series A round of funding for Shotformats Digital Works, a distribution and digital entertainment company. Financial terms were undisclosed. The Singapore and Mumbai-based firm works with media houses, telecom providers and app developers to distribute movies, music, games and apps under the Biscoot brand to mobile customers.
SOUTHEAST ASIA
Malaysian government unit to raise infra fundPelaburan Mara, the investment arm of the Malaysian government’s Majlis Amanah Rakyat agency, plans to launch a MYR300 million ($94.9 million) private equity infrastructure fund early next year to invest in the social infrastructure sector. The fund will buy into assets such as hospitals and schools that are constructed with private finance in the public-private partnership model and have long-term leases - of 25-30 years - from the government.
Vietnam launches ‘Silicon Valley Project’Vietnam’s Ministry of Science and Technology will build two accelerators under its Silicon Valley Project for technology commercialization. The accelerators will be based in Hanoi and Ho Chi Minh city, and will support at least two batches of start-ups in 2014.The project is currently looking to put $400,000 towards building an ecosystem for incubation, acceleration, seed funding, and eventual exits.
Qunar shares nearly double on NASDAQ debutQunar, a Chinese-travel website majority-owned by internet search giant Baidu, saw its stock nearly double on the first day of trading on NASDAQ after raising $167 million in an IPO. The 11.11 million American Depository Shares sold at $15 apiece, higher than the marketed range of $12-14. Qunar’s stock closed at $28.40 for an 89% first-day gain.
Baidu bought a majority stake in Qunar for $306 million in 2011 and, subsequent to the IPO, holds a 58.81% interest. Prior to this investment, the company received more than $25 million in funding from groups including GSR Ventures, GGV Capital, Mayfield Fund and Tenaya Capital. GSR and GGV hold 6.04% and 4.37%, respectively.
Qunar is similar to US-based Kayak.com in that it searches for the best flight, hotel and package trip deals offered by a range of travel agents and aggregates the results based on price. It generates revenue by selling sponsored search services and display advertising to travel agents as well as by providing web platform for travel agents with limited or no online presence.
The company’s user numbers grew from 71.7 million in 2010 to 187.3 million in 2012, while web users increased from 200,000 to 21.9 million over the same period. It had 39.6 million mobile users for the year ended June 2013.
Qunar posted revenue of RMB501.7 million ($81.9 million) in 2012 compared to RMB123.9 million two years earlier. However, rising costs meant the net loss widened from RMB4.4 million in 2010 to RMB91.1 million in 2012.
news
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Number 42 | Volume 26 | November 05 2013 | avcj.com 11
“it feels liKe tHis cycle Has been more difficult for finding exits than previous cycles. During dot-com crash, it was terrible for everyone trying to exit – you couldn’t do an IPO. It was the same in the global financial crisis,” observes a GP who focuses on minority growth investments in Asia. “Cycles are natural – always up and down – but the current cycle has dragged on and on.”
The situation is particularly acute in China. Domestic listings have been suspended by regulatory fiat for about a year, while it is only in recent months that private equity-backed mainland listings in Hong Kong and the US have regained traction. The volumes and valuations are well short of previous highs.
For many fund managers, investments are remaining on the books beyond the intended holding period, so they are scouting for alternative exits. In the public sphere, these include offshore listings in lower profile jurisdictions and backdoor listings through the purchase of public shells. Privately, an entrepreneur with means could buy back shares from a PE investor; those without might agree a joint exit via a trade sale.
“It’s a stress test for portfolio companies as well as for GPs – only the strong will prevail,” Judy Ye, managing partner at China-focused fund-of-funds YiMei Capital, says of the exit situation. “It also generates opportunities for secondaries. We expect to see a lot of changes in the local private equity landscape.”
Strategic reorientation?Uncertainty over exits has an inevitable knock-on effect for investment and fundraising.
A total of $12.6 billion has been deployed in China deals so far this year, half the figure for 2012 as a whole. Fundraising for both US dollar and renminbi-denominated vehicles has fallen by a similar margin.
The broader question, though, is how far-reaching any changes will be. A number of private equity firms have been forced to reassess their investment strategies for China, realizing they must consider the potential for exits beyond an IPO when addressing target companies. But as long as China remains a predominantly growth capital destination, trade sales and secondaries
won’t supplant public markets as an exit route.“I don’t think things have really changed. If
you’re making a minority investment the exit is going to be IPO. If you’re taking a controlling stake, your natural exit is going to be a trade sale,” says Marcus Thompson, CEO of Headland Capital Partners.
There is a strong case to be made that Asia is over-dependent on IPOs. According to Thomson Reuters, listings by PE-invested companies on the region’s major exchanges peaked in 2011, with $29 billion raised through 189 offerings. There were only 79 PE-backed listings on the US bourses that year.
China has been the primary originator. AVCJ Research has records of 170 offerings – on domestic and overseas exchanges – by private
equity-invested Chinese companies in 2011, which generated cumulative proceeds of $33.8 billion. South Korea ranked a distant second, with 40 listings and proceeds of $3.9 billion.
The exit dynamic in China will only change in response to evolution on the investment side.
Growth capital and pre-IPO funding has been the lifeblood of private equity since the asset class emerged in the country and it is likely to remain so for a generation. With Chinese private enterprises still enjoying relative youth and growth, owners simply aren’t willing to give up control. IPOs deliver the best alignment of interest between entrepreneur and investor.
“IPOs can provide high price-to-earnings (P/E) ratios and, from the entrepreneur’s perspective, they don’t have to sell their shareholdings. So
Stuck in ChinaThe weak IPO market has left many China PE firms holding assets for longer than expected. While growth deals will remain dominant, there will be change in how and with whom they are done
plan b: rising tech trade sales The lack of IPOs in China has inevitably swung investors’ focus to trade sales – to the extent
they are possible in what continues to be a minority growth capital market. A total of 98 private equity-backed public offerings generated proceeds of $17 billion in 2012
compared to $2.4 billion from 26 trade sales. In 2013, the balance has turned on its head: there have been 12 IPOs and cumulative proceeds of $3.6 billion for the year to October, while 29 trade sales have amassed $6.4 billion.
Trade sales have been most prevalent in the tech, media and telecom (TMT) space, as China’s internet giants pursue diversification through M&A strategies. Baidu, Alibaba, Tencent Holdings and Sina have between them spent $2.5 billion across 15 deals so far this year. In the eight years to 2010, acquisitions totaled $628 million.
“TMT will definitely see more consolidation. The big boys will buy the smaller ones, or the smaller ones will be merged with others – and it provides exit opportunity for investors,” says Lye-Thiam Koh, a principal at Northgate Capital, a venture-focused fund-of-funds. “As for other sectors, consolidation is also happening but it is more sporadic.”
Baidu has been the biggest spender in 2013, notably acquiring mobile app store and game operator 91 Wireless from NetDragon Websoft and VC investors including IDG Capital Partners, DT Capital Partners, ID TechVentures and Vertex Venture for $1.85 billion.
Traditional retailers have also been active as they push into the online space. Home appliance retailer Suning Commerce recently teamed up with one of its PE investors, Hony Capital, to buy a controlling interest in Chinese online TV provider PPTV for $420 million. Softbank China Venture Capital, Bluerun Venture, Draper Fisher Jurvetson are expected to exit.
Tony Zhu, head of the emerging markets program at Munich Private Equity Partners, adds that some TMT entrepreneurs are overseas returnees and they have also typically spent less time building their businesses than traditional business owners: an internet operator can achieve scale in 5-10 years while it might take a traditional company 20-30 years or more.
“It’s not easy for traditional companies to sell their stakes to outsiders because the amount of time they have spent there is much longer,” Zhu adds.
avcj.com | November 05 2013 | Volume 26 | Number 4212
the investors get to exit, while the entrepreneurs can maximize their enterprise valuation without resorting to a trade sale,” says Tony Zhu, who leads the emerging markets program at Munich Private Equity Partners (MPEP).
Looking for controlNevertheless, the gap between buyouts and growth capital appears to be narrowing.
Buyout deal flow has always been patchy in China, crossing the $2 billion threshold in only three of the last 10 years. The buyout share of overall PE investment fluctuates according to
the amount of growth and pre-IPO capital put to work – so the explosion in public markets-oriented renminbi activity saw this share drop from 7.2% in 2009 to 3.1% in 2010.
The sharp drop-off in growth and pre-IPO deals in 2012 – they fell to $9.3 billion from $17.3 billion the previous year – was accompanied by a spike in buyouts. Deal flow more than trebled to $7.6 billion, accounting for 30% of the private equity total.
Clearly, take-private transactions involving Chinese companies listed on US bourses
feature prominently in these statistics, notably the $3.7 billion acquisition of Focus Media by a consortium of PE investors and company management. However, anecdotal evidence suggests entrepreneurs are – gradually – more willing to consider buyout solutions.
There are a number of reasons behind this. First, many industries are populated by countless small and mid-size private enterprises and, in automotives and agriculture for example, there is more consolidation. Second, moderating macro growth and intense competition have placed businesses under greater pressure.
With rising costs, narrowing margins and a lack of professional management skills, some entrepreneurs just can’t keep up.
“The competitive dynamic in China – particularly in consumer-retail – means a lot of these small businesses will struggle to survive. They are looking for help from fund managers, including buying controlling stakes in competitors to ramp up business scale,” says Vinit Bhatia, head of Bain & Company’s Greater China private equity practice.
Two further factors are expected to tell
over a longer period of time. The legion of entrepreneurs who set up businesses in the wake of China’s modern economic reforms are now approaching their 60s and considering succession options. If their offspring do not want to assume leadership then sales to third-party buyers become more likely, as has been the case in other countries.
Finally, corporate carve-outs may gain traction as large Chinese companies decide to offload non-core assets. Unitas Capital secured a controlling interest in Shenzhen ZTE Netview Technology, a subsidiary of tech giant ZTE Corp, at the end of last year, but for now most companies remain in acquisitive mode.
Similarly, there have been a few cases in which minority investors have managed to engineer secondary exits to other private equity firms. In the last year EQT Partners purchased a controlling interest in RCS Group, which has franchise rights to Dairy Queen and Papa John’s in China, from Warburg Pincus and the local owner, while General Atlantic bought Actis’ stake in hotpot chain Xiabu Xiabu.
“The prospect of exiting through a secondary direct sale, which is relatively new in Asia, seems to be gaining traction,” notes Thomas Chou, a partner at Morrison & Foerster. “Through efforts from promoters to educate GPs and LPs, combined with the continued pressures on GPs to return capital to LPs, these transactions are becoming a more regulator consideration.”
NewQuest Capital Partners is one of few firms focusing exclusively on secondaries direct. Developing the market has been tough but the number of sellers is expected to increase over time, particularly if conventional exits routes do not materialize.
“It is a very practical problem right now – if they can’t do IPO, how long will it take them to achieve the liquidity they want? The mindset is shifting because of what is happening due to the closed IPO market,” says Bonnie Lo, a partner at NewQuest.
A selective marketNeither NewQuest or any other GP doubts that the public market listings will return. The question is will IPOs return with their former gusto – investors and regulators are likely to be more selective and valuations more muted. For those targeting domestic exchanges, a 50-60 P/E ratio is now the stuff of fantasy, which may still pose a problem, depending on the investor’s entry valuation.
Furthermore, the private equity model of investing and flipping a company into a quick listing is no longer as valid with LPs.
“The exit problems LPs complain about are partially caused by LPs themselves. They gave
China private equity exits by type
Source: AVCJ Research
120
100
80
60
40
20
0
10,000
8,000
6,000
4,000
2,000
0
Exits
US$
mill
ion
Trade sale IPO OtherOpen market sale
Open market sale Trade sale IPO Other
2008 2009 2010 2011 2012
No. of disclosed deals
China M&A exits
Source: AVCJ Research
1,500
1,000
500
0
120
100
80
60
40
US$
mill
ion
Dea
ls
Amount (US$ million)
2008 20102009 2011 2012
Number 42 | Volume 26 | November 05 2013 | avcj.com 13
money to someone who shouldn’t have received money when they believed that the IPO stories in China could deliver high returns for most investments,” says MPEP’s Zhu. “We try not to believe in stories that it is easy for investors to grow companies to a certain standard and then deliver 2-3x returns from an IPO exit. Manager selection is the key.”
In this context, the focus is switching to managers who can offer more than just Plan A –the IPO exit. A successful fundraise must therefore be underpinned not only by evidence of past returns but also by an ability to support the development of a portfolio company, perhaps over a longer holding period and coping with the macro headwinds that confront much
of corporate China. “In addition to increased focus on their
operational experience, some GPs are identifying investment targets where exits can be structured at the outset” says Morrison & Foerster’s Chou. “As part of the acquisition of a Greater China business from a global consumer retail business, we have seen clients negotiate options for the repurchase of that asset upon reaching future milestones. This adds a meaningful alternative exit scenario to an IPO.”
Small but influentialAdding value as a minority investor is as much about finding the right entrepreneur as the strength of a GP’s operational credentials. For
many, the attraction of teaming up with private equity remains getting capital as cheaply as possible and with as little investor interference as possible. It is easy for the alignment of interest to break down.
China New Enterprise Investment (CNEI), for example, invested in a consumer business run by a second-generation entrepreneur who subsequently developed a penchant for real estate. With the entrepreneur loosening his focus on the core business, an agreement was reached with CNEI where a new CEO would be appointed in place of the entrepreneur, who would become chairman.
“Every CEO candidate we put before him he rejected,” recalls Johannes Schoeter, the private equity firm’s founding partner. “He then asked to redeem our shares but it wasn’t happening. In the end we told him he could buy back at a higher price than the redemption price and he went for it. We made a 2.3x return but it should have been 5x.”
CNEI’s value proposition is rooted in a commitment that, with long-term capital and professional support, a portfolio company will be worth more to the entrepreneur if he holds 80% than if he retained complete control and never took on third-party investment. A minority of entrepreneurs buy into this philosophy, so identifying the those with strong businesses who are open to partnership is crucial.
Headland’s Thompson echoes the same view, adding that entrepreneurs are generally more receptive to investors with a business background and an understanding of the strategic issues a company faces.
“It’s all about how you manage the relationship and that dictates the level of influence you are able to muster,” he says. “It’s not a question of looking at a business and asking, ‘What do we have to do to get to an IPO?’ but asking ‘What do we have to do to improve it?’”
While it is difficult to unwed Chinese private equity from public market exits, the recent challenges have prompted an adjustment in expectations, for entrepreneurs and investors. The model that emerges is likely to be less heady, and characterized not only by valuations that more accurately reflect China’s continued growth prospects and but also by the work required to realize them at company level.
“There will always be pre-IPO investments but I think the market is maturing and people are realizing that private equity is a long term game,” says NewQuest’s Lo.
“Expectations are becoming more aligned with the international understanding of private equity that IPO markets cannot be relied on. This is even trickling down to the founders, which is a positive for PE investors.”
one year on: domestic ipo gridlock The trickle of listings in Hong Kong and the US are a source of encouragement for private
equity investors looking to exit Chinese companies. Domestic stock exchanges, meanwhile, have been locked firmly shut for about a year, and the China Securities Regulatory Commission (CSRC) has yet to release a timeline for reopening them.
It is the eighth time IPO activities have been suspended since A-share market’s inauguration in 1990.
All the CSRC has said is that IPO approvals will resume once it has improved listing procedures and ensured that companies properly disclose financial information to protect minority investors. Sponsors may face penalties if listing applicants are found to have engaged in malpractice.
However, market watchers suggest said the real reason for the delay is uncertainty about the broader economic impact of a flood of new share issues.
“Perhaps the mainland operators fear that giving IPOs the green light will drain liquidity from the stocks already trading, and given China’s economic slowdown they are concerned about keeping the stock market as stable as possible,” says John Martin Maguire, head of corporate finance at investment bank Reorient Group.
The listings embargo has led to a tremendous build up of companies that need to raise capital but are unable to do so in the mainland. It has also left PE investors stranded in investments and under increasing pressure from LPs to achieve liquidity. The longer the embargo continues, the worse the damage will become.
According to Deloitte, IPOs are likely to restart around the time of the Communist Party Central Committee meeting scheduled for this month. About 83 companies have passed the CSRC’s review and are expected to be the first batch to win approval.
Even so, it will take years for the backlog to clear – the CSRC has never approved more than 150 private equity-backed offerings in a single year, with fewer than 100 coming in 2012 – and some industry participants have expressed disquiet about the severity of the review process.
“What the CSRC has done is an old school intimidation of the bankers and auditors,” says one fund manager.
This GP has a portfolio company that approached the CSRC during the review to disclose a potential issue but was told everything was in order. However, the investment banker on the transaction said there was a high chance of the company being selected for special investigation and refused to sign off on it.
“He told us that if that if the CSRC sent in a team of investigation and they find something – and they have never said specifically what they are looking for – then he would be out of a job,” the GP explains.
The company had to drop out of the listing queue.
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Number 42 | Volume 26 | November 05 2013 | avcj.com 15
NEW PACIFIC CONSULTING IS PRIVATE EQUITY’S TRUSTED ASIA ADVISOR
299 TONGREN LU | SUITE 1001-02 | SHANGHAI, CHINA | 2000040TEL: +86 21 3360 7000 | FAX: +86 21 2302 5110
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Q: How much of a concern is the weak exits market for China-focused investors?
A: For investments that are structured to require A-share market exits, obviously you should be very concerned. The A-share market has never been a reliable market for exits, but for renminbi investors it might be the only option. Overseas investors, even on the growth side, don’t necessarily have to structure deals that way. You can hold all the assets in an offshore vehicle so you aren’t subject to domestic restrictions when it comes to exit.
Q: What about the availability of other exit routes?
A: There are always many options. It depends on whether or not you are knowledgeable enough to structure your deal in such a way that you can take advantage of them. Some investors probably don’t focus enough on different exit options. But if you want to do a strategic sale you have to buy control of the company. Two thirds of our deals are buyouts or control transactions.
Q: Do you expect to see more buyouts in China?
A: I have no idea. For those who are focused on buyouts, opportunities have always arisen from different circumstances. In pre-IPO investment the target doesn’t really care who you are; you’re just a short-term investor who flips out after the IPO. In buyouts it’s very different. China is a low-trust society compared to the US and in low-trust societies who you are becomes very important – your brand name, reputation, track record and operational capabilities, and
what you bring to the table other than capital. Whoever owns a company, they usually care how it will fare after they have sold it. Often they may not sell 100%, just a majority stake. As such, in the US you have auctions but in China you do not because not every buyer is the same. If you have done this before then you will get a bigger share of the buyout opportunities. If you are new and inexperienced then you don’t see them.
Q: How do you work with a founder who givea up control but retains a minority stake?
A: If a founder wants to sell 100% you have some concern as to whether or not there are skeletons in the closet. Typically you don’t want him to get out immediately. You negotiate a deal so that he will stay for a period time until you are comfortable. We did a deal where the founder wanted to sell 100% but we bought 80% with a call option to buy the remaining 20%. With another of our companies we also bought 80% and we don’t have an option to buy the rest because the seller thinks there is more upside.
Q: Isn’t there a risk that the founder won’t be able to behave as a passive minority shareholder?
A: In one of those cases where we bought 80%, it was somewhat difficult because the entrepreneur kept interfering, which placed a burden on the employees. They don’t want to disregard his orders but on the other hand they know he is no longer the controlling shareholder. We ended up exercising our call option. In
another situation we bought 80% and sales improved 30% per store in the first year. The founder was very happy and completely passive. He is building another business and would like us to work with him.
Q: Has there been a change in the nature of operational involvement?
A: I don’t think there has been any change in the importance of operational capabilities because if you are a growth capital investor taking minority positions you don’t necessarily need a strong operations team, but if you are a buyout firm then you’ve always needed a strong ops team. We are always trying to find the best people who can work with the management.
Q: So how has investment strategy changed compared to five years ago?
A: Five years ago it was hard to find opportunities requiring more than $100 million per deal. Today we don’t invest less than $100 million per deal. Companies are larger in scale because today, unlike five years ago when economic development was quite uneven and largely concentrated in coastal regions, if a business model is successful you can quickly replicate it. However, it is very important to invest in businesses that are somewhat unique, not just one of the many. The problem in China is overcapacity. You may be profitable today but if you don’t have any sustainable compelling advantage in terms of brand name or technology or market share or even regulatory barriers, you’re profitability will not be sustainable.
Q: How far does this overcapacity stretch?
A: I would argue that China today is not one economy but two. There is the bad economy, comprising most of the heavy industrial and capital goods manufacturing sectors, where there is overcapacity. Then there is an economy where companies’ ultimate customers are consumers and there is generally not so much overcapacity. However, the market can evolve quickly. Look at electronics retailing and the experiences of Gome and Suning: they face competition from online players that don’t need to make a profit. If there is nothing unique, no entry barrier to protect, then any business could be subject to over-competition.
WEIJIAN SHAN | industry Q&a [email protected]
Looking for controlWeijian Shan, chairman and CEO of PAG, discusses China exit challenges, dealing with company founders in control investment situations, and picking businesses that are less likely to be swamped by local competition
“If a founder wants to sell 100% you have some concern as to whether or not there are skeletons in the closet”
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Number 42 | Volume 26 | November 05 2013 | avcj.com 17
tHe aVailability of co-inVestment is not a deal breaker when Teachers’ Private Capital is picking GPs in Asia, but is an important consideration. The PE unit of Ontario Teachers’ Pension Plan (OTPP) has C$12 billion ($11.4 billion) deployed globally, split equally between fund and direct investments. As the group staffs up its Hong Kong office, so the capacity for co-investment in the region will increase. But these deals must be done in the right way.
“There are two schools of thought on co-investment. We are of the co-underwriting school of thought – partnering with the GP from
the very beginning on a particular opportunity and bringing in our own industry experts who have done lots of deals in that sector,” Jane Rowe, senior vice president at OTPP, told AVCJ in a recent interview. “At the other end of the spectrum are folks that have no desire to go deep into the due diligence or documentation. Maybe they go to two meetings decide they want to ride on the coattails of the GP.”
OTPP belongs to a small group of LPs that possess the remit, resources and will to take this kind of proactive approach to co-investment. Marcus Simpson, head of global private equity at QIC, estimates there are 15-20 of these LPs globally, ranging from sovereign wealth funds through Canadian pension plans to QIC itself.
“A mega buyout manager I spoke to reached out to LPs around the world and 120 that said we are ready to co-invest. He had a deal with a fairly short fuse - about four weeks - and that 120 went down to about 20 who could actually do it,”
Simpson says. “There is a big difference between syndicating and underwriting, but syndication partners are starting the journey. A lot of people are trying to figure out where they sit on the spectrum and where they want to go.”
Accommodating these large-scale LPs, whose priorities may differ from those of the mainstream, represents a challenge for GPs all varieties, either directly or indirectly.
For the larger managers, a $200 million check offers momentum in a difficult fundraising environment, with fee cuts and promises of co-invest frequently offered in return. Smaller
players have little chance reeling in LPs of such size, but they are buffeted by a wider industry trend. As large institutions look to cut back on GP relationships, flocking to brand names that can take larger checks, it begs the question of whether risk aversion is denying them access to what might have been the next big thing.
“The big LPs are changing the market because they have deep pockets – but are they changing it in the right direction?” asks Fritz Becker, CEO and managing director, Harald Quandt Holding, a family office based in Germany. “Do large GPs really generate better returns? Some yes, but most no. In each region we started with brand name GPs but as our due diligence capacity has increased we have allocated more to mid-size and smaller GPs.”
Add weight, shed bulkMany investors have little choice because they are increasingly encumbered by their size.
Thomas Kubr, executive chairman at Capital Dynamics, estimates that a mature PE program with $50 billion in assets needs to make new commitments of $10-12 billion each year to maintain its target allocation. If the LP is unable to account for more than 10% of a single fund then backing mid-market funds of $1 billion or below is challenging – two $500 million commitments are easier to monitor than 10 at $100 million apiece.
Yet at the same time the issue goes beyond size and becomes one of fund economics and ultimately performance. Institutional investors of all sizes are in recalibration mode, saying they will maintain or increase their overall allocation to private equity but focus on a smaller number of managers. What they have in common is depth.
“Many LPs with substantially diversified programs have come to realization that they have 10 people trying to manage over 100 GP relationships and this diversification hasn’t delivered the returns they would have hoped,” says Vincent Ng, a partner at Atlantic-Pacific Capital. “So focus on the top 15-20% performers, allocate another 5-10% for new relationships, and anyone else is run down or sold as a secondary.”
The big getting bigger while the small get nothing at all is a brutal notion but one that is to a certain extent borne out by the fundraising data. According to AVCJ Research, Asia-focused PE funds have received commitments of $34.4 billion so far this year, nearly $20 billion short of the total for 2012 as a whole. It is likely to be the weakest fundraising performance in four years.
These numbers are based on funds that have reached a partial or final close. Take the final closes alone and the bifurcation in the market becomes clear.
At the top of the list sit three pan-regional vehicles, KKR Asian Fund II on $6 billion, RRJ Capital II on $3.5 billion and MBK Partners III on $2.7 billion. Discount funds with an element of government or strategic interest and there is nothing else until Anchor Equity Partners’ debut Korea-focused fund on $500 million. There were eight more final closes above the $200 million mark by independent managers.
In 2012, 17 funds reached a final close of $500 million or more, with eight coming in at $1 billion and above, once again discounting government or strategic-backed vehicles. Another 15 raised in
Size matters?While a select group of GPs are able to raise large funds at short order in Asia, the small and mid-cap space is hollowing out. It is in parts cyclical and a function of broader changes in the post-financial crisis LP base
No. of funds
Asia private equity fundraising
Source: AVCJ Research * excluding real estate and global funds with a focus on Asia
80,000
60,000
40,000
20,000
0
600
500
400
300
200
100
US$
mill
ion
Fund
s
Amount (US$m)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013YTD
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Number 42 | Volume 26 | November 05 2013 | avcj.com 19
Global growth means we have the ideal solution for every organization Bringing AnalytX products into our portfolio means that we have the ideal solution for you - regardless of size, sophistication, or the complexity of your requirements.
FrontInvest, Investment Café and AnalytX work together to bridge today’s approaches with those of tomorrow. Together, we service the private equity, real estate and infrastructure industries with end-to-end solutions for :
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excess of $200 million. Placed against 2007 when Asia fundraising reached its pre-financial crisis peak of $62.9 billion – and the contrast becomes starker. Ten funds reached a final close of $1 billion or more, another 11 raised in excess of $500 million, and over 40 closed between $200 million and $500 million.
Large pan-Asian funds being raised by TPG Capital and The Carlyle Group, which launched after the likes of KKR, RRJ and MBK, have been in the market for more than 18 months. They are attracting capital but it remains to be seen whether they meet their targets by the previously stated year-end goal.
“The firms who have built up significant regional infrastructure and a strong investment track record across multiple markets are the ones who are attracting capital,” says Joe Bae, head of
KKR Asia, referring to the large-cap space. “The ones with fund sizes that are smaller than what was raised previously are those without a top-quartile track record or have seen major turnover on their teams or have different stories today as to the markets they can invest in.”
KV Asia, a Southeast Asia-focused GP, is one of the lucky few in the region’s hollowed-out mid-market, its debut fund closing at $263 million in August, more than two years after launch. Karam Butalia, KV Asia’s executive chairman, notes that the process was made all the more challenging by LPs’ wariness of backing first-time funds, even though the principals in this case are not newcomers to private equity.
“The big are indeed getting bigger. You look at these larger LPs, with tens of billions of dollars, they need to make a material impact, hence they
need larger check sizes,” he adds. “But there is a lot of money out there for private equity and small funds are still coming up. As the market becomes more seasoned you will get more specialized, smaller size funds that understand particular character traits and businesses.”
Slim pickingsPlenty of industry participants are willing to plot a course towards greater GP specialization in the mid-market. Lorna Chen, a partner at Shearman & Sterling, is already seeing differentiation among smaller PE firms – to a large extent a matter of necessity given how the community has proliferated in recent years.
While it goes without saying that a pre-IPO manager who ran China deals out of Hong Kong must evolve if he is to stay competitive, there is some skepticism as to how deep the talent pool really is. Past experience also weighs on judgment calls, and the reality that far too many investors bought into the growth capital story and committed money to multiple GPs, often with overlapping strategies, that should never have been backed in the first place.
“In a China context, when LPs say they want to put more money to work in China but with fewer managers, they are saying that they previously gave money to 20 managers and 15 of them are sucking wind,” one GP observes. “There is still a lot of money going into the market and it goes to those five managers – there really aren’t many more – that are perceived to be differentiated.”
This approach suggests deployment out of necessity rather than choice, which means the LP is always likely to opt for the most defensive option.
Similar attitudes are seen elsewhere in the region. First, there is a general unwillingness to embrace unproven managers and strategies, particularly among LPs who must run decisions past an investment committee that is based outside Asia. This is a classic safety play: the salaried investment manager is more incentivized to protect capital than take a risk on a GP who might deliver alpha but equally may well blow up.
Second, some LPs back the largest player in a particular space, despite having reservations about the manager, simply because there is a desire for exposure to a strategy of geography. “Their minimum check size is $75-100 million and there might be only one fund large enough to absorb that amount, so they have nowhere else to go,” Ng says. “They are making decisions based on scarcity value rather than absolute returns.”
One way an institutional investor can address this issue is by accessing smaller managers through a fund-of-funds. Indeed, the number of LPs who take Asia seriously is expected to grow
institutional platforms It is difficult to talk about institutional platforms in private equity without someone bringing
up David Swensen. The head of Yale University’s endowment is known for developing an investment model that eschewed liquidity in favor of the higher returns available in asset classes such as private equity. He also has a reputation for backing the small guy.
“The David Swenson-type would say, ‘I like the guys who are entrepreneurial and great deal guys. I acknowledge that high returns may come at the expense of a less sophisticated back office,’” says Marcus Simpson, head of global private equity at QIC. “There is now a bifurcation in the market, some people are pushing away from those entrepreneurial roots in the belief that there will be big guys with global domination and then local specialized managers.”
Anecdotal evidence suggests that larger institutional investors are asking more of GPs in terms of compliance and reporting standards, which in turn puts pressure on managers to ensure they have the appropriate infrastructure. Failure to do this may have an adverse affect on fundraising.
“It’s about the operational capabilities you are trying to build, the government and regulatory work that needs to take place to be a good stakeholder in these countries,” says Joe Bae, head of KKR Asia, describing an institutional platform. “A lot of the LP money coming into this part of the world is from investors who really care about governance, risk management, stability of the platform, training, and robust FCPA and ESG programs. These things take a lot of effort to get right.”
Few GPs in Asia can match KKR’s global scale and resources when it comes to putting a platform in place, but the vast majority of industry participants are aware of the need to make LPs comfortable with the markets and opportunities to which they are exposed.
“From an LP perspective, it’s ‘Okay, so I’ve backed these guys and they are great at deal sourcing but are they going to provide the reports I am looking for? Am I confident that the assets are being looked after in the appropriate way and I won’t get involved in some kind of scandal?” says Marcus Thompson, CEO of Headland Capital Partners. Derek Sulger, managing partner at Lunar Capital, adds that it is also an issue of sustainability and the LP being confident that a younger GP will last for 20 years or more, even though one or two key people may depart.
But does institutionalization come at the expense of the entrepreneurism that underpins private equity? “An excellent GP should be allowed to focus on investment and returns, there shouldn’t be too much LP influence,” says Fritz Becker, CEO of Harald Quant Holdings, a Germany-based family office. “PE is still driven by a person’s ability to find the right deals and do the right coaching of management teams. It might not be what is expected in the corporate governance department of an institutional pension fund.”
However, Mario Giannini, CEO of Hamilton Lane, argues that institutional platforms have not damaged entrepreneurial thinking in the US – citing the venture capital industry as an example – and he doesn’t see why Asia should be so different, despite being at an earlier stage of development. “Being entrepreneurial and being in the Wild West is not the same thing,” he adds.
Shearman & Sterling has an established presence with a 140-year legacy. It is one of the world’s leading international law firms known for its expertise in virtually every area of law relating to commercial and financial activity, from advice on investment funds, capital markets, corporate/mergers and acquisitions, project development and finance transactions through to representation in international arbitration and litigation.
With a long-standing commitment to Asia for over 30 years, we offer a sophisticated approach to deliver innovative and integrated strategic, tactical and technical advice to our clients. Our core practice areas include:
INNOVATION...SOPHISTICATION...INTEGRATION...
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shearman.com
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2013 | celebrating
Number 42 | Volume 26 | November 05 2013 | avcj.com 21
Shearman & Sterling has an established presence with a 140-year legacy. It is one of the world’s leading international law firms known for its expertise in virtually every area of law relating to commercial and financial activity, from advice on investment funds, capital markets, corporate/mergers and acquisitions, project development and finance transactions through to representation in international arbitration and litigation.
With a long-standing commitment to Asia for over 30 years, we offer a sophisticated approach to deliver innovative and integrated strategic, tactical and technical advice to our clients. Our core practice areas include:
INNOVATION...SOPHISTICATION...INTEGRATION...
▪ Acquisition Finance▪ Asset Management▪ Banking & Finance▪ Capital Markets▪ Direct Investment▪ Fund Formation
▪ Intellectual Property▪ International Arbitration ▪ Litigation & Dispute
Resolution▪ Mergers & Acquisitions▪ Private Equity
▪ Privatizations▪ Project Development
& Finance▪ Regulatory & Compliance
ABU DHABI | BEIJING | BRUSSELS | FRANKFURT | HONG KONG | LONDON | MILAN | NEW YORK | PALO ALTOPARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC
shearman.com
years
2013 | celebrating
exponentially over the next decade and many will follow the path taken by Harald Quandt and others, investing via a third-party manager until they are comfortable enough to go solo.
For those without the asset base to justify additional staff, a fund-of-funds or an advisory relationship might remain the logical way to access the asset class in Asia. At the other end of the spectrum, LPs with a passive remit are already moving towards customized solutions that typically offer more freedom and lower fees.
“We have clients with large amounts of capital to deploy but don’t want a multitude of relationships in their PE program so we set up special purpose vehicles for them,” says Michael Lukin, managing director and global head at Macquarie Investment Management’s private markets division. “There is flexibility in terms of being able to sell assets on the secondary market, not being locked into a co-mingled product and having control over the pace of deployment, but you can still access markets where there is $50 million of capacity available rather than $500 million.”
When acting as a sounding board for smaller Australian funds seeking in the region of $200 million, Lukin advises against fundraising trips to Europe and the US in favor of Singapore and Hong Kong. Asian fund-of-funds are capable of writing $30-40 million checks and they are generally easier and cheaper to deal with than a far-flung US institution.
The momentum an anchor commitment from a fund-of-funds – or Temasek Holdings’ Pavilion Capital – can give to a first-time fundraise shouldn’t be underestimated, even though some industry participants warn that the terms demanded for performing this role can be egregious. Of the 2013 final closes, Anchor Equity and KV Asia are each said to have won early support from a trio of such institutions.
“Without an anchor investor it would have been a lot more difficult,” KV Asia’s Butalia notes. “They have the knowledge and the feet on the ground – many pension funds can’t do that. Although the Canadians are taking a different route and it’s interesting to see them setting up their own offices, by and large pension funds are understaffed and subject to a lot of regulation.”
Higher standardsRegulation, or the imposition of minimum standards on GPs in terms of reporting and compliance, is another area in which larger managers are seen to hold an advantage. It also offers insight into the broader question of whether the big getting bigger is a function of the cycle or evidence of a more systemic shift.
The driving factors here are not specific to Asia but the outcome is. On one hand, the
introduction of Institutional Limited Partners Association’s (ILPA) set of principles for improving alignment of interest, governance and transparency in private equity has provided a strong starting point for LPs in their negotiations with GPs. On the other, the hawkish environment from which the principles emanated has turned the balance of power between GPs and LPs in favor of the latter.
Where they recognize fundraising is taking longer than anticipated, LPs are able to demand more concessions. Reductions in fees and access
to co-investment are only one part of it. Wary of the opportunity cost of participating in private equity, institutional players want to benchmark the asset class against others. Hence the desire for more information, delivered more frequently, on a fund’s holdings.
The willingness to make an exception for Asia in this respect is dissipating. A manager wanting to secure a commitment from one of these LPs must therefore invest in a back office to meet these requirements.
“A few years ago if you talked to a lot of European and US institutions they would say it’s different in Asia. They understood they couldn’t get the same standards as in the US and Europe,” says Mario Giannini, CEO of Hamilton Lane. “But the lack of returns has made them say, ‘Well, it’s different but not better, so why would I take that risk?’ There’s a view that they need institutional structures that make for a good fiduciary. That is an increasing issue for Asian GPs.”
This poses something of an existential threat to a first-time smaller manager – he can’t become institutionalized without funding but can’t get funding unless he’s institutionalized – but most accept that compliance is a cost of doing business. Furthermore, a fundraising process, while it may take longer than previously due to tighter due diligence, can be targeted to ensure time and cost efficiency.
“The key element we point to is targeting investors that are, at that particular time, focused on the right strategy, have capital and are willing to move,” says Thomas Swain, Vice President with Credit Suisse’s Private Fund Group in Hong Kong. “Unless the GP is in the camp where they can dictate terms and timing, they need to be sensitive to executing those steps to achieve and maintain fundraising momentum.”
Finally, it remains to be seen whether the current – and general – trend whereby the big are getting bigger holds true.
Private equity globally has become increasingly focused on the largest pools of capital with the emergence of large-scale LPs and the retreat of high net worth individuals and family offices since the global financial crisis. At the same time, Giannini argues that bifurcation within the GP base – large players’ scale advantage becoming entrenched and smaller players becoming more local and specialist – has been seen in other markets.
If these forces are preserving the status quo, two more seek to undermine it. First, foreign LPs’ comfort and understanding of Asia will undoubtedly grow, leading to participation from a wider variety of institutions, in terms of size and strategy. Second, capital seeks the best returns and if the mid-cap space is neglected now and managers thrive in the absence of significant competition, they will be oversubscribed next time around. Similarly, a GP that becomes too large and too dependent on management fees risks losing alignment of interest with investors.
“Some of these guys are small because they don’t deserve to be bigger. Far fewer don’t deserve it compared to five years ago, but the next cycle will throw up too much cash, people will start chasing returns and money will go to GPs who shouldn’t get it,” says Capital Dynamics’ Kubr. “We will be having the same conversation in five years time and again in 12 years time.”
Final closes by fund size
Source: AVCJ Research
2003 2004 2005 2006 2007 2008 2009 2010 2010 2011 2013YTD $200-500m $501m-$1b Above $1b
Fund
s
80
70
60
50
40
30
20
10
0
capstone
Number 42 | Volume 26 | November 05 2013 | avcj.com 23
uncertainty Has become tHe norm over the past decade for nearly 77,000 people working for Australian universities and research institutes. They represent barely one sixth of the employees whose pensions are managed by UniSuper, but they have been promised lump sums from the fund as they retire. The money is used to buy annuities that generate regular income to see them through their senior years.
The problem for UniSuper is that – due to salaries rising higher and people living longer than expected, plus investment returns coming in under target – it is unlikely to have enough cash to meet future pension obligations.
“The universities don’t want to put in more money and members don’t want to give up entitlements,” says one local fund manager. “You get to a stage where the fund doesn’t have enough capital to meet liabilities but if no one does anything about it for 10 years then it is the last guy standing who wears the consequences.”
UniSuper can break this stalemate by reducing members and pensioners’ benefits. Four times in the last 10 years it has been forced to review its position: the first review resulted in no change; the second, announced in August, prompted a cut in benefits accrued after 2015; the third and fourth reviews will be completed over the next three years. A further erosion of benefits cannot be ruled out.
Australia has gone to great lengths to avoid these situations. The majority of the population is in defined contribution (DC) plans, where responsibility for providing a pension lies with the employee, not the employer. Defined benefit (DB) plans, and the unfunded liabilities that can accompany them, are left out in the cold.
Global shiftWhile it may be ahead of the curve in terms of developed market pension reform, Australia is certainly not alone. “This shift is definitely happening in Europe and in the US as well,” says Luba Nikulina, global head of private markets at Towers Watson. “Over the next 20-50 years existing DB plans will wind down. Many are already not taking new members.”
For private equity, the retraction of DB plans from the asset class – either through wind downs or a scaling back of commitments as liability horizons draw nearer – represents a challenge.
Firms have grown accustomed to the long-term DB outlook. DC plans, however, are perceived as very different creatures: more portable, more subject to the whims of the individuals they serve, and more inclined to invest in liquid assets.
UniSuper’s DB division, for example, commits 10% of its corpus to alternative investments, twice the size of the largest allocation through any of the fund’s DC plans.
Bridging the gap between DC and private equity is therefore a concern, albeit not an immediate one. Most of the large US public pension funds that feature on LP rosters are resolutely DB and open to new members. Even where there are pullbacks, these can be offset by new sources of capital such as sovereign wealth
funds. In an Asian context, many pension plans are underweight on the region so if they are paring back, it is happening elsewhere.
“It’s not so much private equity firms saying, ‘I need to do something today,’” says Mario Giannini, CEO of Hamilton Lane. “But as DB goes down due to withdrawal pressures and DC goes up, every firm that wants to be around in 10 years is either looking at DC access as a strategy or actively doing it. As the big firms begin to penetrate this market all of us will be doing it.”
DC plans accounted for 45.5% of assets in the leading global pension markets last year, with growth outpacing DB over the past 10 years, according to Towers Watson. The largest of these is the US, where DC plans have grown sevenfold to more than 270 over the past decade, a period
during which traditional DB plans fell by nearly three quarters to 70. Cerulli Associates estimates that assets in US 401k plans – the most common DC strategy – will increase by 6% a year through 2016 to reach $5.03 trillion, surpassing the $4.9 trillion held by public pension plans.
In Europe, meanwhile, a recent survey of 20 investment firms identified DC plans as the fastest-growing source of business growth this year, with assets expected to reach $2.1 trillion.
Needless to say, the DB-DC debate varies between geographies, which can lead to a misunderstanding of the forces at work. Indeed, Thomas Kubr, executive chairman of Capital Dynamics, doesn’t see liquidity as a DB-DC issue at all. Rather, at issue is whether plan members
have the freedom to remove their money on leaving the employment of the sponsor.
“People assume that in DB plans members can never withdraw their capital and thus the money will be there forever. The other assumption is that a DC plan is like a bank where members can move their savings to wherever they would like,” he says. “That is not always the case.”
Kubr contrasts Australia’s DC system, which allows members to move their pension savings between providers and therefore requires ample liquidity, with Switzerland’s DC system, which is strictly linked to place of employment. Similarly, there are DB plans in the US that allow employees to remove their capital from the system.
Although it offers no perfect comparison with other systems, Australia is an interesting case
A slow-burn issueDefined benefit public pension plans are one of PE’s biggest bank rollers, so the rise in defined contribution plans – that tend to favor liquid assets – is a long-term concern. There must be compromise on both sides
Evolution of US retirement o�erings
Source: Towers Watson
300
200
100
0
Plan
s
Hybrid De�ned contribution onlyTraditional de�ned bene�t
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
When time and money are precious,focus on what matters most – your returns
Discover the difference total peace of mind can make your investment and growth ambitions.
For more information contact Bruce Han at [email protected]
As Private Equity firms you have to grapple with many fundamental issues in order to make a success of your investments and portfolio businesses, all the more so in these challenging economic times.
Why bother with the administrative hassle of setting up a fund – whether onshore or offshore – when you can outsource this task to a firm that has the global expertise and local knowledge to take care of it for you?
Why worry about managing a GP’s back-office activities such as accounting, payroll and HR administration and compliance when that same firm can manage these underpinning responsibilities for you in a cost-efficient and risk-free manner?
And as you increase your portfolio of companies, why not consider seeking specialised advice and support to help you in attaining the development, growth and return you are seeking from your investments?
KCS can partner with you on each and all of these essential supporting functions – when and where needed in Asia.
kcs.com
Hong Kong
Beijing
Tianjin
Shanghai
Shenzhen
Chengdu
Guangzhou
Taipei
Hanoi
Ho Chi Minh City
Singapore
Jakarta
Sydney
BVI
Knowledge. Commitment. Success.
•
•
•
Number 42 | Volume 26 | November 05 2013 | avcj.com 25
When time and money are precious,focus on what matters most – your returns
Discover the difference total peace of mind can make your investment and growth ambitions.
For more information contact Bruce Han at [email protected]
As Private Equity firms you have to grapple with many fundamental issues in order to make a success of your investments and portfolio businesses, all the more so in these challenging economic times.
Why bother with the administrative hassle of setting up a fund – whether onshore or offshore – when you can outsource this task to a firm that has the global expertise and local knowledge to take care of it for you?
Why worry about managing a GP’s back-office activities such as accounting, payroll and HR administration and compliance when that same firm can manage these underpinning responsibilities for you in a cost-efficient and risk-free manner?
And as you increase your portfolio of companies, why not consider seeking specialised advice and support to help you in attaining the development, growth and return you are seeking from your investments?
KCS can partner with you on each and all of these essential supporting functions – when and where needed in Asia.
kcs.com
Hong Kong
Beijing
Tianjin
Shanghai
Shenzhen
Chengdu
Guangzhou
Taipei
Hanoi
Ho Chi Minh City
Singapore
Jakarta
Sydney
BVI
Knowledge. Commitment. Success.
•
•
•
study by virtue of how far and how fast it has gone in adopting DC. The DB-DC asset split in the US was 42-58 in 2012 and it has taken 30 years of incremental shifts to get there. In Australia, more than 80% of pension assets are held in DC plans.
A movement that began with corporations getting liabilities off their balance sheets gained momentum in the mid-2000s as members won greater freedom to choose plans, prompting a wave of industry consolidation. The number of superannuation funds has fallen from 4,000 a decade ago to around 150. Martin Scott, head of Partners Group Australia, expects the industry to narrow to 50 or so large players.
There is already bifurcation in product offerings – at one end, a niche group of providers that continues to allocate to PE in the belief that returns outweigh costs; at the other, a mass market is committed to reducing management expense ratios. This has been exacerbated by the MySuper legislation, intended to create a range of simpler products that are easier to compare in terms of costs and returns.
“The way superannuation funds advertise to potential beneficiaries is cost,” says Marcus Simpson, Head of Global Private Equity at QIC, an investment manager set up by the Queensland government. “Private equity is the most expensive asset class and so funds don’t want to put much of it in their portfolios.”
Self-managed superannuation funds, the largest area of growth in Australia’s pension fund market, in some respects represent the apogee of this evolution – the member takes full responsibility for contributions and earnings. Roughly one third of the country’s A$1.4 trillion superannuation pool is deployed in self-managed funds. However, around 80% of the 12 million Australian who hold superannuation accounts don’t opt for a particular plan and are therefore signed up default funds that must ultimately fall in line with MySuper criteria.
Where choice can be exercised, it is often constricted by either the plan’s potential liquidity needs – product offerings are public equities and fixed interest heavy – or risk aversion on the part of the individual.
“In a DC world you see an asymmetric risk profile,” explains Macquarie’s Lukin. “If a fund delivers 14% and the benchmark is 15%, investors are relatively happy. If the fund returns -3% to the market-wide -5%, you have a disgruntled member base. You get rewarded less for excess return and punished more for underperformance in poor markets.”
Adaptation optionsAssuming DB allocations to the asset class do decline in the long term, the question for private equity firms is how they can adapt to the needs
of DC. Global firms such as The Carlyle Group, KKR and The Blackstone Group have rolled out or are said to be planning investment products with a minimum commitment threshold low enough for individuals. Some have spoken publicly of their desire to bring 401k plans into PE.
There are three principal hurdles: providing liquidity; providing daily valuations so a member leaving a plan can be confident the price at which he or she trades out fairly reflects the underlying holdings; and fees. The latter is no longer just an Australian concern. According to David John, senior strategic policy advisor at the American Association of Retired Persons (AARP), providers now have a fiduciary responsibility to ensures fees are appropriate to the market.
A number of groups claim to have identified solutions. In 2011, Partners Group launched a
dedicated Australia feeder fund for its Global Value SICAV vehicle. The product is tailored to the changing priorities of DC programs, offering exposure to secondaries, directs and mezzanine debt as well as primary funds, in keeping with LPs’ more opportunistic, j-curve jumping approach. The entry level is set low, A$20,000 for a retail investor, fees are based on net asset value, and there is a liquidity option in the form of monthly applications and redemptions.
“We are trying to offer a solution to that end of the market so they have something to invest in that is different from publicly listed alternatives,” says Partners Group’s Scott.
Pantheon is also working on a product designed to bridge the liquidity gap. It does this by taking a traditional fund-of-funds pool comprising an assortment of US PE vehicles and carving off 30% of the portfolio, which is then invested in exchange traded fund (ETF). The ETF focuses on the S&P500 and is designed to
replicate the typical US buyout and growth fund portfolio, with a view to correlating the liquid and illiquid portions as closely as possible.
According to Pantheon, the fee will be slightly higher than the level for a typical equity mutual fund under 401k, while the target return is 2-3.5% above the S&P500, net of fees, expenses and costs associated with the liquid tranche. This tranche will not only be used to fund redemptions but also to cover draw downs made by portfolio GPs over the life of the product.
“We are already engaged in some very interesting conversations with large sponsors in the US and we hope to be in a position to bring in clients in the next year or so,” says Rob Barr, a partner at Pantheon and head of the firm’s DC initiative. “A big part of this is reassuring the consultant community that we have something that makes sense for their clients.”
Part of the solutionIt remains to be seen whether these products gain significant transaction in the market, but some industry participants are skeptical, suggesting that liquidity shouldn’t be a priority for investors who are truly committed to the asset class. Questions are also asked about these products’ ability to withstand a downturn. If, for example, there was a surge in members seeking to leave the plan – in situations where they are entitled to exit at short notice – would the liquid balance be sufficient to placate demand?
It is worth noting that Partners Group’s fund assumes a minimum liquidity level of 20% per year and retains the ability to gate redemptions if insufficient liquidity is available.
“What are the two things that are perfectly correlated in finance? Illiquidity and crisis. When people are heading for the door in a crisis everything goes illiquid,” says Capital Dynamics’ Kubr. “None of these schemes people are dreaming up will work when they really need to.”
Hamilton Lane’s Giannini is more generous. He doesn’t see these products working on a standalone basis but rather as the minority private equity component of a long-term horizon target-date fund. Another factor is the maturity of the secondaries market: with more transparent pricing the better the chance of developing a liquid market for private equity positions, so a DC plan that finds itself under pressure from members who want out wouldn’t have to jettison its illiquid assets at fire sale prices.
Getting into target-date funds, which effectively seek to create a DB outcome via DC model, is Pantheon’s principal objective; it wants to provide the private equity sleeve in a broader plan. The approach suggests that, while PE firms must adapt to DC, DC will simultaneously try and adapt to them.
“More DC plans will bring in PE but it won’t be all of them; the ones that go first will have less liquidity pressure than your normal mutal fund-type plan. The question is not whether they do it, but the speed with which they embrace it” – Mario Giannini
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Number 42 | Volume 26 | November 05 2013 | avcj.com 27
www.cooley.com
创新无极限
Innovation without limits
Cooley’s Global Private Investment Funds group is
highly specialized in serving private equity, growth
equity and venture capital clients. We have extensive
experience assisting funds located or investing
in China.
We have been involved in the China investment
funds market since 1989—longer than any other
global law firm. We form more dollar-denominated
China venture capital and growth equity funds than
any law firm worldwide.
科律的全球私募投资基金业务组致力于为位于
中国以及面向中国投资的私募基金、成长型基
金和创投基金提供高度专业化的服务并拥有丰
富的全球及中国经验。
自1989年起科律就一直参与中国私募投资基
金市场的法律服务，起步早于任何其他全球性
律师事务所。科律协助成立的专注投资中国的
创投美元基金和成长型美元基金在数量上远超
过任何其他律师事务所。
© 2013 Cooley LLP, IFC - Tower 2, Level 35, Unit 3510, 8 Century Avenue, Pudong New Area, Shanghai, 200120, China, +86 21 6030 0600
中国上海浦东新区世纪大道8号国金中心二期35楼3510室, 200120 电话: +86 21 6030 0600
科律律师事务所
“The type of sponsor that will be involved in putting PE into these qualified default funds are likely to be those with positive experiences of PE in their DB schemes,” Barr adds. “They know the asset class and they want to give access to their participants to private equity.”
Target-date funds don’t represent a panacea for private equity but they are able
to accommodate the asset class, provided the employer and consultant are willing to accept the added cost and complexity. Rather than a one-size-fits-all approach, a likely retirement date and a desired pension pot are identified for an individual and the investment portfolio is designed to meet these goals. The end result may resemble a final salary pension.
Allocations change over time but for someone who is 40 years from retirement the liquidity of different investments shouldn’t be a major concern – it is estimated that a 2060 target-date fund would be comfortable with a 5-8% private equity weighting. Customization is also seen as sticky; there are less likely to be wholesale shifts between providers.
A similar phenomenon is apparent in Australia. Many of the larger superannuation funds are now offering members a deferred annuity structure that delivers a guaranteed income stream for the rest of a member’s life or for a set period of time.
“They ask people where they want to be in 20 years’ time and then tell them they need to lock it up or allow some level of longevity to their investment,” says Partners Group’s Scott. “What this would actually mean is a full circle back to where we were – just without the liability resting on the corporate or government balance sheet.”
Performance issuesComparing the performance of DB versus DC plans can be problematic: a fully funded DB plan might only require a 4-5% return to meets its target and therefore opt for a defensive strategy
while an underfunded plan is likely to be more aggressive. Furthermore, private equity and other illiquid assets are only one part of the puzzle. However, most studies have found that DB is superior DC.
Analysis released by Towers Watson earlier this year shows that DB plans in the US have outperformed DC by an average of 76 basis
points per annum since 1995. The gap halved for 2007-2011, in part due to strong public markets in 2009, but Towers Watson also noted that it reflects DB plans adjusting allocation strategies to better match assets to liabilities and DC plans assuming certain DB characteristics. Rebalancing achieved through the use of professionally managed target-date funds was cited as an example of this.
The target-date fund remains a work in progress. Fiduciary burdens mean the world of 401k is slow moving, but the general expectation is they will become more sophisticated in line with members’ demands. Alternatively, the product that comes after the target-date fund may go in another directly entirely.
“You could in theory have a lot of customization but recent discussions have
focused on something that is more of a one-size-fits-all,” says AARP’s John. “It is being discussed in terms of a large plan that covers employees of a small business that wouldn’t be able to afford a more customized 401k system.”
This might still appear close to a DB portfolio in composition, but members would be bundled together and assigned to a particular investment category based on risk tolerance. Another scenario offered by John sees the concept of placing all the risk on members could lose favor in political circles and replaced by a cash balance plan, where the DC-style individual account is hypothetical and the employer is responsible for ensuring the lump sum available on retirement meets an agreed minimum level.
Hamilton Lane’s Giannini accepts there will be nuances in most pension systems, but he argues that the trend towards individuals having a greater say over investment across a wider array of asset classes – including PE – is irreversible.
“With pressure from investors as they become increasingly sophisticated, it’s hard to see this not happening,” he says. “More DC plans will bring in private equity but it won’t be all of them; the ones that go first will have less liquidity pressure than your normal mutual fund-type plan. The question is not whether they do it, but the speed with which they embrace it.”
For the PE firms, too, it is in part a matter of necessity, with any compromises made in the interests of securing a portion of the pension market that is exhibiting substantial growth.
While DB plans still have long enough
horizons to make new commitments to the asset class – indeed, some with unfunded liabilities are becoming more aggressive in alternatives – it cannot last forever.
“That’s why you see these new models emerging, PE firms trying to tap the DC market and diversify their investor base by attracting sovereign wealth funds and and high net worth individuals,” says Towers Watson’s Nikulina.
Major global pension markets: Asset allocation
Source: AVCJ Research
0 20 40 8060 100 Other Cash Equities Bonds %
Australia
Canada
Japan
Netherlands
UK
US
Global
Major global pension markets: DB-DC split
Source: AVCJ Research
0 20 40 8060 100 De�ned bene�t De�ned contribution %
Australia
Canada
Japan
Netherlands
UK
US
Global
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Number 42 | Volume 26 | November 05 2013 | avcj.com 29
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Q: What are you expectations for global secondary volume?
A: We have been projecting an average of $25 billion per year, or more than $100 billion in total volume over the next 4-5 years. This doesn’t include direct secondary transactions, which are running at $2-3 billion a year, so you could add $10 billion to the four-year number.
Q: How come 2013 has so far been slower than 2012?
A: The final regulations for the Dodd-Frank Act and the Volcker Rule were being written in the first half of this year, so banks were waiting to see how they came out. The rules are actually tighter than people had anticipated. All major banks doing business in the US must file an extension request by January for assets they don’t anticipate being able to sell by mid-2014 and if there is no filing they have to complete the liquidation process by July 2014. You might have a really big 2014 as banks begin to dispose of their PE assets. Since the global financial crisis, major banks and other financial institutions have sold about $40 billion of PE. We estimate they still hold more than $100 billion and if only half of that is sold in 2014 to comply with Volcker, there is at least another $50 billion to go.
Q: What does this mean for Lexington?
A: Lexington VII was $7.1 billion and it’s now 95% committed so we have been putting out $2-3 billion a year for the last three years. We are ahead of schedule because the investment period doesn’t end until next year. We have always said that, given
the size of the secondary opportunity post-global financial crisis and the trends towards more active portfolio management among the pension funds, it would take two funds to work off the imbalances.
Q: How prominently has Asia featured in Fund VII?
A: We have seen more secondaries opportunities out of Asia than we would have expected. Investors in Asia like private equity, in part because they don’t necessarily have deep public markets, but they dislike illiquidity. The turnover rates, even though inventory is still growing, will be higher than in other parts of the world. Lexington could purchase up to $200 million a year in Asian funds. I think we’ve seen volumes in excess of that already.
Q: What will be the impact of consolidation in the secondaries space?
A: We divide our competitors into two groups: independent firms and then captive or public firms. Ten years ago it was almost all independents. Now it’s less than half, because a lot of the new entrants and some of the independents have chosen to affiliate. When it comes to financial institutions selling PE assets, large financial buying platforms can be difficult from an alignment and competitive perspective. For example, a bank or insurance company might not want to sell to a competitor. Even more complicated, several large public PE firms have acquired secondary platforms without the ability to make large primary commitments. They also compete with some of the large
sponsor funds being offered in the secondary market.
Q: Lexington has never felt the
need to do this…A: We have made more than 200
primary investments over the last 10 years, putting out $1.5 billion. We do it strategically within the secondary funds. We don’t want to be big in the primary business because it is inherently a difficult area, well-served by the major FOF managers. If you look at it as a barbell, most people have used the bar – fund-of-funds and primaries – to then diversify into the alpha products, which are secondaries and co-investments. I would rather own the barbells than the
bar. The bar is getting shorter and people want to add more weight to the barbells because it’s proven that secondaries give you, through the discount and j-curve jumping, an enhanced yield and with co-invest, you bring down your average cost of management fees.
Q: In private equity generally, are the big just getting bigger?
A: You have the big five – Blackstone, KKR, Carlyle, Apollo and TPG – and then Oaktree in distressed debt. It’s going to be difficult to challenge these firms, given the requirements in terms of regulation, compliance and global presence. They have thousands of people, billions of dollars of capital and access to the public equity and credit markets. It is somewhat similar in secondaries in that only a few firms that can handle a $1 billion deal. When you combine the size of funds with the quality and size of our LPs, we are often the preferred buyers. You don’t get that at the lower level so there is a lot of power in terms of our ability to lead large deals and syndicate when appropriate.
Q: There is now also a sub-set of very large LPs. What do they want from you?
A: They want us to be there in the big deals. They like being part of that process and also looking at secondary co-investments. If you are a sovereign wealth fund or large public pension and we are helping de-risk a major corporate pension fund, or releasing tier-one capital for a global bank, they like that stuff. Rather than syndicate that excess opportunity to our competitors, we want it to flow to our LPs.
BRENT NICKLAS | industry Q&a [email protected]
J-curve jumpingBrent Nicklas, managing partner at Lexington Partners, on his expectations for private equity secondaries in a global market characterized by increased regulation, consolidation and ever larger LPs
“Lexington could purchase up to $200 million a year in Asian funds. I think we’ve seen volumes in excess of that already”
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In a diverse region, local presence, experience, and understanding counts Just like you, we do more than deals. In addition to due diligence assistance to help make your next acquisition or divestment a success, with a network covering our member firms in Asia Pacific and around the world, we can tailor our services to suit you from effective tax structuring and strategic corporate intelligence right through to separation, integration and cost optimisation, for value improvement after the transaction.
KPMG’s dedicated Private Equity Group in Asia Pacific.
Organised with your needs in mind.
kpmg.com
Number 42 | Volume 26 | November 05 2013 | avcj.com 31
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kpmg.com
blacKbird Ventures’ a$20 million ($19 million) first close on its A$30 million maiden fund earlier this year marked a bright spot in a difficult period for Australia’s VC community.
Appetite for the asset class among domestic institutional LPs has been weak ever since the global financial crisis. Many of those who active in 2006-2007 had over extended themselves, raising funds that were too large and as a result making bigger bets and taking on more risk. With a worried eye on their portfolios, LPs started asking tough questions about performance.
Recognizing that domestic institutions would be a difficult sell, newcomers like Blackbird sought out alternative sources of capital, essentially tapping into a larger pool of investors willing to write very small checks.
“For us it meant turning to tech founders and people who have made money selling their software companies in Australia,” says Rick Baker, managing director of Sydney-based Blackbird. “We have been fortunate to pull together an excellent group of those kinds of investors from Australia and the US.”
In total, 35 Australian tech founders and Silicon Valley venture capitalists invested in the vehicle, accounting for the lion’s share of the first close. Among them were US angel investors such as Bill Tai and Dave McClure - who invested through his seed stage platform 500 Startups - and the entrepreneurs behind successful Australian technology firm such as Atlassian, Campaign Monitor and Aconex.
So is this start of a new trend? Like their private equity peers, venture capital firms across the region are operating in a challenging fundraising environment. Alternative sources of capital like angels could potentially deliver them from their troubles.
A flight to qualityAccording to AVCJ Research, Asia VC fundraising has slumped in 2013. So far around $3.6 billion has been committed to 105 vehicles, barely half of last year’s total and a world away from the more than $18 billion raised by 204 funds in 2011. It’s not just Australian LPs that have turned away from the asset class.
“Investors are generally more sensitive on performance ratios now than they have been in the past and they aren’t very big on volatility,” says Mounir Guen, CEO of placement agent
MVision. “They like a very consistent, money-generating type of strategy, which means they lean towards growth capital, influential minority stakes or control.”
LPs that have made commitments to venture capital have tended to focus their investments on a handful of large funds. In 2011, for example, 13 Asia-focused venture funds reached a final close of $300 million or more, with seven of these surpassing $500 million.
Much of this concentration was seen in China. Among the larger funds to close in 2011 were IDG-Accel China Growth Fund III, an early- and growth-stage vehicle that raised $750 million after just three months in the market; Qiming Venture Partners III, which hits its $450 million target within a few weeks of its launch; and Northern Light Venture Fund III, which took about two months to close above target at $404 million.
According to Juxin Foo, a partner with GGV Capital, much of this is down to the investment cycle. Many LPs had entered the China market in 2005, following on from the success of internet firms like Tencent and Baidu which had gone public around same time. By 2011, many of these LPs had seen enough to distinguish the outstanding performers from the intermediates.
“Where we are right now is a point of realization on fund performance so LPs are being selective as to whom they back,” says Foo. “So you have a flight to quality.”
This flight to quality is also visible in India. Last year Helion Venture Partners and Nexus Venture Partners both raised their third funds after no
more than eight months in the market, receiving commitments of $255 million and $266 million, respectively. Kalaari Capital took longer to raise its second fund, the GP formerly known as IndoUS Venture Partners having undergone a rebranding, but still garnered $162 million.
To put this in context, only three other VC vehicles reached a final close in 2012. None of them finished above the $100 million mark and the one that came closest, SIDBI Venture Capital’s India Opportunities Fund, is rupee-denominated. Similarly, the only VC fund to exceed $100 million so far in 2013 is Motilal Oswal Private Equity’s India Business Excellence Fund II, another local currency vehicle.
In this climate, fund managers have two options: scale back their ambitions – perhaps even postponing a fundraise – or look for other sources of capital. One approach has been to seek out investors closer to home. While
institutional investors Australia and the US are said to be less bullish on venture capital, several industry participants say this is not necessarily so LPs elsewhere in Asia.
“I think the scene is changing in that you are seeing Asian LPs putting money into venture capital funds,” says Kay-Mok Ku, a partner with Gobi Partners. “Asian LPs are closer to the market so they are more able to get a sense of the opportunity and have less of an issue trying to find the right GPs to back.”
Some LPs in Asia have already started to re-evaluate their allocations to alternative assets, having traditionally focused on lower risk strategies. Among them are university
Where angels flock Venture capital fundraising has become difficult for all but the select few in Asia as LPs concentrate their resources on established names. Where will replacement investors come from?
No. of funds
Asia VC fundraising
Source: AVCJ Research
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2009 2010 20122011
Number 42 | Volume 26 | November 05 2013 | avcj.com 33
endowments and a number of Japanese pension funds.
Evidence of significant change is largely anecdotal to date. Japanese VC firm Globis Capital Partners, reached a JPY8 billion ($81 million) first close on its fourth fund – which has a full target of JPY15 billion – in May with around 80% of its commitment coming from Asian investors. However, doubts are raised as to whether the trend is enough to turn the tide.
Modest ambitionsAs a result, many are VCs are indeed scaling back their ambitions and looking to raise smaller funds – Globis, for example, closed its previous vehicle at JPY18 million. As it stands, only 10 funds targeting $100 million or more have reached a final close this year in Asia; a further 85 fall into the sub-$50 million category, which have collectively raised approximately $1.5 billion – around half of the total capital entering VC funds so far this year.
It is difficult to gauge how many of these funds are independently raised vehicles as opposed to being a corporate funds or government-backed entities. However, many of those that are, like Blackbird, have been able tap a growing community of entrepreneurs and angel investors.
As part of this trend, a number of so-called super angel funds are being set up in the region. Singapore-based Jungle Ventures earlier this year won $10 million in backing from a number of Asian entrepreneurs and tech executives, including Sony Entertainment Television co-founder Jayesh Parekh, Match.com founder Peng T. Ong, and Skype vice president Dan Neary, among others.
One benefit of this kind of arrangement is that it can be a way for angel investors to size up a particular market. “As an investor in a fund it is easier for a lot of people to have an indexed bet on the overall sector and selectively look at investments to be involved with,” says 500 Startups’ McClure
However, this opportunity is not limited to super angels, with other VC funds also coming on board as investors. For both groups, one of the goals is to leverage these relationships to generate further deal flow.
Kae Capital, an India-based seed-to-early-stage fund, was nearly two times oversubscribed when it reached a final close at $25 million in March of last year. Investors include a number of family offices and entrepreneurs such as InMobi founder and CEO Naveen Tewari. Sequoia Capital and SAIF Partners, both of which have raised large funds in the region over the last few years, were also among the backers.
“There is an advantage of being insider versus
an outsider, especially when you are dealing with companies that have found some traction,” says Anand Prasanna, a director with Morgan Creek Capital Management in Shanghai. “If you commit to a fund you can make a condition – either informally or formally – that you will have first refusal, which makes it an interesting proposal.”
However, Prasanna warns that if such relationships are not properly managed they could turn out to be a doubled-edged sword. If one VC firm backs a fund on the premise of generating deal flow when portfolio companies reach a certain size, but then ends up not making any commitments, other investors will start asking why not and the portfolio companies
could become stigmatized. Despite this caveat, there is huge capacity
for growth in Asia’s seed capital space and super angels and larger VC firms can do much to facilitate its development. Funds that perform well with support from the likes of Sequoia and SAIF may ultimately find themselves operating larger vehicles in the same tier as their one-time investors.
“It will take time for them to establish brand reputations in the same way more traditional funds have established theirs, but you are seeing more thoughtful innovation and a different approach with regards to investing,” say 500 Startups’ McClure.
tapping the herd: equity crowd funding Until recently, crowd funding has predominantly been a way for individuals to contribute
small, philanthropic amounts of capital to the projects they like, hoping to turn a dream into reality. Platforms such as Kickstarter have been serving this purpose since 2008.
Now the concept is set to enter the early stage investment space with the emergence of equity crowd funding, which is essentially the same concept, but with a financial upside. Could it be a new source of funding for venture capital?
This concept has been pushed to the fore by the US Jumpstart Our Business Startups (JOBS) Act, a piece of legislation intended to encourage the funding of small business in the US by easing various securities regulations. Among the provisions of the Act is Title III, which creates an exemption under the securities law allowing equity stakes to be sold through a crowd funding structure.
The Securities and Exchange Commission (SEC) voted unanimously to approve the bill last month, issuing proposed set of rules. A company can raise a maximum of $1 million through crowd funding offerings in a 12-month period. Investors, meanwhile, are permitted to invest up to $2,000 or 5% percent of their annual income or net worth, whichever is greater. If their net worth or annual income exceeds $100,000 they can in invest up to 10% with a cap of $10,000 in a 12-month period.
“I think there are many new types of investors coming into the market and crowd funding is a piece of that,” says Dave McClure, founder of Silicon Valley seed-stage investor 500 Startups. “It is still early so I don’t know if it has created a huge amount of alternative capital, but we will see that grow.”
The emergence of equity crowd funding has understandably been concentrated to the US, but the idea has started to make headway in Asia. SeedAsia, a Hong Kong-headquartered web-based platform, offers small-cap angel investors the chance to back a pre-screened group of Chinese and Southeast Asian technology start-ups that have already gained traction.
“It is already difficult for start-ups to find angels as they often target every market in Asia. They work across several jurisdictions at the same time, which makes it difficult for them to approach angels,” says Yelena Sedykh, co-founder of Seed Asia. “Our platform allows investors to look for start-ups in different areas. We saw demand from both sides and came up with this platform.”
However, the platform is not quite as broad as that which proposed under the JOBS Act. Each investment must be at least $5,000, with aggregate investment into a single start-up of $100,000. As such, it remains to be seen whether equity crowd funding platform in their purest form can make an impact on early-stage investment in Asia.
“It is an interesting idea,” says Anand Prasanna, a director with Morgan Creek Capital Management in Shanghai. “I haven’t seen many people move on it here but I would be surprised if more people didn’t.”
avcj.com | November 05 2013 | Volume 26 | Number 4234
do you see tHat space? tHe one Just to side of this article, currently occupied by an advertisement extolling the qualities of a service provider who for now shall remain nameless. Well, for the right price it’s yours, fund manager. No longer held back by non-solicitation rules that prevent you from telling the world all about the dream team behind your latest fund, turn a page of AVCJ into your pulpit.
Tantalizing as the prospect may sound – now made theoretically possible by provisions in the US Jumpstart Our Business Startups (JOBS) Act – few managers are expected to capitalize on the opportunity.
“It doesn’t really impact our clients in terms of offerings in the US because they can still use the traditional private offering exemption,” says Xuan Zhang, Beijing-based counsel at O’Melveny & Myers. “For Asian fund managers that only plan on doing limited marketing in the US, general solicitation doesn’t make sense.”
Managers and advisors also list a string of obstacles – not exclusive to Asian managers – in taking advantage of the legislation, ranging from uncertainty about the compatibility of the new system with regulations in the US and other jurisdictions to wariness of the additional investor due diligence requirements. Above all, no one wants to put their reputation on the line and become the first adopter.
“Established firms can’t take the risk because it is unproven. We are all holding back and watching how it develops,” a regional buyout fund manager tells AVCJ. “No one wants to be the first guy in there and then get charged for something. You just keep your mouth shut until fundraising is over.”
The mother lode?The JOBS Act, which was signed into law in April, is the product of a bipartisan effort in the US to ease the regulatory burdens on smaller companies and facilitate capital formation.
From a private equity fundraising perspective, the key measure is an amendment to Rule 506 of Regulation D under the Securities Act: the removal of the prohibition on general solicitation and general advertising in certain private placements. However, participants in these offerings must still be accredited investors under the Securities and Exchange Commission (SEC)
definition, and a greater burden is placed on the issuer to verify that these investors are indeed accredited.
The potential impact is significant – a manager could employ a full-scale marketing campaign in order to reach out to new investors. Restricted access websites already widely used in the industry under traditional private placement channels could be thrown open to the public;
private equity executives would be free to talk to the media about their fundraising plans.
“There is a big business opportunity in terms of tapping capital that otherwise hasn’t been available,” says Brian McDaniel, a partner at Goodwin Proctor. “Even though investors must be accredited, they previously might not have been sufficiently plugged into the community to participate. And the standard for permitted investors is actually quite low – it covers the comfortably well off, not just the rich. I could easily see the likes of doctors, lawyers and people who have been real estate investors participating.”
As the regulations apply to individuals, an accredited investor has an annual income of at least $200,000, going back two years, or a joint income of at $300,000. Those with a net worth in
excess of $1 million, excluding the value of their primary residence, also qualify.
Aside from the regulations being largely untested, concerns fall into two broad categories: how a private equity firm approaches potential investors and how it verifies the credentials of those who want to participate.
First, in terms of US domestic legislation, private equity firms that may launch general solicitation initiatives are ultimately financial entities are subject to other laws. These laws were designed to accommodate the traditional non-solicitation private placement model and have yet to be updated. “It’s not clear that the rest of the regulatory framework wants to catch up with the SEC on this,” one industry participant notes.
For private equity firms targeting global investors, there is the added complication of foreign regulatory regimes that in many cases still outlaw general solicitation. Trying to restrict direct marketing and publicity efforts to the US may prove futile: dedicated fund websites might include mechanisms that ask users to confirm their region of origin and then shut out non-US investors, but it is a difficult line to draw and media exposure cannot be controlled at all.
“The SEC also mentioned that you can still do parallel offerings under Regulation S to non-US investors and rely on Regulation D exemptions for offerings in the US,” says O’Melveny & Myers’ Zhang. “There is potential here, but you would have to be careful as to what forms of general solicitation you use.”
Regulation S, which falls under Section 5 of the Securities Act, covers offerings made by US and foreign issuers outside the US. Provided no direct selling efforts take place on US soil, there is no need for SEC registration.
Know your customerSecond, although the definition of an accredited investor remains unchanged, the steps a private equity firm must take to verify their credentials are more demanding than under the traditional private placement model. Whereas previously investors had a pre-existing relationship with the manager, under general solicitation this is no longer necessarily the case so proactive due diligence is required.
Goodwin Proctor’s McDaniel explains the logic of the requirement by contrasting dealing
Public accessThe removal of restrictions on general solicitation in the US potentially allows private equity firms to tap accredited investors that previously fell beneath their radar. However, managers are reluctant to rush in
“Some firms may well want to talk about their fundraising in the press, but these regulations that require more stringent analysis of accredited status may dissuade them from doing it. They may well look at the rules and conclude that it’s not really worth it” – Ian O’Donnell
with an unknown quantity to dealing with an institutional investor such as the California Public Employees’ Retirement System (CalPERS).
“When we ask CalPERS to invest in a fund and it sends back the questionnaire saying it has more than $2 million in investment assets, we don’t think twice about it. If you are talking about your partner, brother or an investment banker you’ve worked with for 10 years, there is also a degree of comfort,” he explains. “But when you are contacted by someone you have never met – who reached out via your website saying they are an accredited investor – is relying on them to fill out the questionnaire enough?”
Should non-accredited investors slip through the net, a fund manager might be deemed to have done a bad private offering, which means LPs have the right to ask for their money back and walk away.
Verification issuesVerifying accredited status may involve inspecting tax returns and other financial records. There has even been talk of a cottage industry developing of third-parties providing these services. Much like a bank can obtain a credit report on an individual before agreeing to extend a loan, a fund manager might order a verification report on a potential investor. In this context, the
lines between a placement agent and a facilitator may become blurred.
However, there is a degree of uncertainty as to what happens to verification materials once they have been processed. While the burden of establishing proof lies with fund manager, several industry participants have seen the SEC’s proposed additional changes in the final rules, which include a requirement that PE firms submit relevant documentation to the regulator. They say it is unclear whether this would just be a paper filing or could potential be used as the basis for a substantive review.
Ian O’Donnell, a partner in Cooley’s venture capital practice group, based in San Francisco, notes that a number of his clients have studied the requirements for verifying accredited status and found them unappealing and intrusive. They don’t want to jeopardize existing LP relationships – forged under the traditional private placement model of non-solicitation – by being pushy on documentation.
As such, he expects little change in the fundraising status quo. Cooley represents about 250 fund organizations – most of them in the US – and at any given time 50-60 are actively in the market. None have elected to take advantage of general solicitation as it stands.
“Some firms are going to continue to operate
as clubs essentially, where they have a group of investors that they continually go to and really have no reason to publicize their offerings,” O’Donnell adds. “Other firms may well want to talk about their fundraising in the press, but these regulations that require more stringent analysis of accredited status may dissuade them from doing it. They may well look at the rules and conclude that it’s not really worth it.
Picking up on the point about well-established firms operating as investor clubs, another disincentive to opt for the general solicitation route is simply ego. Managers want the wider world to perceive their funds as heavily oversubscribed, with existing LPs re-upping at larger amounts and prospective investors clamoring for a slice of the remainder. Indeed, some actively cultivate such perceptions.
In this context, direct solicitation – you going to investors rather than investors coming to you – could be seen as a sign of weakness.
“I would think that the big guys aren’t going to do it any time soon,” says Joseph Sevack, a Hong Kong-based partner with Troutman Sanders. “They may feel like if they go out there and start advertising people will start thinking they are having trouble raising money. There is a bit of mystery about the business and they probably like that.”
The Overseas Private Investment Corporation (OPIC) has launched a Global Engagement Call for Proposals.
OPIC is inviting proposals from fund managers that invest in emerging markets via direct equity, debt, and equity-related instruments.
The U.S. Government’s development finance institution, OPIC’s mandate is to mobilize U.S. private sector solutions to help solve critical develop-ment challenges.
For more details, see www.opic.gov or contact us at [email protected].
CALL FOR PROPOSALSEmerging Market Private Equity Managers
The U.S. Government’s Development Finance Institution
avcj.com | November 05 2013 | Volume 26 | Number 4236
THE DEVELOPMENT FINANCE INSTITUTION
Bill Pearce, Acting Head of Investment Funds, Overseas Private Investment Corporation (OPIC)OPIC is the US Government’s development finance institution (DFI), focusing on emerging markets globally. It provides loans and political risk insurance as well as financial backing for PE funds
opic Has botH deVelopmental and financial return targets so we keep that in mind as we put funding towards mid to smaller cap fund managers because that is where DFI capital is needed most. The private equity market has evolved to a point where we are seeing more indigenous funds being in the region, with new fund managers who are knowledgeable about the asset class. We view this as a positive trend.
In terms of our commitments, we would like to do more in Southeast Asia, not only as a foreign policy consideration but because it complements our focus on funds with growth market expansion strategies. We are trying to do more to round out our portfolio in that area as much as possible.
Across the board we are seeing pressure on management fees by LPs but I think there is a different dynamic in emerging markets - particularly with smaller, mid-sized funds because those fees are essential. Like many of our DFI peers, we look at the budget of the fund manager and see what kinds of fees they need to support the operation of the fund. Particularly with managers with offices in several different countries - which you need in emerging markets - we consider how managers justify the fees and will look to see that they follow best practices.
We are seeing more creative aspects on how fees are being managed, between the commitment period and post-commitment period, but I don’t think you are seeing the dynamism in fees as you would see in the developed world. The fee structure in emerging
market funds may be different than what you might experience with developed market buyout funds.
As a DFI, our mission is to catalyze more private capital investment into a given market. We will back follow-on funds on a case-by-case basis where DFI money still has an impact, particularly in OPIC’s priority regions. I think DFIs will continue to have a catalytic role in the region and there will continue to be a movement of DFI funding to the frontier markets with next wave of funds. Hopefully this will give many private sector LPs the confidence to invest in these jurisdictions as they appreciate the value DFIs bring in terms of expertise and contacts, and that is where we will continue to play a role in the future.
THE INSTITUTIONAL PLAYER
Phillip Bower, head of private capital, IFM InvestorsIFM Investors is a global fund manager owned by 30 major Australian not-for-profit pension funds
our clients HaVe less of an interest in fund-of-funds as a product concept. They are seeking more direct mandates to go into funds, which is no different from other programs globally.
Fees are a major issue in the Australian superannuation sector. Some of the industry super funds are moving their investing activities in-house as a way of reducing fees. The overriding concern is that the sector has grown but the benefits from economies of scale have not.
As funds under management in the superannuation sector have now grown to A$1.6 trillion, you would have expected the management expense ratio (MER) of superannuation funds to have come down significantly. I don’t think it has come down at a rate most super funds have thought appropriate and so they are putting pressure across all asset
classes to reduce fees. In the case of private equity, the fees are the highest out of any of the asset classes so there is even more pressure.
I don’t think the mergers of super funds will have any more, or less, specific impact on private equity because it is a specialist asset class. It is unlikely that super funds will move into direct activity with private equity in the near term; rather, they will continue to use fund managers or GPs to manage their business and we as IFM Investors are helping to perform that function.
The industry super funds sector in Australia comprises 6-8 funds that are really big and then it drops down quite significantly. So for super funds to get into direct investments, they need to have a large critical mass and I don’t see them wanting to participate. In other asset classes such as equities and infrastructure, we’ll see more direct activity.
The other trend is super funds looking at GP performance using global benchmarks. So whereas in their listed equities businesses they may say they need to have a certain proportion international and a certain proportion domestic, in private equity it’s seen as a more homogenous market and they look at performance of GPs on a global scale.
When we talk to our clients, they talk about limiting the number of GPs they invest in. They used to spread money broadly across a large
From the source: Capital providers on private equityAsian GPs have endured a difficult 12 months for fundraising and the region is on course for its lowest annual total in four years. Assorted LPs outline their attitudes to the asset class and the region
“We would like to do more in Southeast Asia, not only as a foreign policy consideration but because it complements our focus on funds with growth market expansion strategies” – Bill Pearce
Number 42 | Volume 26 | November 05 2013 | avcj.com 37
number of managers and what generally is occurring now is a comeback to a smaller set of GPs. They’ll compare somebody in Sydney or Melbourne with somebody in Paris or New York, line the results up and say these are the guys who are performing and this is where we’ll put the money.
THE EUROPEAN FAMILY OFFICE
Fritz Becker, CEO and Managing Director, Harald Quandt HoldingA Germany-based family office, Harald Quandt Holdings is also majority owner of global alternatives investment advisor Auda International
We HaVe nearly 200 gp relationsHips globally and 29 in Asia, where we have been investing for more than 10 years. Including third-party money, we have around $5 billion deployed globally. Our net asset value is 12% Asia and on a commitment basis it’s around 20%.
Asia hasn’t underperformed but we expected it to outperform. When we started out we expected 2-3% more alpha than Europe and the US, but this has turned out not to be the case. We are not dissatisfied, but we have learned that, with the stock markets in China closed, cash flow patterns are behind expectations and the market is less liquid than anticipated. However, from a portfolio construction perspective we need and want Asia. It is an attractive market but it’s all about finding the right GPs.
A lot of LPs go for large brand name GPs because it is easier to justify to their supervisory boards. In Asia we started with large GPs but over the years we have increased our due diligence capacity – our subsidiary opened in Hong Kong in 2007 and we have five people based there – and allocated more to mid-size and smaller GPs.
Do large GPs really generate better returns? Some yes, but most no. We do think there is a misalignment of interest in that these GPs are
more management-fee driven than carry driven. Some of the big institutional investors want returns of 10-12% – their requirements for the entire investment portfolio might be 6-8%, or 4-5% in the case of a German insurance company – but I expect more from my niche GPs.
We are now looking for specialized funds, by segment or region, and you have some of that with infrastructure in India and consumer in China. There are so many more GPs out there today – more than 100 in Southeast Asia and 600-700 in China, not including the renminbi-denominated funds.
People are, from a European perspective, less loyal – if they are not satisfied with the existing team they spin-out and create a new one. We see opportunities here; we have already done it with twice in India and 3-4 times in China. The first fund is $200-300 million and they are happy to get a check of $10-15 million; they aren’t asking for $50-100 million. We like to find these teams because they have a track record, they are looking for investors, and they tend to be much more incentive-driven and aligned with LPs.
THE ASIAN FUND-OF-FUNDS
Doug Coulter, head of Asia private equity, LGT Capital PartnersLGT Capital Partners is an alternative investment manager, based in Switzerland, with Asian affiliate offices in Hong Kong, Tokyo and Beijing
in terms of geograpHies, it’s tHe us, Europe and Asia, in that order. There has been a slow increase in our allocation to Asia relative to the US and Europe. Asia is about 15% right now, moving towards 20% over the next 3 to 5 years. In general, we prefer small to mid-market funds – under $1 billion. There are a few exceptionally good large funds that invest in Asia and we don’t say it has to be small in order be beautiful. Sometimes these bigger funds bring a more international dimension and greater resources that can be useful in emerging markets. Size is important but it doesn’t drive our decision making process at all.
The most interesting opportunities are in emerging Asia where there is growth. You have blind pool risk so the fact you have solid growth and low debt levels means the risk you are taking on is much lower than many people believe. The main risk remains the quality, strength and stability of the teams. Slower growth economies like Japan and Australia can be interesting on an asset-specific basis, so we look at them for co-investment and secondary opportunities.
China is the market most LPs remain interested in despite recent concerns, and more than half of our capital invested in Asia goes there. We are positive on the country’s long-term development.
We think LPs are far too negative on India. If you loved India in 2007 when everyone was shoveling money in then you should like it today at a lower valuation. Starting with the currency, you are coming in at a much lower level. Then there is far less competition as many first-time and second-time fund managers are going out of business. It has never been an easy place to invest and make money but we think it makes sense having money there for the next cycle.
Some Asian GPs are able to close quickly, usually because there is something special about their story and they have delivered very good returns in the past. We are seeing more co-investment opportunities, in part because funds raised in this cycle have tended to be smaller or the same size as funds raised in the previous cycle, yet economies have grown so deal sizes are up on average. You do have a dynamic where funds are not bigger but deals are bigger and GPs prefer bringing in some of their LPs rather than other PE funds.
THE GLOBAL ANGEL INVESTOR
Dave McClure, Founder, 500 StartupsDave McClure is a Silicon Valley-based super angel and founder of seed fund and incubator program 500 Startups. The group backs start-ups globally and also makes LPs investments in other seed funds
i tHinK tHe angel inVestor’s role in venture capital is becoming more structured. This means you are seeing more seed funds fulfilling the role which previously, and haphazardly, was fulfilled by individual angels. We have been an investor in a number of funds and this has mostly been for relationship purposes. For us, it has been about trying to establish different relationships
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around the world by having various regional partners. It has been useful for us.
In terms of investment opportunities, it varies country by country. China is becoming a more developed market; historically it has been a little bit overheated but that is starting to calm down now. In other markets, the environment is a little more constrained, though we are starting to see more activity now in Southeast Asia. Much of the rest of the region is underdeveloped. You have some pretty great opportunities at a low cost, but there is still significant risk.
The lack of downstream investor capital makes me nervous sometimes, but we try to work with local partner angels and funds to help companies get off the ground. I am pretty long-term bullish on the whole region and as the next 5-10 years play out we will see a lot more activity. I think there are some tremendous opportunities and we are going to see some great businesses being built.
One thing with investing internationally is that it can be challenging getting companies to the next level of seed funding. My preference is to see more seed funds develop and I think we are beginning to see the emergence of new breed of seed fund managers doing sub $100 million funds. It will take time for them to establish brand reputations in the same way as the more traditional funds, but you are seeing more thoughtful innovation and a different approach with regards to investing.
I think we are seeing more consolidation on the low and high end of the market. At one end you see large funds coming together. At the other end people are practicing more efficient models, scaled back to around $25 million per partner with a lot more of the funds driven by those with operating backgrounds and less by those with fund manager backgrounds.
THE ASIAN FAMILY OFFICE
Steve J. Kim, chief investment officer, Castling Investment GroupCastling Investment Group is an alternatives investment advisory firm based in South Korea
Korean inVestors rigHt noW are willing to sacrifice some of the additional returns or alpha for interim cash flows or liquidity. They don’t like blind pool risk or the j-curve, so we’re seeing secondary funds, credit funds, distress, and more real-asset hybrid type products. It’s less traditional PE that’s catching a big wave of attention here today. However, things should normalize over time and you’ll see more
traditional institutional portfolios taking shape over the next decade.
Korean investments have traditionally dominated so a lot of the institutional portfolios here were invested mostly in domestic stocks and real estate. There’s been a huge push to start putting capital to work in international markets. There were restrictions on institutions investing abroad so a lot of capital was trapped here for a long time, but now policies are easing up. This, coupled with the fact that Koreans were very slow to get into PE, means they are trying to catch up. There’s a big push into foreign alternative investments.
The natural tendency for Koreans is to step out of their comfort zone in a very risk-averse way. They’re looking at the international markets and thinking “let’s start with the US and Europe.” Generally speaking, they prefer Western investments to Asian.
Within Asia today there is more receptiveness to deals in China and Japan, as opposed to Southeast Asia. I feel there’s been a lot of opportunistic capital raised out of Southeast Asia and while there is a growth story there, it’s still a bit foreign and feels like a flavor-of-the-month play, so people have been shying away from the region.
In Korea there are basically three factors that drive fund investments - brand name, flavor of the month and the domestic factor. If GPs have one of these three, they’re likely to raise capital. What’s compounding this is the copycat effect – if one institution sees another doing it, it sort of de-risks any back-end mistake because they can always point the finger at everyone else who did it too. So a lot of people will commit to a GP because the National Pension Service has committed, for example.
There’s a lot of pressure to move fees downward. It’s case-by-case, but if you go to the largest institutional investors here with an early fund and are relatively unproven, you’re going to get burned on the fees. You’re going to be accepting fees that are just way below market. Established players with very large funds obviously have more leverage.
THE PRIVATE BANK
Roger Bacon, Head of Managed Investments, Asia, Citi Private BankCiti Private Bank develops and coordinates wealth management strategies for high net worth individuals
prior to 2007, tHe Vast maJority of illiquid private bank clients’ money would go into large global funds with a co-mingled blind pool structure. Over the ensuing 5-6 years there has been a dramatic shift in the way clients allocate. Most visibly, and this is true in Asia in particular, appetite for illiquids isn’t as low as you might expect. There is a lot of cash sitting on the table and clients are prepared to deploy relatively large sizes into illiquid assets quite quickly. The new need is for transparency.
The demand side is different in other parts of the world. In the US and Europe it is becoming more difficult to raise money in illiquid structures, whether co-investments or blind pools because there isn’t as much money available as there used to be. In Asia it isn’t necessarily the case because people heading into the crisis were less levered.
We have spent the last three years focusing on two areas as part of this transition to a more transparent environment – club structures and single-asset co-investment. The club structure is still part of a fund but it just happens to be a series of single-asset co-investments. What we’ve found is that, if a client was willing to put 100% of illiquid dollars into a blind pool fund pre 2007, they are still prepared to put some money into this area but there are two criteria. First, it must be a best of breed name. Second, they must have a clear view that independent due diligence has been done on the specific opportunity or specific manager before they pull the trigger.
We have a dedicated research team for private equity and real estate globally. We have people on the ground in all the main investment centers and their job is sourcing deals. We are also looking at specific themes where we don’t have something on our platform that specifically exploits it. So our research team will approach managers and sponsors that we believe have some degree of differentiated expertise and see if we can structure something with them.
On the private equity and real estate side we don’t do much fund-of-fund business – we are very much focused on the single deals. We have not seen significant levels of demand from clients for fund-of-fund structures, and we haven’t seen truly differentiated offerings emerging that warrant our attention. There are too many parties involved and the net outcome for clients is relatively unexciting for the liquidity on offer.
“In Korea there are three factors that drive fund investments - brand name, flavor of the month and the domestic factor” – Steve Kim
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Number 42 | Volume 26 | November 05 2013 | avcj.com 41
One financial advisory and investment banking services firm excels at navigating complex financial issues: Duff & Phelps. Our people have the analytical skills to get to the heart of issues and the experience to know which variables matter more. We find the right balance between analysis and instinct—that sweet spot that powers sound decisions. Learn more at www.duffandphelps.com
THE SWEET SPOT
1,000 shades of grey
black and white answers
Investment banking services in the United States are provided by Duff & Phelps Securities, LLC; Pagemill Partners; and GCP Securities, LLC. Member FINRA/SIPC. M&A advisory services in the United Kingdom and Germany are provided by Duff & Phelps Securities Ltd. Duff & Phelps Securities Ltd. is authorized and regulated by the Financial Conduct Authority. © 2013 Duff & Phelps, LLC. All rights reserved.
Beijing: Sammy Lai (黎大汉)Managing Director(8610) 5835 7008 [email protected]
Shanghai: David Lu (吕海歌) Managing Director (8621) 6032 0608 [email protected]
Hong Kong: Andy Wong (王克智) Director (852) 3103 1030 [email protected]
WHen affinity equity partners acquired a significant minority stake in motorcycle distributor Mitra Pinasthika Mustika (MPM) for about $100 million last October it brought to an end the firm’s three-year quest for an Indonesia deal. This effort had included hiring Morgan Stanley executive Inghie Kwik, son of a former Indonesian economics minister, to head up local operations.
Affinity wasn’t alone among Asia’s buyout firms in struggling to make a breakthrough. The Carlyle Group took even longer, eventually securing a minority interest in telecom tower operator Solusi Tuna Pratama (STP) around the same time, also paying about $100 million.
Carlyle had previously come close to landing a stake in GarudaFood but the deal floundered and the food and beverage producer ended up in a joint venture with Japan’s Suntory instead. Industry sources say the private equity firm also lost out on mining services contractor Buma Resources and cable TV operators LinkNet. The first went to local GP Northstar Group and the second to CVC Capital Partners, a regional player with a well-established local operation.
MPM and STP were the two largest Indonesia deals completed by foreign private equity firms in 2012. They also came about through alliances with groups that have strong on-the-ground networks: Saratoga Capital – an Indonesian GP whose co-founder has longstanding ties with MPM management – was a co-investor on the first deal, while Southeast Asia-focused Southern Capital Group has links with STP.
The paucity of large-cap deal flow and
the locally-ingrained nature of transactions when they do emerge, speaks volumes for the challenges of doing business in Indonesia, and it holds true for Southeast Asia as a whole. Apart from Vietnam, every market is characterized by highly condensed corporate ownership, which places a premium on who you know.
“I think many Southeast Asian countries are similar in that there are a lot of family-owned companies,” says Ashish Shastry, managing partner at Northstar Group, a Southeast Asia-
focused firm with a strong presence in Indonesia. “Many of these family-owned companies are in multiple businesses lines and I think that is a feature in a lot of these economies.”
A tough nutThe inherent difficulties in navigating these tangled webs of ownership might explain why private equity opportunities in Southeast Asia – frequently cast against the size of the regional economy and its constituent parts – often flatter to deceive. While plenty of firms want to make a breakthrough, relatively few historically have succeeded.
“The Southeast Asia market is perhaps smaller than people imagine, given the size of
population,” says Marcus Thompson, CEO of GP Headland Capital Partners. “So the number of active players in the market is quite small too.”
According to AVCJ Research, private equity investment in Southeast Asia as whole is at comparatively low ebb. So far this year the region has seen around $2.9 billion transacted across 125 deals, down from $3.8 billion across 134 deals for 2012 in full. This is a poor showing given that, in each of the four years following the 2007 peak of $13.4 billion, deal flow surpassed $7 billion.
Put in a macroeconomic context, the region’s potential is indeed huge. Indonesia may have a GDP of $878 billion and a stock market capitalization of just over $512 billion as of May, but private equity investment from 2009 onwards stands at $4 billion. China’s economy is about 10 times larger and it has seen 27 times more PE investment over the corresponding period.
Singapore, as the region’s most developed market, punches above its weight in economic terms. GDP came to $274 billion in 2012 but the country has seen $15.5 billion in PE investment in the last five years, with 67 deals last year. Thailand, the Philippines, and to a slightly lesser extent Malaysia, fall into the same underpenetrated category as Indonesia.
Crucially to the big pan-Asian funds, Southeast Asia has seen on average 14 transactions of $100 million or more over the last five years. As a proportion of total deal value, these transactions are currently at a five-year low.
One of the major reasons for the lack of correlation between GDP and private equity investment is the scarcity of high-quality assets that are both investible and accessible. Southeast Asia’s emerging economies are rife with transparency, corporate governance and corruption problems.
“The vast majority of companies are probably not investment grade so finding the jewels in the crown can be quite a labor-intensive process,” says Mark Thornton, managing director
Family footholdsBy most measures, Southeast Asia is underpenetrated by private equity. If deal flow expectations are to be met, investors must tap local networks for openings in and around the family conglomerates
“The challenge has always been how GPs work with these businesses, and how they pitch the value creation they can bring” – Tok Hong Ling
No. of deals
Southeast Asia private equity deal �ow
Source: AVCJ Research
50,000
40,000
30,000
20,000
10,000
0
200
150
100
50
US$
mill
ion
Dea
ls
Amount (US$ million)
2008 20102009 2011 2012 2013
What is the reputation of a management team, and does it have what it takes to drive a business forward? How might looming
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Number 42 | Volume 26 | November 05 2013 | avcj.com 43
of Indonesia Private Equity Consultants (IPEC) who until 2011 was head of Southeast Asia at 3i Group. “Once you do find a good investable asset, the owners realize they have something with scarcity value.”
As a result, valuations therefore have soared. Indonesia’s financial services sector, which has attracted huge interest from Asian strategic investors, is a case in point. Deal advisory professionals claim the drop-off rate between formal negotiations and closed transactions is higher than any other market in the region – in part because the sellers are under no real pressure to sell and simply walk away if the valuation isn’t right.
Carlyle’s experience with GarduaFood followed a similar path, the PE firm reportedly putting in a bid of around 20x EBITDA only for the Indonesian player to opt for the Suntory joint venture that didn’t require the sacrifice of as much equity. More recently, a stake in hospital chain Siloam was put on the block in expectation of bids of at least 20x EBITDA. The owner, the Riady family’s Lippo Group, wasn’t satisfied with the result so took the business public instead.
Relationships matterThose GPs who have been able to close deals at acceptable valuations often do so by leveraging connections with family owners.
CVC first teamed up with Lippo in 2010 when it purchased a 72.6% stake in Matahari Department store from the group an enterprise valuation of $892 million – still Indonesia’s largest ever PE deal. The deal was structured as a joint venture, with CVC holding 80% to a Lippo-controlled unit’s 20%. They sold nearly half of their holding via a share offering earlier this year that valued the business $3.3 billion.
One year after the Mathari deal closed, the Riadys decided to sell a stake in LinkNet, a subsidiary of Lippo-owned First Media. CVC prevailed in the auction, paying $275 million for a 33.94% stake in the company and then taking its holding to the 49% foreign ownership ceiling.
“A handful of firms were invited into the Link Net process but they ended up working with us because of the relationship and the comfort level,” says Sigit Prasetya, managing partner at CVC.
The opportunity to source deals from family conglomerates – and to make sizeable investments alongside them – are there, but they remain a rarity.
“The challenge has always been how GPs work with these businesses, how they communicate and how they pitch the value creation they can bring to these family businesses, which are usually quite closely knitted,” says Tok Hong Ling, PE leader with
PricewaterhouseCoopers in Singapore.MPM is a good example of just how knitted
these businesses can be. According to industry sources, Edwin Soeryadjaya, Saratoga’s co-founder, already held an interest in the business because his father, the late William Soeryadjaya, helped set it up in the 1980s.
MPM’s origins can be traced back to Astra International, a diversified industrial conglomerate co-founded by Soeryadjaya senior and now controlled by Jardine Matheson Group. Astra’s interests include a joint venture with Honda that is responsible for the domestic distribution of motorcycles and parts. One of the territories that falls outside Astra’s remit is east Java, where MPM is the sole licensee.
The Astra connection is also prevalent, albeit indirectly and informally, at Northstar. Theodore
Rachmat, father-in-law of Northstar co-founder Patrick Walujo, was William Soeryadjaya’s nephew and served as a senior executive at Astra. The largest PE deal in Indonesia last year – topping Affinity and Carlyle – was Northstar’s $200 million investment in palm oil producer Tiputra Agro Parsada (TAP) alongside GIC Private. TAP is owned by Rachmat and Benny Subianto, another former Astra executive.
Despite these family ties, Northstar – which has made 12 investments in Indonesia and is currently looking to raise $1 billion for its latest Southeast Asia-focused fund – prides itself on having a strong local network.
“A big difference in the way we position ourselves is that we are a group that is owned by locals and controlled by locals,” says Shastry. “If you go to our office in Jakarta you won’t see
Vietnam: state of transition McDonald’s announcement earlier this year that it would open its first branch in Vietnam –
with Henry Nguyen, managing partner of IDG Ventures Vietnam as local partner – spoke volumes for how far the country has developed since introducing economic reforms 25 years ago.
State-owned enterprises (SOEs) continue to dominate large swaths of the economy, but in the last decade private enterprise has put down roots. Recent arrival Ronald McDonald may be the most obvious face or capitalism, but private equity has already carved a niche in Vietnam. The approach is, by necessity, unique in Southeast Asia.
“One of the legacies of state ownership is that people are used to making money by getting kickbacks on their purchases and that is kind of endemic in the culture,” says Chris Freund, a partner with local GP Mekong Capital. “So if people want to sell to state-owned companies or to the government it can be quite difficult.”
It is partly for this reason that Mekong, like many GPs, focuses on the consumer space, where few former SOEs operate and businesses tend to be run by the new generation of entrepreneurs. Mobile World – a mobile phone retail chain in which Mekong invested $3.5 million in 2007 and partially exited to CDH Investments in March, generating an 11x return – is a good example.
“There were five co-founders and they all had relevant backgrounds relating to telecom or business management,” says Freund. “In many cases entrepreneurs who have worked foreign companies or overseas are going to be much more open minded about finding better ways to do things and adopting best practices.”
However, this is not to suggest there are no lucrative deals involving former SOEs. Vina Capital, another local GP, invested around $4 million in dairy producer VinaMilk over two transactions in 2003 and 2004, as did Dragon Capital in 2003. Valued at $500 million in 2005, the company is worth $5.5billion today.
“The beauty of this whole thing is the privatization process allows the manager and employee to become shareholders of the business they work for,” says Andy Ho, managing director and chief investment officer at VinaCapital. “In doing so it turns on the entrepreneurial spirit which mobilizes employees to focus and concentrate their efforts in building the business.”
Nevertheless, Vietnam remains a nascent market. According to AVCJ Research, $577 million has been transacted across eight deals this year – the third-highest annual total on record – but most of it came from two deals. KKR committed $200 million to Masan Consumer Corp, doubling down on a $159 million investment made in 2011, and Warburg Pincus paid the same amount for a 20% stake in shopping mall developer Vincom Retail.
However, large cap deals of this nature remain few in number. The market will continue to be dominated by local players chasing smaller deals for the foreseeable future. “There are a lot of investors interested,” says VinaCapital’s Ho. “But if you don’t have the boots on the ground most of the time your investments will end in tears.”
To understand how AVCJ Research can help you with your data needs, please call: 852-34114956 or email [email protected]
AVCJ Research can provide your firm with timely and accurate research support to help you simplify and expedite your workflow. We conduct in-depth research and provide insightful analysis in a bespoke report that fully meets your data requirements.
avcj.com
Asian Private Equity Data Made Simple
✔Pan-Asian Industry Reviews/Regional Reports – timely updates✔Specific industry and financing stage research✔Comprehensive statistics on investments and funds ✔Exits strategic analysis✔Market peers comparison
AVCJ’s industry standard data is used by the world’s leading firms in their fundraising, investor relations communications and deal due diligence activities. AVCJ Customized Data Service includes:
Customized Research Report
Number 42 | Volume 26 | November 05 2013 | avcj.com 45
a single person wearing a suit and tie, that’s because they will be wearing batik.”
He adds that Northstar’s local knowledge helps the firm understand entrepreneurs’ needs and build trust in the business community. It is an important consideration given local entrepreneurs may be more suspicious of foreign investors with a fly-in fly-out approach who are unable or unwilling to commit to a permanent presence in the country.
This filters through to the mid-market space throughout Southeast Asia that has consistently provided the bulk of private equity deal flow. According to AVCJ Research, sub-$25 million deals have accounted for at least 60% of all transactions in the region, rising to nearly 70% for the first 10 months of 2013.
The role played by the large family conglomerates in this area is one of competing capital provider. With ample cash reserves and strong relationships with local banks, these companies represent an attractive alternative source of capital for entrepreneurs. A local network can help offset this threat, although a number of industry participants aren’t convinced by its validity – many small business owners want to remain free from a strategic agenda.
“Sometimes an entrepreneur wants to stay in the business and grow it with a view to an IPO,” says Luke Pais, managing director with Ernst & Young in Singapore. “They do not see the value in a big strategic investor because such groups may constrain their ability to do a subsequent transaction. They may actually prefer to get a financial investor because the goals are aligned.”
“I think that private equity can find a role alongside conglomerates but more importantly I feel they have a role as competitors in providing capital,” says Gerald Baldivia, managing director at Angeon Advisors, a Philippines-focused GP. “Some of the target firms we have looked at have been wooed by conglomerates but they are actually looking for alternative funding that will more or less preserve the strategic independence of the business.”
A private equity investor can also offer support in situations where a target business needs to diversify into foreign markets or recruit foreign talent. A partner with a regional presence makes sense in these situations.
A typical example of this is Headland’s investment earlier this year in Malaysian snack firm Mamee Double Decker, which is controlled by the Pang family. The PE firm took a significant minority stake in the company and helping to move manufacturing to Indonesia and look for marketing synergies with neighboring countries.
“Although it’s a family company, we are having influence in terms of strategy and the direction the company is headed,” says
Headland’s Thompson. “The management team is also excited about the initiatives we have agreed on and are in the process of executing.”
The partner proxy While these kinds of opportunities may be too small for larger buyout firms, partnerships with mid-cap players remain an option. The mid-cap fund can invest in a target company, develop scale, and then bring in or sell out to a counterpart higher up the food chain. Alternatively, they could simply co-invest when the mid-cap GP identifies an opportunity that is too large for it to address independently.
Where CVC’s Prasetya and Affinity’s Kwik are examples of local investment bankers who have brought deal sourcing expertise into the private equity world, TPG Capital relied on an association with Northstar. The global firm entered its Indonesian counterpart’s early funds as an LP and has co-invested in a number of deals.
Perhaps the most significant fruit of this partnership is Bank Tabungan Pensiunan Nasional. The PE firms acquired a 71.6% stake in
the Indonesian lender for $200 million in 2007, bringing in a few co-investors. They took the bank public, diluting their share to 57.9%, and in May Japan’s Sumitomo Mitsui Banking Corp. agreed to pay $1.56 billion for a 40% stake, pending regulatory approval. Most of the shares will come from the Northstar and TPG consortium.
Prior to this partial exit, the relationship between the two parties was formalized through a share swap agreement – with TPG is now believed to own 10-20% of Northstar, while Northstar owns less than 0.5% of TPG.
It is unclear whether anyone will be able to replicate this arrangement – as it stands, the pool of indigenous Southeast Asian or Indonesian GPs isn’t that deep – but there may be variations upon the theme.
“By partnering with regional and global funds, smaller players are able to gain access to larger deals,” says Luke Pais, managing director with Ernst & Young in Singapore. “So they may lead the discussion and create the relationship but then be able to take a bite of the transaction and farm out the remainder to a bunch of partners.”
To understand how AVCJ Research can help you with your data needs, please call: 852-34114956 or email [email protected]
AVCJ Research can provide your firm with timely and accurate research support to help you simplify and expedite your workflow. We conduct in-depth research and provide insightful analysis in a bespoke report that fully meets your data requirements.
avcj.com
Asian Private Equity Data Made Simple
✔Pan-Asian Industry Reviews/Regional Reports – timely updates✔Specific industry and financing stage research✔Comprehensive statistics on investments and funds ✔Exits strategic analysis✔Market peers comparison
AVCJ’s industry standard data is used by the world’s leading firms in their fundraising, investor relations communications and deal due diligence activities. AVCJ Customized Data Service includes:
Customized Research Report
Southeast Asia PE investment by deal size
Source: AVCJ Research
2008 2009 2010 20122011 2013
US$0-25m US$26-50m US$51-100m US$101-200m Over US$200m
US$
mill
ion
120
100
80
60
40
20
0
Southeast Asia PE deal-�ow by country, 2011-2013
Source: AVCJ Research
Indonesia Malaysia Philippines ThailandSingapore Vietnam
2011 2012 2013
Dea
ls
80
60
40
20
0
avcj.com | November 05 2013 | Volume 26 | Number 4246
Q: Indonesia’s economy has weakened recently. Has this soured PE investor sentiment and is the mood justified?
A: I suspect it’s more a function of how people understand the market and the country. I look at it more from a medium-term point of view. Yes, there are short-term issues with the current account, inflation, maybe a bit of an economic slowdown as a result. But overall, if you look at the secular trends – Indonesia being a large population, a young population and a middle-income growing population – they are still there. One should never expect a straight line for a country like Indonesia; since the Asian financial crisis there have been ups and downs. But PE has the ability to be patient and my view is the economic fundamentals are still solid.
Q: Given the drop in the public markets, how significant was the timing of the Matahari Department Store offering?
A: For any public marketing offering, you need to take advantage of the window. The timing was good with Matahari, but even with the recent sell down, the stock price is holding up. We did the IPO at IDR10,850 and it is now trading 10-20% higher, significantly outperforming the market and its peers. People see through the market volatility and recognize a good quality business with a high scarcity value because it is the leading retailer in Indonesia and probably in Southeast Asia as well.
Q: Has all the hype about Indonesia has exaggerated the size of the opportunity?
A: PE activity in Southeast Asia
should gradually pick up over time, simply because the supply of capital is increasing. But it will not be hockey stick – the market won’t grow that quickly. It will take time for businesses and families to become more familiar with PE and how we add value.
Q: So some of these investors will be disappointed…
A: There is a lot of capital; a lot of big firms are trying to put capital to work. It remains to be seen whether or not they end up disappointed. But how many
deals with an enterprise value of more than $200 million do you think there have there been in Southeast Asia in the last five years? Probably only around 20. That means you only see a handful each year. Deal flow is lumpy and you don’t know where it’s going to be – the Philippines, Indonesia, Malaysia. It is still very much early days for investing in Southeast Asia.
Q: How much of a concern are valuations?
A: Public market valuations are a good benchmark because that is where potential sellers look to value their assets. The markets in Southeast Asia went up enormously in the first half of the year but now they are normalizing, so they look more reasonable. Despite what people say about the slowdown in Indonesia, the corporates are very healthy – strong balance sheets, lots of cash – and consumer debt is very low in Indonesia and the Philippines.
Q: Does that strength mean deals are scarcer and as a result valuations go up?
A: If there aren’t many deals and everyone shows up to an auction, then whoever wins usually overpays for the asset. The current market uncertainties, if they continue, will moderate valuation expectations. However, valuations are not everything. Most of the big investment banks have been active in Southeast Asia for a while now, so the level of intermediation is good. But in most cases, if a family or business group wants to sell, there is a reluctance to hire a bank and do a full auction for face considerations.
Q: How many of CVC’s deals have come via auction?
A: Of the eight investments we have made in Southeast Asia over the last 5-6 years, only two came from auctions – GS Paper & Packaging in Malaysia and then Link Net in Indonesia, both of which were limited auction processes. Regarding Link Net, we had already done Matahari with the same owner, Lippo Group. A handful of firms were invited into the Link Net process but they ended up working with us because of the relationship and the comfort level.
Q: And how many control deals?A: We only have one minority
deal – Rizal Commercial Banking Corp. in the Philippines. The rest are control-oriented investments. There are more buyouts than in China, but we generally still see more growth capital than control deals.
Q: How do you convince people to sell who aren’t under pressure to sell?
A: It’s important to have that relationship base and understanding of the market place to get deals done. With QSR Brands and KFC Holdings in Malaysia, Johor Corporation was never a seller. There were previous efforts by private equity firms to buy that business but they all failed because it wasn’t for sale. However, they saw the value of partnering with us, privatizing the business and improving it, and ultimately doing a re-listing together. Every situation is unique so you have to be able to identify them. With Johor Corp, we had covered them for a while and cultivated the relationship.
industry Q&a | SIgIT [email protected]
Beyond the volatilitySigit Prasetya, managing partner at CVC Capital Partners, on why recent volatility in Indonesia shouldn’t concern PE investors, negotiating auctions and lofty valuations, and working with Southeast Asia’s family groups
“PE activity in Southeast Asia should pick up over time, simply because the supply of capital is increasing. But it will not be hockey stick – the market won’t grow that quickly”
RegistRation enquiRies:
Pauline Chent: +852 3411 4936e: [email protected]
sPonsoRshiP enquiRies:
Darryl Magt: +852 3411 4919e: [email protected]
G LO BA L P E R S P E C T I V E , LO CA L O P P O R T U N I T Y
2014 Conference SeriesPrivate equity & Venture Forum
avcj.com
AVCJ Private Equity & Venture Forum – India4-5 December, Mumbai
AVCJ Private Equity & Venture Forum – Korea13 May, Seoul
AVCJ Private Equity & Venture Forum – Singapore17-18 July, Singapore
AVCJ Spotlight: Real Assets Across Asia Forum4 September, Singapore
AVCJ Private Equity & Venture Forum – USA8 July, New York
AVCJ Private Equity & Venture Forum – Japan26-27 June, Tokyo
AVCJ Private Equity & Venture Forum – China12-13 June, Beijing
AVCJ Private Equity & Venture Forum – Indonesia20 March, Jakarta
AVCJ Private Equity & Venture Forum – Australia & New Zealand5-7 March, Sydney
27th Annual2014 Private Equity & Venture Forum
11-13 November, Hong Kong
RegistRation enquiRies:
Pauline Chent: +852 3411 4936e: [email protected]
sPonsoRshiP enquiRies:
Darryl Magt: +852 3411 4919e: [email protected]
G LO BA L P E R S P E C T I V E , LO CA L O P P O R T U N I T Y
2014 Conference SeriesPrivate equity & Venture Forum
avcj.com
AVCJ Private Equity & Venture Forum – India4-5 December, Mumbai
AVCJ Private Equity & Venture Forum – Korea13 May, Seoul
AVCJ Private Equity & Venture Forum – Singapore17-18 July, Singapore
AVCJ Spotlight: Real Assets Across Asia Forum4 September, Singapore
AVCJ Private Equity & Venture Forum – USA8 July, New York
AVCJ Private Equity & Venture Forum – Japan26-27 June, Tokyo
AVCJ Private Equity & Venture Forum – China12-13 June, Beijing
AVCJ Private Equity & Venture Forum – Indonesia20 March, Jakarta
AVCJ Private Equity & Venture Forum – Australia & New Zealand5-7 March, Sydney
27th Annual2014 Private Equity & Venture Forum
11-13 November, Hong Kong
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