Asia’s Private Equity News Source avcj.com September 24 2013 Volume 26 Number 36

Editor’s Viewpoint Making sense of the Asia real assets story Page 3 News Allegro, Altius, Ancora, Archer, ClearVue, CLSA, Gresham, Helion, IDFC, Kalaari, KKR, Sequoia, OTPP, Pencarrow, Warburg Pincus Page 4 Focus India property investors play the long game Page 13 Analysis Solving Indonesia’s infrastructure gridlock Page 16 Industry Q&A Strong foundations StanChart’s Andrew Yee talks Asia infrastructure Page 6 LP interest in Asian infrastructure is robust, modes of entry are changing Page 19

india cleantech china cleantech

Independent’s day Recalibration time Renewable energy IPPs eye market share Page 9 From exports to domestic consumption Page 11

Pre-conference issue AVCJ private equity and venture capital forum - real assets ExprEssion of intErEst (“Eoi”) forEign partnEr sElEction for a nEw sub-saharan privatE Equity fund today, sub-saharan africa represents the last and perhaps one of the world’s most attractive emerging market private equity frontier regions. our client is the investment banking arm of one of sub-saharan africa’s largest, oldest and most prestigious diversified publicly traded financial service institutions. in 2012,it reported audited assets in excess of $20bn,earnings of approximately $500m+, and a return on average shareholders’ funds of 18.8%. over the past decade (2003-2013), our client has operated a small-cap private equity and principal investing business but now intends to raise a separate, significant and sizeable new private equity fund (the “new africa fund”). the new africa fund will focus on larger investments in sub-saharan africa thereby capitalizing on the many attractive and diverse private equity opportunities in this high growth region.

Expressions of interest [“Eoi”] are now sought from highly successful and proven existing private Equity firms operating internationally (prior emerging market pE experience is essential) to partner with our client in the new africa fund. upon submission of an Eoi as a co-fund manager, your firm, if pre-qualified, will receive a formal request for proposal (“rfp”) due for submission by december 2nd, 2013. Final partner selection is expected to occur by March, 2014. the international pE partner selected should expect to fully co-manage all aspects of the new africa fund with our client including: 1) providing a leadership role with our client in international fund raising and support on africa wide fund raising efforts, 2) developing the new africa fund’s investment strategy and sector/country focus, 3) the lp engagement process (preparing 3rd party presentation materials, road show, etc) and 4) negotiations and achieving financial closing(s) for the new africa fund. your expression of interest letter must include the following to avoid disqualification: 1. full registered name of your current fund 2. Key person contact details (email, phone & physical address) 3. total fund assets under Management [auM] 4. name and address to where to send the formal rfp (contact name, fund name, e-mail and physical address only) 5. your fund’s website address only successfully selected responses to this Eoi will be notified by e-mail to your designated contact by not later than october 31st, 2013.

Summary Indicative Timetable: • Successful RFP submissions notified Dec. 10th, 2013 • Expression of Interest submission deadline: October • One-on-One pre-negotiations/Term Sheet review 28th, 2013 dec. 12th – 15th, 2013 • Successful EOI responses notified, October 31st, 2013 • One-on-One negotiations commence January • RFP & Term sheet circulated Nov. 1st, 2013 20th, 2014 • Management presentation& one-on-one meetings, • Conclude negotiations & partner selection november 14th & 15th, 2013 March 31st, 2014 • RFP submission deadline, Dec. 2nd, 2013

Please send Expression of Interest letters by October 28th deadline, 2013 by email to: [email protected], Tel: +234-703-470-4697 ExprEssion of intErEst (“Eoi”) Editor’s Viewpoint [email protected] forEign partnEr sElEction for a nEw Managing Editor Tim Burroughs (852) 3411 4909 sub-saharan privatE Equity fund Staff Writers Andrew Woodman (852) 3411 4852 Mirzaan Jamwal (852) 3411 4821 Winnie Liu (852) 3411 4907 today, sub-saharan africa represents the last and perhaps one of the world’s most attractive emerging market The Asia real Creative Director private equity frontier regions. Dicky Tang Designers Catherine Chau, Edith Leung, our client is the investment banking arm of one of sub-saharan africa’s largest, oldest and most prestigious Mansfield Hor, Tony Chow Senior Research Manager diversified publicly traded financial service institutions. in 2012,it reported audited assets in excess of $20bn,earnings assets story Helen Lee Research Manager of approximately $500m+, and a return on average shareholders’ funds of 18.8%. Alfred Lam Research Associates Herbert Yum, Isas Chu, over the past decade (2003-2013), our client has operated a small-cap private equity and principal investing business It is difficult to tell whether Asia Australia has seen its share of junior miners Jason Chong, Kaho Mak but now intends to raise a separate, significant and sizeable new private equity fund (the “new africa fund”). the is at the beginning of a real assets story or gain momentum via the public markets, and Circulation Manager negotiating a transition phase somewhere there may be an opening for PE now the Sally Yip new africa fund will focus on larger investments in sub-saharan africa thereby capitalizing on the many attractive Circulation Administrator around the middle. “Real assets” is such an all- commodities super-cycle appears to be turning and diverse private equity opportunities in this high growth region. Prudence Lau encompassing term, taking in everything from and alternative sources of capital are hard to find. Manager, Delegate Sales forestry to energy to real estate, while individual Southeast Asia is now home to a couple Pauline Chen Expressions of interest [“Eoi”] are now sought from highly successful and proven existing private Equity firms Asian markets face challenges that reflect their of publicly-traded independent oil and gas Senior Marketing Manager operating internationally (prior emerging market pE experience is essential) to partner with our client in the new different stages of development. explorers and, if private and corporate money Rebecca Yuen Asian private equity real estate funds have continues to be deployed in such operations Director, Business Development africa fund. upon submission of an Eoi as a co-fund manager, your firm, if pre-qualified, will receive a formal received cumulative commitments of more successfully, more of the geological and Darryl Mag request for proposal (“rfp”) due for submission by december 2nd, 2013. Final partner selection is expected to than $81.5 billion since 2003, according to AVCJ engineering talent working for oil majors in the Manager, Business Development occur by March, 2014. Research, a fraction of the $475 billion that has region will spin out. PE investors can back this Anil Nathani, Samuel Lau entered traditional PE over the same period. Yet talent, as they have in mature basins in the West. Sales Coordinator given the prominence of real estate in Asia – Arguments concerning oil, gas and minerals Debbie Koo the international pE partner selected should expect to fully co-manage all aspects of the new africa fund with our not least as a function of the urbanization that are underpinned by the reality that Asia is growth Conference Managers Jonathon Cohen, Sarah Doyle, Zachary Reff client including: 1) providing a leadership role with our client in international fund raising and support on africa wide continues to shape emerging markets – surely long and resources short. The likes of China, India Conference Administrator fund raising efforts, 2) developing the new africa fund’s investment strategy and sector/country focus, 3) the lp we are still only in the nascent stages of private and Indonesia will account for the bulk of new Amelie Poon equity’s involvement with the asset class. energy demand over the next 20 years and they Conference Coordinator Fiona Keung, Jovial Chung engagement process (preparing 3rd party presentation materials, road show, etc) and 4) negotiations and achieving This time last year, The Blackstone Group had are inclined to look for supplies on their doorstep. financial closing(s) for the new africa fund. accumulated real estate assets in Asia of around The same fundamental need applies to Publishing Director Allen Lee $2.5 billion and committed the same amount to infrastructure. It goes without saying that Managing Director PE investments. These figures predated the close emerging markets in the region require roads, your expression of interest letter must include the following to avoid disqualification: Jonathon Whiteley of the firm’s most recent global real estate fund railways, airports, utilities, power generation and 1. full registered name of your current fund and the launch of its debut Asia vehicle, so the distribution systems, and telecom networks. The 2. Key person contact details (email, phone & physical address) assets balance could shift still further. question is how and where can private equity 3. total fund assets under Management [auM] Of the major global PE firms that are trying provide this and get a satisfactory rate of return. to establish themselves as multi-strategy asset In terms of Southeast Asia, PE is still near Incisive Media 4. name and address to where to send the formal rfp (contact name, fund name, e-mail and physical address only) Unit 1401 Devon House, Taikoo Place managers, Blackstone has arguably made the the beginning of the story. There are needs 979 King’s Road, Quarry Bay, Hong Kong 5. your fund’s website address most progress on real estate. Come back in 10 that must be met and it remains to be seen T. (852) 3411-4900 years time inspect their Asia allocations; direct how foreign investors fare when their interests F. (852) 3411-4999 E. [email protected] only successfully selected responses to this Eoi will be notified by e-mail to your designated contact by not later than exposure to the property market is likely to are sandwiched between those of (sometimes URL. avcj.com account for a larger share across the board. dominant) local conglomerates and (sometimes Beijing Representative Office october 31st, 2013. Another area in which the global firms protectionist) governments. In China, the story No.1-2-(2)-B-A554, 1st Building, No.66 Nanshatan, are building out their presence is oil, gas and is being told by state-owned enterprises, with Chaoyang District, Beijing, minerals, driven by a similar desire to access private equity foraging around the edges. People’s Republic of China Summary Indicative Timetable: • Successful RFP submissions notified Dec. 10th, 2013 T. (86) 10 5869 6203 • Expression of Interest submission deadline: October • One-on-One pre-negotiations/Term Sheet review stable, yield-driven returns as much as growth. And in India, arguably the most attractive and F. (86) 10 5869 6205 These trends are already apparent in developed most maddening of markets, the story seems E. [email protected] 28th, 2013 dec. 12th – 15th, 2013 markets but they are filtering through to Asia, to be told again and again, albeit with a slightly • Successful EOI responses notified, October 31st, 2013 • One-on-One negotiations commence January with several private equity firms in the hunt for different narrators. Will a more mature investment • RFP & Term sheet circulated Nov. 1st, 2013 20th, 2014 assets being divested by Australia’s mining giants. environment emerge from the excesses of pre- The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of • Management presentation& one-on-one meetings, • Conclude negotiations & partner selection High-end auctions aside, direct investments in 2009? Fingers crossed for the current vintages. AVCJ Group Limited. ISSN 1817-1648 Copyright © 2013 november 14th & 15th, 2013 March 31st, 2014 energy and mining retain something of a frontier • RFP submission deadline, Dec. 2nd, 2013 feel – reflecting the size of assets available, the level of specialization required to exploit them fully, the importance of dedicated local deal- Tim Burroughs sourcing teams, and the challenges of dealing Managing Editor Please send Expression of Interest letters by October 28th deadline, 2013 by email to: with often opaque regulation. Asian Venture Capital Journal [email protected], Tel: +234-703-470-4697 Number 36 | Volume 26 | September 24 2013 | avcj.com 3 News

Ontario Teachers keen for oldest tea enterprise, from supermarket chain ASIA PACIFIC Foodstuffs. Accident Compensation Corporation more Asia co-investment (ACC) is coming in as a significant co-investor, Altius appoints new Asia Ontario Teachers’ Pension Plan (OTPP) expects while BTCC’s senior management team will also to become a more active co-investor in Asia, take a significant stake in the company. Pacific head partnering with GPs in the region that offer Altius Associates, a private equity advisory and certain geographic or sector expertise as well as Gresham exits Tasmanian fund-of-funds firm, has appointed Peter Pfister as operational capabilities. a partner and head of Asia Pacific. Pfister, who will Teachers’ Private Capital (TPC), the Canadian Walking Company be based in Singapore, joins Altius from Deutsche pension fund’s PE and direct investment arm, has Gresham Private Equity has exited Australian Bank, where he was head of its Asia Pacific private so far deployed C$1.5 billion ($1.45 billion) through tour firm Tasmanian Walking Company (TWC) equity business for seven years. Asian GPs while a further C$1 billion has been to Virgin Australia co-founder Brett Godfrey. The committed and is available to be drawn down, financial details were not disclosed. Founded in CLSA Capital Partners backs said Jane Rowe (pictured), senior vice president at 1985, the company has two main tourism assets in Tasmania - the Cradle Mountain Huts Walk and VoloAgri the Bay of Fires Lodge Walk, plus guided walking CLSA Capital Partners (CLSA CP) has invested in tours and luxury accommodation. VoloAgri Group, a California-based agricultural technology company, through its Clean Resources Asia Growth Fund. The proceeds will GREATER CHINA enable VoloAgri to accelerate its acquisition and growth strategy in the fragmented vegetable VC-backed Forgame targets seed market in Asia. $222m Hong Kong IPO Forgame Holdings, a Guangzhou-based mobile AUSTRALASIA game developer backed by TA Associates, Qiming Venture Partners and Ignition Capital Partners, Allegro targets $188m for OTPP. Its portfolio includes MBK Partners, Kedaara plans to raise at least $222 million through an IPO Capital, FountainVest Partners, Unison Capital, PAG, in Hong Kong. Forgame is selling 31.37 million Australasia distress fund Unitas Capital and GSR Ventures. shares in a price range of HK$43.50 to HK$55.0 Allegro Funds is raising a A$200 million ($188 On a global basis, TPC has deployed C$12 apiece. The company aims to list on October 3. million) vehicle that will make turnaround billion, split equally between fund and direct investments in distressed Australian and New investments. Its capacity for co-investment in Asia Warburg Pincus invests in Zealand companies. In addition to serving as the is likely to increase now that OTPP has a presence replacement GP on the A$300 million ABN AMRO in the region, with Rowe hoping to have at health center Amcare Capital Australia Fund II, the private equity firm least eight investment staff in place within 6-9 Warburg Pincus has invested in Beijing-based has operated on a deal-by-deal basis since its months. The PE and direct unit’s most recent Amcare Women’s & Children’s Hospital. The inception in 2004. co-investment in the region was alongside MBK proceeds will be put towards the construction Partners in South Korea. of additional facilities and expanding Amcare’s Billabong opts for Oaktree, Other private activity, such as the joint network nationwide. Centerbridge rescue plan acquisition with Hastings Fund Management of a 50-year lease on Sydney Desalination Plant and Sequoia Capital leads $15m Australian surfwear company Billabong had the $300 million investment in Chinese online accepted a refinancing plan from Oaktree Capital retailer 360Buy – now known as JD.com – has Series C in App Annie Management and Centerbridge Partners, walking been driven by OTPP’s infrastructure and public Sequoia Capital has led a $15 million investment away from a previous deal with a consortium equities units, respectively. in app analytics platform App Annie, with led by Altamont Capital Partners and replacing participation from existing investors IDG Capital top management. Thenew agreement provides Partners, Greycroft Partners, e.ventures and the beleaguered firm with longer-term debt at a week. The PE firm and Abano director Peter Infinity Venture Partners. App Annie’s platform lower interest rate, and allows it to repay a $294 Hutson - who has a 14% stake in the company tracks performance across multiple app stores, million bridging loan from the Altamont group. and has been a co-investor with its international including download and revenue estimates. ventures – had renewed an unsolicited proposal Archer revives interest in to acquire the firm. Their first proposal was ClearVue Partners backs NZ’s Abano Healthcare turned down one month earlier. online grocery store Archer Capital has obtained a five-month New Zealand’s Pencarrow ClearVue Partners has led a $5 million Series standstill agreement with shareholders of New A round of funding in Shanghai-based online Zealand’s Abano Healthcare, potentially allowing acquires Bell Tea & Coffee grocery store Fields. The proceeds will be used time for a new takeover bid to come together Pencarrow Private Equity has bought Bell Tea to further expand operations, website, and new after its latest effort was rejected earlier in the & Coffee Company (BTCC), New Zealand’s warehouse, as well as to hire more staff.

4 avcj.com | September 24 2013 | Volume 26 | Number 36 News

NORTH ASIA Ancora closes Indonesia GEF invests $12m in India’s fund at $128m Rishabh Instruments MSPEA-backed Hyundai Indonesia-focused GP Ancora Capital has made a Global Environment Fund has invested INR750 final close on its second fund at $128 million. The million ($11.98 million) in Industrial Control Rotem targets $575m IPO vehicle is currently 40% deployed, having made Products maker Rishabh Instruments (RI), through Hyundai Rotem, a South Korean train maker three investments since its launch in early 2011. its small and medium-sized enterprises-focused backed by Morgan Stanley Private Equity Asia Hendrik Susanto, a managing director with South Asia Clean Energy Fund (SACEF). Nashik- (MSPEA), intends to raise as much as KRW622.4 Ancora, expects the recent volatility in Indonesia’s based RI designs and manufactures energy billion ($575 million) in what is set to be the economy to generate more investment meters and management systems. country’s biggest IPO so far this year. The opportunities - and at reasonable valuations. company plans to sell 21 million new shares “For example, we might invest in companies that Helion, Kalaari lead $10m and 6 million existing shares priced between were ready to go public but now cannot because KRW17,000 and KRW23,000 apiece. the market is not supportive,” he explained. “They Series B for Simplilearn Helion Venture Partners and existing backer Mediaflag moves for J-Star- Kalaari Capital have led a $10 million Series B round for professional certification exam owned sweets maker preparation provider Simplilearn Solutions. Mediaflag - a company which provides The company offers online training, blended distribution support services to consumer goods classroom training and exam practice tests in manufacturers - has offered to acquire a 100% over 80 corporate certification courses. stake in Tokachi, a traditional Japanese sweets maker owned by Japanese mid-market buyout KKR NBFC raisess $100m firm J-Star. The PE firm acquired Tokachi in mid- 2007 for JPY450 million (then $3.93 million). from US pension fund KKR India Financial Services, the global private Japan Private Equity holds equity firm’s non-banking financial company can stay private for 3-4 years and then go public (NBFC), has reportedly raised $100 million from $30m first close on Fund IV at three times the size at which they previously The Teacher Retirement System of Texas. The PE Japan Private Equity (JPE) has held a JPY3 billion planned to list.” firm is also said to be in talks with another global ($30 million) first close on its fourth buyout Ancora’s protracted fundraising, which investor to raise $75-100 million. fund, JPE Private Equity No.4. The fund - which resulted in the vehicle closing well short of its is targeting JPY5 billion - has an eight year original $300 million target, was in part due to India’s Micro Housing lifespan and will focus on majority investments in team turnover. Veronica Lukito was the only one small- to medium-sized enterprises (SMEs) facing of the firm’s four founders who remained in place Finance Corp raises $5.5m succession issues or in need of restructuring. for Fund II. Susanto and Alex Ramlie came in as Unilazer Ventures and existing backers Caspian managing directors, but shortly after fundraising Advisor’s India Financial Inclusion Fund and NTT Docomo Ventures, began Ramlie left to become CEO of Borneo the Michael and Susan Dell Foundation have Lumbung Energi & Metal. invested INR350 million ($5.5 million) in Micro Livesense back Aratana A first close of $70 million came in April Housing Finance Corp, which makes housing NTT Docomo Ventures, the corporate VC arm of 2011 and the fund’s debut investment - a loans to lower income groups in urban areas. the Japanese mobile giant, and internet media palm oil plantation operator - followed about firm Livesense have together led a JPY550 million three months later. In mid-2012 Ancora added A&M launches India M&A ($5.5 million) investment round for Aratana, a a hospital company to its portfolio, and then social e-commerce platform developer. Existing invested in a retail chain focusing on home ware advisory practice VC backers JAFCO, GMO Venture Partners and and fixtures in October. Alvarez & Marsal (A&M), a consultancy Mizuho Capital also took part in the round. specializing in performance improvement and turnarounds, has expanded its India business institutional investors accounting for the balance with the launch of a dedicated transaction SOUTH ASIA of $580 million. advisory practice. The new practice will be led by Vikram Utamsingh, formerly of KPMG India. IDFC makes $644m first NSR buys Moshe’s Fine CORRECTION: In the September 17 issue (page close on second infra fund Foods 6), China Resources Urban Car Park Investment IDFC Alternatives has reached a $644 million first New Silk Route (NSR) has acquired a majority Partnership was inaccurately named Resources close on its second core infrastructure fund after stake in Mumbai-based Moshe’s Fine Foods, Urban Car Park Investment Partnership; 14% just eight months in the market, making it one of which runs a chain of Mediterranean cuisine refers to historical car parking fee growth, not the largest Indian fundraises in recent times. India restaurants and cafés in Mumbai. The business projected return of the assets in the partnership; Infrastructure Fund II (IIF2) has a full target of $1 will expand to Pune, Bangalore and New Delhi and APG was innacurrately named AGP Capital. billion. IDFC has put in $64 million with global over the next two years. AVCJ regrets the errors.

Number 36 | Volume 26 | September 24 2013 | avcj.com 5 Cover story [email protected] A beast with two heads At one end of the market large institutional investors are looking to access Asian infrastructure through separate accounts or independently; at the other, plenty of LPs are still looking to make fund commitments

Canada Pension Plan Investment into their own evergreen platforms and employ Gross reconciles these phenomena with Board’s (CPPIB) acquisition of Intoll Group and internal teams to go out and buy even more, anecdotal evidence of increased investor Queensland Investment Corporation’s (QIC) acting as competition to the managers they once demand for direct infrastructure exposure by purchase of Queensland Motorways sent backed. stressing that it is merely the means through a shockwave through Asian infrastructure Unsurprisingly, the reality is more nuanced, which investors get this exposure that has investment. They contributed the lion’s share of with LP preferences varying according to changed. In recent years numerous LPs have the $8 billion deployed in the asset class in 2010, geography, resources and appetite for risk. pursued deals independently, but with mixed nearly 50% more than the sum committed in success, and they are now turning back to the 2007 and 2008 combined, when the pre-global Bucking the trend fund-plus-co-investment model. financial crisis market was at its peak. Infrastructure fundraising in Asia has never been On top of this, while most LPs want to know The deals had three characteristics in straightforward. Looking back at activity since about co-investment opportunities, not many common: each was worth around $3 billion; each 2003, AVCJ records show that no more than have the internal capacity to act on them. Even primarily involved toll road assets in Australia; 10 infrastructure vehicles have been raised in fewer have large enough dedicated teams to and, crucially, each represented a full buyout by the region in any one year. The high watermark operate independently – and especially not in an institutional investor emerging markets, acting independently where the potential Asian infrastructure fundraising of a third-party fund for strong returns is manager. 3,500 1,050 tempered by lower Was this to be the 3,000 transparency and 1,050 new normal, pension 2,500 higher risk. funds and sovereign This is certainly the 2,000 1,050 wealth funds acting experience of IDFC 1,500 solo or in concert 1,050 Project Equity, which US$ million 1,000 of funds No. to secure plumb recently reached a 1,050 infrastructure assets – 500 $644 million first close with no management 0 0 on its second India fees and no obligation 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013ytd infrastructure fund and to exit after 10 years? No. of funds Amount raised (US$m) is targeting a $1 billion This may have been the Source: AVCJ Research final close by the first case in certain regions, quarter of next year. The but not Asia, statistics GP has received re-ups suggest: the Intoll and Queensland Motorways remains 2008, when $2.94 billion was committed from a fair number of investors and added 4-5 new deals have yet to be topped. There is, however, by LPs, although this doesn’t include global funds faces, and CEO M.K. Sinha says there continues still time. or generic vehicles that dabble in infrastructure. to be strong interest from pension funds and “The private equity investor market is turning The subsequent drop-off reflects the trend sovereign wealth funds that are keen to co-invest. into a big boys club at the top with $100 billion seen in broader private equity, but this trend has Standard Chartered’s Yee adds notes several or more sovereign wealth and pension funds,” been wholeheartedly bucked in 2013. While PE of these investors – including groups from says Andrew Yee, global head of infrastructure fundraising remains in the doldrums, infrastructure Canada and the Middle East – kept their powder in Standard Chartered Bank’s principal finance vehicles have received $2.87 billion year-to-date, dry while the India market was peaking in 2008- division. “Not only for infrastructure but for our up by more than $1 billion on 2012 as a whole. 2009. Those that didn’t hold back have, in many overall business, we aim a bit higher and try Indeed, Macquarie Infrastructure & Real Assets cases, lost 20-30% on the value of the asset and and have co-investing clients where we can do (MIRA) claims the last 12 months of fundraising a further 10-15% on foreign exchange. So there bigger deals. It’s harder and it’s more exclusive globally have been the best it has seen in the is an opportunity for investors with minimal but it’s more efficient if you get it right.” last 7-8 years, and the balance is actually shifting exposure to take advantage of low valuations in There is an argument to be made that towards traditional funds. the expectation that the market and the currency the future of infrastructure investing will be “A significant amount of this capital went into will be stronger in 10 years’ time. dominated by separate accounts, as blind pool funds, although money was raised for separate But are they willing to go it alone? Sinha says funds – unpopular with investors that want a managed accounts and directs” says Steve Gross, no. “I think a lot of these investors realize they clear idea of what they are getting into – are a senior managing director at MIRA. “A significant lack the connections in the local market to put replaced by a product that is more customized. increase in the portion of that money was raised meaningful dollars to work. We are a beneficiary After this, investors will sweep up the assets from larger investors.” of that environment where a lot of people who

6 avcj.com | September 24 2013 | Volume 26 | Number 36 cover story [email protected]

want direct exposure also want a local manager which placed the fund, Equis already had about domestic corporations have been active for years. alongside them.” five investment platforms in sight when it An LP’s infrastructure appetite at a certain commenced marketing efforts. point in time depends on where it sits on Inspecting the pipeline The GP also benefited from being an this development curve. Anthony Fasso, chief Even if LPs are still willing to follow the experienced quantity – a number of the executive of AMP Capital’s international business, fund route, blind pool funds remain an area founding partners were previously with notes the contrasting profiles of investors in his of concern. As such, the deal pipeline an Macquarie Group and helped establish funds firm’s most infrastructure debt funds with those infrastructure-focused GP has in place at the throughout the region. that opt for equity products. beginning of fundraising comes under intense “There are a lot of opportunities in Asia AMP’s most recent infrastructure debt fund scrutiny. A manager who makes a strong and experience in terms of executing those reached a first close of more than $300 million in investment early on in the process – one that opportunities is very much sought after by August. It is the first fund of its type that Mitsubishi illustrates the capacity for co-investment – might investors,” Guen adds. UFJ Trust and Banking Corp, AMP’s strategic be able to ride on the momentum to a final close. Asked to list the qualities he would want to see when marketing an Asia infrastructure “There are a lot of opportunities in Asia GP, Vincent Ng, a partner at placement agent Atlantic-Pacific Capital identified three things: an and experience in terms of executing those ability to show how and through what structures opportunities is very much sought after by outsize returns will be generated, particularly on the greenfield side; a well-defined strategy investors” – Mounir Guen that highlights the GP’s competitive advantage in markets often dominated by strategic and government-linked players; and a local team Singapore-based Capital Advisors Partners partner in Japan, has marketed to local investors that can offer good access to deal flow and Asia (CapAsia), meanwhile, reached a first close of and they are strongly represented in the first close, relationships with regulators. $100 million on its third fund earlier this year with alongside one of South Korea’s top insurance “Some groups might have all this but a view to accumulating $350 million by the end companies. The average investment in the fund is then they don’t have a track record in asset of December. The vehicle focuses on Southeast $20 million, much of it coming from insurers and management,” he adds. Asia, seeking minority stakes in assets of around defined benefit pension plans looking for cash- The largest non government-affiliated funds $30 million but ready to go to $100-150 million yielding assets to match long-date liabilities. to reach first or final closes in Asia over the last through co-investment. Demand for AMP’s equity infrastructure funds, 12 months can claim to meet several of these CapAsia ASEAN Infrastructure III received meanwhile, is split between mid-size global requirements. In the case of IDFC, it is estimated commitments from Japan Bank for International pension and superannuation funds that want that, available co-investment capital included, Cooperation and the Bank of Tokyo-Mitsubishi to put $20-50 million to work, and then large the GP had about $1 billion in dry powder by the UFJ, each of which put in up to $25 million. superannuation and sovereign players looking for first close and 6-7 companies in the pipeline. LPs Speaking to AVCJ in January, CapAsia CEO Johan separate accounts of $100 million or more. are already engaged in due diligence on some Bastin said he expected Japanese institutions to Fundraising is, therefore, no zero-sum co-investment opportunities. become more active in overseas infrastructure. game. For every large-scale institution with the IDFC didn’t offer any co-investment in its last Having initially focuseding on Organization resources to support a separate account or even fund because the deal sizes were smaller. This for Economic Cooperation and Development a stand-alone investment team, there will be a time around the fund’s transaction sweet spot (OECD) member nations, Japanese LPs are now score or more of smaller players lacking the skill, is expected to be $75-100 million but deal sizes considering Southeast Asia. scale or mandate to make anything apart from could run into the $150-200 million range, and This offers a snapshot of how the infrastructure fund commitments. But those funds must be even up to $250 million. Sinha sees particular LP base is evolving and, by extension, where Asia able to offer local competitive advantages, co- potential for big-ticket deals in the power fits into investors’ portfolios. investment and a visible deal pipeline. generation space, but wherever the fund goes, it And, one way or another, capital is coming will focus on large operating assets with a track A sliding scale to Asian infrastructure. MIRA’s Gross reports record. There will be no greenfield. The typical first step is to go for low-risk increased interest from large institutions and “The market in India has evolved,” he assets. One of the fundamental attractions also more reverse inquiries from consultants explains. “Operating assets that are low risk are of infrastructure over other private market representing big and small investors, all of whom coming on the market and they can absorb investments is long-term returns coupled with are tracking the strong yield in developed Asia larger investment amounts. This will generate an element of downside protection. This draws and strong growth in developing Asia. opportunities for co-investment. There are a lot LPs to core infrastructure assets in OECD markets, “This makes it a good diversifier, so if you add of good assets with distressed developers.” such as UK water, that offer a stable customer listed Asian infrastructure into a portfolio you By the time Equis Funds Group announced base, transparent regulation, and predictable increase the potential return for a given level of a final close of $647 million on its debut Asia inflation-linked revenue streams. risk,” Gross adds. “And then Asian infrastructure on energy and infrastructure fund in January of this Once a developed portfolio is established, an an unlisted basis provides a real opportunity for year – exceeding the $500 million target – the investor might consider diversification and adding alpha and outperformance of the listed markets firm had already completed two investments some emerging markets exposure, starting with and therefore even greater improvement in and was finalizing its third and fourth deals. regions close to home – hence the Japanese the overall risk-adjusted returns in an investors According to Mounir Guen, CEO of MVision, interest in Southeast Asia, a geography in which portfolio.”

Number 36 | Volume 26 | September 24 2013 | avcj.com 7 Private Equity & Venture Forum India 2013 5-6 December • Taj Lands End, Mumbai 14th Annual

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avcjindia.com cleantech [email protected] Expansion time PE-backed companies have carved out a sizable share of India’s nascent renewable power production sector, particularly in the wind space. The quickest to scale up will gain a competitive advantage

When IDFC Alternatives was looking two segments of renewable energy – wind target of doubling renewable energy output to to invest a renewable energy-focused and solar, where projects are the quickest to 55 gigawatts by 2017 relies heavily on growth in independent power producer (IPP) five years ago, commission. Even a greenfield facility can start this space. it found little to choose from. The group’s solution generating cash within 9-12 months. The market is, therefore, waiting for dominant was to use capital from IDFC PE Fund II and Fund There is also an option to acquire turnkey players to emerge, although a combination of III to create Green Infra, with a mandate to invest projects from turbine engineering, procurement cyclical and systemic cost factors won’t make it in renewable power generation assets. and construction firms such as Suzlon, Vestas or an easy journey. “There was compelling logic in creating a Gamesa, who buy the land, get the approvals “Three years ago, a company with 100 MW company, investing at par, and creating value and deliver a completed package to IPPs. capacity would be a large wind sector player. in the process as opposed to investing in an Wind is the largest sector – it comprises 70% Today it would be medium-sized and tomorrow existing platform,” says Raja Parthasarathy, a of all renewable energy generation, excluding a marginal player,” says Sanjay Chakrabarti, a partner at IDFC. “We would likely have come in hydroelectric power. Analysts estimate that partner at Ernst & Young. “From a talent attraction at a premium given the environment in 2008, PE-backed power producers control around 50% and vendor management perspective it is very when entrepreneurs were expecting investment of the wind IPP market, while in the fragmented different when you are one of the larger players at a price that that was based on the vision of a solar segment they have less than 20%. and trying to get the right sort of contracts or pipeline rather than the economics of operating ReNew and Green Infra feature in India’s 10 talent vis-à-vis when you are a marginal player.” assets they had on the ground.” largest developers, alongside listed players such The number of IPPs in the renewables space as BlackRock and IDFC-invested Mytrah Energy Going for growth has since expanded to 15-20, and the industry and GIC Private-backed Greenko. Strategic As the companies race to reach at least 1000 MW that continues to attract capital while GPs scale players such as Tata Power, IL&FS, Reliance Power of capacity, one of the strategies being used to back infrastructure investment elsewhere. Other also have some renewables exposure. However, expand is consolidation. PE firms have taken majority stakes: Goldman so far there isn’t a single wind IPP of any scale in Much of the installed capacity was set up Sachs controls ReNew Wind Power, which has India. The largest operator, China Light & Power to earn government tax breaks, with individual received $385 million in investments since 2011, (CLP), has an installed operational capacity of investors and corporates such as property while last year Morgan Stanley Infrastructure about 500 megawatts, built over five years. developer DLF and motorcycle manufacturer TVS Partners bought Continuum Wind Energy for There’s plenty of scope for growth – India has Motors building up assets. This subsidy expired INR12 billion ($210 million). about 80,000 MW of wind potential, of which in 2012, causing debt-laden corporates to sell Most investors are putting their money into 19,000 MW has been built – and the government off their interests. All of J.P. Morgan-backed Leap Green Energy’s capacity is from assets bought in these stake sales. Green Infra, meanwhile, bought Largest PE investments in Indian cleantech a 100 MW wind farm from BP in 2009 and last Date Value (US$m) Company Investors month added nearly 60 MW of wind farms to its portfolio through an acquisition from TVS Motors’ Feb-08 403.8 Sophia Power Farallon; LNM Internet Ventures energy unit. Sep-11 202.1 ReNew Wind Power Goldman Sachs “In wind, if you have an existing asset you Mar-13 149.9 Greenko Group GIC Private have the data on generation and you can Jun-13 135.0 ReNew Wind Power Goldman Sachs predict the revenue you’re going to make,” says Chakrabarti. “The other critical part is how good Apr-13 90.0 NSL Renewable Power ADB; IFC; Proparco; FE Clean Energy; DEG; SBI Korea; GS Power you are at financing. If the loans for the acquired asset are at a very high rate, and the investor Jun-11 78.0 Caparo Energy IDFC Project Equity buying into the asset can get a cheaper loan, Dec-11 70.0 Greenko Group Standard Chartered Private Equity then immediately the IRR escalates.” Jun-10 61.0 Bhilwara Energy IFC; FE Clean Energy Another expansion strategy is building greenfield assets, but it is a capital-intensive Oct-12 58.0 Moser Baer Clean Energy GE Energy business – it can cost INR60 million ($958,863) to Jan-11 50.0 Kiran Energy Solar Power BVP India; New Silk Route; Argonaut Ventures put up 1 MW of wind energy. In order to grow a Oct-11 50.0 Greenko Wind Project GE Energy renewable energy portfolio, you need substantial Nov-09 46.3 Greenko Group Global Environment Fund access to capital and constant investment. However, the steady interest in India’s Source: AVCJ Research renewable energy sector has fallen recently

Number 36 | Volume 26 | September 24 2013 | avcj.com 9 Cleantech [email protected]

because of the general deterioration in the Rupee depreciation is not expected to have One option is supplying directly to third investment environment the volatile currency. a major impact on equipment cost in the wind parties, outside of the state utility off-take Interest rate hikes are hitting everyone, leading sector, as most of the manufacturing is done agreement. This is currently complicated as it banks and equity providers to become more in-country. Solar panel costs have come down by involves breaking an existing power purchase conservative. more than 50% over the last 3-4 years, but most agreement, but could be done through smaller “People are holding back on investments, and of these are imported, which means the cost of greenfield projects, which are dedicated to a lot of deals in the space over the last few years production has risen by INR0.35-40. According serving these open access consumers, or getting into captive arrangements with consumers who have a stake in the IPP. “Three years ago, a company with 100 MW Renewable energy tariffs have become competitive with conventional energy. Wind capacity would be a large wind sector player. energy has already reached grid parity in Today it would be medium-sized and tomorrow a many places, at INR4-5 per unit. In the state of Karnataka, the listed off-take price for wind is marginal player” – Sanjay Chakrabarti INR3.70 compared to INR5 for thermal energy from new coal plants. Solar is currently at INR7- 7.50 and expected to reach grid parity by 2016. have been mezzanine transactions with relatively to Deloitte’s Mishra, if the rupee stabilises around According to Chakrabarti, Ernst & Young is in fewer straight equity plays,” says Sumant Sinha INR60 to a dollar, the impact will be nullified in the process of starting a request for quotation Chairman and CEO of ReNew Power. 2-3 months because of falling costs. (RFQ) for a multinational company which wants to “Given the relatively stable cash flows in the supplement and off-take almost 5-7 MW of solar. wind sector, it has lent itself more to that kind Expensive real estate Other, more mainstream ways to offset of a structure where people are happy getting Another factor in greenfield expansion is the rising land costs include negotiating better on a stable return, which is possible because of cost of land. Nearly 85% of India’s wind power is equipment purchases, entering into schemes the cash flow nature of the business. The initial generated in just five of its 28 states: Tamil Nadu, such as the group capital schemes that offer a investor or entrepreneur can tap the capital Maharashtra, Gujarat, Karnataka and Rajasthan, slightly higher tariff to what the IPP might be markets for the upside they feel might be there.” and most of the highest potential sites have been able to procure purely by selling under a long- While investors are attracted by the acquired. Of the 69,000 MW in unrealized wind term power purchase agreement to the grid, and opportunity in the renewable energy space, potential, the land for 20,000 MW of it is owned creatively structuring the financing of the wind the principal challenge with a straight equity by the likes of Suzlon, Enercon and Gamesa. asset to boost equity return. investment is the frequent disconnect between buyer and seller on the valuation. Structured India renewable energy funding, 2012 equity investments are a way around this – these 3,500 are instruments that are largely equity-like in nature and don’t represent fixed annual cash 3,000 obligations as would be the case in straight debt. 2,500 But debt is costly in India. “It costs around 2,000 13% in rupee terms for the wind sector so a lot of players have gone for external commercial 1,500 borrowing (ECB),” says Debasish Mishra, senior US$ million 1,000 director at Deloitte. “Many of these borrowers 500 have managed 4-5% US dollar interest rates in the ECB market.” Of course, rupee depreciation 0 Wind Solar Small hydro Biomass Biofuels can make these loans more expensive. VC/PE Public markets Asset finance Hence developers are looking hard for Source: UNEP, Bloomberg New Energy Finance more equity financing. The Asian Development Bank (ADB) made its first equity investment in an Indian private sector renewable power “Things were a little bit easier in 2007-2008 The government has also re-introduced generation company in May, when it committed because the competition was not as fierce and incentives for wind farms to generate more $30 million to NSL Renewable Power (NRPPL). there were some good sites available. Now the power, instead of using tax subsidies to bring in According to Martin Lemoine, ADB’s senior number of good sites is decreasing and land more investment. investment specialist, many renewable energy acquisition has become challenging,” NSL’s “Given that wind projects generally operate developers have approached the bank for equity. Vaidyanathan says, adding that land rates have on mid-teens IRRs and that many of the wind M. Vaidyanathan, CFO at NSL Group, explains tripled and project timelines have lengthened IPPs are currently backed by PE funds that have why: “Other than senior debt, which constitutes due to these issues. cost of capital in excess of that, the reality is 70% of the project cost, mezzanine funding is Apart from looking for newer sites and that every percentage or two of IRR makes a also available as a bridge to meeting the equity exploring opportunities in other states, there are difference. So the generation-based incentive has requirements, but this comes at higher cost than other ways IPOs can offset land price increases given investors greater confidence in achievable the bank financing and would typically be in the and create an extra percentage point or two of returns from investments in the wind sector,” says mid-teens with some upsides.” returns. Parthasarathy.

10 avcj.com | September 24 2013 | Volume 26 | Number 36 cleantech [email protected] Addressing overcapacity China’s cleantech sector was the factory to the world, churning out solar panels and wind turbines for export. After the bottom fell out of the market, domestic demand took center stage – how is PE responding?

Zhengrong Shi, founder of solar enough,” says Bruce Yu, a partner at GGV Capital. increasing demand for high power technology giant Suntech Power and once China’s richest “As the solar industry continues to evolve, their solar,” says Sonny Wu, a partner at GSR Ventures. man, saw his empire collapse into bankruptcy in business should experience a V-shape recovery, “Now the government has announced this March. Suntech was the first Chinese solar panel as the government emphasizes domestic subsidy, about half of solar PV panels made in manufacturer to go public in the US, raising $395 consumption.” China will be used domestically, while all the million in 2005, and reaching a peak market value natural gas the country produces is for domestic of $16 billion. Eight years on, the company is Ambitious targets consumption.” worth about $180 million. Arguably the most telling of China’s clean energy Wu also sees strong potential for electric Thanks in part to preferential government initiatives is the carbon intensity target included vehicles and water-related services over the next policies for renewable energy, including subsidies in the 12th Five-Year Plan. The country wants to 5-10 years. This corresponds to The Cleantech and tax cuts, private equity investors who go in reduce the amount of carbon dioxide emitted Group’s findings that solar, transportation, early on solar – i.e. before 2010 – prospered in an for each unit of GDP to 17% below 2010 levels wastewater and energy efficiency have received under-populated market. A total of 20 VC-backed by 2015, which means carbon-based fuels must the most private equity investment since 2006. Chinese solar players sought to list in the five be used more efficiently or less frequently, or In each of the first three categories, the pace of years after Suntech. In 2007 alone, four of them both. This complements a continued effort to cut investment in 2011 outpaced that of the US. – including Yingli Green Energy and LDK Solar – energy intensity – the amount of energy required Richard Youngman, the Cleantech Group’s raised $1.1 billion through US IPOs. per unit of GDP – by 16% on 2010 levels. managing director for Europe, the Middle East The party lasted as long as the participants In addition, the government wants to further and Asia, is optimistic that solar in China “still has could rely on scarcity value. In a commoditized reduce a swath of greenhouse gas emissions and a great future.” industry – the Chinese manufacturers became increase the non-fossil fuel share of its energy mix He argues that the sector has reached a competitive because they churned out to 11.4% by 2015, up from 8.6% in 2010. point in its life-cycle like many before it, such as panels at lower cost than other exporters – Investments in solar, wind, coal, oil and hydro automobile manufacturers in the US in the 1920s overcapacity pushed down prices. At the same power generation are one part of this equation. As to 1930s, where there are too many players for time, end-users in the West were losing their of year-end 2012, China had about 8.3 gigawatts a young market. “The market has a great future government incentives to buy panels and those of installed of solar capacity; it wants to reach 35 for those who can survive this phase,” he adds. same governments started filing anti-dumping GW by 2015, achieving in 3-4 years what took “It is natural for the Chinese government at this complaints against the Chinese solar industry. Germany 10 years. Last month, it was announced time to help manufacturers by trying to stimulate “Local governments poured vast subsidies that RMB29.4 billion ($4.8 billion) be invested a domestic consumption to replace the lost and over-promoted solar sector, resulting in an in solar PV electricity generation stations in volumes from Europe in particular.” uncontrollable situation. Local authorities were residential areas. It was followed by the launch of a Consolidation is the next step for solar panel actually paying for the trouble,” John Zhao, CEO solar subsidy of RMB42 cents for per kilowatt-hour. manufacturers, with a smaller and revitalized of Hony Capital, told a conference this week. “This “This will allow solar power plants to generate industry emerging in time to service ever higher experience tells us that only a market-oriented IRRs in the range of 15-20%. There will be volumes in China and gradually returning demand approach can maintain sustainable growth and private equity should help those enterprises to VC/PE breakdown of China cleantech deals since 2012 reform their operational structures.” Not only solar, but also the wind turbine and Transportation 21% light-emitting diode (LED) industries are now Solar 13% coming to terms with overcapacity, according Recycling & Waste 3% Other Cleantech 9% to industry players. The Chinese government’s Energy E ciency 13% solution is to reposition the business model from Conventional Fuels 5% export-oriented manufacturing to domestic Biofuels & Biochemicals 2% consumption, piggy-backing on broader Air 5% Agricultural & Forestry 6% initiatives to boost the renewable share of energy Advanced Materials 1% output. The onus is on superior technology and Wind 5% greater efficiency, not so much low cost. Water and Wastewater 17% “Investors could get higher returns when they invested in the early-stage development of wind and solar five years ago. It’s no longer the case because their technologies weren’t sophisticated Source: Cleantech Group i3 Platform

Number 36 | Volume 26 | September 24 2013 | avcj.com 11 cleantech [email protected]

overseas. It is a positive message, but not one effectively uniting foreign technology with technology investments, capital has entered that PE investors are necessarily listening to. Their domestic demand. businesses developing apps for taxi reservation attention has moved on from solar and wind to CLSA is not the only water investor. Last and car sharing, the Cleantech Group’s energy efficiency involving conventional power month, Invesco WLR Private Equity, a joint Youngman observes. and water, where there is the expectation of long- venture between Huaneng Capital and Invesco, Last month, Car Clubs, a Hangzhou-based term returns and less subsidy-linked policy risk. participated in a Series B round of funding for car rental operator, received a Series A round The Cleantech Group noted a significant jump wastewater treatment specialist Organica Water, of funding from local VC investor Incapital and in wastewater treatment investment between led by the International Finance Corporation. In Tobon VC, a government-managed fund, to 2006 and 2012. This in part a response to China’s the past few months, the company has signed expand its operation stations and cars with a basic needs: its freshwater resources per head contracts to design and supply equipment for view to reducing traffic congestion in the city. amount to 2,200 cubic meters, less than one treatment plants in several Asian countries, Car Clubs’ fleet initially comprised electric cars third the global average, and the government including Indonesia, China and India. but these were soon replaced by gas-powered has warned it will have exploited all its available vehicles because, Incapital’s Rongjun Liu explains, water supplies by 2030. Clean travel EV technology is not fully developed in China, “In mature markets, wind and solar are While its rise to prominence between 2006 prompting safety concerns. becoming traditional kinds of infrastructure plays, and 2012 is not as great at that of wastewater, S.C. Mak, founding partner of cleantech- with proper returns. For new technology and transportation has clearly become a target for focused Fuel Capital, indicates that electric emerging markets, we are seeking investments private equity. Here the policy considerations are bicycles could become the preeminent form in agricultural and water,” says Peter Kennedy, relevant, with the Chinese government identifying of urban transport. Navigant Research forecasts managing director of CLSA Capital Partners’ Clean the sector as key to its efforts in reducing energy that annual sales of e-bicycles will grow from Resources Asia Growth Fund. and emissions and strengthening energy security. 31 million in 2013 to nearly 38 million in 2020, In February, CLSA led a $10 million round of Public service vehicles, railways and civil aviation although discussions about licensing the funding for Scinor Water, a Chinese company must cut energy consumption per kilometer machines must be resolved first. that produces membranes used in wastewater traveled by 5% by 2015. For ships, the reduction “The lectric bicycle is a practical solution to treatment. The fund previously participated target is 10%. energy saving as well as meeting increasing in two rounds of financing for Norwegian What is noticeable about the transportation domestic demand, given that it is cheaper than a desalination solutions provider Aqualyng, sector is the significant number of the so-called car and so more affordable,” says Mak. “However, it which went on to sell a 50% stake in its Chinese “cleanweb deals,” also referred to as e-mobility. needs government support, and infrastructure to subsidiary to Beijing Enterprises Water Group, In addition to electric vehicle (EV) or hybrid go along with it.”

Recognising excellence AVCJ Private Equity & Venture Capital Awards – Asia in AsiAn PRivAte equity Nominations open until 30 September. Act now!

Held in conjunction with the AVCJ Forum and now in their 13th year, the AVCJ Awards have become the highest distinction that can be achieved in private equity in Asia, and a showcase for first-class innovation, ingenuity and performance. Tell us who you think deserves recognition. Submissions for nominations are open now until 30 September, 2013. Visit www.avcjforum.com/nominations and fill out the form. For any enquiries, please e-mail [email protected] The Awards categories • Firm of the Year • Private Equity Exit of the Year • Private Equity Professional of the Year • Fundraising of the Year • Venture Capital Professional of the Year • Operational Value Add Award • Private Equity Deal of the Year • AVCJ Special Achievement Award • Venture Capital Deal of the Year

AssociAte your brAnd with excellence: If you would like to be associated with recognising and rewarding excellence within Sponsored by the Asian private equity industry, award sponsorship opportunities are available. For more information, please contact Samuel Lau on +852 3411 4963 or [email protected] Focus [email protected] The long game India’s economic slowdown has created opportunities for real estate investors still convinced by the country’s long-term fundamentals and with strategies that take capital where it is most needed

“I believe that if one wants to bet “If you’d invested in rupee terms, via a rupee financing to real estate developers, not capital for on the Indian long-term macro growth story, fund raised domestically, you’re fine. But from a land acquisition, and the Reserve Bank of India real estate is the better option to go with,” says global investor’s perspective, if you had put in (RBI) continually monitors how much money is Subhash Bedi, managing director at Red Fort this money in 2006 through a dollar fund, the entering the sector. Capital, comparing real estate to stock market- investments have done well at the property level Non-banking finance companies (NBFCs) driven private equity investing. but returns in hand are almost negligible,” says are another source of capital for real estate “The real estate market is more closely tied Shobhit Agarwal, managing director at Jones developers as they are not subject to the same to the core macro fundamentals of India than Lang LaSalle. lending restrictions as banks. NBFCs have done the stock markets, which for the most part are Domestic funds can be far more flexible on well in terms of doing take-out financing, driven by global sentiment on emerging markets. the RE side as regulations are easier than for an facilitating the purchase of more land. When emerging markets are out of fashion, as is offshore one. “A domestic GP can structure the These institutions can be fully foreign-owned the case today, stocks crash; real estate, on the and IndoStar Capital, which is controlled by other hand, is local consumers so it’s more closely Everstone Capital, and Warburg Pincus’ Future aligned with India’s long-term growth story.” “The question is can Capital are some of the PE-backed lenders in the Investors in residential projects might agree sector. KKR is planning to launch a $150 million with him. A shortage of housing and rising you build homes real estate NBFC in collaboration with GIC Private urbanisation has provided steady returns over affordable enough for that will primarily back residential projects. the last 4-5 years. Bangalore has been one of the most productive markets, with a total of 19.14 people in this segment Room for negotiation million square feet of residential space sold in the The capital crunch has also allowed investors city during the 2013 financial year. Average per to be able to buy to negotiate preferred return structures, which square foot prices of units grew between 3-7%, hasn’t always been the case. them?” – Subhash Bedi ending the year at a INR3,954 per sq ft. “In the bull market a lot of investors went Once construction has started, a residential into straight joint ventures, but preferred project is self-financed by way of sales to investment in any manner that he wants to, but returns mean developers bear the risk of rising customers and their payments. As and when for offshore it has to be an equity. Domestics construction costs or project delays. The margins people buy homes, GPs can take profits out and also do not have a timeline restriction that the are fairly attractive, with IRRs of 25%-plus on return capital to investors – so there is no reliance investment has to be for a minimum period of investments made a few years back,” says Wolff. on external events like IPOs and M&A deals. 3 years, which is the case on the offshore side,” Partners Group prefers to invest in smaller Red Fort targets the affordable middle class explains Vishal Tulsyan, managing director and residential developments to keep construction housing segment in its development strategy. CEO at Motilal Oswal Private Equity. and development time down, using preferred Bedi estimates this covers 33 million people, each There are foreign investors who claim not return structures that, for example, might deliver making $5,000-25,000 a year, and the segment is to have suffered. Partners Group says it has a 2x cost multiple even if the portfolio was to be growing at about 12% a year, which equates to seen good returns even in US dollar terms in sold at 0.74x cost. approximately 3.5 million additional households. the residential sector. The group recently made Motilal Oswal has a slightly different strategy, “Over a fund cycle of 10 years, people a direct investment in the second phase of a but one that still leverages the capital crunch. eventually need to buy a house. So forget project in the National Capital Region in 2011. Tulsyan says the firm will launch a domestic inflation, the rupee depreciation, forget what’s The first phase is over 90% sold and construction fund, largely doing mezzanine investments in going on in the world. The question is can you is underway on phase two. residential projects in a sector starved of liquidity. build homes affordable enough for people in this “We’re going into much more established Secondaries are another success story in real segment to be able to buy them?” he adds. product on the residential side where pre-sales estate. Partners Group has invested in these at have been generated and demand is established discounts to net asset value, which in many cases Mixed bag at a particular price point, but the local developer was original cost. These properties, typically a However, the returns have not been the same needs capital to build out the second or third mix of residential and commercial, have made for foreign investors. When Indian real estate was phase,” says Bastian Wolff, senior vice president at significant progress in their business plans and first opened to overseas investors in 2005, foreign Partners Group. “In these situations you mitigate value has been created, says Wolff. direct investment rose from $38 million that year land aggregation and zoning risks and timing “People have become much more realistic to $2.8 billion in 2008. Funds that have invested doesn’t become as big of an issue.” about their assumptions so it could be quite a when the rupee was trading at 40-45 to a US There is demand for real estate investment, good vintage for real estate investment in India dollar are likely to exit at more than INR60, which but the supply of capital and credit has been over the next 2-3 years,” he adds, “because it’s just is a loss of around 30% in the currency itself. constrained. Banks can only provide construction not that hyped.”

Number 36 | Volume 26 | September 24 2013 | avcj.com 13 26th AnnuAl

Book yoUr PLACe by 27 September and SAve 12-14 November 2013 US$300 Four Seasons Hotel, Hong Kong Keynote speakers Steve Koltes Dwight Poler Co-Founder & Managing director Managing Partner, CvC BAIn CAPItAl CAPItAl PArtnErS Thomas H Lee Christopher Flowers President Founder lEE EquIty PArtnErS JC FlOWErS & CO

Plus global economist Byron Wein vice Chairman BlACKStOnE AdvISOry PArtnErS lP Senior LP speakers already confirmed include: Wim Borgdoff Pak-Seng Lai Managing Partner Managing director & AlPInvESt PArtnErS Head of Asia AudA Jay Park Thomas Kubr Managing director Executive Chairman BlACKrOCK PrIvAtE CAPItAl dynAMICS EquIty PArtnErS Jeremy Coller Steve Byrom Executive Chairman & CIO Head of Private Equity COllEr CAPItAl FuturE Fund

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register now at avcjforum.com Book yoUr PLACe by 27 September Lead sponsors Asia series sponsor and SAve 12-14 November 2013 US$300 Four Seasons Hotel, Hong Kong Keynote speakers Steve Koltes Dwight Poler Co-Founder & Managing director Managing Partner, CvC BAIn CAPItAl CAPItAl PArtnErS Thomas H Lee Christopher Flowers President Founder lEE EquIty PArtnErS JC FlOWErS & CO Co-sponsors

Plus global economist Byron Wein vice Chairman BlACKStOnE AdvISOry PArtnErS lP Senior LP speakers already confirmed include: Wim Borgdoff Pak-Seng Lai Managing Partner Managing director & AlPInvESt PArtnErS Head of Asia Legal sponsors Knowledge partner AudA Jay Park Thomas Kubr SOLICITORS AND INTERNATIONAL LAWYERS Managing director Executive Chairman BlACKrOCK PrIvAtE CAPItAl dynAMICS EquIty PArtnErS Jeremy Coller Steve Byrom VC summit sponsors VC summit legal sponsor Awards sponsors Executive Chairman & CIO Head of Private Equity COllEr CAPItAl FuturE Fund

Fritz Becker D. Brooks Zug CEO & Managing director Senior Managing director HArAld quAndt HOldIng & Founder PE leaders’ summit sponsors gMBH HArBOurvESt PArtnErS, llC Marshall W. Parke Sherry Lin Managing Partner Managing Partner lExIngtOn PArtnErS MOuSSE PArtnErS

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Contact us Contact us Registration: Pauline Chen Sponsorship: Darryl Mag T: +852 3411 4936 E: [email protected] avcjforum.com T: +852 3411 4919 E: [email protected] avcjforum.com Focus [email protected] Infrastructure gridlock There is substantial demand for infrastructure investment in Indonesia and plenty of opportunities to participate, yet progress is slow. Does the does the sector still hold promise for private equity?

With nine in 10 passenger journeys and 50% of cargo traffic carried by road, stand- Indonesia infrastructure investment still traffic jams have become a daily fact of 900 7 life in the Jakarta, Indonesia’s capital, where 800 6 the number of vehicles has tripled in the last 700 5 decade. This problem has been exacerbated by 600 the absence of long-term infrastructure projects 500 4 such as the Mass Rapid Transit (MRT) system and 400 3 US$ million 300 of funds No. the monorail. The latter is only just said to be 2 restarting after a five-year pause. 200 100 1 Delay and inaction has long been an issue 0 0 with Indonesian infrastructure. At least four of 2008 2009 2010 2011 2012 2013 11 infrastructure projects selected by President No. of deals Amount (US$m)

Susilo Bambang Yudhoyono as a priority for his Source: AVCJ Research second term in office are not expected to be completed in time. The worst delay has been with toll-roads; of 1,296 kilometers of highways come from the government, with the private have tended to the likes of large pension funds, promised between 2009 and 2014, only 296 km sector providing the remaining $140 billion. sovereign wealth funds and developmental has been completed. Meanwhile, of the planned There is clearly an investment opportunity, finance institutions, which are able to make long- 954 km of railways, only 319 km is operational. but Suri warns the challenges are significant – term investments in return for a steady cash flow. Transport is expected to account for 71% to the point that it might not be a good fit for of infrastructure investment by 2014, but the private equity. Getting traction in Indonesian Openings in energy country’s needs go beyond that. Indonesia is infrastructure requires patience. However, there are examples of GP participation, one of Asia’s fastest growing economies and According to AVCJ Research, PE has most notably in energy. One of the larger infrastructure investment is lagging behind GDP accounted for a small portion investment in infrastructure PE deals to take place in recent growth, threatening to put the brakes on this the asset class over the past decade, with just times saw Saratoga team up with IFC to buy rapid economic development. $2.2 billion deployed in utilities, transport and a 51% stake in Medco Power International for “The demand for infrastructure services in telecom. However, the real number may be $112 million. The deal came about because the Indonesia is huge,” says Sarvesh Suri, Indonesia less once investments in infrastructure-related company’s parent, oil and gas specialist Medco country manager with the International Finance services are discounted. Energi, needed fresh capital to develop small Corporation, the World Bank’s investment arm. Anecdotal evidence suggests that a large independent power producers (IPPs) to serve “The economy is growing at 5-6% per annum proportion of infrastructure opportunities are areas outside the main Java-Bali grid. and there is now a significant movement of greenfield. It typically takes three or more years Standard Chartered IL&FS Infrastructure people from the rural to urban areas, so there is to work through licensing and land clearance, Growth Fund also made investment in this space pressure on land, pressure on water, pressure on another two years to build the asset, and a in 2011, when it committed an undisclosed sum services like power.” couple more to ramp up production. this means to Navigat Group, which develops independent most GPs are under pressure to sell an asset power systems for island locations off the grid. Fundamental need before it reaches its full potential. “The disaggregated nature of the islands According to the World Bank, Indonesia’s Mature infrastructure assets on the other means you can’t put wires from island to island so infrastructure needs are the third greatest in hand are rarely for sale, and if they are, the asking you need all these independent power systems,” Asia after China and India with $450 billion in price is high. says Andrew Yee, global head of infrastructure capital expenditure needed between 2010 and “This is the really the main challenge at Standard Chartered Bank’s principal finance 2020. These figures broadly correlate with the when investing in infrastructure,” says Easy division. “We found a novel way of providing government’s 2011-2025 development plan, Arisarwindha, investment manager with Saratoga power in Navigat but with toll roads there is no which identifies IDR4,012 trillion ($440 billion) of Capital. “The choice is either invest in mature infra such solution – with roads, bridges and tunnels it investment, of which IDR1,786 trillion is assigned such as telecom towers or operating toll roads, is not as easy to address that disaggregation.” for basic infrastructure. but the return is limited; or invest in a greenfield Indeed, the transport sector has been slower Under the nation’s shorter term 2011-2014 or brownfield project with the hope that a buyer to gain traction with foreign investors compared economic plan, the infrastructure investment will become available before the end of the fund to the power sector. One investment that target is up to $191 billion for the economy to life, which is clearly a riskier strategy.” closed this year saw toll road operator Baskhara grow at its full potential. One third of this will As such, the most active investors in the space Utama Sedaya (BUS) receive a IDR1.13 trillion

16 avcj.com | September 24 2013 | Volume 26 | Number 36 Focus [email protected]

18-year convertible debt facility by OCBC Bank’s private land owners to be forced through. The infrastructure projects. With the World Bank’s mezzanine arm together with a consortium of most signifi cant recent development came in support, the IIGF acts as a credible guarantee investors, including Saratoga. BUS has a 45% February when the constitutional court upheld provider, leveraging private investments in stake in Lintas Marga Sedaya (LMS), which was the 2011 Land Acquisition Law, which was infrastructure projects. awarded a concession to build and operate the designed to speed up the settlement of legal “The government realizing that it must Cikampek-Palimanan Toll Road (CPTR), a section problems resulting from land acquisitions. regularize PPPs, not look at them as one-off of the Trans-Java Toll Road that is scheduled for projects that can cherry-picked,” says Lindborg. completion by September 2014. Lacking clarity “The government needs to treat PPP as one of However, the project which – kicked off in Another area which area investors are also the basic options for infrastructure services.” December 2011 – has suff ered a number of hoping for clarity is regarding public private This also highlights the point that support delays. LMS only began work on the road in partnerships (PPPs). With the two thirds of for infrastructure investment in Indonesia is not January of this year after running into trouble on infrastructure investment expected to come from limited to putting capital into assets. land acquisition issues. the private sector, the government will need to For example, the country’s Ministry of The lack of clear regulations on land rely on PPPs but so far only two projects off ered Finance teamed up with a consortium of acquisition and the provision of land since 2006 have made it to the construction development fi nance institutions to form compensation are among the most commonly phase – coal-fi red power plant Central Java IPP Indonesia Infrastructure Finance (IIF), which cited barriers to investment in space. Much of and an expressway in Bali. provides local-currency fi nancing for privately- this is rooted in Indonesia’s history of informal “I think there is a weak public sector capacity funded projects. Meanwhile, the Ministry of land, which prompts any number of individuals to actually develop, transact, ward and monitor National Development Planning (BAPPENAS) to claim the rights to the land during the these projects,” says Jon Lindborg, Indonesia has established a project development facility acquisition process. country director with the Asian Development with funding from the ADB aimed at assisting in The other frequent complaint is land owners Bank. “There is still much to be done to develop project preparation and the selection of private holding on to their land as long as possible to the public sector capacity to implement PPPs.” partners in infrastructure services. benefi t from appreciation in value while a project The World Bank threw its weight behind There may be a huge demand for progresses, which has led to unexpected land the issue in September of last year, approving infrastructure investment in Indonesia, and more cost escalation. a project to support the newly established capital willing to fulfi ll it, but the key is in bridging One way the government has tried to tackle Indonesian Infrastructure Guarantee Fund (IIGF), the gap to ensure the proper resources reach the this is through land reform legislation, allowing an institution under the Ministry of Finance right projects. Otherwise progress will remain purchases for projects previously thwarted by responsible for providing guarantees for PPP stuck in downtown Jakarta traffi c.

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Q: How big an opportunity is price to book value over the last We are helping to bring them India distressed infrastructure? five years was at least 2x, rising together and hopefully take a A: It’s definitely the biggest to 3x when the market was at its stake in the projects or holding opportunity right now. For peak, and the average now is less company, which we ultimately the first time, there are quite than 1x. Given these are listed seek to exit by way of trade sale a few control deals available. portfolios of operating assets (often to one of the partners) or Even some of the larger local with some greenfield projects for occasionally by way of IPO. Water conglomerates are now looking growth, it’s now possible to earn and waste management feel to divest whole subsidiaries or a decent return as you are paying like the toll roads and power of operating assets, for example close to book value for existing China a decade ago. in the toll roads or power cash flow with sustainable long generation sectors, in order term growth. Q: How does Southeast Asia to urgently pay down debt in compare to China in terms of that vertical or in other parts Q: There has previously been talk government influence? of the empire. Unconstructed of the China market opening “I’m a believer A: In Indonesia the government greenfield projects even with more should the economy is everywhere and somewhat off-take agreements are not start to slow and companies in China protectionist but at the same terribly valuable now given the have to address their time, since the Asian financial significant delays experienced mounting debts… infrastructure, crisis, it has reconstructed some in recent years trying to A: I’m a believer in the China macro but I’m not yet key infrastructure industries. get projects developed. An story – it’s slowed down in Government entities do not operating infrastructure asset recent times but it continues to a believer in have the money to build this with a track record of at least a grow at a reasonable and steady out and retain control as the few years is sellable – at least for rate – and I’m also a believer the China PE Chinese government has done. book value if not a bit more if it’s in the China infrastructure infrastructure A lot of projects are bid out performing well. We are looking story. However, the sector is and you have a good mix of at a whole bunch of deals. The dominated by state-owned investment local corporations active in the infrastructure private equity story enterprises (SOEs). Returns have story” space, some in partnerships used to be $50-100 million for been driven down through SOEs with international firms. In the a minority stake, with maybe a often building market share power space, look at what Mitsui $200 million deal here or there. or size rather than focusing the fact remains we have looked & Co. has done with Paiton, Now there are multiple deals in on the bottom line. It’s been at many Chinese infrastructure developing top-quality coal-fired the $300-500 million range, and very hard for private equity to companies and made just three power plants. The Philippines is potentially some even larger. find deals with the potential to investments in the last five years. at the other end of the spectrum generate the higher returns we from China, with Indonesia in Q: What has happened to seek – even getting 15% has Q: So which areas are most the middle. You have a handful valuations? been tough since the SOEs have attractive in China? of huge conglomerates – the A: At the height of the market a much lower cost of capital A: For the last five years, we have likes of San Miguel Corporation, you had certain infrastructure of say 5-7% and they are often been focused on water – water Fastpak and First Gen – that assets trading at around 3x prepared to invest in projects supply (including desalination), dominate everything. They book value – and some of these with returns marginally above waste water treatment, and might get minority investors assets weren’t even built. Paying this. So while I am a believer in waste management. A lot from around the world but such multiples of book value Chinese infrastructure, the China of different technologies are their modus operandi is to own for regulated assets, no matter private equity infrastructure being used in these areas 100% and do it their way. It’s where you are in the world, investment thesis remains around the world, and the taken Philippines a while to hit simply isn’t rational. If you look challenging. Not to be too multinational companies that its stride but the government is at all the listed Indian power pessimistic, we completed a own this intellectual property are really moving on infrastructure. companies, they are now trading buyout of independent power venturing into China. In some They recognize the big guys can on an average book value of producer Meiya Power, which cases, these companies will get it done but they want to around 1.1x. With the listed toll held for three and a half years partner with SOEs that provide diversify away from a few large road companies, the average and then exited at a 35% IRR. But the connections and muscle. corporates.

Number 36 | Volume 26 | September 24 2013 | avcj.com 19 AVCJ Spotlight: Asian Venture Capital Journal Real Assets Across Asia Private equity investment in infrastructure, energy and real estate avcj.com site licences 3 October 2013 • Hilton Singapore

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