AVCJ FORUM Environment, According to Industry Participants

Asia’s Private Equity News Source avcj.com November 20 2012 Volume 25 Number 44

Editor’s Viewpoint Voting opens for the AVCJ India Awards Page 3 Nes w Bain Blackstone, Carlyle, CVC, Highland, IVFA, KKR, NewQuest, OTPP, PEP, Symphony Asia Page 4 Focus Best practice for GP-LP co-investment deals Page 11 Funds FountainVest in $1.35b quickfire fundraise Page 12 Anacacia attracts $129m for Australia SME fund Page 12 AV CJ FOruM Under the hammer The results of our audience polls GPs must adapt to Asian business owners’ attraction to auction sales Page 7 Page 15

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Asian distress angle Green field cuisine SSG reaches $400m hard cap on Fund II Page 13 VC builds China dining chain from scratch Page 14 QUARTILIUM Quartilium manages € 1.4 billion of assets invested with 90 leading private equity managers across the globe. Our tailored investment programs span all segments of private equity including LBO, growth equity, technology, infrastructure and mezzanine funds.

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Managing Editor Tim Burroughs (852) 3411 4909 Senior Editor Brian McLeod (1) 604 215 1416 Staff Writer Alvina Yuen (852) 3411 4907 Please vote in the Andrew Woodman (852) 3411 4852 Creative Director Dicky Tang Designers Catherine Chau, Edith Leung, AVCJ India Awards Mansfield Hor, Tony Chow Senior Research Manager Helen Lee Research Manager Alfred Lam Research Associates Voting has opened for the 2012 AVCJ INDIAN PRIVATE EQUITY EXIT OF THE YEAR Kaho Mak, Jason Chong Indian Private Equity & Venture Capital Awards. • Fourcee Infrastructure Equipment (Mayfield) Circulation Manager The region’s private equity community has • Genpact (General Atlantic/Oak Hill Capital) Sally Yip until November 26 to pay tribute to the leading • Housing Development Finance Corp (The Circulation Administrator fundraising, investments, exits, individuals and Carlyle Group) Prudence Lau firms of the past 12 months. • Netmagic Solutions (Nexus Venture Partners/ Senior Manager, Delegate Sales Anil Nathani Votes are cast via the AVCJ Awards website Fidelity Asia Ventures/Nokia Growth Partners/ (www.asianfn.com/voteind.asp). No more than Cisco Systems) Senior Marketing Manager Stacey Cross 10 votes will be accepted from employees of a • Parag Milk Foods (Motilal Oswal Private Equity) Marketing Manager single firm. The public has a 50% say in the final Rebecca Yuen result, with a judging panel of industry experts INDIAN VENTURE CAPITAL DEAL OF THE YEAR Director, Business Development and the AVCJ Editorial Board each accounting • Au Financiers (Warburg Pincus) Darryl Mag for 25%. • Bigtree Entertainment (Accel Partners) Manager, Business Development Based in part on recommendations submitted • Capillary Technologies ¬(Norwest Venture Samuel Lau by the private equity community, the AVCJ Partners/Sequoia Capital/Qualcomm Ventures) Sales Coordinator Debbie Koo Editorial Board drew up nominee shortlists in • Fashion And You (Intel Capital/Norwest consultation with the judging panel. The website Venture Partners) Conference Managers Jonathon Cohen, Zachary Reff, Sarah Doyle includes full details as to why each nominee • Flipkart (Accel Partners/Iconiq Capital/Naspers/ Conference Administrator made the final shortlist. Tiger Global) Amelie Poon Conference Coordinator The winners will be announced at an Fiona Keung, Jovial Chung invitation-only gala dinner in Mumbai on INDIAN PRIVATE EQUITY DEAL OF THE YEAR Publisher & General Manager December 6, during the AVCJ India Forum, which • CARE Hospitals (Advent International) Allen Lee runs from December 6-7. • Continuum Wind Energy (Morgan Stanley Managing Director Infrastructure Partners) Jonathon Whiteley The nominees in each category are as follows: • Fourcee Infrastructure Equipment (General Chairman Emeritus Atlantic) Dan Schwartz INDIAN LEGAL ADVISOR OF THE YEAR • Genpact (Bain Capital) • ALMT Legal • TVS Logistics (KKR/Goldman Sachs) • Amarchand & Mangaldas I ncisive Media 20th Floor, • AZB & Partners INDIAN PRIVATE EQUITY PROFESSIONAL OF THE Tower 2, Admiralty Centre • J. Sagar Associates YEAR 18 Harcourt Road, Admiralty, Hong Kong • Khaitan & Co • Sanjeev Aggarwal (Helion Venture Partners) T. (852) 3411-4900 • Abhay Havaldar (General Atlantic) F. (852) 3411-4999 E. [email protected] INDIAN FINANCIAL ADVISOR OF THE YEAR • Sanjay Nayar (KKR) URL. avcj.com • Avendus Group • Ajay Relan (CX Partners) Beijing Representative Office • Edelweiss Capital • Naren Gupta (Nexus Venture Partners) Room 1805, Building 10, Jianwai SOHO, 39 East 3rd-Ring Road, • Ernst & Young Chaoyang District, • o3 Capital INDIAN FIRM OF THE YEAR Beijing 100 022, China T. (86) 10-5869-6205 • PricewaterhouseCoopers • ChrysCapital Partners F. (86) 10-5869-7461 • Helion Venture Partners E. [email protected] INDIAN FUNDRAISING OF THE YEAR • KKR The Publisher reserves all rights herein. Reproduction in whole or • ChrysCapital VI (ChrysCapital Partners) • Nexus Venture Partners in part is permitted only with the written consent of AVCJ Group Limited. • Helion Venture Partners III (Helion Venture • Warburg Pincus ISSN 1817-1648 Copyright © 2012 Partners) • Kalaari Capital Partners II (Kalaari Capital Advisors) Tim Burroughs • Nexus India Capital III (Nexus Venture Partners) Managing Editor • Tano India Private Equity Fund II (Tano Capital) Asian Venture Capital Journal

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Slowdown in IPO exits is ups in an increasingly challenging fundraising AVCJ FORUM environment, according to industry participants. boon for trade sales “GPs should expect a longer and more Industry experts predict Public market volatility has cut off IPO exits and complicated fundraising process and they will investors don’t expect a turnaround in the short need to be a lot more creative, a lot more flexible next 25 years of Asian PE term. However, PE firms that target control deals and really understand different segments of the The future of Asian private equity will see the are excited by the prospects for trade sales. LP base,” said Wayne Tsou, head of Carlyle Asia rapid macro growth fuel the buy-out market “One of challenges that faces our industry now is Growth Partners. while LPs demand more co-investment the exit situation in the public markets over the opportunities, said industry participants at last two years, the IPO market is difficult,” said Joe LPs wary of raising Asia PE the AVCJ Forum. During a panel discussion on Bae, managing partner of KKR Asia. lessons of the past 25 years of Asian private The options are more limited for GPs with allocations above 10% equity, panelists were asked what they expected minority investments in countries like China and Institutional investors are generally happy to in the next quarter century. “You will find India and holding periods are lengthening. “If deploy 10% of their private equity allocation institutional LPs insisting on more co-investment, you have a high quality business you will still be in Asia, but say it is difficult to justify increasing and private investors such as family offices will able to go public but you may not get an optimal this portion until risk factors ease and local start doing more direct deals and investing less valuation,” Bae added managers build up stable teams and substantive in funds,” predicted Anil Thadani, chairman of On the other hand, the challenging IPO track records. ”The flow of capital to emerging Symphony Asia. market is facilitating investments as growth markets is such that it’s pricing out the emerging companies confronted with a scarcity of capital markets premium,” said Steve Byrom, head of PE Pension plans unsure about find they have fewer places to go, broadening the at Australia’s Future Fund. “Asia will probably get opportunities for PE. ”I think the hard truth is that us the same returns as other emerging markets, VC commitments in markets like China we can look back to 2008- which will probably be about the same as the US North American pension plans have mixed 2011 and a huge part of the market was pre-IPO, and slightly better than Europe on an IRR basis.” feelings towards venture capital funds – some growth stage investments and investments find GPs that were once refused to take meetings in smaller companies, not necessarily market GPs see strong deal flow are now opening up to a wider range of investors leaders,” said Michael Chae, senior managing while others back off from the asset class, director at The Blackstone Group. despite macro headwinds blaming limited access to top funds. “Groups that Asia’s leading PE investors remain bullish about wouldn’t talk to public pension funds a few years investment prospects in the region despite a ago are now considering us,” said Scott Parrish, challenging macro environment and a weak private equity portfolio manager for the State of public exits market. ”We have completed some Wisconsin Investment Board. large deals in Japan and we also see more transactions coming out of Australia, Southeast Cross-border complicates Asia and Korea,” said Jim Hildebrandt, managing ‘regional v country’ debate director at Bain Capital Asia. As GPs become more efficient at cross-border China to remain world’s deals, industry participants say the regional funds versus country funds debate is becoming less leading emerging market clear cut. “Whether it is better to have a regional China and Asia will remain the preeminent fund or a country fund depends on the GP,” said emerging markets destination for private equity Roy Kuan, managing partner at CVC Capital Investors bullish on Asia despite moderating growth and increased Partners. “It depends on their expertise and what competition for deals, GPs said. ”We are looking they are good at.” healthcare sector at emerging markets but nowhere compares to Despite regulatory hurdles and a waning China and India,” said Wayne Tsou, head of Carlyle China’s entrepreneurs are IPO market, the healthcare care sector is an Asia Growth Partners. “You might get huge increasingly attractive area of investment for returns from economies like Africa if you get in chasing Silicon Valley venture capitalists. “Over the past decade China’s early but the game changer for the next couple China’s venture capital industry may not yet rival GDP has been growing at a rate of 10% a year, of decades is Asia.” Silicon Valley, but companies are still exhibiting while the growth rate in the healthcare sector strong growth and pursuing business models has been 30%, and I firmly believe it will continue as innovative as those found in the US. “The to grow at a similar rate over the next few years,” AUSTRALASIA Chinese entrepreneurs have copied copy the said Leon Chen of Frontline Bioventures. Silicon Valley model but what we have found PageUp People gets $10m today is that, at least over the past three years, GPs must improve IR in Chinese entrepreneurs are now using more from Accel-KKR creative models than those being used in the US,” tough fundraising climate Accel-KKR, a Silicon Valley-based PE firm, has said Chuan Thor, managing director at Highland It is imperative that GPs build better relationships invested $10 million for an undisclosed stake in Capital Partners. with end investors if they hope to secure re- PageUp People, an Australian firm that provides

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software for tracking worker performance. Northstar set to complete Revenue was approximately RMB36 billion The investment will fund the further expansion compared to RMB44 billion for the corresponding of the PageUp People technology platform into Nera telecom take-private period last year, which saw the firm report profits emerging markets. Northstar Pacific Partners has agreed to of RMB1.79 billion. Gome warned last month that buy a controlling 50.05% stake in Nera it expected to report a net loss for the period. PEP targets $3.6bn for Telecommunications from power conversion specialist Eltek and is offering to buy the entire Western valuation criteria Fund IV company for S$177.3 million ($145 million). This is Pacific Equity Partners (PEP) is targeting up the Indonesian GP’s first foray into Singapore. cannot be applied to China to A$3.5 billion ($3.6 billion) for its fifth fund, Northstar - through its newly-incorporated Valuation standards devised in Western markets including A$2 billion of core equity and a further unit Asia Systems - will acquire 181.1 million cannot be automatically applied to Chinese $1-1.5 billion earmarked for a co-investment shares from Eltek at a price of S$0.49 apiece. This companies due to the influence of factors such pool. Although smaller than the GP’s previous represents a discount of 5.8% from NeraTel’s last as due diligence, according to a new joint study fund - which closed at A$4 billion in early 2008 - closing price on Monday, as well as a premium released by German exchange organization the new vehicle dwarfs anything everything that Deutsche Börse and law firm CMS Hasche Sigle. has come out of Australia since then. The study was based on interviews conducted with European investors and Chinese managers Billabong director explores of private equity and venture capital funds. buyout options Billabong shares spiked 17% during Monday SOUTH ASIA morning trading after the Australian surfwear company announced one of its directors was India Value Fund reduces looking at a possible leveraged buyout. TPG Capital and Bain Capital both submitted bids size by 15% of A$694 million ($709 million) for Billabong India Value Fund Advisors (IVFA) has trimmed but withdrew last month after conducting its fund size by 15%, returning $100 million preliminary due diligence. of 10.6% over its 12-month volume weighted of the approximately $700 million corpus to average. The transaction value also implies a LPs in response to changes in the investment Carlyle, Seven Group plan 1.84x premium to the company’s net asset value environment. Management fees charged on (NAV) per share as of September.The private that $100 million have also been reimbursed to Coates Hire sale equity player will extend the same offer for the LPs. ”We want to do things right - to serve all the The Carlyle Group and Australia’s Seven Group remaining shares, as required under Singaporean stakeholders underpinning our success today, are planning to sell their stakes in Australian takeovers and mergers legislation. both LPs and the portfolio companies,” said Vishal equipment rental company Coates Hire. The Headquartered in Singapore, NeraTel Nevatia, managing partner at IVFA. news comes after the pair failed to proceed offers solutions and services from satellite with an A$800 million ($831 million) IPO of the communications and wireless infrastructure NewQuest to invest $140m company earlier this year. Carlyle and Seven networks to internet protocol, broadcast network Group have appointed Goldman Sachs to co- infrastructure and payment solutions. It serves in India ordinate a strategic review of a possible sale. The customers in Asia, the Middle East and North Africa Secondaries specialist NewQuest Capital Partners review will commence immediately and take expects to invest about $140 million in India - several months. almost one third of its $400 million NewQuest Squadron’s Prasanna joins Asian Fund I. The firm, which focuses on the direct acquisition of portfolio assets from GPs in GREATER CHINA Morgan Creek in Shanghai Asia, intends to capitalize on vast opportunities Anand Prasanna, known to many in the industry for secondary deals in the country. OTPP leads funding round as Anand RP, will join Morgan Creek Capital Management as a director in their Shanghai for 360buy.com office. He left his previous position as an SOUTH EAST ASIA Canadian pension fund Ontario Teachers’ Pension investment director at Squadron Capital, an Asia- Plan (OTPP) has led a $300 million round of focused fund-of-funds, two weeks ago. SingTel Inov8 leads Series funding for 360Buy.com, China’s second-largest The addition of Prasanna takes Morgan Creek’s business-to-consumer e-commerce website Shanghai team to eight investment professionals. D round in Vuclip by revenue. 360Buy confirmed that OTPP SingTel Inov8, the venture capital arm of contributed $250 million, with the remainder Gome records $110m loss Singapore telecom giant SingTel, has led a $13 committed by existing investor Tiger Global. million round of series D funding in mobile video Other market sources have put the round at for first nine months firm Vuclip. Existing investors NEA and Jafco $400 million, suggesting that Tiger Global’s Bain Capital-backed Gome Electrical Appliances Ventures also participated. Vuclip is based in India contribution is $150 million instead of $50 has reported a loss of RMB686.7 million ($110 and claims to be the world’s largest independent million. million) for the first three quarters of 2012. mobile video and media company.

Number 44 | Volume 25 | November 20 2012 | avcj.com 5 Private Equity & Venture Forum India 2012 6-7 December • Taj Lands End, Mumbai 13th Annual GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjindia.com

Meet 250+ leading global investors, including the following confirmed LPs: Abu Dhabi Investment Authority (ADIA) Khalid Ali Alturki & Sons Co Abu Dhabi Investment Council Macquarie Funds Group Adams Street Partners Nationwide Insurance Al Homaizi Group Northrop Grumman Corporation Axiom Asia Private Capital Old Mutual Investment Group BlackRock Private Equity Partners OPTrust Private Markets Group Capital Dynamics Overseas Private Investment Corporation (OPIC) CDC Group plc Pomona Capital Cogent Partners Siguler Guff India Advisers Coller Capital State General Reserve Fund of the Sultanate of Commonfund Capital Oman DEG - German Investment and Suhail Bahwan Group Development Company Unigestion Greenpark Capital U.S. Department of the Treasury Hamilton Lane Washington State Investment Board HarbourVest Partners Waterfield Advisors International Finance Corporation (IFC) and many more. Visit avcjindia.com for the full programme and speaker faculty. ONLY 2 WEEKS LEFT! Register now at avcjindia.com

Contact us Registration: Pauline Chen T: +852 3411 4936 E: [email protected] Sponsorship: Darryl Mag T: +852 3411 4919 E: [email protected]

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Cocktail Reception Host Knowledge Partners

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avcjindia.com Private Equity & Venture Forum Ce ov r Story India 2012 [email protected] 6-7 December • Taj Lands End, Mumbai 13th Annual GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjindia.com Auctions: The new normal Meet 250+ leading global investors, including the following confirmed LPs: Private equity firms love selling assets via auction but hate buying them through such channels. As Asian Abu Dhabi Investment Authority (ADIA) Khalid Ali Alturki & Sons Co company owners become more sophisticated, bidding contests for large assets are becoming more frequent Abu Dhabi Investment Council Macquarie Funds Group Adams Street Partners Nationwide Insurance Al Homaizi Group Northrop Grumman Corporation T he last time Navis Capital Partners bought a company via auction was 11 years Axiom Asia Private Capital Old Mutual Investment Group ago, when it acquired Malaysia-based diaper Keep it small: Limited BlackRock Private Equity Partners OPTrust Private Markets Group manufacturer Drypers in a deal that was Capital Dynamics Overseas Private Investment Corporation (OPIC) worth $22 million. The process was distorted, though, because the PE firm won over senior auctions in Asia CDC Group plc Pomona Capital management at the very beginning. Three years Cogent Partners Siguler Guff India Advisers later, Navis exited the asset to Sweden-based hile a full-scale M&A auction in the US usually involves as many as 10 bidders in a room, Coller Capital State General Reserve Fund of the Sultanate of hygiene product group SCA for $90 million WAsian companies usually preferred a limited process. It starts with 5-6 prospective investors, through a limited process, yielding almost 7x its which are subsequently trimmed down to the 2-3 that express the most aggressive interest. Commonfund Capital Oman original cost and an IRR of 103%. There are numerous reasons why limited auctions are popular in Asia, including the inability to DEG - German Investment and Suhail Bahwan Group “As a seller, I quite like auctions because they run a big process, a wish to avoid too much publicity, as well as unwillingness to disclose financial usually provide better prices,” Nick Bloy, Navis’ co- data to unfamiliar investors. Development Company Unigestion managing partner, tells AVCJ. “But from a buyer’s “Auctions are more prevalent in the US, Europe and Australia as these markets are more Greenpark Capital U.S. Department of the Treasury perspective, we rarely participate in auctions. regulatory-driven at this point,” says Stephen Seelbach, managing director and head of Morgan Hamilton Lane Washington State Investment Board Our goal is to break an auction, as opposed to Stanley’s regional financial sponsors division. “But if you are dealing with more developing struggling over the finish line ahead of multiple markets in Asia Pacific, often first or second generation entrepreneurs may not want the publicity HarbourVest Partners Waterfield Advisors other parties. To do this, you need an information an auction generates.” International Finance Corporation (IFC) and many more. advantage or some sort of asymmetry between However, Nick Bloy, co-managing partner at Navis Capital Partners, argues that limited you and the other buyers, so you can reach a auctions have their merits as drawing the attention of a few potential buyers brings with it a Visit avcjindia.com for the full programme and speaker faculty. bilateral agreement with the sellers as early as sense of exclusivity. possible.” When the private equity firm hired J.P. Morgan for the sale of King’s Safetywear, the investment Navis is certainly not the only private equity bank initially sent out information memoranda to 20 investors. The list was narrowed to three ONLY 2 WEEKS LEFT! firm that stays away from auctions. Weijian bidders within four months and Honeywell International finally secured the asset for S$430 Shan, chairman and CEO of PAG, has yet to million ($338 million) last November. Register now at avcjindia.com emerge victorious from an auction after 14 years “You don’t throw it to everybody and present the same set of materials 20 times,” Bloy explains. in the industry simply because he has never “You are selective about whom you bring in. As a seller, I also feel a little bit more comfortable Contact us Registration: Pauline Chen T: +852 3411 4936 E: [email protected] participated in one; CVC sees around 80% of its because if I put the best buyer in a three-horse race, they might think it’s worth it and put in the Sponsorship: Darryl Mag T: +852 3411 4919 E: [email protected] portfolio companies in Asia come via propriety effort.” transactions. It is not difficult to understand why private run by investment banks and corporate finance Auctions, already prevalent in developed Asia Series Partner Partners equity players don’t like auctions – by definition houses, the formal process is often conducted economies such as Australia and Japan, are they imply someone has to outbid others to rigidly and at the seller’s behest. Even if bidders becoming more common in emerging markets acquire an asset. These processes inevitably open are allowed to meet the company management M&A. Private equity investors may not like to look up the universe of bidders, and it is challenging several times, building intimate relationships is at auctions, but for certain kinds of deals, they for financial sponsors to overcome strategic challenging. The presence of investment bankers, must accept that it has become a sellers’ market. aureos investors that typically have a longer term who often write the presentation materials, capital outlook and a willingness to pay a premium for routinely rehearse the sellers, and then sit in on Bidding universe potential synergies with the target company. every meeting, makes the process even more The proliferation of auctions comes as global “For auctions that undertake a well-organized difficult. buyout firms probe deeper into developing marketing process, most of the deals can be Of course, sellers are to some extent in the Asia in search of larger-ticket deals. For various completed successfully,” says Chris Laskowski, opposite position. Given emerging Asia’s rapid reasons, not least entrepreneurs unwilling to give head of the financial entrepreneurs group and economic growth, strong interest from foreign up control or state-owned enterprise officials Cocktail Reception Host Knowledge Partners COO of global banking for Citi in the Asia Pacific investors, and the limited number of large unable to do so, China and India have yet to region. “But if you ask me how many auctions assets that come to market, entrepreneurs are become strong buyout markets. Southeast Asia, have private equity investors participating, most increasingly aware of the merits of leveraging however, is another matter, and investors are will just take a look, and only a few of them end the supply-and-demand gap. And even if they building up a presence in the region. up bidding aggressively.” aren’t aware, there are plenty of intermediaries KKR, The Blackstone Group and General Showcase Partners Due diligence is another concern for private willing to set events in motion and take a fee for Atlantic have all opened offices in Singapore equity investors. Given that most auctions are the trouble. since the start of the year to serve as bases for

avcjindia.com Number 44 | Volume 25 | November 20 2012 | avcj.com 7 Ce ov r Story [email protected]

private equity activity in Southeast Asia. The price tension in order to obtain the best terms in AVCJ’s sources were skeptical, saying that Carlyle Group, TPG Capital and CVC Capital a fairly rapid manner.” such a high valuation might kill the transaction. Partners are already well established there, each Given these high expectations on price, there In mid-July, Suntory duly announced that it with 4-9 investment professionals. Regional is often a significant valuation gap between would set up a joint venture with GarudaFood players such as Affinity Equity Partners and buyers and sellers – and this is particularly and take a large minority stake in the company’s Navis already boast more than one location in obvious in Indonesia. In August, Blackstone, distribution arm. Southeast Asia. Bain Capital, KKR and Abraaj Capital were said to “From a buyer perspective, the key is to be If more deals of size are forthcoming, based have reached the second round of bidding for a disciplined on valuation and not get influenced on recent form, they are likely to come via significant minority stake in Siloam, Indonesia’s by the fact that there is an auction going on,” says auction. Private equity suitors can expect to biggest private hospital firm. The seller – the Watson of Ashurst. “Try not to be affected by the face competition from a growing number of tension that sellers want to introduce because multinationals looking for inorganic means of Formal auction process timeline it’s much more likely that you will overpay if you expanding their footprints in the region. think you are in a competitive process.” “The last couple of private equity deals I was ➤ P reparation involved were all run by some sort of auction. • Preparation of carve-out financials Relationship building The trend is towards that and it’s all about the • Finalise teaser and information Despite formidable challenges in the bidding value threshold: if the value is significant, I would memorandum (IM) process for private equity players, some industry expect an auction,” says Robert Ogilvy Watson, • Build forecasts and valuation model participants argue that it is possible to emerge managing partner of Ashurst in Hong Kong. “One • Finalize potential investor list victorious from auctions by following the Navis- of the reasons you see auctions on the biggest • Draft process documentation and prepare Drypers approach: establish personal relations deals is that running the process requires quite confidentiality agreement with management before the formal process a lot of upfront investment, but if you have a starts. good asset and get good attention, you can get ➤ Phase 1 - leading to indicative offers Relationships are especially helpful when a higher price.” • Contact investors companies are looking for partners to provide At the same time, investment bank and • Execute non-disclosure agreements expansion capital instead of selling their entire corporate finance houses – which previously • Distribute IM and bidding instructions interest in a business. Given that the first focused on more mature markets – are also • Receive non-binding indicative offers phrase of an auction is mostly non-binding, running around the region, pitching company there is a chance that a level of intimacy with founders on the hidden benefits of having a ➤ Phase 2 - leading to binding offers management is worth more than the price on third-party transaction organizer. Apart from • Finalize and hold management the table. providing modern governance and transparency, presentation “In reality, auctions – often time – are a these entrepreneurs also appreciate that a top- • Draft sale and purchase agreement (SPA) winner’s curse because you have to overpay tier investment bank is able to bring an auction for inclusion in data room to win. We only participate very selectively, if a host of international strategic investors that • Evaluate bidder offers and select preferred we have a distinct angle or relationship” Sigit would otherwise be out of reach. bidders Prasetya, managing partner at CVC, tells AVCJ. “When you look globally, the country with • Second round bidding instructions issued “There are a number of our successful deals from the most auctions is the US because regulations and data room opens auctions that we were not the highest bidder.” require them,” says Stephen Seelbach, managing • Invite short-listed bidders to view data In March, the private equity firm bid $275 director and head of Morgan Stanley’s regional room and answer Q&A million for a 33.94% stake in LinkNet, Indonesia’s financial sponsors division. “But as China and second-largest fixed-line broadband and cable other emerging countries develop, I think there is ➤ Phase 3 - negotiation and closing TV operator, with the option of increasing it to no question that there will be more auctions.” • Receive final binding offers the 49% foreign ownership ceiling. According to While entrepreneurs are becoming more • Review final binding offers and decide a source familiar with the transaction, the deal sophisticated and the capital markets are more negotiation strategy and tactics originated from a pre-existing relationship with developed, a dual-track process – in which an • Negotiations on SPAs the seller, the Riady family’s Lippo Group. IPO and a private auction process are pursued • Signing subject to closing conditions A year earlier, the PE firm had sourced a simultaneously – is a popular option for sellers proprietary deal from Lippo – a majority stake wishing to preserve flexibility while maximizing Source: Ashurst in Matahari Department Store for $633 million. prices. If a public market exit is ruled out and the CVC acquired a 72.6% holding in the asset, which asset is sold via auction, the competitive pressure accounted for the bulk of parent company of a feasible IPO process can drive bidders to put Riady family-controlled Lippo Group – is looking Matahari Putra Prima’s majority stake. The two more money on the table. for a valuation of up to 25x EBITDA, according to parties agreed to enter into a partnership “Even if there is just one guy who is serious at market sources. The deal has yet to close. structure, with Lippo Group-controlled Putra the auction, if he knows there is a viable IPO as Last year, Carlyle was the frontrunner for a Prima placing its entire holding into a joint an alternative, the deal dynamics change,” Citi’s 25% stake in Indonesian snack and beverages venture, of which it owns 20% to CVC’s 80%. Laskowski says. “When entrepreneurs put their producer GarudaFood. The private equity firm “When CVC was trying to do invest in LinkNet, projections together, their net income tends to seemed poised to land the asset for around $200 the company thought there was a valuation gap,” go up and they genuinely believe in it. I’d say million, having reportedly made a bid of 20x says the source. “LinkNet subsequently launched company owners are very optimistic about their EBITDA that overcame the likes of TPG, Affinity, 3i an auction and CVC participated. The private future growth and now see value in creating Group and Japan’s Suntory. equity firm was the third highest bidder but the

8 avcj.com | November 20 2012 | Volume 25 | Number 44 Ce ov r Story [email protected]

relationship with the Riady family finally between the initial bid and confirmation won them the bid.” Top 10 Asia Pacific M&A financial of the potential acquisition, while foreign exchange rates turned against the pound. Deal certainty advisors by value, 2012 YTD This meant the acquisition could amount While strategic investors may hold the Ranking Market to more than 25% of Sage’s market value, value share No. of advantage in terms of cost of capital, Financial advisor (US$m) (%) deals requiring a shareholder vote for it to go they are generally slower to close through. The company abandoned its bid. transactions because of long and Morgan Stanley 111.8 18.1 152 Another threat to deliverability comes complicated internal decision making Goldman Sachs & Co 110.1 17.8 105 in the form of regulatory requirements processes. In some cases, corporate Citi 95.4 15.5 71 that might be attached to a transaction. investors also demand that additional This was the reason a group led by conditions be attached to the deal, UBS 87.3 14.2 56 Primus Financial Holdings and China ranging from corporate governance JP Morgan 78.6 12.7 58 Strategic Holdings failed to secure requirements to social responsibility AIG’s Nan Shan Life Insurance unit last Credit Suisse 68.0 11.0 57 licenses. year despite its $2.15 billion bid being As such, deliverability – minimizing Mizuho Financial Group 64.1 10.4 119 accepted. The Taiwan authorities vetoed conditions and time to closing – is Nomura 58.9 9.5 136 the deal, citing concerns over the buyers’ often a critical factor in private equity financial capability and long-term Deutsche Bank 54.1 8.8 56 investors winning auctions. This is commitment. particularly the case during transactions Bank of America Merrill Lynch 52.9 8.6 33 Ruentex Gorup, a Taiwanese family when a company is seeking urgent debt Note: Ranking value includes net debt of target conglomerate eventually picked up the refinancing or restructuring. Source: Thomson Reuters asset for the marginally higher price of Bain’s A$1.3 billion ($1.3 billion) $2.156 billion after receiving guarantees acquisition of Australian business software firm The strategic buyer was said to be willing to pay from the regulators. MYOB represents an interesting case study in as much as A$1.4 billion, beyond the comfort “Sellers often have a fair value in mind,” says the importance of deal certainty. UK software zone of Bain or rival KKR and well above the Navis’ Bloy. “If someone overpays it, it is bonus, manufacturer Sage had emerged as a late original asking price of around A$1 billion. but ultimately if you can get fair value, you would frontrunner for the asset, which was put on the However, Sage then ran afoul of the global want the sale to be done in a way that is quick block by Archer Capital and HarbourVest Partners. markets. Its share price dropped 11.5% in and clean.”

AVcJ indian Private equity & Venture capital Awards 2012

Recognising excellence in inDiAn PRivAte equity Voting is now open!

Members of Asia’s PE community have until november 26 to cast their votes for the leading fundraises, investments, exits, firms and individuals over the last 12 months.

Cast your vote now at www.avcjindia.com/vote. You can see details of the nominees and why they have been shortlisted.

The winners will be announced at a gala dinner in Mumbai on December 6 as part of the AVCJ India Forum.

The India Awards categories . Private Equity Deal of the Year . Private Equity Professional of the Year . Venture Capital Deal of the Year . Financial Advisor of the Year . Fundraising of the Year . Legal Advisor of the Year . Exit of the Year . Private Equity Firm of the Year

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avcj.com Focus [email protected] Friends with benefits Co-investment deals have been on the rise in recent years, enabling GPs to take on bigger deals and offer LPs fee-less returns. What is driving this trend and are such deals always a good idea? as k any gP about their PAST showed any interest. When the GP was raising its then the chance is gone,” the GP says. “Many LPs experiences of co-investment and you are not most recent fund in 2006, however, as many as are used to taking their time. You can email one necessarily going to get the same answer from 45 LPs expressed a desire to co-invest. and not get a response for two weeks, which on all. Such transactions are by no means new to the “One of the nice things about Asia, in many a deal timetable is forever. They are supposed to asset class but the understanding of what they respects, is that it’s really well set up for co- get back to you in two hours not two weeks.” involve and what investors expect from them is investment,” says Doug Coulter, a partner with changing. LGT Capital Partners. “Track records are still being Big picture “When I was asked to participate in a co- established, brands are still being built, even by Nevertheless, a need to encourage quality LPs investment panel, intuitively it implied to me some of the bigger GPs. If you have some strong to re-up means GPs are still willing to extend investing alongside other GPs,” said George LPs, why not build the relationship? If it is such co-investment invitations and becoming more Raffini, chairman of Headland Capital Partners, a good deal you might not want to show it to a aware of institutional sophistication in area. speaking on a panel at the AVCJ Forum. “If you competing GP.” Pacific Equity Partners announced this week look at our history about 30-40% of all deals have The decision to co-invest with another GP that it would seek to raise A$3.5 billion ($3.6 been co-investments but only about 5% of those may be born out of a need for the expertise that billion) for its fourth fund, with A$2 billion of core have been with LPs in our funds.” a particular manager can bring to a deal, such as equity plus a further A$1-1.5 billion earmarked Yet, in the last few years there has been a rise an understanding of the regulatory environment for a discretionary co-investment pool. The in the number of GP-LP co-investments. This is in in a specific industry or country, or because GP’s previous vehicle featured A$2.7 billion of part a response to the post-global financial crisis they have access to a certain market. Headland’s core equity plus A$1.3 billion in co-investment fundraising environment. Institutional investors are looking to Co-investment deals in Asia consolidate their fund manager relationships, which means GPs must offer more to secure 35,000 600 a re-up. Co-investment is a classic sweetener, 30,000 offering LPs the opportunity to reduce fees and 25,000 generate higher returns, and also to develop 500 closer relationships with GPs. 20,000

According to Preqin, funds-of-funds are the 15,000 Deals LPs with the biggest appetite for these kinds US$ million 400 of deals, accounting for 23% of co-investors 10,000 globally. Public pension funds make up 10% with 5,000 asset managers, private sector pension funds, 0 300 insurance companies and banks accounting for 2009 2010 2011 2012 7%. By region, 25% of LPs that co-invest are in No of deals Total transaction value (US$ million) Asia, 44% are in the US and 31% are in Europe. Source: AVCJ Research AVCJ research meanwhile reveals a broader trend in Asia favoring co-investment deals in general: the number of transactions between Raffini argues that co-investment with LPs should capital, structured on a discretionary basis – the 2009 and 2011 rose by more than 50% to 535. be motivated by similar considerations. co-investment was packaged into the fund and “There is no template, but that should be there was a single decision-making entity. Helpful partners? the driver of co-investments rather than fee The idea is that the more modest fund size It is, however, not a zero-sum game: GPs may reduction from a LP point of view or getting to will pursue the same kind of deals but over a need extra capacity to target certain transactions. know a LP because of upcoming fundraising, and shorter deployment period. “The most obvious reason to seek co-investors is I largely think that has been the case,” he said. LGT’s Coulter points to a broader trend: even when a deal is too large.” said K.Y. Tang, chairman Furthermore, not all LPs are suited to co- the more successful GPs are struggling to raise and managing partner of Affinity Equity Partners, investment. One Asian GP, whose firm recently capital, either by choice or by design because and another panelist. “In the early days we always made its first co-investment, noted that only that is what the market. “On the other hand went to other GPs but once we changed our larger, more experienced LPs are able to make Asian economies are growing and the average minds, our first preference became LPs.” decisions quickly. check size is increasing,” he adds. “One would According to Tang, when Affinity was raising “When we offer a co-investment opportunity expect more co-investment opportunities its first fund, LPs on the whole were unfamiliar to our LPs they are under a very specific time with smaller funds and larger equity checks. In with co-investment deals and only four parties frame to respond; if they don’t respond in time general, it is a good time for co-investment.”

Number 44 | Volume 25 | November 20 2012 | avcj.com 11 Funds [email protected] FountainVest in rapid fundraise

F ountainVest Partners reached a requirements more demanding than five years partial – over the 12-month period generating final close on its second fund at $1.35 billion ago,” he tells AVCJ. “There are also many terms an approximate gross IRR of 80%. There were 10 last week, but the process was more or less in the limited partnership agreement (LPA) that companies in the portfolio in May. The PE firm completed in July when the China-focused GP moved significantly to become more LP friendly. has since become involved in two management announced a first close of $1 billion, about four We actually made some meaningful changes.” buyouts of US-listed Chinese companies: a $3.5 months after launch. The fund strategy, however, billion bid for advertising firm The vast majority of investors in Fund I, remains largely the same. Focus Media alongside four which attracted commitments of $950 million FountainVest has more capital at other GPs; and a $63.3 million in 2008, re-upped for the new vehicle. This its disposal so the $50-75 million bid for jewelry retailer and included anchor LPs Ontario Teachers’ Pension typical ticket size may increase, wholesaler LJ International. Plan (OTPP), Canada Pension Plan Investment but the targets are still private “Everybody has been looking Board (CPPIB) and Temasek Holdings. Washington enterprises entering high growth at these types of opportunities,” State Investment Board was another substantial stages. The major investment Tang says. “The challenge contributor, committing $150 million. themes are also unchanged: FountainVest CEO: Frank Tang of the last couple of years is Overall, North American and European the rise of the middle class the psychological hurdle the institutional investors contributed the majority and domestic consumption, urbanization and entrepreneurs have to get over to accept a of the funding, while pension funds remain the industrialization, and sustainable development. privatization. They like to be listed and are not largest investor type. Even though FountainVest Tang notes that backing companies entering happy about the idea of de-listing, but now more China Growth Capital Fund II exceeded its $1.25 high-growth stages means bolt-on acquisitions high profile companies are doing it, it seems to billion target and reached the hard cap, Frank are common. Indeed, three of FountainVest’s be the right thing.” Tang, the PE firm’s CEO, says that fundraising was investments were in part driven by the targets FountainVest was set up in 2007 by Tang, more challenging than for the previous vehicle. needing capital and support for acquisitions. George Chuang, Chenning Zhao and Terry Hu, all “I found the current fundraising environment At year-end 2011, FountainVest’s portfolio was of whom were previously members of Temasek’s to be tougher with investor due diligence marked at 1.5x, with two exits – one full and one China investment team. Anacacia seeks Aussie SME buyouts

With the established participants in capacity is expected to be covered early in the IRR of more than 50%. There have been two full Australia’s lower mid-market having graduated year, predominantly by international LPs. exits – including the sale of Lomb Scientific to to fund sizes of A$250 million or more as they The private equity firm raised A$50 million for US-listed Thermo Fisher Scientific in 2010 after progressed through the cycles, and many smaller its 2007 vintage debut fund, almost exclusively a two year holding period, which generated an players struggling to raise money, Anacacia from domestic investors. Every investor with IRR of 80% – and several partial exits through Capital finds itself in less populated space. capital available for private equity re-upped for dividend payments. “We find very limited competition in Australia Fund II. Australian superannuation and pension Half the returns from Fund I come from – it’s the larger buyout space funds are prominent backers portfolio company dividends, with the likes of that has become crowded. We with Anacacia taking up part baby food producer Rafferty’s Garden, Integrated had exclusivity for every deal of the small buyout allocation Appliance Group and language technology we did in our first fund,” says of their global PE strategies. provider Appen Holdings all performing well. Jeremy Samuel, managing International LPs account The new fund will follow a similar strategy director at the private equity for a significant minority of to its predecessor – targeting Australia-based firm. “But the heart of the the corpus, principally fund- small- and medium-sized enterprises (SMEs) Australian economy is still of-funds, endowments and with revenues of A$20-100 million and positive small business; there are more SMEs drive Australia’s economy family offices. According to earnings – although the larger corpus should than two million of them.” industry sources, two of the allow for more deals in total. The plan is to make Anacacia arrived at a second close of A$125 participants in the second close are institutional 12 investments over the 10-year life of the fund. million ($129 million) for its second fund. The investors, each with more than $20 billion “There is a baby boomer generation that private equity firm has already exceeded its under management, that only maintain 2-3 is dealing with succession issues and they are target of A$100 million and is on course to reach relationships with local GPs. looking for exclusive relationships with private the hard cap of A$150 million. The completion Fund I has invested in eight management equity investors who can serve as partners, deadline is September 2013 – about 17 months buyouts and completed five follow-on helping them manage the succession and keep after launch – but the A$25 million in available acquisitions. As of July, it had delivered a gross some equity in the business,” Samuel says.

12 avcj.com | November 20 2012 | Volume 25 | Number 44 Funds [email protected] SSG raises $400m Asia distress fund

I nternational investors are currently situations group. The GP recently closed its state pension funds and insurance companies, gun-shy on India, with capital is leaving the second fund at the hard cap of $400 million, among others, from Europe and the US. They will country with alacrity, across all asset classes. For well above the $300 million originally targeted. still have opportunities for co-investment but not Asia-focused distressed investor SSG Capital Fundraising took about eight months. A first to the same magnitude as the previous vehicle. Partners, India has become an attractive target close of $85 million was reached in March 2012 SSG focuses on proprietary transactions, market. as existing investors re-upped and then the team determining complex capital solutions and “We tend to be contrarian – when the went out into the market with placement agent driving the turnaround process. SSG typically economy is down and funding is tight in the Mercury Capital Advisors. attacks the balance sheet of the company with market it translates to robust deal flows” says “We didn’t know what to expect, we were a view to control the capital structure and work Edwin Wong, managing partner and chief prepared for a much tougher ride,” says Wong. with management to execute a restructuring. investment officer at SSG. “The economic “Most investors need to be educated about what They have also done deals involving shareholder slowdown plus inherent issues in India mean special situations means in Asia.” disputes where a fundamentally strong there are more special situations opportunities.” The process stands in stark contrast to SSG underlying business is being held back by Wong adds that there is a lot less competition Partners I, which had no formal institutional disagreements at ownership level. SSG would for deals in India compared to SSG’s other rollout and came at a time – September 2009 partner with one shareholder and take out major target markets of China and Indonesia. – when many LPs were busy recalibrating their the rest. It also takes positions on a secondary There are few special situations professionals portfolios in the wake of the global financial basis from other managers when assets aren’t on the ground, although a growing number crisis. The fund closed below target at slightly performing as expected. of traditional private equity players are shifting over $100 million in December the following “It is more than just capital – it is ideas, down the capital structure and pitching credit year, although there was a considerable amount solutions to restructuring,” says Wong. “There is a strategies. of co-investment by LPs so the GP ended up certain value-add that we bring to the table that The SSG team has been operating in the deploying about $300 million in equity. resolves conflicts. We are a credit fund in nature special situations space since 1997, having This time around the LP base is more and we look to take credit risk but with a pretty originally run Lehman Brothers’ Asia special balanced, with a mixture of large family offices, major equity upside along with it.”

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Scan to find out more about the regional reports avcj.com Focus [email protected] Fast food, quicker expansion Qiming Venture Partners decided to create a China casual dining chain from scratch in order to replicate an outsourcing model that has worked in other industries. Cloud 9 is now aggressively building out its network

Chinese smart phone manufacturer The $20 million Series B round was led by Tingyi Holdings to run its China casual dining Xiaomi sources its handsets from Hon Hai Taiwan’s Hotung International, with institutional business, and finally moving to Yili Group, which Precision Industry, the company responsible commitments from Qiming and Mitsui Global wanted to start an ice cream parlor chain. for assembling the iPhone. Vancl, the country’s Capital, as well as personal contributions from “Chris has worked for a Hong Kong family, largest online clothing retailer, sources apparel high net worth individuals. a Taiwan family and a state-owned enterprise, from workshops also used by Zara. For Qiming, the journey started before the restructuring portfolios and taking them to the Both companies are heavily focused on company’s China operations even existed. It next level,” says Tung. “He has a scientific, data- design and user experience and they have was the sole participant in the Series A round, driven approach to the fast casual restaurant featured in Qiming Venture Partners’ portfolio providing $5 million in green field investment. business.” since their early days. Now Hans Tung, the VC This came after the venture capital firm identified As for the restaurant chain, Tung and Tay firm’s Beijing managing partner, is looking to a restaurant chain that could be established in spent six months scouting for possibilities before replicate this disruptive model offline in the China and an entrepreneur to come in and run it. identifying Cloud 9, which has 67 franchised food and beverage industry. The test case is YPX “There are 50-plus listed dining chains in stores in Taiwan and claims to be the island’s Cayman Holdings, owner and operator of Cloud the US and 16 in Japan,” says Tung. “There were third-largest Wonton restaurant brand. The China 9, the mainland China licensee of a Taiwan casual about five in China and three of them have been operation has a separate ownership structure to dining chain. bought out by other players. There are lots of its Taiwan affiliate. “They don’t have central kitchens – food restaurants around but why are none of them preparation is done by high-quality outside listed and scaling well?” Outside expertise vendors, using menus from Taiwan that the team He concluded that most restaurant chains LionRock, which exclusively targets consumer- has since tailored for China, and then delivered – typically small, family-run operations – made related assets, got involved largely because to the stores. YPX focuses on data analytics, money because they weren’t being run in a Tseung is a board member of Gourmet Master, customer service, food ingredient mix, and staff transparent fashion. If these chains met all of their a Taiwan-listed company that owns coffee management” says Tung. “If you dig deep, it is a tax and social security obligations in full, profit shop and bakery chain 85°C. He supported the similar approach to what Xiaomi and Vancl have done for smart phones and apparel.” The approach is rooted in logic. By opting for “Once YPX finds a location it can get a systematic outsourcing model underpinned by strong IT systems and logistics instead of central operational in about two months, compared kitchens, YPX can expand rapidly at low cost. to 4-6 months for larger restaurants that need The company opened its first restaurant in 2010 and is on course to have 30 outlets by the end of to bring in a lot of expertise and chefs from the year. It wants to expand to 90 outlets within – Daniel Tseung two years, with a particular focus on northeast different areas” China. Four in five restaurants will be located in shopping malls. margins would be decimated unless rising costs company’s successful rollout in mainland China. “Once YPX finds a location it can get were counterbalanced by improved efficiency. “Chris Tay asked me if I could help in a similar operational in about two months, compared to Qiming targeted the casual dining market way on YPX,” says Tseung. “There are similarities 4-6 months for larger restaurants that need to where the quality is lower but the prices are between the two. The 85°C offerings are not bring in a lot of expertise and chefs from different affordable and consumers are willing to pay a revolutionary – it is bread, cakes and teas but the areas,” says Daniel Tseung, managing director of small premium for food safety, consistency and strategy is executed very well, offering quality LionRock Capital. a pleasant restaurant environment. Other PE and food at affordable prices for mass market Chinese VC investors have done the same. consumers.” Institutional investment Casual dining chains also fit well with the As for the VC investors’ ultimate exit channel, LionRock last week led an $11.5 million Series C preferences of China’s emerging middle class: Tung sees a trade sale as the logical option. And round of funding for YPX, with existing investors there is a desire for out-of-home dining but a it all comes back to those 66 listed dining chains Qiming and Ignition Capital also participating. certain level of frugality remains. in the US and Japan. “China will be the biggest The company received a further $4 million from Next came the CEO. Tung settled on Chris growth market for food and beverage over the investors in the Series B round last year who Tay, a Singaporean former tech entrepreneur next 10 years,” he says. “If you have a company exercised warrants and then $2.5 million in who previously ran IT systems for the group that in China that has good corporate governance debt financing from Silicon Valley-based lender licensed Dairy Queen and Yoshinoya in China, and does everything by the book, it would be an Western Technology Investment. before being hired by Taiwan food conglomerate ideal partner.”

14 avcj.com | November 20 2012 | Volume 25 | Number 44 AV CJ FOruM [email protected] State of the industry: AVCJ Forum audience polls The 2012 AVCJ Private Equity and Venture Capital Forum, which took place in Hong Kong last week, saw delegates invited to participate in a series of polls intended to gauge opinion on a series of key issues facing the indsutry. LPs, GPs and service providers from around the world shared their views

Is operational and industry expertise important for private Will there be a shakeout in the Indian private equity market? equity funds?

Yes 95% Never 22%

No 5% Next 12 months 44%

Next 24 months 33%

Where do you think the majority of new LP commitments for Which LPs are the best co-investors? Asian funds will come from?

Asia 28% Gate keepers 33%

Europe 6% Fund of funds 44%

Middle East 11% Sovereign wealth funds 22%

USA 56% Pension funds 0%

When will the size of the Asian private equity industry surpass Can Chinese PE funds compete on a regional/global level? that of the US?

Never 5% Yes 46%

5 years 5% Regional only 46%

10 years 37% Global only 0%

Longer 53% No 8%

Which market in Southeast Asia has the most potential in the Will carried interest continue to be treated, in the US, as capital next 12 months? gains?

Indonesia 77% Yes - for the foreseeable future 67%

Thailand 0% No 11%

Malaysia 18% No comment 22%

Philippines 5%

Number 44 | Volume 25 | November 20 2012 | avcj.com 15 Private Equity & Venture Forum Australia & New Zealand 2013 6-8 March • Westin, Sydney 10th Annual

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How Australian GPs can create value in the current environment What successful funds have done to secure commitments from local and global LPs The sectors which present the best options for distressed investments How Australian investors can best access opportunities in China, India and South-East Asia The opportunities for PE-backed take-private transactions and secondary deals LPs expectations on returns in the current environment

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