Asia Private Equity Trends

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INSIDE China Venture Investing Soared to Record Level in 2014 ...... p.3 Japan Private Equity Market Hungry for Sellers ...... p. 5 What Would a Yuan Devaluation Mean for PE Investors? ...... p. 6 Korea’s Sovereign-Wealth Fund to Retool Direct Investment Program ...... p. 8 Myanmar Gains Higher Profile as Investors Shun the Asian Crowds ...... p. 9 Asia Starts to Embrace ESG Amid Investor Pressure ...... p. 10 India Resurgence Comes With Note of Caution ...... p. 12 Despite Coup, Thailand Deal Making Stays Small & Steady ...... p. 14 Rising Star: Chris Freund’s Pioneering Spirit Pays Off for Mekong Capital ...... p.15 Asia Private Equity Trends

Nicholas Elliott Managing Editor, Introduction Dow Jones Private Markets

private equity, whether on deals, fundraising, regulation or Asia is a region of high the overall flow of capital into the asset class. For our interest to international private equity investors but the coverage we can also draw on the worldwide reporting of shifting prospects of individual nations illustrate the need the 1,800 journalists at The Wall Street Journal. for regular informed analysis. With that in mind we are pleased to provide this selection of recent analytical stories We will continue to strive to provide the best insight on from our monthly magazine Private Equity Analyst and daily private equity and in the meantime I hope you find this newsletter LBO Wire. collection useful in framing your investment decisions.

The team of 25 specialized and experienced journalists Nicholas Elliott supporting these publications spans three continents. Each Managing Editor month they report on the most significant trends affecting Dow Jones Private Markets

Copyright © 2015 Dow Jones & Company, Inc. All rights reserved. Published April 2015. Dow Jones & Company is a News Corporation Company. Copying and redistributing prohibited without permission of the publisher. This publication is designed to provide factual information with respect to the subject matter covered but its accuracy cannot be guaranteed. Dow Jones is not a registered investment adviser, and under no circumstances shall any of the information provided herein be construed as a buy or sell recommendation or investment advice of any kind. Photo Credits - Cover: ©istockphoto.com/btrenkel; p2: Equilibrium Photographers/Shutterstock.com; p3: ©istockphoto.com/plavevski; p8: ©istockphoto.com/P_Wei; p12: Fedyaeva Maria/Shutterstock.com

2 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

China Venture Investing Soared to Record Level in 2014 By PATRICK BOEHLER

opened up Venture capitalists the spigot in China in the fourth quarter of 2014, blowing away the previous record for yearly total investment.

Investors poured $15.5 billion into deals during the year, more than twice the previous record of $7.3 billion set in 2011 and the highest amount since VentureSource began collecting data on China in 2006. Dow Jones VentureSource is a database from Dow Jones & Co., which is owned by News Corp.

Underlying the increase is a boom in the use of mobile devices. For the first time, more Chinese accessed the Internet via mobile devices than via PCs last year, the China Internet Network Information Centre said in July. The state-affiliated think tank estimated the number of mobile shoppers at 205 million as of June 2014, up 42% from December 2013.

Hans Tung , managing partner at GGV Capital , a venture firm focused on China and the U.S., said the widening spread of smartphones and mobile devices in China spurred innovation Consumer-focused businesses dominated capital-raising in in 2014, attracting more venture capital. “We have a lot of new the fourth quarter, accounting for all the top five deals. The products being born, new apps and hardware developed,” he largest deal was a $1.1 billion financing for Xiaomi, a maker said. “There is a lot of demand for new services.” of smartphones and electronic gadgets. After Xiaomi, the next two largest rounds were for companies providing taxi- reservation services. Beijing Xiaoju Technology Co. raised $700 million and Hangzhou KuaiZhi Technology Co. raised Equity Financings for Mainland China $600 million. Venture-Backed Companies For the quarter, investors injected $6.8 billion into Chinese venture-backed companies, an almost fivefold increase from $20B the $1.4 billion invested in the same period a year earlier, according to VentureSource. The number of completed deals $15.53 rose 79% to 243 from 136 over the same period of 2013. 15 Mr. Tung, who was an early investor in Xiaomi, said he expected the focus on mobile services to continue next year. “More traditional industries such as retail will be 10 disrupted,” he said. “Consumer numbers will not grow as $7.27 $6.70 much next year, but there will be a continuing shift from offline to online.” $4.78 $4.98 $5.03 5 $3.99 $2.97 $3.46 He said, however, that many in the industry see valuations being too high. “What if in 2015 the bubble bursts? My 0 guess is that category winners will still be able to raise funds, 2014 2013 2012 2011 2010 2009 2008 2007 2006 albeit by a lower valuation,” he said.

Equity fnancings include cash investments by professional venture capital frms, Despite the large rounds raised by consumer businesses corporations, other private equity frms, and individuals into companies that have received at least one round of venture funding. Source: Dow Jones VentureSource like Xiaomi, such big dollops of capital didn’t influence the

3 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends totals as much in the U.S. market, where investments in the The largest public offering in the fourth quarter was by likes of ride-service company Uber Technologies Inc. and HuaDian Heavy Industries Co., a provider of material- room-rental company Airbnb Inc. have meant rising levels of handling equipment, in November. The company raised investing spread across fewer deals. $244.65 million in its listing in Shanghai.

In China, the median round size of $9.8 million for the year Venture firms based in China raised $4.2 billion during the year, was well above the number for the prior two years but didn’t according to VentureSource, the highest amount in three years. match a figure of $10 million for 2011. Overall private equity fundraising reached a record of $47 billion, beating a previous record of $46 billion recorded for 2011. n The surge in venture investment came as initial public offerings resumed after the closure of the market for more than a year while it was overhauled, offering investors better prospects of cashing out of successful companies.

“Part of why 2014 was significantly stronger than 2013 is that the government relaxed its hold on IPOs,” said Benjamin Lavender, principal at China Market Research Group in Shanghai.

There were 61 venture-backed IPOs in 2014, a leap from the 15 in 2013 but still well down from 100 in 2011 and 141 in 2010. The value of those IPOs last year was $7.2 billion, the highest in three years but still well down from 2011 and 2010 when the markets were deluged with listings, sometimes from Great Hall of the People (Chinese Parliament), Tiananmen Square in Beijing, companies with weak finances and governance. China. Photo Credit: tcly/Shutterstock.com

Asia/Pacifc Annual Fundraising

$80,000M $75,219.69 Fund Of Funds $70,857.55 70,000 Secondary & Other $63,537.40 60,000 $55,606.52 Mezzanine $54,195.89 Venture Capital 50,000 $45,907.48 Buyouts/Corporate Finance 40,000 $39,236.96 $38,668.72

30,000

20,000

10,000

0 2014 2013 2012 2011 2010 2009 2008 2007

2014 2013 2012 2011 2010 2009 2008 2007 Buyouts/Corporate Finance $58,825.48 $29,762.29 $51,519.56 $47,597.75 $35,623.84 $29,103.01 $37,608.01 $42,966.18 Venture Capital $8,332.83 $4,940.75 $6,784.36 $17,841.45 $9,198.97 $6,801.72 $8,775.94 $5,982.97 Mezzanine $299.58 $10.00 $575.55 $584.40 $97.94 $1,052.06 $1,151.25 $888.40 Secondary & Other $151.00 $444.00 $177.00 $571.45 $56.70 $137.00 $233.00 $136.00 Fund Of Funds $7,610.80 $4,079.92 $4,480.92 $4,262.51 $930.02 $1,574.93 $6,427.69 $5,632.96 Grand Total $75,219.69 $39,236.96 $63,537.40 $70,857.55 $45,907.48 $38,668.72 $54,195.89 $55,606.52

Source: Dow Jones VentureSource

4 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

Japan Private Equity Market Hungry for Sellers

By KOSAKU NARIOKA In addition to the government’s push, Japan’s private equity market has been gaining renewed attention because many Minister Shinzo founder-owned enterprises haven’t secured their Despite Prime Abe’s push for higher successors. shareholder returns, Japanese companies remain slow to sell their businesses, limiting the size of the marketplace for About 60% of nearly 34,000 companies run by owners aged private equity investors. 60-64 don’t have a successor, according to Teikoku Databank. More than half of the 31,000 firms run by owners Since coming into power in late 2012 the Abe administration aged at 65-69 doesn’t have one either, the credit research has placed a strong emphasis on improving corporate firm also said. efficiency, which has raised hopes among investors that companies will sell some of their underperforming or noncore Mr. Mori said the psychological hurdles remains high for units to improve returns. owners to sell their businesses but if they become a bit more willing Japan would become “a really great market.” n But private equity deals have yet to show signs of taking off so far, with many executives throughout Japan Inc. apparently reluctant to let go of their businesses regardless of how well they fit into the big picture.

In 2014, Japan logged 101 private equity deals amounting to $2.8 billion through October, according to the latest figures from data provider S&P Capital IQ. That compares with 90 deals worth $4.7 billion in the same period the previous year. The world’s third largest economy is a tiny portion of the global private equity market. Japan-focused private equity funds raised $5.3 billion in 2013, or 1% of the global total, according to Preqin, a research firm.

Atsushi Yokoyama, a Tokyo-based principal for Bain Capital, which has invested in several companies in Japan such as restaurant chain Skylark Co., said that one possible obstacle is the sheer amount of time it takes for big Japanese corporations to decide to sell some of their units due to their large number of stakeholders.

“The direction taken by the current Abe administration is absolutely right and it will likely increase corporate carve-out deals,” he said at a recent event hosted by Dow Jones & Co. “But how long will it really take to see the impact?...I think it’s going to be a few years, not months probably.”

Mr. Yokoyama said another challenge in Japan is the relative lack of available managerial talent to put the vision that the new owners have into place. Unlike their U.S. and European counterparts, Japanese managers tend to switch companies much less frequently.

Tokihiko Mori, operating partner in Tokyo for Riverside Co. also said large Japanese companies often sell their April 30, 2014 - Berlin: Shinzo Abe at a meeting of the Japanese Prime businesses only as a last resort and when the chance of a Minister with the German Federal President in the Schloss Bellevue, Berlin. successful turnaround seems unlikely. Photo Credit: 360b/Shutterstock.com

5 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

What Would a Yuan Devaluation Mean for PE Investors?

By HILLARY CANADA Investor demand subsided for those types of vehicles because of a lack of transparency over how such funds equity ﬁrms typically don’t worry much would be treated by the Chinese government as well as Private about day-to-day currency ﬂuctuations, China’s slowing economic growth. Last year, yuan funds given the multiyear holds typical of their investments. raised just $5.6 billion, versus $16.9 billion raised in other currencies for China-focused funds, Preqin reported. Private equity investors in Asia, however, may be paying closer attention to currency values amid heightened pressure At the same time, Asia-focused funds have been slow to on the Chinese government to devalue its heavily controlled deploy capital and return cash to investors, as The Wall currency to address sluggish economic growth. Street Journal recently reported, meaning there is likely still plenty of yuan floating around for investment. A devaluation Further declines in the value of the already weak yuan could could leave managers with yuan funds with less purchasing put pressure on both private equity funds denominated in yuan power than those who raised funds in U.S. dollars. and those denominated in other currencies. That could affect not only investments, but also expansion plans. Many of the world’s largest private equity firms rushed to raise yuan-denominated funds after the financial downturn, seeking “If there is a devaluation at a significant level, you may see access to closely held Chinese companies. During the peak continued tough times for yuan-denominated funds that are years of 2011 and 2012, firms gathering China-focused private looking to help their companies go global,” Baird Capital equity pools raised roughly $35.5 billion for yuan-denominated Partner Aaron Rudberg wrote in an email. “Dollar- funds, compared with $33.7 billion raised by non-yuan denominated funds will be in a much better position to denominated funds, according to data provider Preqin Ltd. support their companies in their growth outside China.”

Beijing, China- April 20, 2014: The People’s Bank of China (PBOC) headquarters building. Photo Credit: 1970s/Shutterstock.com

6 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

China: Top Investors by Number of Deals in 2014

IDG Capital Partners (Venture Capital) 63

Sequoia Capital (Diversifed Private Equity) 48

Matrix Management Corp. (Venture Capital) 39

GSR Ventures (Venture Capital) 27

Morningside Group (Holdings) Ltd. (Diversifed Private Equity) 22

Qiming Venture Partners (Venture Capital) 19

Zhen Fund (Angel Group) 19

Shenzhen Capital Group Co. Ltd. (Diversifed Private Equity) 18

Northern Light Venture Capital (Venture Capital) 16

Ceyuan Ventures (Venture Capital) 16

01020304050607080

Source: Dow Jones VentureSource

A major shift could also prove problematic for investors that though he added that in areas with historically volatile have an imminent exit. For example, a dollar-denominated currencies, it should be more closely considered. fund that converted currency to invest when the yuan was much stronger would likely need a higher multiple at exit to Mr. Kallen emphasized that manager selection, rather than compensate for the weaker currency. currency fluctuation, is a much more significant driver of returns.

Given that valuations are often tied to cash flow or public If China’s central bank does decide to devalue the yuan, companies that are comparable, a weaker yuan could force industry executives agreed that it would likely do so gradually general partners to write down the value of portfolio and not in a surprise move similar to one Switzerland’s companies they still own. central bank made in mid-January.

“Lack of stability could knock 10% to 15% off the return,” said The central bank has taken other steps to address the Kevin O’Mara, a partner at law firm Morgan Lewis & Bockius nation’s flagging growth. On Feb. 28, it cut interest rates for LLP. “It could knock something below the hurdle rate.” the second time in a matter of months.

Fund managers that are nearing a sale could consider currency “Should they choose to devalue, one can assume it will be hedging, but the high cost of doing so could cut further into profits. modest in scale, and well-telegraphed so as not to disrupt sensitive domestic financial markets as well as global “GPs will need to decide if they are willing to walk away from markets,” said Joe Brusuelas, chief economist at advisory the sale due to the current dollar-yuan rate,” wrote Mr. Rudberg. and accounting firm McGladrey LLP. “A Switzerland-type “I believe it is generally better to drive toward the exit and return shock out of Beijing is an extremely low probability.” the capital to your investors rather than play the currency trade.” Mr. Rudberg, whose firm manages growth equity funds that Theoretically, one deal hit by depreciating currency should invest in health care, technology and services in China, said be balanced by other investments in a portfolio, said Mr. PE firms have to take any such changes in stride. O’Mara and others. “Currency is always something we evaluate when entering a “Private equity is not a macro-driven investment class. market and in the ongoing management of the portfolio,” he [Economic] growth helps, currency appreciation helps, but said. “However, given the long-term nature of a private equity when you underwrite an investment, you should take those fund, you need to be careful not to try to react to every twist factors out,” said Hamilton Lane Principal Christian Kallen, and turn of country’s currency.” n

7 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

Korea’s Sovereign-Wealth Fund to Retool Direct Investment Program

KIC has therefore set up a research department and decided to “refrain from making direct greenfield investments with a concentration on [the] energy sector,” Mr. Ahn wrote.

In addition, KIC plans to team up with other sovereign-wealth funds and public pension systems to co-invest in deals in their respective home markets, according to Mr. Ahn.

For instance, KIC initiated the founding of Co-Investment Round- table of Sovereign and Pension Funds, an organization that includes 25 other sovereign and pension funds from such countries as Singapore, China, Japan, United Arab Emirates, Malay- sia, U.K. and Sweden, according to the organization’s website. By SHASHA DAI The organization’s September conference in Seoul featured Corp., South presentations from such general partners as Partners Group, Korea Investment Korea’s $72 Providence Equity Partners, and Highstar Capital, now part billion sovereign-wealth fund, plans to retool its direct of Oaktree Capital Group, according to the website. investment program, the performance of which has trailed that of fund investments, according to Chairman and Chief In a keynote speech at the conference titled “We Should Executive Hongchul Ahn. Fly High Now,” Mr. Ahn said, “The returns on co-investments in general outperform other ways of So far, KIC has invested roughly $1 billion in direct private investing in alternative asset classes.” equity deals and committed an additional $1.3 billion to private equity funds, LBO Wire reported in September. However, co-investment opportunities have so far been offered only to larger sovereign and pension funds, Mr. Ahn The direct deals have fared worse than fund investments, said in the speech, according to a transcript posted on the generating 1.4% on an annualized basis as of the end of Co-Investment Roundtable’s website. 2013, compared with 10.2% from fund investments, as LBO Wire reported. Smaller sovereign funds should aim to break bigger peers’ “monopoly” in co-investment by teaming up with each other, One reason why direct deals lagged behind fund he said in the speech. commitments was a lack of diligence and risk management, with KIC relying primarily on recommendations of investment “We should place joint efforts into seeking co-investment advisers to make decisions. opportunities. In other words, we should increase such opportunities by sharing co-investment information on our Another reason why direct investments haven’t performed own soil where each of us has a comparative knowledge well is that some of the earlier investments had concentrated advantage in prospective projects over others,” he said. in the energy sector, with a fair amount dedicated to greenfield development, Mr. Ahn wrote in an email. “Who could know more of Korean projects than KIC? Who could be better versed in what’s happening in Singapore KIC doesn’t identify its investments. than GIC or Temasek?”

“Since I took office as CEO of KIC [in December], our When pursuing direct deals, KIC is open to taking a more objective has evolved to the obtaining of higher returns,” Mr. active role, Mr. Ahn’s wrote in the email. Ahn wrote in the email. “We can both team with fund managers as a co-investor and “Disappointingly lower returns on our direct investment[s] take an active role as a sponsor or co-sponsor of deals,” he wrote. stem from…deals with no back-up of research function, lack of knowledge and experience in [the] energy sector,” he “We can even be a solo investor, depending on the nature continued in the email. of deals.” n

8 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

Myanmar Gains Higher Profile as Investors Shun the Asian Crowds

By SONJA CHEUNG said could increase by an average 8% in the next few years, partly based on the country’s increasing gas production. is creating a buzz among private Myanmar equity investors looking to catch For now, private enterprise remains underdeveloped and the ﬁrst wave of deals in the frontier market as it develops its may require investors to hold on to businesses for longer. economy after years as a pariah state. For this reason, some investors including Anthem Asia and Myanmar Investments International Ltd., an investment Nestled between Asian superpowers China and India, Myan- company listed on the London Stock Exchange, said a mar historically has been ignored by investors in favor of its fixed-life private equity fund structure, in which there is larger neighbors, places where private equity has matured in pressure for GPs to offload holdings of portfolio companies the past decade. Large buyout firms Kohlberg Kravis Roberts after a certain amount of time to realize returns, may be less & Co., CVC Capital and Carlyle Group have been attracted suitable in Myanmar than an evergreen or perpetual to those countries by deal and exit opportunities and the structure. “There are those companies which you’re likely to ability to achieve solid returns via sales to large corporations hold on for 10 to 15 years, and you don’t want an artificial or initial public offerings. gun to your head to exit them,” said Mike Dean, a co-founder of Myanmar Investments. But the past couple of years have seen both markets becoming crowded with an increasing number of players Investors said there are plenty of deals to be scored in bidding up for companies, along with difficulties in achieving Myanmar. TPG is looking at financial services and exits. All of these factors – as well as slowing economic telecommunications, while smaller investor Myanmar growth, specifically in China – have prompted some Investments is focusing on businesses that will support the investors to look elsewhere in Asia for deals. country’s developing infrastructure, including raw materials and equipment, as well as education and health care. Myanmar has appeal because of its large population, government initiatives to encourage foreign investment and a TPG believes there is an “advantage of being an early mover in strategic location close to India, China, Thailand and Vietnam. these large industries [financial services and telecommunications]...Assets such as these have an easier and better liquidity “[Myanmar is] not a market you will be able to ignore in the path, and ultimately liquidity is key in a market where there is vir- medium term, especially as China slows down. It’s a significant tually no stock market,” Mr. Dattels said. economy for general partners, and limited partners will begin to need exposure,” said Josephine Price, managing director of The big question for investors will be how to exit portfolio Anthem Asia, a Myanmar investment firm focused on sectors companies, given the country’s underdeveloped capital including agribusiness, food and beverage, and consumer. markets. Myanmar is in the process of opening a stock exchange, which is slated for next October in the country’s TPG Capital made its first Myanmar investment last year when commercial capital of Yangon. it injected $35 million into Apollo Towers and its operating unit Apollo Towers Myanmar, which provide telecommunications Although exits via local public offerings may be off the table for tower infrastructure, according to a statement from Cleary the near future, trade sales to strategic investors are the more Gottlieb Steen & Hamilton LLP, counsel to TPG. likely path of exit for private equity firms. There has been an influx of interest from foreign conglomerates looking to establish The obstacles for investing in Myanmar vary, but for themselves in Myanmar as the government encourages foreign some market participants, a crucial hurdle is that small investment by, for example, offering tax breaks. Multinationals businesses are less mature there compared with their Coca-Cola Co., British American Tobacco PLC and Nissan Asian counterparts, mean ing GPs may need to hold on Motor Co. are all operating in Myanmar. to companies beyond a fund’s average holding period of roughly five years. There are other issues, including language Even though Myanmar may be teetering on the brink of and cultural barriers. “Myanmar is not for the faint of heart,” modernization and focusing on the “new,” for some investors said Tim Dattels, who co-heads TPG’s Asia operations. such as Mr. Dean, the “old” still offers up investment opportunities as well, which is sure to pique private equity’s Investors said businesses are expected to benefit from a interest. “You can be like a kid in a candy shop – everything is boom in the economy, which the International Monetary Fund old and not working properly,” he said. n

9 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

Asia Starts to Embrace ESG Amid Investor Pressure

By SONJA CHEUNG among their investors international LPs, which place ESG investing high on the priority list. is starting The color green to symbolize The World Bank Group member organization International more than just dollars for Asian private equity ﬁrms, as an Finance Corp. and the California Public Employees’ Retirement increasing number of fund managers place environmentally System are some global LPs that champion ESG and are active friendly investing, as well as socially responsible principles, investors in Asian private equity. For instance, the IFC is an higher on their agendas. investor in India’s Gaja Capital, while Calpers backs funds managed by Baring Private Equity Asia. A representative from Asia’s general partners are becoming more conscious of Baring Asia declined to provide comment for this story. having some form of environmental, social and governance guidelines in place, especially in response to demands from Gaja Capital Managing Partner Gopal Jain said his firm, some limited partners. There is also pressure from the exit which plows a large portion of capital into education-related markets as leading exchanges require disclosures on some deals, has always looked at companies that have a “triple ESG issues, and with strong ESG practices seen as bottom line,” with a focus on the needs of shareholders, enhancing the appeal of companies to buyers. community and the planet, but in the past few years it has developed a more formal ESG handbook. It has completed Asia-focused LPs appear to be putting greater importance ESG audits on portfolio companies as part of due diligence. on ESG issues. PricewaterhouseCoopers predicts the percentage of Asia-Pacific investors interested in ESG Gaja has taken “a few years to build up its ESG capability,” issues will jump to 62% in 2015 from 8% in 2013, based on Mr. Jain said, but now has one person at the firm who a global survey of 103 private equity participants in 2013. oversees ESG principles across its portfolio.

A handful of Asian private equity firms are dedicated solely to responsible investing, but an increasing number of firms Smaller Firms Slower to Sign Up investing in more mainstream sectors such as consumer goods However, not all firms will be quick to prioritize ESG, partly and information technology – which count for the majority of because they lack the time or resources to do so. Monica Hira, firms in the region, especially those in the midmarket sector – a partner of risk services and sustainability at PwC in Singapore, are formalizing and developing ESG programs. said Asia’s private equity landscape is dominated by a large number of small firms, which are more likely to be “focused on Everstone Capital, which manages $2 billion worth of assets maximizing returns and have limited focus on sustainability.” and is raising a $650 million fund to invest in India and surrounding areas, has had an ESG framework for several There are some Asian fund managers that solely invest in years but has evolved guidelines to align with investors’ socially responsible deals, including Aavishkaar Venture requirements and India’s local regulations, said Chief Management, which aims to back businesses set up by Executive Dhanpal Jhaveri. entrepreneurs who are “at the lower end of the economic spectrum,” it says on its website; and India- and China- In some cases, market watchers say, Asian GPs with an based Aloe Private Equity, which targets environmental and ESG framework can differentiate themselves from peers that socially sustainable investments. don’t and attract allocations from international institutional investors. For managers that already have some existing Asia’s smaller private equity firms have so far been slower guidelines, it appears they are evolving and molding them than their European and U.S. counterparts to execute deals more in line with investors’ interests. in accordance with an ESG framework. Many lack the resources and in some cases don’t have the metrics to “The easiest path for GPs is to work within the guidelines of assess ESG investing. “We aren’t seeing it [ESG] as much their biggest LPs. There’s an affinity with those giving just yet. But it is definitely coming as the market matures,” capital,” said James Pearson, chief executive of risk manager said Juan Delgado-Moreira, a managing director at fund-of- Pacific Risk Advisors. funds manager Hamilton Lane in Hong Kong.

On top of that, most small to midmarket firms managing For larger firms, including U.S. buyout giant Kohlberg Kravis dollar- or foreign currency-denominated funds now count Roberts & Co., the benefits of ESG investing are more

10 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends obvious. Portfolio companies that are part of the firm’s Green Portfolio Program have a specific set of analytic tools that can be used to track greenhouse gas emissions, water and waste, among other environmental factors, which can help them improve performance and ultimately lower costs. Oriental Brewery Co., a South Korean brewery that was part of the Green Portfolio Program prior to KKR ‘s exit, for instance, avoided $26.5 million in energy costs and $5.3 million in water-use costs from 2008 to 2013, according to KKR.

For smaller fund managers, ESG investing is seen as being pertinent to certain industries, including logistics, energy and mining, said PwC’s Ms. Hira. But some firms don’t deem it necessary to do ESG audits on investments made in more common sectors like retail, given there’s less perceived risk in terms of the way companies do business. She added there are growing ESG investment issues to address, including labor-intensive manufacturing in Asian emerging markets such as Cambodia.

However, it’s questionable how much impact some investors can really make on a company, given that many will go in as minority shareholders, as is the usual case for private equity firms investing in growth capital deals across the region. Experts say any calls to improve a portfolio company, such as strengthening manufacturing or workers’ safety, usually have to be stipulated early on, either in the investment thesis or due diligence stages.

HK Exchange Sets a Higher Bar Exchange Square, Hong Kong. Photo credit: ©istockphoto.com/TommL Asian GPs are not only under increasing pressure from investors to have an ESG framework, but also as regional Ltd., in 2008, just after baby formula from another company stock exchanges from Hong Kong to Singapore call for was found tainted, leading to the death of infants and the better ESG management and disclosure from companies hospitalization of children. Joseph Bae, head of KKR Asia, about to go public or already listed. previously told media the investment into Modern Dairy stemmed from the need to supply milk safely on a large scale. The Hong Kong Stock Exchange will raise the ESG disclosure “obligation level to comply or explain” in 2015. Investing responsibly may be a worthy cause, but with private This means companies have to make certain disclosures equity’s top priority being the greenback, embarking on an based on the exchange’s ESG Guide, which sets out four ESG program has to be financially beneficial. Some market areas for reporting: workplace quality, environmental participants say the valuation of a company with a solid ESG protection, operating practices and community involvement. background will likely attract a higher bidding price when it’s time to exit. “It could help maximize the valuation of a For China-focused private equity firms, this is particularly company when it comes to exiting…and would satisfy U.S. pertinent, given that Hong Kong is one of the favored and European trade buyers,” said Mr. Pearson. destinations to exit Chinese portfolio companies. From January until Dec. 9, 2014, 64 mainland companies went However, for Asia’s home-grown firms, it may be the start public on the Hong Kong Stock Exchange, compared with rather than the end that makes managers think twice about 13 mainland companies that listed in the U.S., figures from fully embracing ESG. “They recognize it [ESG] can be data provider Dealogic Ltd. show. considered to be an additional element of administration. When looking at companies, GPs have an extra level of Governance is a particular concern for investors in China, and thoughtfulness, and another layer which could impact ESG-focused firms have seen a business opportunity in the maneuverability, when going against, for example, a family failures of others, such as in the dairy sector. Chinese private group or a local company that doesn’t have the same equity firm CDH Investments invested alongside KKR in the requirements,” said Mounir Guen, founder of fundraising country’s largest dairy producer, China Modern Dairy Holdings specialist MVision Private Equity Advisers. n

11 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

India Resurgence Comes With Note of Caution

money, versus wanting it, still remains to be seen,” said Dhanpal Jhaveri, chief executive of Everstone Capital.

Everstone itself is raising a $650 million fund to invest in India and the surrounding region. It will be the Mumbai- and Singapore-based manager’s third vehicle. The International Finance Corp. said it may commit up to $50 million to the fund.

Gaja Capital is another firm raising a new fund, having secured a $130 million first close last year. It is targeting a $225 million final close in mid-2015 for its second vehicle, said co-founder and Managing Partner Gopal Jain.

Prime Minister Narendra Modi’s administration, which came into office in May 2014, is under the microscope as it releases measures to reform and boost the country’s economy. India’s gross domestic product grew by 5.3% in the third quarter of last year, down from 5.7% in the By SONJA CHEUNG preceding quarter.

a case of “Back to Analysts from Goldman Sachs Group Inc. said India’s growth It’s looking like the Future” for Indian could reach 6.3% in 2015 and 6.8% in 2016, which would private equity. Limited partners are once again plowing outstrip the 6.7% rate it forecasts for China in 2016. At the capital into the country’s fund managers, which not long ago same time, investors want to make sure the recovery in were shunned for lackluster returns after receiving sizable India’s stock market will endure. allocations less than a decade ago.

These hopes of a resurgence in Indian private equity stem from optimism about a new government, a stronger currency, Equity Financings for India a more buoyant public capital market potentially fueling further exit opportunities and attractive company valuations Venture-Backed Companies relative to a few years ago. $6B This time around, however, LPs are likely to be more cautious $5.15 with their capital, compared with the heydays of the mid- to 5 late 2000s. 4 General partners raised $3.59 billion from January to early December 2014, twice as much as for all of 2013, when 3 they raised $1.77 billion, and more than the $2.07 billion gathered in 2012, according to Preqin Ltd. $2.01 2 $1.78 $1.59 $1.58 Looking forward, 57 funds are seeking to raise around $11 $0.90 $0.89 billion to invest in the South Asian country, figures from the 1 $0.84 $0.71 data provider show. However, market participants are skeptical that some or all of that new funding will be achieved. 0 2014 2013 2012 2011 2010 2009 2008 2007 2006 “The flood gates [for new capital] won’t be open. People will watch the new government for at least a year, as well as Equity fnancings include cash investments by professional venture capital frms, corporations, other private equity frms, and individuals into companies that have public and private markets. The ability to raise and deploy received at least one round of venture funding. Source: Dow Jones VentureSource

12 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

India: Top Investors by Number of Deals 4Q’ 2014

Blume Venture Advisors (Venture Capital) 6

SAIF Partners (Diversifed Private Equity) 5

Sequoia Capital (Diversifed Private Equity) 4

Helion Venture Partners LLC (Venture Capital) 4

Accel Partners (Venture Capital) 3

Kalaari Capital Advisors P Ltd. (Venture Capital) 3

Softbank Corp. (Corporation) 3

Unitus Seed Partners LLC (Venture Capital) 3

IDG Ventures India Advisors Pvt. Ltd. (Venture Capital) 3

International Finance Corp. (Diversifed Private Equity) 3

0123456

Source: Dow Jones VentureSource

“Limited partners are realistic. Modi’s effects won’t be seen In 2007, 11 managers closed funds in the second quarter, for another five years, and they want to make sure GDP whereas the number of funds closed since then has never [growth] is more sustainable. However, lots of GPs are trying exceeded single digits on a quarterly basis. to ride on the positive sentiment,” said an investor. As money slowly rolls back into India, private equity firms are Recent fundraising may be on the rise, but numbers still pale also evolving. For instance, GPs are looking at taking majority in comparison with the industry’s peak in 2007, just before or controlling stakes in deals, rather than the minority the global economic downturn, when fund managers raised shareholdings that were standard before. This gives managers $6.21 billion. more say on how to run and then exit a portfolio company.

GPs, which are typically cash hungry, nonetheless are wel- In November, Everstone and investment firm Solmark bought coming today’s slow-but-sure approach from investors to a controlling stake in Indian software company Servion capital allocation and the overall more conservative tone to Global Solutions Ltd. from venture capital firm Basil Partners fundraising. New capital will go to a select number of private for 4.03 billion Indian rupees ($66 million). The deal not only equity houses that have proved themselves capable of represents a move to take a controlling stake, but is also one achieving good returns and thus limit competition for deals of a growing number of secondary purchases from another among GPs, they said. GP, as India-focused investors seek to increase the ways they can unload portfolio companies outside of IPOs. For their part, investors are being cautious to avoid a repeat of the late 2000s, when a scarcity of exits amid few initial One of the largest exits of 2013 was the sale by Warburg public offerings led to some Indian fund managers turning Pincus and co-owner Yogesh Kumar of a controlling stake in cold on the sector. tire maker Alliance Tire Group to Kohlberg Kravis Roberts & Co. for $630 million, including debt. For instance, in 2007, private equity firms invested $12.9 billion in deals but saw only $3 billion worth of exits, according Signs of change may be afoot for Indian private equity, but to consulting firm Bain & Co. That investment-to-exit ratio has some say the revival will likely take some time. started to balance out a bit more recently, with $10.4 billion invested in 2013, compared with $5.5 billion worth of exits. “The market has been dormant and is now coming back alive. There is increased interest, but it hasn’t been a 180 “LPs are more discerning with general partners, and the GP degrees return from investor; it’s more like 90 degrees,” said universe has shrunk,” said Mr. Jhaveri. Gaja Capital’s Mr. Jain. n

13 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

Despite Coup, Thailand Deal Making Stays Small & Steady

By SONJA CHEUNG firm exited duck processor Bangkok Ranch and its Dutch unit for 5.7 billion Thai baht ($188 million) in 2013, after military seized acquiring a controlling stake in the business in 2007 at an When Thailand’s power in a coup enterprise value of THB4.3 billion. The firm sold its Dunkin’ last year, it marked one of Asia’s biggest political upheavals. Donuts and Au Bon Pain businesses in Thailand to Sub Sri Private equity ﬁrms appear undeterred by Thailand’s Thai PCL for around $41 million two years ago, after buying uncertain political future, however, and continue to seek a stake in the business in 2006 for $24.4 million. investments in the Southeast Asian country. Still, investors say there are benefits to investing in Thailand Thailand has so far proved to be a small but steady market when compared with other countries in the region. They cite for private equity investors but has yet to grab attention like the lack of government restrictions on the private sector, an Asia’s other developing markets, including Vietnam. Some economy driven in large part by the consumer sector and the Thai-focused investors say challenges in deal sourcing are a attractive valuations of its companies. major sticking point. The Thai public market has traditionally traded at a discount “[Thailand is] a pretty tough market due to the ups and compared with other Southeast Asian markets, said downs. It’s not a market where there’s a lot of deal flow…but Panaikorn Chartikavanij, co-founder of Lakeshore Capital businesses are resilient,” said David Ireland, a Thailand- Asia, a midcap Thai investment firm targeting sectors based senior partner at Southeast Asian private equity firm including manufacturing and consumer. Navis Capital. Private equity and venture capital firms have been especially Four deals were done in Thailand in the first half of 2014, welcome in Thailand since the country’s Securities and on par with the total number of transactions for all of 2013, Exchange Commission revised rules a couple of years ago to according to data from the Emerging Markets Private Equity exempt managers from holding securities licenses, making it Association. From 2008 to 2012, there were no more than easier for funds to be launched. five deals completed per year. The amounts invested each year are unclear as EMPEA didn’t have the deal amounts Political uncertainty is a concern for all types of investors in for all of the transactions in its private equity survey. Thai Thailand, but private equity participants say tepid deal flow deals last year included growth investor Abraaj Group’s and the dominance of family-run businesses are more backing of education provider KPN Academy and East pressing issues for them. Similar to Indonesia and India, Ventures’ seed investment in e-commerce company Thailand’s private sector is dominated by families, especially BuzzCommerce, both in May. those of Chinese origin. Thai-Chinese companies have grown in power over the years, with one of Thailand’s largest Although the number of Thai deals has been consistent, it’s being Charoen Pokphand Group, which was established by tepid compared with that of nearby Vietnam, where there has the Thai-Chinese Chearavanont family. been double-digit deal flow for the past few years, reaching a high of 28 transactions in 2010, according to figures from There are plenty of willing buyers of private equity-backed the Asia Venture Capital Journal. companies in Thailand. At the same time, firms may face competition from Thai conglomerates, specifically large Finding private Thai companies to invest in can be a family-run entities, which are consolidating their industries by challenge, given that many businesses continue to be family- acquiring smaller enterprises. run and it is not “intuitive” for them to sell stakes to private equity, said Mr. Ireland. Competing in those conditions favors local firms, according to Mr. Chartikavanij. “A local team which is full time in Navis, like many other Asian general partners looking at Thailand will help gain access to deals,” he said. “There can Thailand, invests opportunistically. A key advantage Asia- be a cultural and language gap between local entrepreneurs focused firms have over their domestic Thai peers is that they and those providing foreign capital.” n are under less pressure to deploy capital, given they can invest elsewhere on the continent. In fact, Navis, whose latest fund totals $1.3 billion, has seen more exits than new investments in recent years in Thailand, said Mr. Ireland. The

14 | DOW JONES PRIVATE EQUITY ANALYST Asia Private Equity Trends

RISING STAR Chris Freund’s Pioneering Spirit Pays Off for Mekong Capital

By SONJA CHEUNG consultant for Chicago-based investment company Harris Associates LP, before spending the next six years at Franklin founder of Mekong Capital, Templeton Investments as a portfolio manager in the 1990s. Chris Freund, is one of the pioneers of Vietnamese private equity. The 42-year-old was one of the ﬁrst Back then, there was often a misalignment between foreign investors to look at deals in the Southeast Asian country, almost investors and their local Vietnamese partners, who often sought 20 years ahead of global ﬁrms. kickbacks from company owners, he said. Mr. Freund said he has as far as possible avoided companies that have Today, some of the world’s largest connections with, or sell to, Vietnam’s state-owned enterprises, private equity houses – from TPG adding that there can be transparency issues. Corruption in Capital to Kohlberg Kravis Roberts & Vietnam has been a long-standing concern for many investors, Co. – are circling Vietnam in search of holding back foreign direct investment, according to experts. investment opportunities and the prospet of making solid returns as the Mekong Capital’s portfolio comprises consumer-related country’s rising middle class supports companies, including retail and education businesses. The companies’ growth. firm is currently raising a fourth fund with a target of $150 million to invest in the frontier market. It has achieved multiple Career History Standard Chartered PLC ‘s private equity exits from previous funds. arm made its first deal in Vietnam when it u Partner at Mekong acquired a stake in retaurant chain opera- The key challenge today, however, is finding well-managed C apital (March 2001-Present) tor Golden Gate for $35 million from companies, said Mr. Freund, who prefers to put money into Mekong Capital in September. TPG businesses that have multiple co-founders. u Vice president and injected around $50 million into Masan portfolio manager Agriculture in 2013, while KKR invested “There’s more accountability. Two to five co-founders keeps at Franklin Templeton Investments (April $200 million in Vietnamese sauce maker [the company] in check.” 1995-March 2001) Masan Consumer Corp. in January 2013. One portfolio company with a handful of founders, and an u Consultant at As an early Vietnam mover, Mr. Freund investment of which Mr. Freund is particularly proud, is Harris Associates (June 1994- said his interest in the country was Vietnamese mobile phone business Mobile World. Mekong November 1994) sparked by watching old war movies plowed $3.5 million into the company for a 32.5% stake in about the nation, but his decision to em- 2007. It has since made several partial exits, including selling bark on an investment career was largely driven by the U.S. shares in 2013 to CDH. Most recently, in April, the firm sold lifting its 19-year-old trade embargo on Vietnam in 1994. some of its shares in Mobile World via a pre-initial public offering private placement, representing a nearly 22-times “There were no foreign investments before, but suddenly the return on its initial investment. door was open. Vietnamese companies, however, had no experience of working with foreigners,” he said. Mobile World had fewer than 10 stores when the private equity firm first invested, but that number has increased to Although many people would be deterred from going into the hundreds, given the meteoric rise of mobile phone unchartered territory, this wasn’t the case for Mr. Freund. subscribers in the country.

Former colleague Thomas Lanyi, who now works at Chinese Mr. Freund graduated from the University of California, Santa private equity house CDH Investments, said the “act of Cruz, with a bachelor’s degree in psychology in 1995. He pioneering” appealed to Mr. Freund, a psychology graduate originally focused on religious studies and psychology, and who is “willing to learn all the time, and has a willingness to then economics. He spent a year abroad from 1992 to 1993 look at things newly.” studying Buddhism in India, and Southeast Asia. He lived in a monastery in Thailand and spent time in Bodh Gaya in Mr. Freund was quick to recognize early pitfalls of investing India where Gautama Buddha is said to have obtained in the emerging Asian market, though, when he became a enlightenment under the Bodhi tree. n

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