Quarterly Review a Publication of the Emerging Markets Private Equity Association ● Volume V, Issue 3, Q3 2009 October 2009

Emerging Markets Private Equity Quarterly Review A Publication of the Emerging Markets Private Equity Association ● Volume V, Issue 3, Q3 2009 October 2009

Viewpoint In This Issue With consensus growing that we are turning the corner to recovery, now seems an appropriate time to take stock of the impact of the crisis on emerg- FEATURES ing markets private equity.

The good news is that most emerging economies weathered the crisis intact, RMB Funds—The Current State and and some are in fact leading the global recovery. The not-so-good news is Way Forward: A Legal and Tax Wish emerging market fund managers’ dependence on the hardest hit Western List (Expert Commentary) 3 institutional investors has made fundraising extremely difficult. As reported in this issue, fundraising through mid-year fell 55% year over year, testament to the internal capital constraints tying the hands of even the most enthusiastic Distressed Private Equity: potential investors for the next few quarters. The 52% year over year drop in Is There an Attractive investments, by contrast, seems to be a temporary side effect of the crisis. Investment Opportunity in Fund managers who have capital were waiting for markets to stabilize and the Emerging Markets? 9 valuations to sink lower. There are already signs of a pick-up in deal activity in the second half of the year. To put the gloomy start to 2009 into perspective, it’s important to note that fundraising and investment totals for the first six Fundraising and Investment Slows months of 2009 still exceed those for all of 2004, and are on pace to match Down Through Mid-Year 16 2006 activity levels.

News and Data One key driver for the continued vibrancy of the asset class will be increased diversification of sources of capital to include local institutions, and the nec- essary regulations allowing for comingled capital. This issue includes expert Member News 18 commentary from EMPEA members Clifford Chance and KPMG on the legal and tax considerations for creating such a framework for China RMB funds, and serves as an excellent preview of the topics for discussion at the upcom- Funds Launched & Closed 20 ing 2nd annual Beijing Private Equity Forum, co-hosted by EMPEA and the Beijing Private Equity Association and taking place November 8th and 9th. EM PE Performance 21 While the China growth story has been a pivotal part of the recovery narra- tive, the expected boom in distressed investments has yet to materialize. Notable EM PE Exits & IPOs 24 EMPEA’s findings from a recent study for the International Finance Corpora- tion, summarized in this issue, suggest that pockets of distressed opportunities do exist, particularly in Emerging Asia and Central and Eastern Europe. EMPEA Members 25 However, most sellers remain more “stressed” than distressed, as use of leverage leading up to the crisis was minimal, and restructurings have been slow in coming. A small set of players are well-positioned to exploit the grow- Featured Events 28 ing stream, rather than flood, of deal flow as it emerges.

Looking ahead to our inaugural Africa PE event with the Financial Times on November 2nd, and the 5th Annual Emerging Markets Private Equity Forum on November 3rd and 4th, we anticipate some vigorous stock taking from the podiums and in the hallways of London. We hope you can join us there.

Sarah E. Alexander, President Emerging Markets Private Equity Association

Emerging Markets Private Equity Association 1055 Thomas Jefferson St. NW, Suite 650, Washington DC 20007 Tel: +1.202.333.8171 www.empea.net About EMPEA

The Emerging Markets Private Equity Asso- ciation (EMPEA) is a non-profit, independent, Executive Editor global industry association that promotes Sarah E. Alexander greater understanding of and a more favorable climate for private equity and venture Editorial Director capital investing in the emerging markets of Jennifer Choi Africa, Asia, Europe, Latin America and the Middle East. Writing and Research Harrison Moskowitz EMPEA was founded in 2004 with the be- Nadiya Satyamurthy lief that private equity and venture capital Scott Scheide can be critical drivers of economic growth in emerging markets while simultaneously Production generating strong returns for investors. Blue House www.bluehouse.us In support of its mission, EMPEA: • Researches, analyzes and disseminates © 2009 Emerging Markets Private Equity Association authoritative information on emerging markets private equity; All rights reserved. Emerging Markets Private Equity Quarterly Review is a publication of the Emerging Markets Private Equity Association. Neither • Convenes meetings and conferences this publication nor any part of it may be reproduced, stored in a retrieval around the world to promote information system, or transmitted in any form or by any means, electronic, mechanical, exchange between leading fund manag- photocopying, recording, or otherwise, without the prior permission of the ers and institutional investors; Emerging Markets Private Equity Association.

• Offers professional development programs Subscriptions to enhance knowledge transfer; and, For subscription or single issue purchase, visit www.empea.net or email empea@ empea.net. Subscription for one year (4 issues) is US$495. EMPEA members • Collaborates with stakeholders from receive the Emerging Markets Private Equity Quarterly Review for free. across the globe. Advertising Opportunities The Emerging Markets Private Equity Quarterly Review offers readers an analytical and factual look at private equity investing in emerging markets. The Quarterly Review features include regional and country market analysis, an overview of current trends in the industry, benchmark data from Cambridge Become a Member Associates, and guest articles from leading thinkers and practitioners. The Emerging Markets Private Equity As- Its readership comprises a broad array of private equity fund managers, sociation is the only global body that rep- institutional investors, service providers, and other key stakeholders in the resents the growing industry of emerging industry from more than 50 countries. markets private equity. As a leading global player, EMPEA offers features that meet Advertising opportunities are available for upcoming issues. For more the needs of a broad range of institutions information, please contact Cristiane Nascimento, Communications and active in emerging markets, including Gen- Marketing Manager, at [email protected] or +1.202.333.8171. eral Partners (GPs), Limited Partners (LPs), business associations, service providers, EMPEA multilateral and academic institutions, and 1055 Thomas Jefferson Street NW, Suite 650 governmental bodies. Washington, DC 20007 USA Tel: +1.202.333.8171 • Fax: +1.202.333.3162 For more information on how to become www.empea.net a member visit www.empea.net or contact Kyoko Terada at [email protected] or +1.202.333.8171.

2 EM PE Quarterly Review Vol V Issue 3, Q3 2009 Expert Commentary RMB Funds—The Current State and Way Forward: A Legal and Tax Wish List

Recent headlines on interest in establishing RMB-denominated funds in China underscore the growing importance of issues relating to the coexistence of domestic and offshore fund sponsors and capital not only in China, but across the emerging markets. EMPEA is proud to present the following expert opinion on issues for consideration in building a framework for the Chinese market, contributed by John Fadely of Premier Member Clifford Chance and John Gu of As- sociate Member KPMG.

Recently several international fund sponsors have announced Shanghai and other municipalities have played an impor- plans to establish Renminbi (RMB) private equity funds for tant role by introducing incentives for offshore sponsors to investors based in the People’s Republic of China (PRC), as establish wholly foreign-owned and/or –invested fund man- summarized in the table below. RMB venture capital funds agers based in the PRC. On March 5, 2009, the Ministry of that include participation from foreign investors have existed Commerce (MofCOM) signalled its support for this decen- in a limited application since 2000. However, these announce- tralized approach by officially delegating approval authority ments have drawn renewed attention to RMB funds as a po- over foreign-invested venture capital investment enterprises tential means to access the growing pool of capital in China (FIVCIEs)1 to the Ministry’s provincial level branches. These as well as deal flow, and to invest without having to obtain developments suggest growing recognition of the potential the governmental approvals required of offshore funds. Inter- contributions that offshore fund sponsors could make to the est in RMB funds will certainly continue to grow, given the development of China’s private equity industry. increasing viability for exits through China’s capital markets and the anticipated strengthening of the RMB against the Although recent developments are encouraging, impedi- U.S. dollar. ments remain to greater foreign participation in China’s

Exhibit 1: Sampling of RMB Funds and Foreign-Invested Managers Established in Pudong, Shanghai (as of 7 September 2009)

Offshore Sponsor (PRC Co-Sponsor) Announced Name Announced Fund Size Approved Foreign-Invested Fund Managers First Eastern Financial Investment Group First Eastern (Shanghai) Equity Investment RMB 6 billion Management Co., Ltd (Zhongqidong Fund) Zhongqidong (Shanghai) Equity Investment Not known Management Co., Ltd CLSA Asia-Pacific Markets Guosheng CLSA (Shanghai) Industrial Investment RMB 10 billion (Shanghai Guosheng Group Co.) Management Co., Ltd Prax Capital Management Co. Prax Equity Investment Management (Shanghai) Co., Ltd RMB 1.5 billion DFJ Dragon Fund China DFJ Dragon (Shanghai) Equity Investment Not known Management Co., Ltd Foreign Investors with Intent to Establish Foreign-Invested Fund Managers (based on press reports) Blackstone Group N/A Not known Kohlberg Kravis Roberts & Co N/A No less than RMB 5 billion Carlyle Group N/A No less than RMB 5 billion Private Equity Arm of Goldman Sachs N/A Not known Approved Foreign-Invested RMB Fund Blackstone Group Blackstone Zhonghua Development Investment Fund RMB 5 billion

1 With registered capital under US$100 million. Continued on page 4

EM PE Quarterly Review Vol V Issue 3, Q3 2009 3 RMB Funds, continued from page 3 Expert Commentary private equity industry. A key driver of change has been Also, the marketing of private equity fund interests to Chi- competition amongst municipalities to attract offshore nese investors is currently done without the benefit of a fund sponsors to establish RMB funds, but a clear regula- private placement regime under PRC securities law. Ideally, tory framework from the central government will eventu- fund interests could be placed under a “safe harbor” rule. ally be needed to sustain the growth of the industry. The This would assure sponsors and PRC-based intermediaries National Development and Reform Commission (NDRC), (such as banks) that placements do not require regulatory ap- which studies and formulates macroeconomic policies un- proval so long as solicited investors meet clear sophistica- der the Chinese State Council, is expected to publish such tion requirements and/or the number of investors solicited a framework later this year. Ultimately, however, the indus- is below a maximum threshold, and would also protect non- try will also need national legislation—requiring the involve- qualified investors in China from being solicited to purchase ment of the NDRC, MofCom, the State Administration of fund interests that are not suitable for them. Foreign Exchange (SAFE) and the State Administration of Taxation (SAT), among others. Creating workable legisla- Provide sponsors with comfort regarding tion for the formation of RMB funds by offshore sponsors operation of onshore-offshore fund and the pooling of Chinese and offshore capital will require that all of these governmental entities work together. As structures each entity has authority within its own jurisdiction, one would have to coordinate the others; it appears the NDRC As discussed below, currently there is no onshore vehicle that would take that coordinating role. allows offshore fund sponsors to pool Chinese and offshore capital into RMB funds. To fill this gap, certain PRC municipali- This article discusses several issues hampering offshore fund ties have allowed offshore sponsors to pool Chinese capital in sponsors’ participation in the development of China’s private domestic limited partnerships that are (or will be) effectively equity industry and lays out some potential ways to over- controlled by the offshore sponsors. come them. This raises two sets of questions: Allow more PRC capital to be invested in i.) Under the domestic limited partnership law, can a (directly private equity funds or indirectly) foreign-invested entity be the GP of a domes- The National Social Security Fund (NSSF), China’s national tic limited partnership? So long as this question remains government pension fund, has invested in a handful of RMB unanswered, the basis on which such a GP may convert funds. Registration with the NDRC is required for the NSSF foreign exchange into RMB to make its required de mini- to invest, and, so far, only RMB funds with general part- mis capital contribution to the limited partnership will be 2 ners (GPs) that are wholly domestically owned have been unclear. able to register. Ideally, the NSSF would have the flexibility to invest in a broader range of RMB funds—including those ii.) If the offshore sponsor already operates offshore private formed by (directly or indirectly) foreign-invested GPs—so equity funds that invest in China, will those funds be able that the returns on its portfolio could benefit from greater to co-invest with the RMB funds formed by the same diversification. sponsor without raising “cherry picking” concerns (i.e., preferential access by the RMB fund to investment op- The promulgation of regulations permitting PRC insurers portunities)? To address this concern, the offshore spon- to invest in onshore private equity funds would further sor would probably need to control the RMB fund’s invest- increase the available pool of capital in China, as would ment decision-making process by controlling the GP. liberalization allowing other financial institutions to do the same. According to Z-Ben Advisors, after receiving approv- Even if cherry picking concerns can be effectively addressed, al last year to allocate up to 10% of their assets into infra- could the RMB fund lose potential investment opportunities structure funds, by June 2009 PRC insurers allocated into to other onshore competitors because it must wait for the infrastructure funds approximately RMB 75 billion, or about offshore fund to obtain pre-investment regulatory approvals 2% of their total assets of RMB 3.7 trillion. This may be a from MofCOM, which generally requires at least one month precursor of additional capital flows from PRC financial in- and sometimes much longer? Will potential portfolio com- stitutions into RMB funds. Additionally, Chinese banks and panies be willing to accept an investment not only from the other financial institutions may eventually play a key role in RMB fund, but also from the offshore fund, given the for- placing RMB funds to high net worth individuals and other eign currency conversion procedures involved? As further potential fund investors. discussed below, could the offshore fund co-invest without undue exposure to PRC tax risk?

Continued on page 5

2 Some offshore sponsors of RMB funds do not face currency conversion issues because their PRC affiliates hold sufficient amounts of RMB to fund the general partner’s capital commitment. Also, a foreign-invested enterprise lacking sufficient RMB funds could, in theory, borrow the shortfall amount up to the excess of its total investment amount over its paid-in capital. However, this is generally not a viable solution because PRC law is unclear on whether the borrower could use such borrowings to meet its capital commitment to an RMB fund.

4 EM PE Quarterly Review Vol V Issue 3, Q3 2009 RMB Funds, continued from page 4 Expert Commentary

To encourage the effective pooling of Chinese and offshore Provide workable vehicles for the pooling capital through onshore-offshore fund structures, harmoniza- of Chinese and offshore capital tion of the regulatory treatment of RMB and offshore funds under common sponsorship and clarification of the tax posi- Offshore fund sponsors and investors are accustomed to tion of offshore funds (discussed below) would be helpful. using limited partnerships and other legal forms that en- Additionally, to promote the stable development of private sure the limited liability of investors while affording fund equity funds in China, these benefits could be given only to participants considerable freedom of contract with regard RMB funds that are managed by qualifying managers estab- to the commercial terms of the fund. Ideally, any RMB fund lished in the PRC that meet reasonable minimum capital, pro- vehicle that ultimately allows the pooling of Chinese and fessional experience and other requirements. offshore capital would also provide these benefits. The foreign-invested limited partnership (FILP) model, not yet Although onshore-offshore fund structures generally invest available within China, and the existing foreign-invested within China, some offshore funds have investment objec- venture capital investment enterprises (FIVCIEs) present tives that allow them to participate together with PRC enter- two potential models upon which future regulations could prises in their China outbound investments. To better enable be based.3 outbound co-investments under an onshore-offshore fund structure, the approval requirements for RMB funds to invest Foreign-Invested Limited Partnerships (FILPs) offshore—including requirements under the qualified domestic institutional investor (QDII) scheme for outbound invest- Foreign-invested limited partnerships could potentially ments in listed securities—would also need to be clarified. boost the growth of China’s private equity industry by

Exhibit 2: Comparison of Current FIVCIE Rules vs. MofCOM Consultation Draft (2006)

Current FIVCIE Rules MofCOM Consultation Draft (2006) Leverage Not permitted. FIVCIEs with capital commitments of at least US$10 million and no more than US$30 million: leverage of up to 4X or 6X, respectively, of paid-in capital. Qualification as The “mandatory investor” or one of its affiliates Minimum assets under management lowered to US$60 a “Mandatory must: million, no less than US$30 million of which must have Investor” 1. be engaged mainly in venture capital business; been deployed. 2. have had minimum AUM of US$100m in three years prior to applying to form the FIVCIE (including minimum US$50 million already deployed)*; and 3. have at least three investment professionals, each with at least three years venture capital experience.** Foreign Exchange Treatment unclear pending promulgation of Repatriation of profits permitted from the foreign exchange and Remittances State Administration of Foreign Exchange account of a non-legal person FIVCIE or through purchase (SAFE) regulations. of foreign exchange from designated banks. Other matters governed by SAFE regulations applicable to FIEs. Investment Scope No activities permitted under consultation draft FIVCIEs may: currently allowed. 1. manage other venture capital enterprises; 2. participate in establishment of venture capital enterprises and venture capital management and advisory enterprises; 3. invest in preferred shares and convertible preferred shares of portfolio companies; and 4. subject to approval, make strategic investments in listed companies (i.e., PIPE deals). * This applies only to offshore “mandatory investors”; a lower threshold applies to onshore “mandatory investors.” ** The professionals could work for the FIVCIE’s foreign-invested manager. Continued on page 6

3 A third alternative is the potential introduction of a qualified foreign investor scheme under which offshore investors could invest directly in RMB funds formed as domestic limited partnerships, ideally without causing such RMB funds to be treated as foreign-invested under PRC law. The rough analogy of such a scheme is the qualified foreign institutional investor (QFII) scheme, under which qualified foreign investors may obtain quotas to purchase shares listed in the PRC. However, the minimum requirements for foreign investors in RMB funds under such a scheme would have to be considerably less stringent than those for QFIIs; otherwise, such a scheme would not attract meaningful amounts of foreign capital into RMB funds.

EM PE Quarterly Review Vol V Issue 3, Q3 2009 5 RMB Funds, continued from page 5 Expert Commentary allowing the replication of customary terms found in off- iii.) Instead of obtaining pre-investment approvals from Mof- shore fund documents. Although this would not address COM, FIVCIEs only have to make post-investment filings offshore investors’ concerns regarding the enforcement so long as the investment is in an “encouraged” (e.g., of contractual terms in PRC courts, the availability of the infrastructure, environmentally-friendly technologies, etc.) customary partnership form and legal terms would at least or “permitted” (i.e., neither “encouraged” nor “restrict- allow RMB funds to offer offshore investors the basic deal ed”) category. to which they are accustomed. In January 2007, MofCOM issued a draft of the FILP law for consultation, and recently Although the FIVCIE model has proliferated, its wider adop- a new draft was reportedly submitted to the State Coun- tion has been impeded by various limitations. These limita- cil for approval, although its contents are not yet publicly tions arise in part from the somewhat artificial bifurcation available and the promulgation date remains unclear. Also, between venture capital and private equity under the FIVCIE reportedly a draft Administrative Measures for Foreign En- rules, despite the considerable overlap between the two ap- terprises and Individuals to Establish Partnerships in the proaches, particularly in predominantly growth capital markets PRC has been prepared. However, since it has not been such as China. Specifically, the rules contemplate FIVCIEs to finalized and published by MofCOM, SAFE and other rel- be “pure” venture capital funds by limiting them to making evant ministries, the implementing rules and notices that investments in enterprises that use high or new technology generally follow, and are required to clarify key issues, also (which itself is not well-defined) and preventing the use of have not been published. leverage or guarantees by FIVCIEs for the borrowings of their portfolio companies. To take full advantage of the benefits of the limited partnership model for the Chinese private equity industry would Additional impediments to wider adoption include the re- require amendments to certain provisions in the draft law quirement that a FIVCIE’s “mandatory investor” (or one of its for consultation. Ideally, (i.) FILPs would only be required affiliates) must meet the experience requirements outlined in to make post-investment filings with MofCOM rather than Exhibit 2, the lack of clarity surrounding the foreign exchange obtaining prior MofCOM approval for investments, (ii.) as aspects of the operation of FIVCIEs, and the requirement that discussed below, the tax treatment of FILPs would be clari- capital may not be contributed to non-legal person FIVCIEs fied, (iii.) certainty would be provided regarding the treat- over a period exceeding five years (which means having to ment of FILPs under the PRC foreign exchange regime and obtain regulatory approvals for any follow-on investments (iv) certain provisions in the draft law would be reconsid- made after the five-year period). ered. For example, the statement of assets to be filed by FILPs with MofCOM would not be made publicly available. In July 2006, MofCOM published a consultation draft contain- Additionally, FILPs would not be obligated to ensure that ing measures (see Exhibit 2) that, if adopted, would overall capital is contributed within 90 days after the partner- come some of these hurdles. However, amended FIVCIE ship’s formation, nor would assets be potentially subject to rules have yet to be promulgated, and the key restriction on expropriation if in the public interest. FIVCIEs—that they may invest only in companies using high or new technology—would remain. Foreign-Invested Venture Capital Investment The table in Exhibit 2 contrasts the current FIVCIE rules with key Enterprises (FIVCIEs) changes suggested in the 2006 MofCOM consultation draft. Although first permitted in 2001, in practice FIVCIEs became a viable option for offshore sponsors only in 2003, when key Formulate clear taxation policy to promote amendments were made to the FIVCIE rules. Initial market interest in FIVCIEs was weak but in the past few years has swelled, RMB funds and now there are roughly 50–60 FIVCIEs known to be in ex- Given the potential tax impact (as discussed below) on off- istence. With a few exceptions, to date, FIVCIEs have been shore limited partners (LPs) and GPs due to the GP’s man- formed with capital commitments of less than US$100 million. agement of RMB funds, a tax framework that clarifies the tax treatment of these participants in RMB funds will be key to Formed as foreign-invested enterprises (FIEs)—and generally promoting the growth of RMB funds that pool Chinese and as FIEs that are non-legal person cooperative joint ventures offshore capital. Drawing on the experience of other jurisdic- (CJVs)—FIVCIEs offer the following advantages: tions, the following tax measures could be adopted to encourage offshore participation in RMB funds. i.) They allow for the pooling of Chinese and offshore capital; ii.) An offshore sponsor may manage a FIVCIE through its The tax challenges “mandatory investor” (the rough equivalent of a GP) and Currently there are no PRC tax rules specifically dealing with an onshore manager, both of which the offshore sponsor the taxation of RMB funds (or, for that matter, offshore funds may control; and investing in China). As a result, offshore GPs intending to

Continued on page 7

6 EM PE Quarterly Review Vol V Issue 3, Q3 2009 RMB Funds, continued from page 6 Expert Commentary manage RMB funds could potentially expose themselves to To avoid this unfavorable tax result, offshore GPs would have a higher tax impact, which must be taken into account when to carefully structure their activities in the PRC when man- structuring RMB funds. Risks regarding the PRC tax expo- aging RMB funds so as to avoid constituting a permanent sure of offshore investors would also have to be addressed establishment in the PRC for the sponsor’s offshore China- if offshore investors (i.e., LPs) are allowed to participate in focused funds. Ideally, PRC tax laws would clarify that the RMB funds in the future. direct investment of an offshore LP in both RMB funds and offshore funds would be taxed on a withholding basis, thus Potential tax impact for offshore GPs resulting in no increased PRC tax leakage for the offshore For an RMB fund formed as a domestic limited partnership, the LP. Unfortunately, since the current PRC tax framework does GP and fund manager must be onshore entities, which expos- not offer such clarity, the onshore GP and the manager of es carried interest paid to the GP and management fees paid the RMB fund would have to structure their activities so that to the fund manager in the PRC to full taxation at the corporate they do not have authority to manage or participate in the income tax rate of 25%. A business tax of 5% may also apply investment decisions of the offshore fund. Only through this to this income, as well as a further withholding tax of 10% separation of authority can the offshore fund convincingly on profit distributions from these onshore entities, depending make the case that its LPs’ returns from China portfolio in- on the holding structure. By contrast, GPs and fund managers vestments should continue to be taxed on a withholding ba- established in offshore jurisdictions generally are not taxed on sis. However, separating management and decision-making carried interest or management fees, depending on the fund functions along onshore-offshore lines is not without draw- structure. This means that there could be considerable addi- backs, as it may involve higher overhead costs and would ex- tional tax leakage on carried interest and management fees for acerbate the “cherry picking” concerns of LPs in the offshore RMB funds compared to offshore funds. fund, as noted above.

If an FILP law is promulgated, offshore GPs would be able Potential tax reform measures to form RMB funds that pool capital from PRC and offshore Confirmation of withholding tax position of offshore LPs investors. However, unless the tax rules are amended to limit the potential tax impact for offshore GPs, the resulting As noted above, most offshore LPs would prefer to retain the incremental PRC tax exposure for carried interest and man- withholding basis of taxation (capped at a tax rate of 10%) agement fees earned in connection with the RMB fund un- with respect to their PRC portfolio investments and avoid der the existing tax framework would be a strong disincen- the risk of permanent establishment arising from an offshore tive for sponsors to form RMB funds as FILPs. This could GP’s onshore management of RMB funds (potentially trigger- lead to a continuation of the bifurcated onshore-offshore ing the 25% corporate income tax rate). fund structures described above, with sponsors establishing separate GPs to respectively manage their RMB funds Offshore LPs potentially interested in investing directly in and offshore funds. RMB funds require greater clarification from PRC tax authori- ties regarding the circumstances under which the withholding Potential tax impact for offshore LPs taxation basis would be preserved for RMB funds organized as FIVCIEs or (in the future) FILPs. For example, perhaps tax- An offshore LP that invests in an offshore fund managed by ation on a withholding basis could be preserved if offshore an offshore GP would be taxed at a rate of 10% or less, on LPs do not actively participate in the negotiation and man- a withholding basis, with respect to investment returns from agement of PRC portfolio investments and the fund manage- PRC portfolio investments to the extent that such returns ment functions are delegated to a qualifying fund manager represent China-sourced income. (meeting reasonable minimum capital, professional experience and other requirements). This basis of taxation was giv- However, were an offshore LP to invest in an RMB fund man- en to offshore investors in FIVCIEs established as non-legal aged by an offshore GP, the LP’s tax leakage from invest- person CJVs under a specific fund management arrangement ments in offshore funds investing in China could substantially described in a 2003 SAT tax circular that is believed to have increase due to the GP’s activities on behalf of the RMB been superseded by the 2008 Corporate Income Tax Law. fund. This risk exists because, without a specific exemption This has led to significant uncertainty as to the legal stature for offshore funds under PRC tax rules, offshore LPs could of the 2003 circular regarding the tax treatment for offshore be considered to have a “permanent establishment” in the LPs in RMB funds. PRC due to the offshore GP’s activities in China on behalf of the RMB fund. The result—the taxation of the offshore LP’s Incentive measures for offshore GPs and offshore funds investment returns from China portfolio investments at the rate of 25% instead of 10% if no permanent establishment To encourage the development of the RMB fund manage- exists—could be the difference between an acceptable and ment industry and attract offshore GPs to establish a PRC an unacceptable after-tax return. presence, the PRC government could consider introducing

Continued on page 8

EM PE Quarterly Review Vol V Issue 3, Q3 2009 7 RMB Funds, continued from page 7 Expert Commentary national tax policies to provide greater incentives and cer- tion taxes, as well the refund of personal income taxes for tainty to offshore GPs and fund managers. Incentives, such senior executives or professional staff hired in China. Ide- as preferential tax treatment and subsidies, have been in- ally, such incentives could be extended on a national level troduced locally in several jurisdictions, including Shanghai, to qualifying fund managers, including those established by Beijing, and Tianjin (see Exhibit 3). However, these are in- offshore GPs. sufficient to address offshore investors’ concerns. Hopeful- ly, such tax policies could be extended and applied at three In conclusion levels, as follows: Offshore participation in RMB funds at the sponsor level is ■■ If a fund manager meets reasonable minimum capital, well underway, but regulatory and tax obstacles remain for professional experience and other requirements, offshore offshore fund sponsors to become fully engaged, and for the funds managed by the qualifying fund manager (including comingling of Chinese and offshore investor capital. This arti- those established by an offshore GP) would be exempt cle offers a “wish list” of regulatory amendments that would from PRC direct taxation. This would remove the uncer- pave the way for much greater participation from offshore tainty associated with the tax exposure of offshore China- sponsors and investors in the development of the RMB funds focused funds arising from the onshore fund management landscape. Whether through sweeping regulatory change or activities of the manager and its affiliates in the PRC. in phases, as has been the case with other industries in Chi- na, addressing some of the impediments outlined here could ■■ Preferential tax treatment could be extended to income allow for a much deeper and more diverse pool of both capital derived from qualifying fund management activities. and managers. ■ Such incentive measures could be accommodated under the PRC’s present tax incentive framework—which offers a lower corporate income tax rate of 15% and an exemption from business tax for certain industries that are export-focused or have a high-tech component—and extended to the carried interest and management fees earned in connection with an RMB fund managed by a qualifying fund manager.

■ Fiscal incentives (usually at the municipality level), such as John Fadely (left) is a Partner specializing in private funds in the those recently enacted in Pudong on a trial basis, are of- Hong Kong office of Clifford Chance, and John Gu (right) is a ten provided to newly established financial institutions in Hong Kong-based Partner in the M&A and Private Equity Tax China, including direct subsidies or the waiver of transac- Department of KPMG China.

Exhibit 3: Tax Incentives for RMB Funds in Certain PRC Municipalities Beijing Shanghai Tianjin Chongqing Fund and/or Fund Taxation 5% Business Tax For Pudong- 2-year exemption followed by 3-year half Management (BT); Corporate registered Fund rate tax rebate for BT and for local portion Company in Income Tax (CIT) investing in of income tax paid both LLC and LP 2-year exemption “encouraged” structure followed by 3-year industries within half rate tax rebate Pudong, 50% for local portion of tax rebate from income tax paid local portion of income tax paid on investment return

Fund established in Corporate Income If meeting certain conditions, FIVCIE can take deductions (from CIT taxable income) the form of a legal- Tax (CIT) equivalent to 70% of equity investment in qualified medium-to-small-sized advanced person FIVCIE and technology enterprises.

Individual LPs in LP Individual Income 20% 20% (if the LP is not involved in management of limited structure Tax (IIT) partnership business)

8 EM PE Quarterly Review Vol V Issue 3, Q3 2009 Distressed Private Equity: Is There an Attractive Investment Opportunity in the Emerging Markets?

The term “distressed” has become ubiquitous in light of Despite expectations of a post-crisis flood of distressed entities a growing number of opportunities created by the disloca- in the emerging markets teetering on default or desperate to re- tion in the credit markets. One limited partner (LP) active in structure, to date the opportunity set has not been sufficient to distressed investing sums up the current landscape: “The entice many distressed specialists to dedicate resources to de- model of good companies with bad balance sheets is quick- veloping countries. There is a growing consensus, however, that ly being replaced by great companies with terrible balance although the distressed activity in the West may be masking sheets.” The mounting number of companies falling into opportunities elsewhere, such opportunities do exist in a few the latter category signals potentially unprecedented invest- select markets and will continue to grow. The fact that the large ment opportunities. Through September 2009, Standard and global distressed players are not active in these markets has cre- Poor’s reported 214 defaults globally year to date, a four-fold ated a significant opportunity for those few managers that have increase over September 2008, and comprising 34 emerg- both the local knowledge and the specialized restructuring and ing market companies. legal expertise to act on these growing opportunities.

The distressed market in the West is booming. According to This article examines the state of play for distressed investing data provider Prequin, distressed private equity funds raised in emerging economies, with a focus on comparatively robust approximately US$92 billion in 2007 and 2008. The sheer vol- markets for the asset class in Asia and Central Europe. Addition- ume of distressed companies in the West, along with overall ally, this article highlights that if the handful of locally-focused perceptions of lower risk versus non-Western markets, have fund managers with distressed expertise are able to raise capital propelled many leading global distressed fund managers to fo- in the current environment, they will be uniquely positioned to cus entirely on U.S. and European deal flow, ignoring emerging capitalize on both current and upcoming distressed opportuni- economies altogether. ties in the emerging markets.

Exhibit 1: Distressed Investing Strategies

Pools/Portfolios Single Credits: Non-control Single Credits: Control (NPLs) Passive Trading Active Trading Restructuring Rescue/Turnaround Summary Buy and sell securities Accumulate distressed Attain a controlling Attain a controlling Purchase packages of that are fundamentally sizable (but minority) debt position in a financially position in a financially and assets from banks or mispriced and will positions in entities and distressed company operationally distressed financial institutions rebound without any influence the process and actively engage company and work to and create workout direct involvement in the in the restructuring repair the balance sheet agreements with issuer’s operations process and improve operations individual borrowers Skills Trading, credit Trading, credit, Trading, credit, Trading, credit, Legal; also need large Required restructuring restructuring, legal restructuring, legal, teams and a local operational presence Instruments Primarily debt Primarily debt Debt or equity Debt or equity Primarily debt Focus Large and midsize Large and midsize Large, SMEs Large, SMEs Large, SMEs Companies Entry Point Secondary market Secondary market Secondary market or Secondary market or new Secondary market new lending lending Timeframe Less than 2 years; 1–2 years 2–5 years; can be 2–5 years; can be longer Varies. This is a hold to holding period is often longer maturity strategy; can days or weeks sell prior to maturity Expected 12–18% 15–20% 18–25% 20–25%+ 25%+ or 1.75x Returns[1] [1] Note that performance varies significantly based on a number of factors, including but not limited to investor/firm, fund, timing, location and sector. The return expectations outlined in this article are meant to serve as a guide based on average approximation. Note: The definition of “special situations” varies significantly by investor; typically refers to distressed investing in an event-driven or complex situation, such as spin-offs, mergers or share buybacks.

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EM PE Quarterly Review Vol V Issue 3, Q3 2009 9 Distressed Private Equity, continued from page 9

Defining Distressed Private Equity passive trading up to acquiring a significant minority stake that carries influence in the restructuring process, while In the broadest sense, the distressed subset includes any as- control strategies entail active engagement in the restruc- set that is undervalued.1 Anthony Stalker, a Partner with Hong turing process with investors as leading stakeholders in the Kong-based distressed asset manager ADM Capital, notes, distressed company. Under a non-performing loan (NPL) “Distressed can refer to a company, a seller, or the fact that the strategy, investors buy from financial institutions to clear market is broken and there is no liquidity.” In terms of securities, their balance sheets of non-performing assets, packaged at distressed investing most often refers to the purchase of non- discounts to par value in portfolios (10–15 loans) or pools performing debt or debt-like instruments, although this occa- (100–1,000 loans). sionally includes equity. The most common types of distressed securities are bank debt, private debt (such as trade claims), and Distressed Opportunities in the bonds including fixed/floating rate public debt or convertibles. Emerging Markets Some distressed strategies employ a “loan-to-own model,” whereby as a distressed company reorganizes its capital struc- The supply of distressed instruments in the emerging mar- ture, the pre-restructured debt ends up converting to equity. kets is small relative to North America and Western Europe, largely because of less company reliance on leverage and Distressed investing strategies can be segmented into (1) comparatively small credit markets. (See Exhibit 2 for a sam- single-credits and (2) non-performing pools and/or portfolios pling of firms active across various strategies in emerging (NPLs). (See Exhibit 1 for a more detailed summary of each markets.) There is a growing consensus, however, that dis- strategy.) Single-credit strategies involve the purchase of a tressed deals will continue to expand beyond the range of single company’s securities, either via a controlling or non- existing opportunities in regions such as Emerging Asia and controlling position. Non-control strategies can range from Central and Eastern Europe.

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1 The technical definition of distressed debt refers to debt trading at yields in excess of 1,000 basis points over the risk-free rate (e.g., United States reasuryT bonds). In the context of emerging markets, where a risk-free rate usually does not exist, securities designated as distressed refer to instruments of an entity in default, under bankruptcy protection, or likely heading towards either of these two conditions.

10 EM PE Quarterly Review Vol V Issue 3, Q3 2009 Distressed Private Equity, continued from page 10

The crisis appears to be yielding greater opportunities for entre- It is rare in Asia, and throughout preneurial activities, according to Parham Pouladdej, Managing Partner of turnaround specialist CRG Capital. “Six months ago, the emerging markets, to get we may have seen 10–20 deals per month and now we’re see- enough equity in a distressed deal to ing 30–50. It’s actually becoming more challenging to pick and gain control of a company. Historically, choose where to invest,” he says. “We’ll continue to see an only 10% to 40% of a company has increase in opportunities—at more reasonable valuations—as the banks become more realistic about restructuring their port- been available for a debt-to-equity swap. folios. The effects of the crisis are likely to last beyond one or However, if you are willing to take a two quarters.” minority position and proactively help a company back on to a growth path, However, few players expect the global financial crisis to yield a distressed boom in the emerging markets. One emerging mar- it has often proven a win-win for the kets distressed investing specialist notes, “We haven’t seen a company and the investor.” great deal of activity in terms of defaults or forced selling in the —Rob Petty, Clearwater Capital Partners emerging markets, and this is not a case where the flood gates will open in the near future. Distressed situations will develop gradually over the next several years.” and the first non-Chinese investor to purchase an NPL portfolio in China, observes that, “in some emerging markets, To date, the opportunity set within the emerging markets has there is currently a greater focus on restructurings than on tended more to non-control single credit strategies, typically aris- NPLs. But you have to chose carefully and do your home- ing from a handful of large entities that became highly-levered work since in a few of the jurisdictions where Western-style and/or made derivatives bets that resulted in sizable currency bankruptcy laws do exist, they’re insufficiently developed or losses. The credit crisis has also begun to yield opportunities inadequately enforced.” with small and midsize companies struggling to access financing due to tighter local credit markets and challenging market Emerging Asia conditions putting strain on their balance sheets. Asia’s distressed industry emerged to seize on opportunities Control strategies are the most difficult to execute in the emerg- created by the Asian crisis in the 1990s. Companies saw ing markets. Because most control deals assume bankruptcy, their foreign-denominated debt burdens surge in the face investor comfort with local rule of law and credit rights is es- of major local currency devaluations, and the subsequent sential. Additionally, the family-control model and cultural biases capital flight resulted in a flood of non-performing assets against such deals often hampers distressed transactions in the throughout the region. Many Asian governments responded emerging markets. Restrictive employment policies can signifi- by requiring financial institutions to record write-downs and cantly hinder an investor’s ability to make personnel changes. remove non-performing assets from their balance sheets. Rob Petty, Managing Partner at Clearwater Capital Partners, Several Asian countries, including China, South Korea, Ma- an investment firm focused on distressed investing in Asia, laysia, Indonesia and Thailand, created institutions called remarks, “When there is an alignment of interests, control is Asset Management Corporations (AMCs) to help financial possible; however, the number of control deals that have been institutions solve their balance sheet problems. successfully implemented in the region is a short list.” During the Asian crisis, an estimated US$7.5 billion was raised In fact, non-control investors in single credits can significantly in- by distressed private equity investors pursuing opportunities in fluence outcomes simply by securing representation on a credi- the region. Early entrants included a number of private equity tor committee—i.e., by owning 10% of a particular security, an firms such as Lone Star, The Carlyle Group, Newbridge, War- investor can by default be the largest single holder and therefore burg Pincus and J.P. Morgan Partners, as well as a number of represent all creditors in the bankruptcy process. larger hedge funds doing PE-style deals.

While there are many non-performing or equivalent loans in Several buyers, particularly hedge funds, have since exited the the emerging markets, most developing countries lack an market due to internal credit and liquidity constraints. Clearwa- active NPL market with the exception of a few countries in ter’s Petty points to the shorter lockup period for hedge funds Asia. In particular, China, India and Korea have made signifi- as a handicap in the distressed market, noting, “Hedge funds cant progress in developing a local NPL market, and similar have tried to do distressed deals in Asia, but ran into problems markets are emerging in the Philippines, Malaysia, Thailand once they were faced with redemptions that they couldn’t and Indonesia. Phil Groves, President of DAC Management, meet. It takes time to build up and exit positions, which hedge an Asia-focused distressed and special situation specialist funds are not well equipped to do.” Specialists also point to

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EM PE Quarterly Review Vol V Issue 3, Q3 2009 11 Distressed Private Equity, continued from page 11

Exhibit 2: Sampling of Distressed-Focused Funds Investing in Emerging Markets Vintage Year, Fund Manager Fund Name Geographic Focus Fund Size 3 Degrees Asset Mgmt. ADF Special Opportunities Fund Raising, US$300 million Asia, ex-Japan Spice Finance & 3 Degrees Spice 3 Degrees Special Opportunities Fund Raising, US$100 million India, Southeast Asia Asset Mgmt. ADM Capital ADM Capital CEECAT Recovery Fund Raising, EUR300 million Central and Eastern Europe, Central Asia and Turkey

Ashmore Investment Mgmt. Ashmore Global Special Situations Fund V Raising Emerging Markets Avenue Capital Group Avenue Asia Special Situations Fund IV 2006, US$3 billion Asia Clearwater Capital Partners Clearwater Capital Partners Fund IV Raising, US$1 billion Asia, ex-Japan CRG Capital CRG Central European Special Situations Raising, EUR200 million Central and Eastern Europe Fund DAC Mgmt. S.O. DAC China Special Opportunity and 2007, US$285 million China Situation Fund mCAPITAL European and Asian Special Situations Fund Raising, US$500 million Europe and Asia Mount Kellett Capital Mgmt. Mount Kellett Capital Fund I* Raising, $3.5 billion North America, Asia and Europe NBD Sana Capital NBD Sana Pakistan Distressed Fund* Raising, US$200 million Pakistan Shoreline Capital Mgmt. Shoreline China Value I 2008, US$178 million China Sphinx Private Equity Mgmt. Sphinx Turnaround Fund 2009, US$100 million Egypt TEKT Group TEKT Private Equity Fund I Raising, US$64 million Ukraine WL Ross India India Asset Recovery Fund 2006, US$300 million India * Exact fund name unknown. the bandwidth and expertise required to successfully execute However, single-credit opportunities are increasingly be- these deals, estimating the average PE-style turnaround deal coming available according to DAC’s Phil Groves. “NPLs requires a team two to three times the size of a normal PE deal. have historically been the biggest component of the Chi- The “real work” is said to begin once the papers are signed— nese distressed market, but in the last year, we’ve become closing the deal is only the beginning. aware of numerous single-credit restructuring opportunities,” says Groves, noting that many of these new op- Until this year, most distressed investing opportunities in Chi- portunities tend to be non-control. Many businesses are na have involved portfolios of non-performing loans. Govern- family-owned, and the “loan-to-own” model is not popular ment pressure and efforts to list Chinese banks have result- culturally. Clearwater’s Rob Petty adds, “It is rare in Asia, ed in many banks removing such assets from their balance and throughout the emerging markets, to get enough equi- sheets, providing a continuous source of supply. In China and ty in a distressed deal to gain control of a company. Histori- India, additional supply is coming from struggling foreign insti- cally, only 10% to 40% of a company has been available for tutions such as Lehman Brothers and AIG look to unload their a debt-to-equity swap. However, if you are willing to take a Asian holdings. However, systemic regulatory issues made for minority position, and proactively help a company back on thinner trading volume than many investors originally expect- to a growth path, it has often proven to be a win-win for the ed, observes Ben Fanger, Co-founder and Managing Director company and the investor.” of Shoreline Capital, a private investment firm that specializes in Chinese distressed assets and special situations. “Eventu- The few notable examples include the 2006 acquisition of Chi- ally there will be a robust debt trading market in China, but nese cable operator Pacnet by a consortium of private equity there isn’t yet. Banks are operating under oversight that is investors led by Ashmore Investment Management, with par- often less than effective at forcing banks and their branches ticipation from additional investors such as Clearwater Capital to quickly recognize and sell bad loans,” Fanger says. Partners and Spinnaker Capital.

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12 EM PE Quarterly Review Vol V Issue 3, Q3 2009 Distressed Private Equity, continued from page 12

For both NPLs and non-control single-credit strategies, inves- These markets are not as tors in Asia look to exit through negotiated workouts rather than via the court system. Bankruptcy laws in some Asian corrupt and uncertain as they’re countries, such as Korea and India, are more fully developed perceived to be. Investors doing than in other Asian jurisdictions, such as Indonesia, Thailand distressed in China should expect and China. The lack of consistency among the application of that exits may require some level of laws by local jurisdictions in a single country poses another challenge. Requirements, application and enforcement can creativity, and that they should price in vary significantly. Foreign creditors seeking to seize assets the unknowns at the outset.” designated as collateral do not have a clear expectation for —Ben Fanger, Shoreline Capital how the process will be conducted in court.

Investors’ options for recourse in a bankruptcy remain un- The Central and Eastern European region has proven gener- clear, and several recently adjured cases have underscored ally more conducive to single-credit, control-oriented strate- the legal uncertainty facing distressed investors in Emerging gies, particularly in European Union (EU) accession countries Asia, reinforcing investors’ view of local courts as the last considered to have greater legal transparency and stronger resort. For example, Asia Aluminum Holdings (AA), one of rule of law. Pouladdej of CRG notes, “There is a clear distinc- China’s leading aluminum processors, fell victim to the re- tion in Emerging Europe between those countries that have cent drop in global demand. The Hong Kong court oversee- legal and political structures to support free enterprise—and ing the liquidation rejected the proposed sale to Norwegian therefore have more developed capital markets and insol- aluminum firm Norsk Hydro ASA, leaving a court-approved vency laws—versus those that do not, such as Russia and plan that guarantees bondholders only 20% of their invest- the Caucasus.” ment returned. Holders of the company’s US$800 million payment-in-kind notes (many of which are held by foreign in- Ukraine, Hungary and Southeast Europe in particular have vestors) are likely to receive only a few cents on the dollar. seen increased interest from investors such as CRG Capi- tal in recent months. However, investors remain cautious, Emerging Europe particularly in markets that don’t follow the EU legal model. Richard Furst of Avenue Capital asserts that investors avoid Due to rapid escalation in foreign currency-denominated bor- dealing with the courts. “If you are a local investor in places rowing among companies in the region, Central and Eastern like Bulgaria or Romania, you may take a chance if you know Europe has become one of the most distressed regions across the judge, but outcomes depend on each court. Judges can the globe. Although ripe for investors, only a handful of firms play favoritism and trample on creditor rights.” are active in the region, including Avenue Capital Group, ADM Capital, CRG Capital and Ashmore Investment Management. Considerations for LPs CRG’s activities are wholly focused on the region, and ADM, which invests across the globe, is currently raising a vehicle Many LPs are convinced that distressed assets present one targeting Central and Eastern Europe, Turkey and Central Asia. of the best investment opportunities at present. An LP actively investing in Western market distressed funds reasons, According to Richard Furst, Senior Portfolio Manager at “Peak EBITDA multiples paid in market were around 9-10X. Avenue Capital Group, which invests in distressed single Now, when you can pick up distressed assets as cheaply as credits in the U.S., Europe and Asia, “Eastern Europe is a 5X, why would you even look at non-distressed comparable new territory for most folks. In terms of meaningful invest- companies?” ment opportunities, there are not a lot of deals and those that exist are small. The majority of opportunities tend to While investors in traditional private equity might be looking for be worked out directly between banks and borrowers.” returns greater than 30%, with distressed, returns of 20% are considered exceptional given the lower entry valuations that Distressed investors in Emerging Europe focus less on NPLs “bake in” the risk. Projected IRRs range from 12% to 18% and more on those companies that have made mistakes and for passive trading strategies, and up to 20% to 30% for turn- now need to restructure their balance sheets. ADM’s Patrick arounds. While many LPs increasingly understand the case O’Brien, Partner, adds, “One feature of the region is there is to invest in distressed funds, fewer are fully convinced that no mountain of bad consumer debt, either secured or unse- the emerging markets are the best destination for distressed cured. Funds that specialize in this area don’t have much to investments at this time, as the emerging markets have tradi- do in the region.” tionally been viewed as a riskier place to direct money. West- ern distressed funds with an 18% yield may be more compel- ling than funds offering 25% yield with a 5-year lockup period

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EM PE Quarterly Review Vol V Issue 3, Q3 2009 13 Distressed Private Equity, continued from page 13 in an emerging market. However, Shoreline’s Ben Fanger sees The model of good companies risk as potentially overstated and addressable, saying, “These with bad balance sheets is quickly markets are not as corrupt and uncertain as they’re perceived to be. Investors doing distressed in China should expect that being replaced by great companies exits may require some level of creativity, and that they should with terrible balance sheets.” price in the unknowns at the outset.” —Limited Partner For those LPs comfortable with the risk of investing in distressed assets in emerging markets, there is a small but a transformative way, you want to be able to raise the money well-positioned field of managers from which to choose. Dis- discreetly. You do not want a public bidding process whereby tressed specialists with emerging market operations don’t you hire an investment bank and all of your competitors be- expect a flood of new managers to fill this void, as the requi- come aware of your distressed situation. You will go to a firm site skill set is broad and the barriers to entry are significant. that you can trust.” As Anthony Stalker of ADM notes, “You need the ability to source opportunities locally, structure them intelligently and Outlook manage them well. A local presence is critical as most information is not freely available in these markets and most com- Despite the fact that many emerging market companies are panies are privately held, family-controlled businesses.” facing various degrees of financial distress, the distressed deal pipeline, while on the rise in a few select markets, has Few entities in the emerging markets benefit from coverage by not yet fully developed. Some distressed specialists believe the research departments of local and/or global banks or finan- it may be some time until these regions warrant more seri- cial institutions and the resulting lack of knowledge can lead to ous consideration. According to Ashmore’s Booth, “There huge pricing disparities. An NPL-centric distressed strategy, for will be a greater shake-out over the next year and a half. example, requires a deep base of contacts with the holders of Many companies are not distressed enough to be forced these assets in order to truly understand what is available and sellers, and those investors who have lost a lot of money in consequently pay a fair price. their Western-focused portfolios will likely wait to restructure until the markets normalize.” Good information on the reputation of a company, as well as the backgrounds and style of the management team, is also The retreat of global hedge funds and global distressed private crucial for distressed investors. However, the best distressed equity teams from the emerging markets has left a handful of targets—good companies with bad balance sheets—are not players capable of recognizing local distressed opportunities. typically inclined to make themselves well known. Rather, When a more robust distressed opportunity set does emerge, such firms are more likely to discreetly seek out investors they these few teams that possess established track records in dis- deem trustworthy. Ashmore Investment Management’s Head tressed investing combined with a solid understanding of local of Research Jerome Booth explains, “If you operate a family- market idiosyncrasies will be best positioned to successfully owned business in the emerging markets and need capital in exploit it. ■

14 EM PE Quarterly Review Vol V Issue 3, Q3 2009 5501 Emerging Markets Ad Resize.qxd:Layout 4 15/9/09 08:42 Page 1

The Emerging Markets Co-hosted by: Private Equity Forum

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For further information about the programme or sponsorship packages contact Colm Gilmore: [email protected] / +44 (0) 20 7566 5447 www.peimedia.com/emlon09 Fundraising and Investment Slows Down Through Mid-Year

After bucking the global trend to raise a record-breaking from US$321 million to US$855 million. Sub-Saharan Af- US$66.5 billion in 2008, the emerging markets registered a rican funds saw flat growth during the period, and funds dramatic slowdown in both new capital commitments and focused on MENA actually saw an increase by both total investment activity between January and June 2009 (1H). amount raised and number of closes. Fundraising for the emerging markets totaled only US$16 billion in the first six months of the year, down 55% from Investment a half-year high of US$36 billion in 2008 (see Exhibit 1). The US$16 billion raised through June includes closes by In the emerging markets, where the application of lever- 84 funds, representing a 36% decline in the number of ve- age remains less prevalent and large buyouts remain the hicles securing commitments during the same period in exception, fund managers have assessed the effects of 2008, when US$36 billion was raised by 132 funds. the crisis as somewhat favorable—increasingly reasonable valuations and fuller deal pipelines. However, a persistent The drop in fundraising for the emerging markets was less gap in pricing expectations and the need to focus both fi- severe than that among developed market funds, which nancial and human resources on existing portfolio compa- saw fundraising down by more than 65% relative to the nies translated to a decrease in overall investment volume same period one year prior and investment activity at its during the first six months of 2009. lowest levels in nearly a decade. As global fundraising has fallen, the share captured by emerging market funds has Private equity investment in the emerging markets fell by grown, from only 4% of global private equity capital raised 52%, with US$12.8 billion invested across 265 transac- in 2001, to 16% of the global total for the 18 months end- tions, compared to US$26.6 billion and 391 deals during ing June 2009 and 20% of capital raised between January the same period in 2008 (see Exhibit 2). While many mar- and June 2009. kets saw near zero activity in the first six months of the year, a handful of countries witnessed increases in invest- Following a slow start in the first quarter, accelerating ment value due to a small number of outsized deals. fundraising and investment activity in the second quarter and a more robust outlook for the second half of the year offer optimism about the new opportunities emerging in the aftermath of the crisis.

Fundraising Exhibit 1: Emerging Markets Private Equity Fundraising The drop in 1H fundraising was most pronounced in Emerg- Totals (2006–2009), US$ Billions ing Asia, where total funds raised went from US$29 billion 70 in the first half of 2008 to US$11 billion in the same period in 2009, representing a 61% fall in capital committed and a 60 ■ 1H ■ 2H 45% drop in the number of funds with closes (from 89 to 49). China-dedicated funds saw a 67% decrease in capital 50 US$30B raised in the first half of 2009 at US$3.9 billion down from US$34B US$11.8 billion in the same period of the previous year. 40 India-dedicated funds saw a less severe decline of 32% 30 in the aggregate funds raised year-over-year, but a sharper US$ Billions US$19B 52% decline in the number of funds with closes. 20 US$36B US$25B Fundraising for both Latin American and Central and East- 10 US$14B US$16B ern Europe / CIS funds fell by roughly 40% relative to first six months of 2008. Only one Brazil-dedicated fund 0 achieved a closed in the first half of the year. Russia saw 2006 2007 2008 2009 an increase in the amount of capital raised for the country Source: Emerging Markets Private Equity Association

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16 EM PE Quarterly Review Vol V Issue 3, Q3 2009 Fundraising and Investment, continued from page 16

China and India continued to be the most active markets ter statistics suggest a deceleration in the decline of both for investment, with 88 and 68 transactions each, respec- fundraising and investment activity. The year over year tively, in the period ending June 2009, versus 103 and 89 comparison points to a potential leveling off, with fund- deals, respectively, in the same period in 2008. Account- raising down by 39% in the second quarter compared to a ing for 62% of capital disbursed by private equity investors 72% decline for the first quarter. The year over year change in Asia, China was the only BRIC country to experience in investment totals was down by 31% from April through growth in year-over-year investment activity in the first two June, versus a 71% drop from January through March (see quarters. China saw the total value of private equity invest- Exhibit 2). Should the current pace of fundraising and in- ment double in the first half of 2009 from the same period vestment continue, 2009 totals would be on par with 2006, of the previous year, due to two watershed US$1 billion- when emerging market funds raised US$33 billion, and de- plus banking deals. ployed US$35 billion. ■

The overall decline in investment volume was attributable only in part to a correction in valuations. As of midyear, fund Exhibit 2: EM PE Quarterly Investment Totals, 1H 2008 vs. managers continued to cite mismatched pricing expecta- 1H 2009, US$ Billions (No. Transactions) tions as the main reason for stalled deals, even though some funds reported renegotiating deals in their pipelines 30 at more favorable terms. The more likely driver of the drop in investment totals was the disappearance of outsized 25 ■ Q1 ■ Q2 deals in the first half of 2009, a function both of scarcity US$13B 20 of financing in markets where the leveraged buyout model (180) -31% was beginning to appear, e.g., Asia, South Africa and Cen- 15

tral Europe, as well as liquidity constraints of those manag- US$ Billions ers focused on keeping their portfolios above water. 10 US$9B US$14B (132) Outlook 5 (211) -71% US$4B (133) While quarter-on-quarter analysis is an imprecise predictor 0 2008 2009 of overall trends, due to inevitable gaps between contractual events and timing of announcements, second quar- Source: Emerging Markets Private Equity Association

Exhibit 3: Global Private Equity Fundraising Totals 2008–1H 2009, US$ Billions (Number of Funds) 1H 2009 as % FY 2008 Amount Raised No. Funds with Region FY 2008 1H 2009 (US$B) Closes Emerging Asia 39.7 (119) 11.1 (49) 28% 41% CEE/CIS 5.6 (20) 1.8 (9) 32% 45% LatAm & Caribbean 4.5 (22) 0.9 (8) 20% 36% MENA 6.9 (19) 1.2 (9) 17% 47% Sub-Saharan Africa 2.2 (16) 1.0 (6) 45% 38% Multi-Region 7.7 (14) 0.157 (3) 2% 21% EM Total 66.5 (210) 16.2 (84) 24% 40% North America 318.1 (390) 86.2 (111) 27% 28% Europe 82.7 (128) 8.3 (N/A) 10% N/A Source: Emerging Markets Private Equity Association, EVCA, Prequin.

EM PE Quarterly Review Vol V Issue 3, Q3 2009 17 Submit your news to [email protected] Member News (Details on the back of this publication)

Asia Prior to the sale, Warburg Pincus held a 22.6% stake in Max India through its entities Madison Holdings, Melany Holdings Hong Kong-based AIF Capital Ltd. has invested approximately and Parkville Holdings. US$45 million in Singapore-listed Tat Hong Holdings, one of the world’s largest crane distribution and rental companies, acquir- CEE/CIS ing an 11.4% stake in the company. The investment was made through AIF Capital Asia III, a US$435 million fund that closed in Russia-based Alfa Capital Partners, an affiliate of Alfa Group, January 2007. is establishing a venture capital fund that will focus on Rus- sia’s telecommunications and IT sectors. The fund will target The Carlyle Group has closed its fourth Asian growth capital commitments totaling US$30 million. fund, Carlyle Asia Growth Partners IV (CAGP IV), at US$1.04 billion. Approximately 80% of the fund is to be allocated to India Russia-based Baring Vostok Capital Partners has invested and China. CAGP IV’s first investment was a US$20 million in- approximately US$18 million in Volga Gas, an oil and gas ex- jection in Chinese women’s fashion house Ellassay. The fund’s ploration and production company focused on Russia’s Vol- predecessor, CAGP III, raised US$668 million and has invested ga region. The investment increases Baring Vostok’s stake in 22 companies. from 54.8% to 58.7%. Additionally, Baring Vostok, alongside co-investors Tiger Global Management and UFG Asset Man- CIMB Standard Strategic Asset Advisors, an Asian private eq- agement, recently acquired a 9% stake in Russian search uity and infrastructure fund specialist, has been appointed man- engine Yandex. ager and advisor to the Islamic Infrastructure Fund sponsored by the Asian Development Bank (ADB) and the Islamic Develop- Darby Overseas Investments, the private equity arm of ment Bank (IDB). The fund, which is targeting commitments to- Franklin Templeton Investments, is investing EUR15.3 million taling US$500 million, will make Shariah-compliant investments in Czech Republic-based Energy 21, a builder and operator in emerging Asian markets. of photovoltaic solar power plants in Central and Eastern Eu- rope. The investment is being made through the Darby Con- Duoyuan Global Water, a portfolio company of U.S.-based pri- verging Europe Mezzanine Fund. vate equity firm Global Environment Fund (GEF), has raised US$88 million through an initial public offering on the New York The European Bank for Reconstruction and Development Stock Exchange. Duoyuan is a leading China-based domestic (EBRD) will commit up to US$50 million in a UFG Private Eq- water treatment equipment supplier. Prior to the IPO, GEF was uity’s second fund, which will focus on investments in midsize the only outside investor in the company. companies in Russia and the Commonwealth of Independent States and is targeting US$200 million in total commitments. U.S.-based private equity firm TPG Capital and China’s Hony Capital invested in Hong Kong-listed Wumart Stores, which op- Istanbul-based private equity firm RHEA Investments has erates supermarkets in China, acquiring a 10.95% stake. The acquired a controlling stake in Vakifbank’s private equity op- deal is valued at approximately US$213 million. eration Vakif Venture Capital Investments Trust (VVCIT), an Istanbul Stock Exchange-listed joint stock company. Cambodian private equity firm Leopard Capital Ltd. has re- opened its debut Leopard Cambodia Fund, which has raised ap- Latin America proximately US$29 million to date, until year-end. Leopard Capi- tal has made several investments through the fund, including a New York-based private equity firm Conduit Capital Part- US$1 million investment in Greenside Holdings, a rural power ners has reacquired Jamaica Energy Partners (JEP) for ap- transmission and distribution system project, and a US$1.8 mil- proximately US$100 million. Conduit had previously owned lion investment in Cambodia Plantations, a Singapore-based ve- JEP and sold it to Basic Energy of Texas in December 2007 hicle for agricultural investments in central Cambodia. for US$92.5 million. Separately, Conduit has also acquired a 55% stake in Panama’s Pedregal Power Company. Vietnam-based Mekong Capital has sold its stake in Tan Dai Hung, a Vietnamese food packaging manufacturer, and addition- Darby Overseas Investments, the private equity arm of Frank- ally exited its investment in Duc Thanh Wood Processing through lin Templeton Investments, has invested US$30 million in GEA, a sale to an unnamed Vietnamese strategic investor. Both trans- the holding company of Brazilian energy company Eletrogóes. actions were made through Mekong Capital’s US$18.5 million The investment is the first made through the US$245 million Mekong Enterprise Fund, which had originally invested in Tan Brazil Mezzanine Infrastructure Fund, which is managed via a Dai Hung in 2003 and Duc Thanh in 2005. joint venture between Darby and the Stratus Group.

Private equity firm Warburg Pincus International has sold Venture capital firm DLJ South American Partners has ac- a 5.6% stake in insurance and healthcare firm Max India quired a 75% stake in Argentina-based auto parts manufac- through multiple block deals for approximately US$51 million. turer L’Equipe Monteur. Additional recent investments by DLJ Continued on page 19

18 EM PE Quarterly Review Vol V Issue 3, Q3 2009 Member News, continued from page 18

include Chilean labeling company Cameo Marinetti, Brazilian US$13.8 million in Algeria-based Shoresal. The investment events-organizer BTS, watch manufacturer Technos and hu- in Almes was made through the Moroccan Infrastructure man resources manager Academia Brasileira. Fund, a joint venture between ECP and Attijariwafa Bank, and the investment in Shoresal was made through the GP Investments reduced its stake in BR Malls Participações, MENA Growth Fund. Brazil’s largest shopping mall company, from 14.4% to 8.8% through a share offering. GP originally invested in the compa- HBG Holdings, a private equity firm operating in the Middle ny in 2006. Separately, GP, in conjunction with Private Equity East, will acquire strategic positions in companies listed on Partners, also reduced its holding in Brazilian consumer goods the Alternative Investment Market of the London Stock Ex- company Hypermarcas through a combined sale of 10 million change through the new HBG Special Opportunities Fund I. shares. GP’s shares were sold though the GPCP IV Fund. The Shari’ah-compliant fund, which is targeting commitments totaling US$150 million, will focus on listed companies in the Brazil’s Rio Bravo Investimentos has acquired a 30% stake Middle East, North Africa and South Asia. in Perenne, a Brazilian manufacturer of water treatment equipment, in conjunction with other investors, including São Paulo- Qatari investment bank QInvest and Fortis Bank Nederland based investment firm Greentech Capital. The investment was have launched a Shari’ah-compliant mezzanine fund that will made through Rio Bravo Nordeste II FMIEE. focus on investments in deep sea vessels, targeting total commitments of US$200 million. MENA Sub-Saharan Africa Emerging markets-focused private equity firm Actis has agreed to pay US$244 million to acquire a 9.3% stake in Com- African Capital Alliance (ACA) has held the first closing of mercial International Bank (CIB), Egypt’s largest lender. Under Capital Alliance Private Equity III (CAPE III) with US$200 mil- the terms of the transaction, Actis will acquire 50% of a stake lion in commitments. The fund, which will make investments held by a consortium led by U.S.-based Ripplewood Holdings. in Nigeria and other West African nations, is targeting total commitments of US$350 million. Investors include several Egypt’s Beltone Private Equity, a subsidiary of Beltone Part- international development finance institutions, such as CDC ners, and Sudan’s Kenana Sugar Company will jointly estab- Group, the European Investment Bank, the International lish a firm that will invest up to US$1 billion in large-scale ag- Finance Corporation and the FMO - Netherlands Develop- riculture projects in both countries. Kenana, which produces ment Finance Corporation. 400,000 tons of sugar a year, will provide technical expertise for the venture, while Beltone will manage investments and The Aureos Africa Fund managed by Aureos Capital has in- corporate finance. creased its funds under management to US$317.8 million a first closing of US$253.5 million in September 2008. The fund Egypt-based agrifood platform Gozour, established by Citadel is targeting a final close of US$400 million and has made nine Capital and a group of regional co-investors, has acquired the investments to date, including the acquisition of a 10.4% stake Nile Company for Food Industries (Enjoy) from Haykala, an in Senegalese cement company Les Ciments du Sahel. Egyptian private equity firm established by Commercial Inter- national Bank. South Africa-based Net1 UEPS Technologies, which pro- vides an electronic payment system as an alternative for The US$500 million MENA Infrastructure Fund, sponsored by the unbanked populations of developing economies, will HSBC, Waha Capital and Dubai International Capital, has reacquire all of the company’s shares held by South Africa- acquired a 32.8% stake in Oman’s United Power Company based Brait Private Equity. The deal is valued at approxi- SAOG (UPC), making it the company’s largest investor. The mately US$124.5 million and represents 16.9% of Net1’s stake was sold to the MENA Infrastructure Fund by French outstanding shares. energy company GDF Suez in a deal valued at approximately US$26.5 million. The International Finance Corporation, Investment Fund for Health in Africa and Africa Healthcare Fund are investing The Technology Development Fund, managed by Egypt- approximately US$16 million in Kenya’s healthcare sector, based EFG-Hermes Private Equity, will sell its stake in Mak- with a focus on start-ups and expansion of established insti- toob.com, a Jordan-based Internet portal, to Yahoo! The deal tutions. is estimated at US$100 million. Botswana-based private equity firm Venture Partners Bo- Emerging Capital Partners (ECP), a private equity firm tswana (VPB) is launching a fund in Namibia. The fund has that invests across Africa, has acquired controlling stakes approximately US$30 million in commitments and will fo- in two North African construction sector businesses, in- cus on primary industry sectors, which include education, vesting US$12.4 million in Morocco-based Almes and commodities, transportation and healthcare. ■

EM PE Quarterly Review Vol V Issue 3, Q3 2009 19 Submit news on funds launched & closed to [email protected] Funds Launched & Closed (Details on the back of this publication)

Sampling of Emerging Markets PE Funds Launched (YTD2009) PE Firm Fund Name (Target / Size) Geographic Focus Fund Focus Axxess Capital Emerging Europe Accession Fund (EUR 200m, CEE/CIS Growth / Expansion US$280m) Baninfo Capital Ghana Growth Fund (US$10–30m) Ghana Growth / Expansion CIMB Standard Strategic Asset Islamic Infrastructure Fund (IIF) (US$500m) Asia, Central Asia Infrastructure Advisors Confrapar Participacoes e Pesquisas Horizon TI (US$10m) Brazil Venture Capital S/A Emerging Energy & Environment CleanTech Latin America Fund (CTLAF) (US$150– Latin America Cleantech 200m) Frontier Investment & Development Cambodia Laos Investment & Development Fund Cambodia, Laos Agribusiness Partners (FIDP) (US$200m) IFC Asset Management Company Fund II—African, Latin American & Caribbean Fund Sub-Saharan Africa, Growth / Expansion (US$1B) Latin America, Caribbean Venture Partners Botswana (VPB) VPB Namibia Fund (US$32m) Namibia Growth / Expansion

Sampling of Emerging Markets PE Funds Registering Closes (YTD2009) Funds Raised to PE Firm Fund Name (Target / Size) Geographic Focus Fund Focus Date (Status) Actis Actis India Real Estate Fund India Real Estate US$300m (Final) (US$300m) African Capital Alliance Capital Alliance Private Equity (CAPE) West Africa, Nigeria Growth / Expansion US$200m (First) Fund III (US$350m) Aureos Capital Aureos Latin America Fund (ALAF) Latin America Growth / Expansion US$184m (Final) (US$184m) Fintra (Colombia Private Fintra Infrastructure Fund (US$300m) Colombia Infrastructure, US$300m (Final) Equity) Transportation Harith Pan African Infrastructure Development Sub-Saharan Africa Infrastructure US$630m (Second) Fund (PAIDF) (US$1B) Henderson Equity Partners Henderson Asia Pacific Equity Asia Growth / Expansion US$85m (Final) Partners II (US$85m) ICICI Venture Funds India Advantage Fund VII (US$95m) India Mezzanine US$95m (Final) Management IL&FS Investment Standard Chartered IL&FS Asia China, India Infrastructure US$601m (Second) Managers Infrastructure Growth Fund (US$1B) International Housing South Africa Work Force Housing South Africa Real Estate US$225m (Third) Solutions Fund (US$250m) Marshall Capital Partners Marshall Capital I (MarCap I) Russia Direct Secondaries US$300m (Final) (US$300m) Mount Kellett Capital (MKC) Mount Kellett Capital (MKC) Fund I Asia, China Buyout US$2.5B (Final) (US$2.5B) Navis Capital Partners Navis Asia Fund VI (US$1.3B) South Asia, Consumer US$400m (First) Southeast Asia Siguler Guff & Company Russia Partners III (US$800m) Russia Growth / Expansion US$800m (Final) The Carlyle Group Carlyle Asia Growth Partners IV Asia Growth / Expansion US$1B (Final) (US$1B) TMG Capital Partners TMG Private Equity Fund II (US$400m) Brazil Venture Capital US$200m (First) UFG Private Equity UFG Private Equity Fund II (US$200m) Russia/CIS Growth / Expansion US$150m (First)

20 EM PE Quarterly Review Vol V Issue 3, Q3 2009 Emerging Markets Private Equity Performance

The effects of the financial crisis on private equity fund perfor- earlier, when one-year returns across the emerging market mance have become much more pronounced, a reflection of indices hovered above 25%. the deterioration in global markets. The slide in performance that began in the third quarter of 2008 has continued as the Despite a series of down quarters, the performance decline result of marking to market and subsequent write-downs, al- for emerging market PE and VC funds was largely in line though the most recent performance figures suggest a poten- with, or less severe than, US VC and PE funds. Emerging tial leveling off, particularly among Asian PE and VC funds. market funds overall have produced returns on par with US private equity over a five-year period, and CEE/Russia and Emerging market VC and PE returns inched up during Latin American PE funds have outperformed their develo- the period ending March 31, with one-year net IRRs of ped market peers. -28.74% compared to a nadir of -31.81% in the period ending December 31, 2008. While both the Latin America While it’s not yet clear whether the markets have bottomed, and CEE/Russia indices saw returns creep further down private equity continues to outperform the public markets. for the period ending March 31, a slight improvement in For the one-, three- and five-year periods ending March 31, the Asian index pulled up the pan-EM figures as the index the emerging markets and the US private equity indices re- is more heavily weighted to Asian funds. Recent perfor- corded stronger returns than did the S&P 500 or the MSCI mance marks a dramatic departure from twelve months EM index. ■

Comparative End-to-End One-Year Returns Comparative One-Year Returns: Public Markets vs. Private Equity Index As of 12/31/08 As of 3/31/09 20% Emerging Markets VC & PE -31.8 -28.7 10% Asia (ex Japan) PE -32.2 -25.7 0% CEE & Russia PE -35.2 -43.7 -10% Latin America & Carib.PE -13.9 -23.4 -20% -30% MSCI Emerging Markets -53.2 -46.9 -40% US VC -16.5 -17.5 End to Returns (%) -50% One Year Three Year Five Year Ten Year US PE -24.2 -24.2 ■ ■ ■ ■ Western Europe PE -39.6 -46.0 Emerging Markets MSCI Emerging US PE S&P 500 VC & PE Markets S&P 500 -37.0 -38.1 Source: Cambridge Associates LLC Proprietary Index; Morgan Stanley; Standard & Poor’s.

Continued on page 22

EM PE Quarterly Review Vol V Issue 3, Q3 2009 21 Emerging Markets Private Equity Performance, continued from page 21

Comparative End-to-End FiveYear Returns by Region as of 31 March 2009

60%

50%

40%

30%

20%

% IRR, net 10%

-10%

-20% Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

Emerging Markets VC & PE Asia (ex Japan) PE CEE & Russia PE Latam & Carib. PE US PE

Source: Cambridge Associates LLC Proprietary Index: pooled end-to-end returns, net of fees, expenses and carried interest.

Comparative End-to-End Returns by Region (as of 3/31/2009) Index One Year Three Year Five Year Ten Year Emerging Markets VC & PE -28.74 1.45 9.17 4.59 Asia (ex Japan) PE -25.69 -1.63 3.30 2.61 CEE & Russia PE -43.73 5.99 22.59 13.44 Latin America & Caribbean PE -23.35 7.39 13.27 -0.87 MSCI Emerging Markets -46.90 -7.88 6.25 8.14 US VC -17.49 1.31 5.80 26.16 US PE -24.18 0.31 9.67 7.92 Western Europe PE -45.99 4 .70 16.24 15.94 S&P 500 -38.09 -13.06 -4.77 -3.00

Source: Cambridge Associates LLC Proprietary Index: pooled end-to-end returns, net of fees, expenses and carried interest.

22 EM PE Quarterly Review Vol V Issue 3, Q3 2009

Submit news on exits to [email protected] Notable EM PE Exits & IPOs (Details on the back of this publication)

Portfolio Private Equity Year of Capital Date Country Company Name Firm Name Sector Investment Invested of Exit Exit and Return Details Brazil Hypermarcas GP Investimentos, Consumer goods 2007 US$137m Jul-09 Share sale of US$115m on Samaja family Bovespa Brazil Microsol BTG Pactual Electronics Jan-09 Strategic sale to Schneider Electric Bulgaria Avto Union Equest Investments Automotive Apr-09 Strategic sale of 80% stake Balkans Eurohold Bulgaria for EUR 8m Chile Parque Arauco Equity International Real Estate 2006 US$50m Jul-09 Sale of 13.5% stake to the Said Somavía and Said Yarur families for US$65m China Duoyuan Global Global Environment Natural resources 2008 US$30m Jun-09 IPO on New York Stock Exchange Water Fund (GEF) China Nanjing Yunhai Haitong-Fortis Private Metals 2005 US$6m Feb-09 – Multiple share sales totaling $14m Special Metals Equity Fund Mgmt. (RMB July-09 on Shenzhen Stock Exchange 45m) China Perfect World SAIF Partners Online gaming 2006 US$8m Jul-09 Buyback of SAIF-owned shares for US$57m Croatia Tele2 Croatia Quaestus Private Telecommunications 2005 EUR 4m Jun-09 Strategic sale of 7% stake for Equity Partners EUR9m to majority owner, Tele2 Czech Nowaco CCMP Capital, Trading and 2005 EUR 90m Jul-09 Strategic sale of 100% holding to Republic Bancroft Private Equity distribution Bidvest* Egypt Nile Company for Haykala Investment Food & Beverage 2005 US$16m Jun-09 Strategic Sale to Citadel Capital- Food Industries Managers owned Gozour (Enjoy) India Delhi International IDFC Private Equity Transportation 2006 Jun-09 Equity share swap with parent Airport GMR Infrastructure Limited India HT Media Citi Venture Capital Media 2004 US$13m Jun-09 Share sale of 3.11% stake for International (CVCI) US$15m to Sandstone Capital and Reliance Life Insurance India Indlaw 2i Capital Group Professional services 2002 Jul-09 Strategic sale of 10% stake to Communications Thomson Reuters; 3x return. India Max India Warburg Pincus Healthcare & 2004 Jul-09 Share sale of 5.6% stake for Insurance US$51m on BSE and NSE; nearly 5x return. India MindTree Capital International Software 2001 Sep-09 Share sale of 11% stake to multiple Franklin India funds for US$47m India Shriram City Union Merrill Lynch Private Financial Services 2006 US$14m Jul-09 Secondary sale of 8.4% stake Finance Equity to Norwest Venture Partners for US$25.7m Indonesia PT Bank Central Farallon Capital Banking 2002 Jun-09 Share sale of 4.05% stake for Asia Terbuka Management US$329m; 8x return. Jordan Maktoob.com EFG-Hermes Private Internet Technology 2000 US$3m Aug-09 Strategic sale for approx. Equity US$100m to Yahoo! Moldova Natur Bravo Horizon Capital Food Processing 2005 Sep-09 Secondary sale; 3.1x; 46% IRR. Peru Consorcio Agua AC Capitales SAFI Infrastructure 2007 US$8m Jul-09 Strategic sale of 29% stake to Azul Marubeni Corporation Poland Farutex CCMP Capital, Food Distribution 2005 Jul-09 Strategic sale of 100% holding to Bancroft Private Equity Bidvest* South Africa Net1 UEPS Brait Private Equity Electronic Payment 2004 Jul-09 Buyback of Brait’s 16.9% holding Technologies Systems for US$125m South Korea Hyunjin Materials H&Q Asia Pacific Industrial Materials Apr-09 Share sale of 13.9% stake for US$55m on KOSDAQ South Korea Vieworks STIC Investments Medical Equipment Apr-09 Share sale following Vieworks’ IPO on KOSDAQ; 6x; 90.1% IRR. Uruguay Interactive Prosperitas Capital InternetTechnology 2006 US$1m May-09 Strategic Sale to India-based Networks Partners Geodesic Limited Vietnam Duc Thanh Wood Mekong Capital Manufacturing 2005 Aug-09 Strategic sale Processing *Deals are expected to close in the third quarter of 2009, pending European Union competition clearance.

24 EM PE Quarterly Review Vol V Issue 3, Q3 2009 EMPEA Members as of September 2009

We are delighted to welcome the following new members who have joined EMPEA in the 3rd quarter of 2009.

Premier Members DAC Management Pinto America Growth Fund Euromed-Capital Forum BTG Pactual DLJ South American RHEA Investments Greenpark Capital IFC Asset Management Partners Verny Investments Holding KPMG Company LLC Fairview Capital Partners Vietnam Investments Group NORFUND Full Members Finansa Fund Management Associate Members Paul Pannkuk Associates Assetswise Capital Marlow Capital AxeaGroup & Co. Proparco Beltone Private Equity Marshall Capital Partners BIO—Belgian Investment SikSal Blackthorn Capital Partners NEVEQ Capital Partners Company for Developing Countries

Premier Members Abraaj Capital Limited* China New Enterprise European Investment Bank* Kohlberg Kravis Roberts & Co. Investment Abu Dhabi Investment Export Development Canada* Norton Rose* Authority Citadel Capital FMO-Netherlands O’Melveny & Myers Actis* Clearwater Capital Partners* Development Finance Company* Orrick, Herrington & Sutcliffe Advent International* Clifford Chance* Global Capital Management* Quilvest* AIG Capital Partners* Conduit Capital Partners* Global Environment Fund * Shearman & Sterling Akin Gump Strauss Hauer & Debevoise & Plimpton* Feld* GP Investments* SHUAA Partners* DEG* Alfa Capital Partners HarbourVest Partners SIFEM* Delta Private Equity Partners* Asian Development Bank * Hony Capital SigmaBleyzer* Denham Capital Management Baring Private Equity Asia* ICICI Venture Funds Siguler Guff & Company* Development Bank of Management Company* Baring Vostok Capital Southern Africa SJ Berwin* Partners* IDFC Private Equity* Dubai International Capital Standard Bank Private Equity BTG Pactual IFC Asset Management EFG-Hermes Private Equity* Company SVG Advisers Limited* Capital International Private Equity Funds (CIPEF) * Emerging Capital Partners* IL&FS Investment Swicorp* Managers* Capital MS&L EMP Global* Warburg Pincus International* International Finance The Carlyle Group* Ethos Private Equity* Corporation* White & Case*

CDC Group* Eton Park Capital Japan Bank for International Zephyr Management* Management* Cooperation (JBIC)

* EMPEA’s founding Charter Members.

Continued on page 26

EM PE Quarterly Review Vol V Issue 3, Q3 2009 25 EMPEA Members, continued from page 25

Full Members 7L Capital Advisors CICapital Private Equity Henderson Equity Partners Poteza Partners

AB Capital CIMB Standard Strategic Asset Horizon Capital QInvest Advisors AB Invest Horizon Equity Partners Quadriga Capital Russia Citi Venture Capital International Absa Capital Private Equity Hupomone Capital Partners RHEA Investments CoInvest Argentina Singapore Pte ACCION Gateway Family of Rio Bravo Investimentos Funds Confrapar Participações e I&P Management (Indian Ocean) Pesquisas The Rohatyn Group (TRG) Advanced Finance and Icentis Capital Management Investment Group Cordiant Capital IDFC Project Equity Co. Shoreline Capital Management African Capital Alliance CRG Capital International Housing Solutions SkyBridge Global Partners AIC International Investments DAC Management Investec Asset Management Small Enterprise Assistance AIF Capital Darby Overseas Investments Funds Ithmaar Bank B.S.C. Albright Capital Management Development Partners SOAR Management International JS Private Equity Algebra Capital Société Générale Asset Discovery Americas Capital Kingdom Zephyr Africa Management Alternative Alothon Group Partners Management Investments

Alta Growth Capital DLJ South American Partners Leopard Capital Southern Bridge Capital

Artesia Capital Management Duet Group Lereko Metier Capital Growth Stratus Group Fund Asia Mezzanine Capital East Africa Capital Partners Susquehanna Capital Advisers Lighthouse Funds Eastgate Capital Group Templeton Asset Management Asian Tiger Capital Partners Lombard Investments Emerging Energy & Environment TMG Capital Assetswise Capital Madagascar Development Environmental Investment Partners Trans-Century Limited Aureos Capital Limited Partners & CWP Marlow Capital Travant Capital Partners Avigo Capital Partners Eurasia Capital Management Marshall Capital Partners Tuninvest Finance Group Axxess Capital Evolvence India Life Science Fund Marshall Fund UFG Private Equity Baird Asia Advisors EVU Management Mekong Capital Venture Capital Trust Fund Baninfo Capital Fairview Capital Partners Mobius Sustainable Financing Venture Investment Partners Beltone Private Equity Finansa Fund Management Bangladesh National Venture Capital Blackthorn Capital Partners Finlombarda Gestioni SGR Venture Partners Botswana Navis Capital Partners Limited Blue River Capital FIR Capital Partners Verny Investments Holding NEVEQ Capital Partners Brait Private Equity Foursan Group Vietnam Investments Group Nine Rivers Capital Management BTS Investment Advisors Frontier Investment & Vision Brazil Development Partners NSG Capital Administração de Capital Invest Recursos S.A. Wamex Private Equity Mgmt. Gávea Investimentos Capital Trust Och-Ziff Capital Management Wolfensohn Capital Partners GIMV NV Group Capitalworks Equity Zephyr Peacock Fund I Partners (Pty) Great Circle Capital Paladin Realty Partners

Cartica Capital GrowthGate Capital Corporation Pan African Capital Group

Centras Capital HBG Holdings Pinto America Growth Fund

*Full members include private equity fund managers.

Continued on page 27

26 EM PE Quarterly Review Vol V Issue 3, Q3 2009 EMPEA Members, continued from page 26

Associate Members Adams Street Partners Commonfund Capital Jefferies Helix Paul Pannkuk Associates

Alberta Investment Management Corporación Mexicana de K2 Investimentos PCGI Corporation Inversiones de Capital (FONDO DE FONDOS) KfW IPEX—Bank GmbH PE Consulting Investintoindia Alpha Associates Private Limited Corporate Connect BV KPMG AlpInvest Partners N.V. Proparco Denning and Company Kusuntu Partners Amanda Capital Rensselaer Polytechnic Institute EMAlternatives Liberty Global Partners ANBID—Associação Nacional dos Robeco Private Equity Bancos de Investimento Emerisk Magog & Cie SAVCA Asia Alternatives Advisor Euromed-Capital Forum Middleland Capital SikSal AxeaGroup & Co. European Bank for Reconstruction Milbridge Capital Management and Development Squadron Capital Axonia Partners MontaRosa Finnish Fund for Industrial SVB Capital Azerbaijan Investment Company Cooperation Morgan Stanley Alternative Investment Partners Teacher Retirement System of Barnellan Equity Advisors First Avenue Partners Texas MVision Private Equity Advisers BIO—Belgian Investment Georgetown University TechnoServe Company for Developing Investment Office National Council for Social Countries Security Fund P.R.C. Thunderbird Private Equity Center Global Strategies Group Boston BioCapital, FZ Natixis Private Equity International TozziniFreire Advogados Goldman Sachs Management C.P. Eaton Partners Tufts University Investment Office Greenpark Capital New Market Venture Caísse de depot et placement du Management UMWA Health & Retirement Québec The Gutmann Group Funds NORFUND CalSTRS Hamilton Lane Value Enhancement International Northgate Capital Cambridge Associates Howard Hughes Medical Institute World Bank Pension Plan OMERS Private Equity Campbell Lutyens & Co. Hunton & Williams XT Capital Partners Overseas Private Investment Canada Pension Plan Investment IDFC Capital (Singapore) Corporation Board IDI Emerging Markets Paul Capital Partners Coller Capital

*Associate members include limited partners, fund of funds, service providers and other organizations.

EM PE Quarterly Review Vol V Issue 3, Q3 2009 27 Featured Events EMPEA Member and Industry

Private Equity in Africa China Eurasia Investment Submit Your News London Stock Exchange Forum 2009 Information for EMPEA 2 November 2009 Grand Millennium Hotel, Beijing Member News, Funds 23 October 2009 Launched & Closed and Exits 5th Annual Emerging Markets is compiled from submissions Private Equity Forum CVCA Annual General Meeting & to EMPEA and from a range Merchant Taylors’ Hall China Venture Capital/Private Equity of publicly-available news London Summit 2009 sources. We encourage firms 3-4 November 2009 Pudong Shangri-la, Shanghai to submit their information 27-28 October 2009 to EMPEA on a regular basis 2nd Annual Beijing Global Private for possible inclusion in Equity Forum FT View from the Top the Quarterly Review and Beijing China World Hotel (Shangri-La) New York City to ensure the accuracy of 8-9 November 2009 28 October 2009 individual firms’ fundraising, (20% discount available for EMPEA members) investment and exit The PEI Turkey Forum information in EMPEA’s Hyatt Regency Istanbul Limited Partners Summit West global emerging market 23-24 November 2009 San Mateo, CA statistics. For more 3-4 November 2009 information on how to include For more information about EMPEA (15% discount available for EMPEA members) events go to: www.empea.net/ your news, or to submit empeaevents. For more information about industry information, please email us events go to: www.empea.net/ at [email protected]. industryevents.

5501 Turkey Forum Ad.qxd:Layout 4 15/9/09 09:03 Page 1

Co-hosted by: Reg ister y pla our ce befo The PEI Turkey Forum Oc re 9th tober and sa up ve to $495 23-24 November 2009 – Hyatt Regency Istanbul

Join them - Examine Turkey’s pivotal role in the region and how private equity can help contact Tereza on the economy grow. Confirmed top flight speakers include: +44 (0)20 7566 5445 / [email protected] Uğur Bayar, Mete Çakmakcı, Murat Çavuşoğlu, Managing Director Assistant Managing Partner, • Government rate $1310, contact Tereza for details & CEO, Secretary General, Actera Group Credit Suisse Turkey Technology • EMPEA members are entitled to special rates – Development see website Foundation of Turkey for details • Institutional LPs attend for Mete İkiz, Murat Koprulu, David Nieuwendijk, free* - quote promotion Investment Director, Chairman & CEO, Senior Investment code TURKEY09LP NBGI Private Equity Multilateral Funding Officer Private Equity, International FMO

Alessandra Pasian, Seymur Tari, Selcuk Yorgancioglu, Senior Banker, Managing Director, Executive Director & European Bank Turkven Turkey Country Head, for Reconstruction Abraaj Capital and Development (EBRD) * Institutional investors and limited partners from foundations, endowments and public and private pension funds will receive a complimentary pass to attend this event. Excludes fund of funds. Promo codes cannot be applied to existing registrations. www/peimedia.com/turkey09 Please do not make any travel arrangements until we have confirmed your eligibility.

28 EM PE Quarterly Review Vol V Issue 3, Q3 2009