Made to Measure New Zealand Superannuation Fund Client Demand Pushes Fund-Of-Funds to Customize Their Asia Products Page 9 Page 19

Asia’s Private Equity News Source avcj.com June 25 2013 Volume 26 Number 24

Editor’s Viewpoint India investment, exit numbers are cause for cheer, finally Page 3 News AlpInvest, Apax, ChrysCapital, Fidelity, GSR, KKR, Macquarie, Quantum Pacific SEAVI Advent, Temasek Page 5 China awards Interviews with the winners: FoutainVest, Morgan Stanley, and more Page 13 Deal of the week Carlyle exits China infant formula producer Page 17 LP interview Made to measure New Zealand Superannuation Fund Client demand pushes fund-of-funds to customize their Asia products Page 9 Page 19

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Managing Editor Tim Burroughs (852) 3411 4909 Staff Writers Andrew Woodman (852) 3411 4852 Mirzaan Jamwal (852) 3411 4821 Positive signs Winnie Liu (852) 3411 4907 Creative Director Dicky Tang Designers Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow

Senior Research Manager from India Helen Lee Research Manager Alfred Lam Research Associates The last few years haven’t been kind transactions announced recently. Herbert Yum, Isas Chu, to Indian private equity. After a period of strong Does this mean the global private equity Jason Chong, Kaho Mak fundraising and bumper investment – a large industry is embracing India once again? It’s too Circulation Manager portion of it into publicly-listed entities – the soon to say, but the numbers look promising. So Sally Yip Circulation Administrator industry has largely been unable to deliver on far this year, AVCJ Research has records of 151 Prudence Lau the promise. Non-performers are already being deals with a combined value of just over $4.4 Manager, Delegate Sales weeded out as LPs, operating on a “I won’t give billion. That’s nearly $1 billion up on the same Pauline Chen you money if you can’t show me money” basis, point last year. Investors appear to be taking Senior Marketing Manager refuse to back new funds. bigger bets with average ticket size around $30 Rebecca Yuen The question that remains with international million, compared to $17 million in 2012 and $23 Director, Business Development investors is when will the consolidation be over? million in 2011. Darryl Mag A colleague’s feedback from a recent There are numerous possible explanations for Manager, Business Development research trip to India is that it’s business as usual. the improvement. The Securities and Exchange Anil Nathani, Samuel Lau While there hasn’t really been much change in Board of India’s moves to alter the regulatory Sales Coordinator sentiment from a few months ago, many GPs are framework to favor dealmakers is likely having an Debbie Koo see light at the end of the tunnel. The economy impact, but I would highlight one other factor: Conference Managers Jonathon Cohen, Sarah Doyle, Zachary Reff, maybe slow, but they are being proactive exit options for portfolio companies seem to be Conference Administrator and finding new ways of creating investment increasing. Amelie Poon opportunities. These include the use of debt AVCJ Research tracked 48 exits totaling Conference Coordinator Fiona Keung, Jovial Chung instruments such as structured lending and around $2.5 billion for the year so far. The $5 mezzanine finance. billion returned in 2012 is still some way off – Publishing Director Allen Lee Although the private debt space is interesting, and that figure was distorted by a couple of Managing Director there has been no shortage of “traditional” deals bumper deals – but the first six months of this Jonathon Whiteley announced recently. The more established local year alone are nearly on par with the full-year firms like ChrysCapital Partners, IL&FS Investment 2011 stats, which saw $2.9 billion generated Managers and IDFC Private Equity have been from 59 exits. active; a few more international names – Incisive Media Macquarie, Fidelity, Oaktree Capital Management Unit 1401 Devon House, Taikoo Place and Goldman Sachs – are also making headlines. 979 King’s Road, Quarry Bay, Hong Kong PIPE deals are less prevalent than before and the Allen Lee T. (852) 3411-4900 industry focus appears to be quite diversified, Publishing Director F. (852) 3411-4999 E. [email protected] notwithstanding the spate of real estate Asian Venture Capital Journal URL. avcj.com

Beijing Representative Office No.1-2-(2)-B-A554, 1st Building, India private equity exits No.66 Nanshatan, Chaoyang District, Beijing, 5,000 80 People’s Republic of China T. (86) 10 5869 6203 F. (86) 10 5869 6205 4,000 70 E. [email protected] 3,000 60 Exits 2,000 The Publisher reserves all rights herein. Reproduction in whole or US$ million in part is permitted only with the written consent of 50 1,000 AVCJ Group Limited. ISSN 1817-1648 Copyright © 2013 0 40 2011 2012 2013YTD No. of exits Amount (US$m)

Source: AVCJ Research

Number 24 | Volume 26 | June 25 2013 | avcj.com 3 26th Annual AVCJ PRIVATE EQUITY & VENTURE FORUM 12-14 November 2013 Four Seasons Hotel, Hong Kong Super Early Bird – RegisteR now What’s new in 2013? • Emerging market focus groups • Sector focus – Energy and real estate • Technical workshops • LP invitation only breakfasts • Women in private equity roundtable • Spotlight on family offices

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avcjforum.com Global perspective, local opportunities 26th Annual AVCJ PRIVATE EQUITY & neWs

VENTURE FORUM GLOBAL Macquarie commits $58m M.H. Carnegie, Vivant to Prime Focus World launch accelerator 12-14 November 2013 Apax reaches $7.5b fi nal Macquarie Capital has invested $53 million in M.H. Carnegie & Co has launched an A$80 Prime Focus World (PFW), the creative services million ($76 million) accelerator fund for close on latest global fund division of India-headquartered entertainment emerging technology companies. It will be run in Four Seasons Hotel, Hong Kong Apax Partners has reached a EUR5.8 billion ($7.5 company Prime Focus. The investment – which collaboration with Vivant Ventures, an Australia- billion) fi nal close on its eighth global fund, short values the subsidiary at $300 million – will based digital development specialist, providing of the initial target of EUR9 billion. The fund is be made in two tranches of $38 million and start-ups with support and seed funding of up Super Early Bird – RegisteR now also smaller than its predecessor, which attracted $15 million. PFW provides visual eff ects and to A$500,000. The vehicle has already received commitments of EUR11.2 billion back in 2007 animation services to major fi lm studios, and it a commitment of A$40 million through the during the pre-global fi nancial crisis boom. North will use the capital to build its creative services Innovation Investment Fund (IFF) scheme. What’s new in 2013? America accounted for 43% of commitments, platform and make a number of acquisitions. 25% came from Europe while Asia, Middle East • Emerging market focus groups • Sector focus – Energy and real estate and Africa accounted for 32%. GREATER CHINA • Technical workshops • LP invitation only breakfasts • Women in private equity roundtable • Spotlight on family offices ASIA PACIFIC Tsinghua University unit bids for Spreadtrum Contact us SEAVI Advent Fund VI Spreadtrum Communications, a Chinese mobile Registration enquiries: Pauline Chen T: +852 3411 4936 E: [email protected] reaches $125m fi rst close chip manufacturer backed by NEA, has received Sponsorship enquiries: Darryl Mag T: +852 3411 4919 E: [email protected] a buyout off er from a unit of Tsinghua Holdings, SEAVI Advent Private Equity, the Asian arm of an investment entity controlled by Beijing- Advent International, has reached a fi rst close based Tsinghua University. Tsinghua Unigroup is of $125 million on its six fund - SEAVI Advent Last week, Prime Focus revealed it would be willing to pay $28.50 in cash for all outstanding Lead Sponsors Asia Series Sponsor Equity Fund VI. Commitments came from high opening an offi ce in Beijing in order to tap into American Depository Shares - a 20% premium net worth individuals, corporate institutions and the growing Chinese fi lm market. In March, the on the stock’s previous closing price – valuing family offi ces, while SEAVI Advent partners put company entered a joint venture with Hong Spreadtrum at $1.35 billion. in $10 million. The fund, which has a hard cap of Kong private equity fi rm AID Partners and $200 million, is expected to close by the end of Zhejiang Jingqi Wenhua Chuanbo Company; at Yageo shareholders block the year. the same time, AID Partners injected $10 million into PFW. private equity deal AlpInvest’s HK secondaries Standard Chartered Private Equity also Shareholders of Taiwanese electronic head steps down invested $70 million in Prime Focus last components manufacturer Yageo Corporation Co-Sponsors November, paying $35 million for a 19.71% stake have blocked a $1.65 billion private equity deal AlpInvest has confi rmed that the head of its and investing an additional $35 million through put forward by company management. Rather secondaries team in Hong Kong, Neal Costello, non-convertible debentures. than seek public fi nancing, Yageo wanted to has left the company after less than a year in the PFW is the world’s largest provider of sell up to 500 million shares to a private equity role. Costello, who was a principal with AlpInvest, 2D-to-3D content conversion, visual eff ects and investor at NT$10 ($.33) apiece. This was intended relocated to Hong Kong last July when the animation services. Previous projects include to bolster operational capital and improve Netherlands-based fund-of-funds decided to The Great Gatsby, Star Wars: Episode One – The fi nancial structure, while attracting long-term establish a secondaries investment team in the Phantom Menace, Transformers: Dark of the strategic investors. region. Costello had joined the fi rm in 2003 in Moon, Avatar and Wrath of the Titans. Legal Sponsors Knowledge Partner VC Summit Legal Sponsor New York. PE-owned Dutch waste fi rm

SOLICITORS AND INTERNATIONAL LAWYERS assuming some of the proceeds are returned to sells subsidiary to CKI AUSTRALASIA equity holders. A Dutch waste management provider owned by CVC Capital Partners and KKR has exited PE Leaders’ Summit Sponsors KKR-backed GenesisCare Carlyle, Seven to retain its energy-from-waste (EfW) subsidiary to a consortium led by Cheung Kong Infrastructure taps US debt markets ownership of Coates Hire (CKI) for EUR940 million ($1.27 billion). CKI and GenesisCare, a healthcare business controlled The Carlyle Group and Seven Group Holdings parent company Cheung Kong Holdings will by KKR, has become the latest Australian PE- have decided against pursuing an exit from each take a 35% stake in AVR Afvalverwerking, Awards Sponsors Exhibitors backed company to refi nance its debt via the US Australian equipment-leasing business Coates with Power Assets Holdings and the Li Ka Shing Contact us high-yield market. GenesisCare is seeking $245 Hire following a strategic review. The co-owners Foundation owning 20% and 10%, respectively. Collins & Kent International million in fi rst lien, senior secured Term Loan B said they remain fully committed to growing fi nancing, plus a revolving credit facility of A$30 the business. Goldman Sachs was appointed GSR leads restructuring million ($28 million). According to Standard & last November to assess sale options, with China Poor’s, GenesisCare’s debt-to-EBITDA ratio will International Capital Corp. and Nomura assisting round for Mirabilis Medica avcjforum.com rise to around 5x following the recapitalization, in China and Japan, respectively. China-focused GSR Ventures is leading a $7

Global perspective, local opportunities Number 24 | Volume 26 | June 25 2013 | avcj.com 5 News

million restructuring round for Mirabilis Medica PE backers fail to oust Healthcare Fund invests in with a view to helping the company expand its footprint outside the US. Mirabilis Medica, whicih Intrepid board over mine Wellspring clinic chain develops non-invasive treatments for uterine Hong Kong-based PE firm Quantum Pacific Asian Healthcare Fund has invested in Wellspring fibroids, wants total commitments of $13 million. Investment has failed in its attempt to remove Healthcare, which runs eight primary care clinics Existing investor Charter Life Sciences also the directors at Australia’s Intrepid Mines after the in Mumbai under the Healthspring Community participated in the financing. company lost control of a key Indonesia mining Medical Centres brand. This is one part of a larger asset. Quantum, which owns 5.4% of Intrepid, fundraising effort. In 2011, Wellspring raised $3.5 mounted its campaign over the Tujuh Bukit milion from Catamaran Ventures, Blue Cross Blue NORTH ASIA deposit, a copper and gold project in Java in Field Venture Partners and Reliance Venture Asset which the company took an 80% stake in 2008. Management. Castling gets first LP The problems emerged when the seller, Indonesian firm Indo Multi Niaga, was sold to a Fidelity leads Series B commitment, targets FoF new owner who transferred the mining license to Castling Investment Group, a start-up alternatives a separate entity. This effectively dishonored the round for Cloudbyte investment advisory firm based in South Korea, Fidelity Growth Partners India has led a $4 million has received its first external LP commitment Series B round of investment in Cloudbyte, a – totaling $80 million – from a local museum company which provides cloud-storage solutions foundation. The capital will be placed into a for online applications. Existing investors separate account and deployed globally. “We Nexus Venture Partners and Kae Capital also want to take this commitment and go to market participated. This latest round brings the total next year for a co-mingled fund-of-funds,” Steve amount raised by Cloudbyte to $6.1 million. J. Kim, chief investment officer at Castling, told AVCJ. TriVeda Capital launches $500m real estate vehicle VCs provide $4.4m round investment agreement with Intrepid, which has spent $100 million developing the project. India-focused TriVeda Capital has launched a for social site Muzy Greg Mazur, a founding partner at Quantum, $500 million real estate asset management Docomo Capital and Recruit Strategic Partners said the debacle meant the shareholder group platform, initially comprising five residential – the corporate VC arms of Japan’s NTT Docomo he represented had lost confidence in the board. and mixed-used projects located in Bangalore. and Recruit Holdings, respectively – have teamed Quantum had hoped to remove five of the seven It plans to invest in structured property up with Chinese entrepreneurs to invest $4.4 board members and appoint four new directors transactions in tier-one cities. Over the next million in micro-blogging service Muzy. The to pursue a plan to win back a stake in Tujuh several months, TriVeda also plans to raise capital round was led by WPP with Xuyang Ren, former Bukit within nine months. However, a majority of for a closed-end vehicle targeting a combination vice president of corporate development for shareholders came out in support of the board of India-based and non-resident investors. Baidu, and Jianfeng Lu, former CTO of Qihoo 360, in a vote held yesterday. The board wants to win investing alongside the Japanese VCs. back rights to the deposit by pressing for fraud and embezzlement charges against its former SOUTHEAST ASIA SOUTH ASIA Indonesian partners. Investors commit $100m to retail start-up ChrysCapital-backed Intas Fund I. The vehicle launched last year and has a final target of INR3 billion ($51.2 million) It aims Southeast Asian online retailer Lazada has raised Pharma files for IPO to invest in residential projects in seven tier-one $100 million through a new round of funding ChrysCapital Partners will exit the 10.16% Indian cities. Each project is expected to receive led by Verlinvest, a Beglium-based investment stake held by Fund III in Ahmedabad-based INR250-300 million in funding. firm set up by the founding families of Anheuser- formulations maker Intas Pharmaceuticals via an Busch InBev. Existing investors Holtzbrinck upcoming IPO. Another 6.25% stake will continue Tencent-Naspers JV ibibo Ventures, Kinnevik Investment, Summit Partners to be held by the PE firm’s fifth fund. The offering and Tengelmann Group also participated. will comprise of a fresh issue of equity shares buys ticketing firm redBus aggregating up to INR2,250 million plus 11.6 Delhi-based ibibo Group has acquired venture Singapore’s Temasek million shares held by ChrysCapital vehicle capital-backed Indian bus ticketing company Mozart Limited. redBus.in, allowing Helion Venture Partners, establishes UK presence Inventus Capital Partners and Seedfund to Temasek Holdings has set up a unit in the UK JLL reaches first close on exit their investment. The financial terms of that will focus on investments in Europe. It is the transaction were not disclosed. Ibibo is the Singaporean sovereign wealth fund’s 10th India real estate fund 80%-owned by Naspers and 20% by Tencent. overseas office or affiliate. John Cryan, Temasek’s Jones Lang LaSalle’s (JLL) Segregated Funds It already runs the travel aggregator Goibibo president of Europe and co-head of the portfolio Group has reached a first close of INR1 billion and B2B travel agency platform Travel Boutique and strategy group, will be one of two directors ($17.2 million) on its Residential Opportunities Online. of the new unit.

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The hollowing out of Australia’s “They realize that making money in Asia asset class matures around the world.” leveraged financing market is well documented. doesn’t happen by itself, and are trying to figure The point is there are investors occupying In the wake of the global financial crisis and out the best way to allocate capital,” says Doug every segment of this maturity spectrum, and for regulations designed to prevent its repetition, Coulter, head of Asia private equity at LGT Capital some, a fund-of-funds still makes sense. foreign banks that once accounted for a Partners. “On the supply side, fund-of-funds and First of all, the resources might not stretch significant portion of the debt in private equity- others are providing more structures, vehicles far enough that an LP is emboldened to go solo. backed deals have retreated. The likes of BOS and strategies through which to access the A team of four running a global private equity International, Natixis and Credit Agricole have region. It has become more complex but the key program might have sufficient bandwidth to deal scaled back or shut their operations in the region. question is how are you going to deliver good with funds of a certain size directly, but anything Domestic banks can be relied upon to risk-adjusted returns?” below a certain threshold is delegated to a third provide financing and foreign lenders still active party. Another category of investor, often small- in the market come on board as well. Then it is Alive and kicking to mid-size institutions, has no previous exposure a case of tapping other institutions to make up There is an element of fee pressure at work here. to private equity whatsoever and requires the difference – and these range from traditional On one hand, a fund-of-funds offers exposure support building a program that covers multiple mezzanine providers to private markets investors to a basket of GPs, which may include a cluster vintages and geographies. to superannuation funds. of star managers; on the other, the extra layer of Second, fund-of-funds can form part of The attraction is clear: averaged leveraged fees could eat into these returns and shift the a broader strategy. Goldpoint Partners, a PE margins have more than doubled since 2001 and risk-reward balance. Investors want a suite of affiliate of New York Life Investments, revised its the 5-7% returns available on first lien debt in a services – featuring co-investment, secondaries, approach in 2001 after becoming dissatisfied stable market like Australia compare favorably to separate accounts, and so on – rather than with the returns it was getting from portfolio other fixed income assets, even allowing for the reduced liquidity. For PE fund-of-funds managers, Fund-of-funds with Asian exposure it is also a means of expanding along the capital structure, incorporating equity all the way up 15,000 to senior debt. Several industry participants are eyeing the opportunity. 12,000 “From HarbourVest Partners’ perspective, there are push and pull factors,” according to a source 9,000 at the firm with experience in the leveraged market. “We have existing relationships with 6,000 institutional investors and a number of them are US$ million seeking additional products. And then we have 3,000 existing relationships with the GP sponsors who 0 face reduced liquidity and say to us, ‘Why don’t 2004 2005 2006 2007 2008 2009 2010 2011 2012 you enter the space?’” This approach goes to the heart of the Country-speci c Global-focused Region-speci c information arbitrage that underpins much of Source: AVCJ Research what a traditional fund-of-funds provider has to offer. But as the private debt example suggests, fund-of-funds aren’t the only product in a just plain vanilla. This may result in institutional GPs in the region. The firm made two discreet manager’s portfolio, nor do they satisfy every clients graduating from fund-of-funds to fund-of-funds commitments, one in China and client’s demands. Rather, a manager is tasked advisory mandates and, in some cases, to direct one in India, to get a clearer picture of what is with matching opportunities identified in the commitments as their familiarity with the asset happening on the ground. torrent of information that crosses his desk each class grows. But there is no uniform approach. Ludvig Nilsson, managing director at China- day from GPs or other counterparties with the “Our clients still want fund-of-funds – the focused fund-of-funds Jade Invest, claims to have investment objectives of different customers. model is not dead,” says Russ Steenberg, global a similar relationship with his largest LP, which This is a global phenomenon, but one with an head of BlackRock Private Equity Partners. has more than $100 billion in global assets. “We Asian twist. Some LPs are becoming more familiar “Growth is not as upward as it has been but there work tightly with them, sharing information, with a once opaque region and developing will always be a place for them. What you are and when we invest in a fund they often want clearer ideas of what they want from it. seeing is more specialization as the institutional to have a look at it as well,” Nilsson says. “They

Number 24 | Volume 26 | June 25 2013 | avcj.com 9 Cover Story [email protected]

invested with brand names before but were less marketing? “I think what LPs are finding now in strained as the industry continues down its path than satisfied with the exposure as well as the Asia is what they have already found out in the towards greater customization. A fund-of-funds information sharing.” West: All most managers want to do is a separate may already be sliced and diced so that primary Reports vary as to the willingness of fund- account that looks like a fund-of-funds,” notes fund exposure is accompanied by co-investment of-funds to pool manager research with LPs. Monte Brem, CEO of StepStone. and secondaries in order to address fee and According to Steenburg, BlackRock is happy Needless to say, there are counterarguments. j-curve concerns, respectively. In some cases to make all the necessary introductions to the Sebastiaan van den Berg, managing director for there are already teams in Asia dedicated to each point that clients are able to go it alone if they HabourVest Partners in Asia, believes there is a of these three pillars, and the expectation is they so desire. Some of the of local players – stand- misconception surrounding separate accounts in will have to devise and manage more bespoke alone Asia or China operations – are said to have that rising demand for such arrangements is only solutions as relationships with LPs become been less accommodating, although everyone driven by having more influence over strategy increasingly granular. ultimately has to move with market demand. and securing lower fees. In his experience, most BlackRock bought Swiss Re’s fund-of-funds There is certainly evidence of LPs shadowing separate account clients’ primary concern is often business last year in order to fill some geographic fund-of-funds in the region. Much like Goldpoint, confidentiality and the need for a more tailor- and strategic holes in its product offering, and New York State Common Retirement Fund made investment program. the company is keen to expand its co-investment (NYSCRF) started out investing in a string of pan- capabilities in Asia. As such, the division is no Asian funds before adopting a more targeted longer referred to as “fund-of-funds” but rather approach. It invested $50 million in each of Asia “When we talk to an “private equity solutions.” Partners Group, which Alternatives’ second and third comingled vehicles LP we don’t ask if they has made plain its preference for direct and and in 2011 put $200 million into two separate co-investment and secondaries, declined to be accounts with the firm. want a discretionary interviewed for this article on learning that the Both accounts made small commitments topic was fund-of-funds. to Hony Capital V and NYSCRF followed up by manager or an advisor, “StepStone was founded on the concept of investing $100 million in the fund, its first direct we ask how they want doing customized accounts. That comes through foray into an indigenous China vehicle. portfolio construction and also through how the to relationship to work” investment process works,” says StepStone’s Brem. Separate offerings “When we go in and talk to an LP we don’t ask if – Monte Brem Asia Alternatives’ third fund, which reached a final they want a discretionary manager or an advisor, close last year, is in certain respects the apogee we ask how they want to relationship to work.” of its type in the region. The corpus is divided The level of discretion afforded to the The bulk of StepStone’s business is divided between $908 million in the comingled fund manager also varies, depending on the mandate. between advisory services for large institutions and another $600 million spread across separate “If it’s an Asian LP that wants to invest in North and customized accounts, but clients are now accounts for a total of $1.5 billion. The separate America you typically find the client is less calling for real estate and infrastructure space. accounts have the same fee structure as the specific. They aren’t knowledgeable enough Comingled funds tend to be niche offerings, comingled vehicle. According to AVCJ Research, to provide any meaningful direction. If it’s a US bringing together groups of clients under a it is the largest pool of capital ever raised by an investor in Asia it’s typically the same thing,” says particular strategy. independent Asia-focused fund-of-funds. van den Berg. “If it’s an Asian LP with an Asian The approach seems broadly comparable to The number of separate accounts isn’t mandate, they will have views on what to do.” the club structures formed by private banks that disclosed but anecdotal evidence suggests that However, the first criticism does hold true. enable high net worth clients to participate in a some investors put in far less than NYSCRF’s Numerous industry participants didn’t pursue series of single-asset co-investments. According $200 million. Indeed, the standard threshold for separate accounts to begin with, and even if to Roger Bacon, head of managed investments a separate account is said to be around $100 they now do, a high participation threshold is for Asia at Citi Private Bank, the spike in demand million, but many smaller players are willing to set in order to keep the numbers down. An LP for these products, globally and among Asian compromise on size and fees in order to win being told that a fund-of-funds manager already clients specifically, in the last five years has come market share. runs 15 separate accounts is akin to a high net at the expense of blind pools. “You offer discounts to big name clients worth individual finding out that his private An off-the-shelf fund-of-funds product is because it helps build out business. It also makes banker is simultaneously handling 30 other unlikely to get more than a cursory look unless fundraising and reporting processes easier. If relationships. There can also be headache in the manager is able to demonstrate a level of someone gives you $100 million in one go you terms of allocations. If there is a great secondary expertise and deal access that differentiates don’t have to devote the time and energy to deal but it’s not very big, would it still be divided them from the rest of the market. These offerings sourcing and looking after 20 clients who each up among all the clients on a pro rata basis? hinge on managers being fleet of foot without put in $5 million,” says one Asia-based manager. The other resource issue is whether the neglecting due diligence. “At the same time, if someone commits $100 manager has enough people and time to deal “This a hugely complex area and there are so million they want to be treated differently from with clients individually and to a consistently many ways of skinning so many cats that to try everyone else. So a lot of it is about marketing.” high standard. While LPs’ expectations of a and do it in a scalable way is quite difficult,” Bacon This gives rise to a couple of criticisms of separate account relationship differ, it is a labor- explains. “If you do have dedicated resourcing fund-of-funds. First, does a smaller manager intensive process that goes beyond just doing in place then you can be more tactical and still have the resources to provide a quality the investment work. In short, a much greater opportunistic in the way you look at individual service after making concessions on separate degree of interaction with the client is required. deals and make them available to clients.” accounts? Second, is there substance behind the Resources are likely to become even more The implication is that a fund-of-funds

10 avcj.com | June 25 2013 | Volume 26 | Number 24 coVer story [email protected]

provider with a broad base of resources as its Capital and Europe’s Capital Dynamics – but the has been taking a more fundamental approach disposal is better equipped to move quickly and consolidation debate still generates more heat all the way through. We feel it’s great that now deeply into more customized solutions. On a than light. LPs are starting to ask the right questions.” basic level, there is a lot of crossover in terms of Two more nuanced, or perhaps cynical, Opinion is also divided as to the prospects for the due diligence that is conducted on a primary interpretations come from two diff erent industry those at the larger end of the scale – the big who fund-of-funds mandate and a secondaries participants, a global manager and a gatekeeper, are only going to get bigger. Some claim that program. In addition, creating a new product respectively: the larger Asia fund-of-funds will multi-product asset managers sitting on large might not be economically viable without be sold during the next China boom; and many distribution networks are out to commoditize the regulatory, compliance, reporting and won’t get picked up at all because they are family the industry, although it is diffi cult to reconcile information infrastructure that is part and parcel offi ces with aspirations to manage third-party this with the resource-intensive and costly nature of a global platform. capital rather than fully fl edged independent of the asset class. Under another scenario, asset “At a GP level, it’s an advantage being managers and therefore off er little value to larger managers will move up the value spectrum, specialized; at a portfolio level, it’s an advantage platforms. abandoning fund-of-funds space in favor of to have a portfolio-level perspective,” says Jade’s Nilsson expects to see more mergers sourcing deals directly and operating as GPs. StepStone’s Brem. “The LPs who work with want and notes that several fund-of-funds providers Steenberg says that BlackRock currently has no not only global access but also the ability to in the region have already retreated into the plans to adopt a this approach, with separate identify opportunities in Asia relative to other investment advisory space because they are accounts seen as the best fi t for the fi rm’s model. opportunities in the world.” unable to raise capital. Yet the trajectory he Wherever they end up, the same push and envisages for the industry is unsurprisingly pull factors apply: clients demanding more Big vs. small diff erent from those of global players. As diversifi ed exposure to the asset class and fi rms So where does this leave the more specialist institutional investors realize that Asia isn’t as identifying in their information fl ow ways to regional players? One view is that they face easy as it once appeared they will look for greater create new products and boost sales. the same fate as their European counterparts: value-add and it won’t necessarily come in the “Fund-of-funds are just like PE fi rms are overtaken or absorbed by localizing global form of a large-scale provider. diversifying their off erings over time,” says LGT’s asset managers, although it may take some “Back in 2006 you had IPOs left, right and Coulter. “In an Asian context, how many PE fi rms years for this to happen. There have been two center and high returns everywhere,” Nilsson says. are there with a global off ering of which Asia is a mergers in the past 12 months – Asia-focused “It is only when the market begins to slow down part? Very few. It’s no diff erent with fund-of-funds Squadron Capital and US-based FLAG Capital, that you come back to fundamentals and realize – they have diff erent off erings in response to the and then renminbi fund specialist Diligence who has just been following the hype and who market.”

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avcj.com INNOVATION... SOPHISTICATION... INTEGRATION...

Shearman & Sterling has an established presence with a 140-year legacy. It is one of the world’s leading international law firms known for its expertise in virtually every area of law relating to commercial and financial activity, from advice on investment funds, capital markets, corporate/mergers and acquisitions, project development and finance transactions through to representation in international arbitration and litigation.

With a long-standing commitment to Asia for more than 30 years, we offer a sophisticated approach to deliver innovative and integrated strategic, tactical and technical advice to our clients. Our core practice areas include:

▪ Acquisition Finance ▪ Intellectual Property ▪ Privatizations ▪ Asset Management ▪ International Arbitration ▪ Project Development ▪ Banking & Finance ▪ Litigation & Dispute & Finance ▪ Capital Markets Resolution ▪ Regulatory & Compliance ▪ Direct Investment ▪ Mergers & Acquisitions ▪ Fund Formation ▪ Private Equity

Q: The fundraising process went smoothly companies with variable interest entity (VIE) carve-outs. How much activity are you despite a difficult environment. What were structures, the uncertainty surrounding these seeing in these areas? the contributing factors? structures will discourage many from going A: Succession planning has started to emerge A: We have three anchor LPs and then a number private. – there are selective first generation INNOVATION... of investors in Fund I are highly reputable. entrepreneurs who are now thinking about The fact that they decided to re-up in Fund II Q: To what extent are you going to the succession. As for carve-outs, we haven’t seen was great in terms of supporting momentum. chairman/founder and pitching the idea of any. There are potentially a lot of opportunities By the time we reached our first close we a take-private? Is it a difficult sell? among state-owned companies but we don’t had already surpassed the size of Fund I and SOPHISTICATION... that helped quite a lot in terms of finishing it off. In addition, our increase in our fund size “Becoming a public was seen as pretty moderate. We were about company is always more $1 billion last time and this time it was hard capped at $1.35 billion. Investors didn’t see glamorous, so to de-list this as aggressive and they knew our strategy INTEGRATION... would be consistent. could be perceived as embarrassing. However, over Q: You have been involved in a couple of buyouts recently. Are you expecting to do the last two years this view more and what does this mean in terms of team size and skill sets? has turned around” Shearman & Sterling has an established presence with a 140-year legacy. It A: It’s limited right now, but we are seeing certain buyout situations emerging and it is A: For the deals we’ve worked on, we have focus on that. In the future there might be is one of the world’s leading international law firms known for its expertise in likely to become a trend. In anticipation of our approached the founder. Becoming a public carve-outs from private companies but at the virtually every area of law relating to commercial and financial activity, from next phase of funds, we have been expanding company is always more glamorous, so to moment they are growing and adding new the team. Our Beijing office opened about de-list could be perceived as embarrassing. business lines. They could reach a point where advice on investment funds, capital markets, corporate/mergers and acquisitions, two years ago and we have been adding However, over the last two years this view has they decide to become more focused people across the board since then, at various turned around, it’s not necessarily a shameful project development and finance transactions through to representation in levels and functions. thing. The decision is driven more by practical Q: So for the time being it will remain international arbitration and litigation. considerations. Does the valuation of the primarily minority investments? Q: Including the operational side… shares reflect the business fundamentals? A: We want to enlarge our stake and influence A: We have always been looking at various ways Does being public help the company raise in businesses so we are in a better position With a long-standing commitment to Asia for more than 30 years, we offer a to add value to our portfolio companies. It money through the capital markets on an to add value, and that could include more starts with the experienced people we recruit ongoing basis? Does the company have an buyouts. Generally speaking, entrepreneurs sophisticated approach to deliver innovative and integrated strategic, tactical for these companies, depending on specific active following among analysts? have two choices. First, they want more needs. We also have senior advisors engaged capital so they can become a clear leader in and technical advice to our clients. Our core practice areas include: by the fund, and then on each project we Q: Focus Media is by some distance the their sector, and that could mean their stake have outside consultants. In terms of an in- largest PE-backed deal of this type. Will it is diluted. Second, they can insist on holding house team, we are gradually building it. be topped? 51% or more and basically put a stop in terms ▪ Acquisition Finance ▪ Intellectual Property ▪ Privatizations A: I haven’t come across any meaningfully larger of how big they can grow. Q: Can the recent spate of take-privates of companies than Focus Media that are looking ▪ Asset Management ▪ International Arbitration ▪ Project Development US-listed Chinese companies – two of to do the same thing. Most of the companies Q: The IPO market has been difficult in the ▪ Banking & Finance ▪ Litigation & Dispute & Finance which involve FountainVest (Focus Media are small. Shanda was the largest to go private last year or so. What impact is this having and LJ International) – be sustained? in the US and then there was Alibaba.com in on your exits? ▪ Capital Markets Resolution ▪ Regulatory & Compliance A: I think it’s a wave of opportunity – it became Hong Kong. For the likes of Tencent and Baidu, A: The IPO market remains weak but exits are quite active last year and it will continue to be they trade at fair valuations, their businesses also becoming more diversified. We do ▪ Direct Investment ▪ Mergers & Acquisitions active this year. There will be a self-selection are well understood and covered by analysts, see mergers, trade sales and cross-border ▪ Fund Formation ▪ Private Equity process: some entrepreneurs feel it doesn’t and they have high liquidity. There is no need acquisitions becoming more active. In our make a whole lot of sense to continue to be for them to consider going private. case of our first fund, there has been on trade listed in the West; others think that, with TMT sale exit to a domestic strategic buyer from companies, NASDAQ is a natural location Q: Investors cite two other potential sources the same industry. Consolidation is certainly because investors understand them. For of control deals – succession planning and taking place. ABU DHABI | BEIJING | BRUSSELS | FRANKFURT | HONG KONG | LONDON | MILAN | NEW YORK | PALO ALTO PARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC

Number 24 | Volume 26 | June 25 2013 | avcj.com 13 shearman.com China Awards [email protected] PE deal of the year – Alibaba Group

After three years of on-and-off “We were keen to invest in the company due to Once again, structuring and timing were the negotiations with Yahoo, Alibaba Group finally its leading position in the global market, strong main challenges – Alibaba set out to finance the agreed to repurchase half of the US internet firm’s team and prospect for future development.” $2.5 billion privatization of B2B arm Alibaba.com 40% stake in itself for $7.6 billion last September. The timing of the deal was uncertain due in parallel with the buyback but it was unclear Supported by $5.9 billion in financing, of which to a combination of past tensions between the which would come first. $3.9 billion was equity, it was one of the largest – companies, the size of Yahoo’s stake in Alibaba as “We were dealing with a large number of and most sought-after – transactions involving a a proportion of its own market capitalization and highly sophisticated and experienced investors Chinese company to date. tax considerations in structuring the deal. This and the biggest challenge was logistical – “The size of that investment round presented meant that CIC was ready to move much earlier making sure everyone was moving the same an excellent opportunity for us to make a major than required. direction and getting where we needed them investment,” says Ken Hao, managing partner and to be,” says Ken Martin, head of China Practice at managing director of Silver Lake. Freshfields, legal advisor to Alibaba. In 2011, Silver Lake and DST Global co-led “We were keen to invest Yahoo has done well from its investment, a $1.6 billion equity investment for purchasing having acquired the full 40% stake in 2005 for 5.7% employee stake in Alibaba. The two firms, in the company due to $1 billion plus the Yahoo China business. The US plus co-investors including Temasek Holdings, its leading position in firm received $6.3 billion in cash, $800 million in raised their holdings in the buyback transaction. preference shares, and $550 million in patents China Investment Corp. (CIC) led the PE portion the global market” – Mao Yong and licensing payments. Its remaining 20% stake of the deal, with Boyu Capital, CITIC Capital and is worth $8.1 billion and Alibaba has a two-year CDB Capital – China Development Bank’s PE arm window in which to purchase it, in case of an IPO. – coming in as new investors. CIC is said to have The $2 billion in senior debt portion of the The listing would be Alibaba’s pay off on put in $2 billion on its own. deal was split between China Development its efforts, with some industry participants “Alibaba has established a close cooperative Bank and a consortium of international banks, expecting the offering to value the company at relationship with CDB,” Mao Yong, executive including ANZ, Barclays, Citi, Credit Suisse, DBS, up to $100 billion. Nothing is likely to happen director & CIO at CDB International tells AVCJ. Deutsche Bank, Mizuho and Morgan Stanley. before the final quarter of 2013. Exit of the Year – China Pacific Insurance

“The transaction, the largest were hard to come by. Apart from Newbridge the parent company following a restructuring of private equity investment in China to date, is Capital, which took a close to 18% stake plus the various subsidiaries. The company listed in a testimony to the maturing investment and management control of Shenzhen Development Shanghai the same year and went public Hong regulatory environment in China and to the Bank in late 2004 – it could be argued that no Kong in 2009, its turnaround complete. government’s commitment to financial reform,” private equity firm managed to secure itself Carlyle’s exit was protracted, as was to be X.D. Yang, managing director and co-head of The a more influential position in the sector than expected given the lock-up periods on its China Carlyle Group’s Asian buyout group, said in 2005 Carlyle. Pacific shares. The first block trades came in when the firm invested in China Pacific Insurance. After three years of negotiation it agreed to December 2010 and January 2011, generating The investee was insolvent and losing money inject RMB3.3 billion (then $410 million) for a proceeds of $2.6 billion between them. There at the time, like many institutions in China’s 24.98% stake in China Pacific’s life insurance unit. followed three more over the next 18 months beleaguered financial services sector. For foreign Getting the deal done meant putting before the final portion – representing 2.2% of investors, there was the prospect of participating company management through a crash course China Pacific’s overall share capital – was sold for in a turnaround story, but regulatory approvals in private equity. $796 million. “We knew the company had great potential The full proceeds top $5 billion, making it but a lot of work had to be done,” Yang told not only by some distance the most successful AVCJ last year. “We spent a fair amount of time investment in Carlyle’s debut Asia buyout fund, explaining what Carlyle is. That was a good but also supposedly the firm’s largest-ever cash process for the two sides to get to know each exit globally. other and I have to give credit to China Pacific’s “Over [more than seven] years, we have management for recognizing that a global firm worked very closely with the company, company like Carlyle could make a difference to their management and other shareholders in support business.” of transforming China Pacific into one of the best The private equity firm subsequently took its run and most successful insurance companies in total investment China Pacific to $740 million in China and a Fortune Global 500 company,” Yang Brian Zhou (rights) accepts on behalf of Carlyle 2007, converting its stake into a 19.9% interest in said in response to the final exit.

14 avcj.com | June 25 2013 | Volume 26 | Number 24 China Awards [email protected] PE professional of the Year – RMB fundraise Homer Sun of the Year –

Somewhat unusually for Morgan “This relatively low level of penetration positions CDH Investments Stanley Private Equity Asia’s (MSPEA) China us well to drive strategic value by expanding on team, the last 12 months have been dominated what is already the largest convenience store by control deals. Leading Beijing convenience chain in Beijing.” CDH Investments did not get into store chain Hi-24 was acquired last November He expects to see even more buyout deals the renminbi fund space as part of the mad through a corporate carve-out and then two in the future – through corporate divestments, rush for heady exit multiples on Chinext. The more buyouts – take-privates of US-listed dairy shareholders restructurings or general changes private equity firm’s involvement dates back producer Feihe International and crop nutrients – but they will remain fewer in number than to several years earlier and it owes much to specialist Yongye International – are pending. The minority transactions. As for China take-privates, China’s regulators restricting offshore corporate Feihe deal has already won board approval. these are a cyclical play, as MSPEA knows from restructurings and encouraging investors to stay “Hi-24 entails a classic buyout arrangement of experience: in 2009 it privatized Singapore-listed onshore. equitizing management to better align incentives Sihuan Pharmaceutical and took the company “The exit route through red-chip structures with shareholders. Management, in turn, look public in Hong Kong 11 months later. was more difficult and the China Securities to us to provide a level of support to growth Sihuan is also an example of how MSPEA has Regulatory Commission (CSRC) encouraged us the business that they wouldn’t have otherwise broadened its sector focus to incorporate areas to use the A-share market. Then the National such as healthcare and agriculture. Traditionally, Council for Social Security Fund (NSSF) decided consumer goods featured most prominently to get into the asset class and CDH and Hony but the relatively high valuations in this space Capital were the first two they picked up,” prompted the PE unit to look elsewhere. Shangzhi Wu, chairman and managing partner of “The industries we are spending time on CDH, told AVCJ earlier this year. increasingly highlight technical barriers to entry The private equity firm launched its versus more traditional branding and distribution debut renminbi fund in 2008 and received models,” Sun explains. “We are also seeing more commitments of RMB4.06 billion ($668 million), services businesses. For example, we continue with the NSSF putting in almost 40%. The fund to like specialty chemicals and healthcare where was intended to be a small complement to the we’ve made four investmentments in recent firm’s other offerings – the previous year CDH’s years.” third US dollar fund closed at $1.6 billion – but Homer Sun (right) receives his award Ticket sizes are increasing as companies the NSSF’s participation made it an important in China mature and industries consolidate – consideration. received as a non-core operation of their prior MPSEA has invested more in the country in the Two years later, the firm returned to market parent company,” says Homer Sun, MSPEA’s CIO. last two years than during the six years prior or with a successor vehicle – Tianjin CDH Equity The private equity unit spent three years the 12 years prior to that. However, the private Investment Fund II – and an initial target of building relations with Hi-24’s management equity unit’s team is also growing, which has RMB5 billion. Despite an increasingly challenging before acquiring the business from China made life slightly easier for Sun. A board member fundraising environment towards the end of Financial Services Holding as an exclusive of six portfolio companies, his trips to China are the process, the fund closed at RMB8 billion last purchaser, for RMB58.1 million ($9.3 million). It down to two days a week, from four days a week. September. The NSSF’s contribution was RMB3 now plans to double the number of stores from MSPEA is said to be in the process of raising billion. 200 to 400. its fourth pan-regional fund, which has a target The pension fund is now CDH’s largest “Beijing has about 500 branded convenience of around $1.5 billion. A first close of $750 came single LP across any of its funds – US dollar and stores, compared to Shanghai’s 5,000,” says Sun. towards the end of last year. renminbi – although the largest single group remains international institutional investors, Firm of the Year – FountainVest Partners accounting for about two thirds of the total assets under management. PE Professional of the Year – Homer Sun (Morgan Stanley Private Equity Asia) As to the investment prospects for the new VC Professional of the Year – Lei Jun (Shunwei Capital Partners) renminbi-denominated fund, Stuart Schonberger, Private Equity Deal of the Year – Alibaba Group (Boyu Capital/China Investment Corp/China managing director at CDH, notes that “China’s Development Bank Capital/CITIC Capital/DST Advisors/Silver Lake/Temasek Holdings) potential for economic growth still remains Venture Capital Deal of the Year – Xiaomi (Shunwei Capital Partners/IDG Ventures/Morningside very high and its economic model supports the Technologies/Qiming Venture Partners/Qualcomm Ventures/Temasek Holdings/DST Advisors/GIC) establishment and development of world-class Exit of the Year – China Pacific Insurance (The Carlyle Group) firms.” Fundraising of the Year: US dollar – FountainVest China Growth Fund II (FountainVest Partners) He cites pharmaceuticals, real estate, logistics Fundraising of the Year: Renminbi – Tianjin CDH Equity Investment Fund II (CDH Investments) and technology as sectors that are likely to deliver strong returns for PE investors.

Number 24 | Volume 26 | June 25 2013 | avcj.com 15 China Awards [email protected] VC Professional of the Year – Lei Jun Having cut his teeth with Kingsoft and enjoyed an early but short-lived high with Joyo, Lei Jun embarked on a successful career as a super angel. Mobile phone brand Xiaomi is his masterpiece, for now

Twenty years ago, Lei Jun joined spot companies with potential. He is also happy million came one year later, with Beijing Shunwei Chinese software company Kingsoft and to hold on to portfolio companies for a long Venture Capital, Qualcomm Ventures and dedicated himself to developing its flagship period of time and help them grow. Lei invested Temasek Holdings joining the existing investors. product, WAP Office, a word processing system $1 million in YY eight years ago and, based on primed to challenge Microsoft’s mid-1990s the company’s current valuation of $1.5 billion, Innovative approach offering. It lost. he has made a paper gain of nearly 100x. Yet he Lei’s approach stood out in two respects. First, “This hit me hard. It was like someone had has still to exit. he didn’t just want to launch a new smart phone destroyed what we had spent years creating. “Other angel investors wouldn’t have the but create an ecosystem around it as well. By Microsoft will always be our enemy,” Lei said in patience to hold on to a covering both the hardware a television interview a few years ago. He then company for such a long and software angles, Xiaomi spent 90 days in trying to WAP Office in Kingsoft period,” says Liu. “They usually could essentially mimic the stores and realized why it hadn’t worked. “We give up and cash out in Apple approach and tie in focused on producing something we liked, but the fourth or fifth round of customers on the basis of never researched what users preferred.” funding.” user experience. Second, Lei As a result, Lei lost out on the global internet Another characteristic of wanted to compete on cost. boom. The late 1990s saw a legion of millionaires Lei’s investment approach is The idea was to strip out emerge from Silicon Valley start-ups and a few he only invests in industries marketing and distribution of China’s nascent internet companies caught he understands and expenditure by launching, the end of the wave. For software companies, alongside entrepreneurs promoting and selling the however, it was difficult to match the success of that he knows well. Vancl smart phone online. Google or Yahoo. And the Chinese equivalents of CEO Chen Nian, for example, After focusing on R&D these providers had yet to emerge. founded Joyo with Lei. in the first year, Xiaomi’s “Lei missed the first internet bubble. The likes In total, Lei has seeded debut handset, the MI-ONE, of Tencent Holdings, Alibaba Group and Baidu about 20 companies and he continues to launched in August 2011 with a price tag of were nothing more than junior start-ups when support them on an institutional basis through RMB1,999($310), less than half the cost of smart he started working at Kingsoft,” says Hans Tung, Shunwei Capital Partners, the venture capital firm phones with comparable specifications. There Beijing managing partner at Qiming Venture he set up in 2011. were 300,000 pre-orders in the first 34 hours. Partners, who worked with Lei for several year. So far, Morningside has collaborated with Lei “Everyone has been surprised by now how But in Joyo.com, an online retailer of books, on seven deals and Qiming on four, including fast it has grown,” Tung says. “Xiaomi is the music and videos, Lei had his first success story. Vancl. Tung volunteers that if anyone else had fastest start-up to reach $1 billion in revenue The company was founded in 2000, in the early walked in and made the same pitch, he wouldn’t and achieve profitability. Google did in year six, stages of Chinese e-commerce, and within four have invested in many. Facebook in year seven, Amazon reached the years had been acquired by Amazon for $75 For all his success, Lei describes super revenue target quicker but it took nine years to million. angel investing as a hobby, not a job. However, achieve profitability.” his long-held ambition was to penetrate the Validation of Xiaomi’s approach was provided Going solo mobile phone market, something that has been by Yuri Milner of DST Advisors who led a $216 Having served as Kingsoft CEO for nearly a achieved with Xiaomi. “The creation of Xiaomi million third round of funding in June – valuing decade, Lei stepped down in 2007 shortly after combines those three key investment themes the company at $4 billion – with Government of taking the company public in Hong Kong. He into one product,” Tung explains. Singapore Investment Corp. (GIC) also involved. then embarked on a second career as an angel Lei’s idea was to create a high quality but However, Lei is in no hurry to take the business investor. marketing-lite smart phone brand, and he first public and has ruled out an IPO before 2016. Lei identified three themes likely to drive pitched it to Liu and Tung in 2009. “We were on “What Xiaomi products have been launched now the next generation of internet start-ups: the phone from 9 p.m. to 9 a.m. discussing the only accounted for 20% of what we discussed in e-commerce, social networking and mobile. business model,” Liu told AVCJ last year. “We had the beginning,” Liu says. Early targets included social networking site to change batteries and chargers several times. There are rumors of a Xiaomi Internet TV YY, clothing retailer Vancl, and mobile browser We wanted to identity the next big wave and product, but all Tung will say is that the company UCWeb. YY went public in the US last year and getting the timing right.” is going international, from Greater China to Vancl is expected to follow suit, while UCWeb is Morningside and Qiming provided $10 Taiwan and Hong Kong, and then Southeast Asia. expected to be acquired by Alibaba. million in seed funding in 2009 alongside the “Of course the US and European markets are part Richard Liu, a partner at Morningside founders. They were joined by IDG Capital of the plan,” he adds. “Korea has Samsung. Why Technologies, which has backed YY since Partners in the $41 million Series A round in can’t China have its own brand reach the same inception, notes that Lei has an innate ability to December 2010. A Series B round worth $92 level of achievement?”

16 avcj.com | June 25 2013 | Volume 26 | Number 24 deal of the week [email protected] Carlyle finds the right formula for Yashili

Glow-in-the-dark pork, dumplings tainted with melamine as it passed through things, Yashili’s fortunes revived and it went with aluminum, cadmium-tainted rice, and the fragmented supply chain, resulting in the public in Hong Kong in 2010, raising $348 million. cooking oil made from recycled sewage are just deaths of six infants. Yashili wasn’t among the Carlyle increased its stake to 24.4%. some of the horrors that have found their way main culprits but it suffered with the industry Following the IPO, Yashili stepped up onto Chinese dinner tables in recent times. It is as a whole, posting a record loss of $128 million efforts to strengthen its brand, emphasizing in no wonder, then, that there is an equally long in 2008, mainly due to product recalls and marketing campaigns that the raw materials for list of private equity deals where investors have decreased sales. its formula were sourced from New Zealand. sought to take advantage of both a dire need Carlyle’s priority was not only In early 2012 the company for safer food in China and the willingness of a to ensure product safety but also introduced slogans like “Pure New growing middle class to pay a premium for it. to restore consumer confidence. Zealand, Cherish Yashili.” It also Last week, The Carlyle Group joined the “Carlyle has worked closely with committed RMB1.1 billion ($180 growing list of firms to cash in on this strategy Yashili’s management team in the million) to a new milk processing as it agreed to exit infant formula manufacturer past several years to facilitate the plant in Pokeno, near Auckland. Yashili to China Mengniu Dairy. Mengniu is company’s internationalization, The plan received regulatory buying about 75% of the company from majority including setting up the Food approval in April. shareholders the Zhang family and CA Dairy, a Safety & Quality Assurance Yashili: Road to recovery For Mengniu, the investment vehicle owned by Carlyle Asian Partners II and its Committee (FQSAC) and supply means a larger share of the parallel co-investment entity. The private equity chain initiatives in New Zealand,” says Eric Zhang, domestic baby-formula market, which is firm will receive HK$3 billion ($387 million) for its managing director at Carlyle. projected to grow by more than 70% to $21.8 24% holding. FQSAC was the first committee of its kind in billion by 2015. It is the company’s second Carlyle initially paid $95.2 million for a 17.3% China, headed by Robert Brackett, former director lateral deal in a matter of weeks, following the stake in Yashili back in September 2009. This of the US Food and Drug administration’s Center purchase of a minority stake in China Modern was less than a year after China’s dairy industry for Food Safety and Applied Nutrition. On the Dairy, facilitating the partial exit of KKR and CDH reached its most recent nadir. Milk had become back of the committee’s efforts, among other Investments. Partners Group joins India’s IT crowd

Few investors need to be convinced process outsourcing (KPO) industries. Established development by building out its sales capabilities of the wealth of possibilities that exist in India’s in 1996, the company provides a range of and expanding its service footprint through the IT outsourcing industry. As of last year, the sector services, including mobility solutions, cloud addition of delivery centers in new geographies. was valued in excess $100 billion with export enablement, technical support and remote CSS is also expected to focus on its business revenues reaching $69.1 billion and domestic infrastructure management to a blue-chip client in analytics-led customer support, mobility, revenues of $31.7 billion – growing at rate of 16% base. virtualization and telecom services. and 9%, respectively. CSS now operates from 13 locations CSS stand out as India’s largest tech support It comes as little surprise that the sector has worldwide with a team of more than 5,400. The services buyout but there have been plenty of been prime hunting ground for firm has revenues of $200 million, other sizeable transactions. The Blackstone Group VC and PE investors in recent drawing on a customer base that acquired Internet Global Services in 2007 for $200 years. At $275 million, Partners includes Nortel, Deutsche Bank million, selling it four years later to Serco Group Group’s acquisition of CSS Corp, and Motorola. It is based in the for $634 million, while last year Bain Capital paid which was officially confirmed US but most of its employees and $1 billion for a 30% interest in Genpact. The this week, represents the largest delivery centers are in India. sellers, General Atlantic and Oak Hill Capital, still private equity buyout seen so “CSS Corp is already a leader own another 30%. far. The investor is understood in the supply of specialist The CSS deal facilitates the exits of SAIF to have taken an 80% stake in CCS Corp: Global player technological outsourcing Partners, Goldman Sachs and Sierra Ventures, the company, with CEO T.G. services,” says Andreas Baumann, which prior to the transaction owned 70% of the Ramesh and private equity entrepreneur Sanjay partner and head of Singapore at Partners Group. company. SAIF’s first investment came in 2006, Chakravarty holding the remainder, “This is a sector in which we expect to see strong when it paid $22.5 million for Baring Private Like many of the larger participants in the growth going forward as demand for these Equity Partners India’s interest in the business. global technology support services sector, CSS services increases.” Goldman Sachs arrived the following year, emerged during the boom in India’s business For Partners Group, the plan is to shepherd leading a $25 million round that included Sierra process outsourcing (BPO) and knowledge the company through the next phase of and SAIF.

Number 24 | Volume 26 | June 25 2013 | avcj.com 17 Focus [email protected] India secondaries: Plan B? India’s PE industry is expected to see an increase in secondary deals as funds approach maturity and GPs look for alternatives to difficult public market exits. But is the talking translating into transactions?

When Asia Growth Capital Advisors of underperforming assets then as much as I capital, or where the primary and secondary are (AGCA) acquired a portfolio of assets from understand why a GP is looking to sell, we have clubbed in a stapled deal, giving the investor an its former parent Credit Suisse, the company no interest in acquiring.” exit. received a new lease of life. Backed by a new In situations where a GP is sitting on a Seasoned GPs could also find value in set of LPs ready to commit capital, if a portfolio maturing portfolio of un-exited assets, frustrating secondary deals – they might be investing from company needed additional support AGCA could incumbent LPs to distraction, a secondary their fourth fund but still have a few assets left now do follow-on investments. The transaction investor is a useful antidote. The assets and from the first fund. “They want to fully realize the was also tipped to fuel investors’ interest in management team into a new entity and old fund as they generally have already returned secondary deals where existing backers are allowing the frustrated LPs to cut their losses. enough money to the investors,” Gupta says. unable or unwilling to continue. However, not only must the assets be worth “They want to rationalize the investments and HarbourVest Partners was the lead investor in having, but the LPs must be willing to cede manage their team’s bandwidth effectively.” that transaction. Since the deal was completed control at an acceptable price. When buying from On the portfolio deal side, a change in in February, Tim Flower, a principal at the firm, strategy is one reason investors want to exit, such has received plenty of inbound communication as with financial institutions where banks are about portfolios that might be for sale. “In some situations readdressing their strategy on holding assets in Such deals could account for the 10-20% of Asia. HarbourVest’s nearly $6 billion in secondary- investors aren’t willing Contrary to HarbourVest, Gupta says that focused funds that has been earmarked for Asia. to bite the bullet pricing expectations, once far apart, are now “There is a lot of activity. We are talking to closing. These sentiments are echoed by Akshat several people, advisors as well as GPs,” Flower around a realistic Shukla, Paul Capital’s regional representative for says. He is currently working on two India deals sourcing secondary transactions. But he notes valuation” – Tim Flower – one to acquire the sub-portfolio of a seasoned that the relationship with a company promoter fund manager and another for a virgin fund’s and his willingness to enter into a secondary deal portfolio of high-growth businesses. a pool of investors, there are often differences is an important factor. This is particularly the case in terms of need for liquidity and valuation with minority investments that were done with a Big opportunity, little action expectations. view to pursuing an IPO. The opportunity certainly is there. Between 2006 Doug Coulter, head of Asia private equity at and 2008, more than $23 billion was raised by LGT Capital Partners, says there are deals to be GP to GP Indian GPs, mostly for funds in the $100-200 done but they are extremely resource-intensive. While the number of PE exits has declined over million range. Portfolios acquired during these “As an LP you look at them and they might be the last few years, secondary sales between GPs boom years are maturing and the slowdown interesting, but you need to balance that against have shown significant growth, rising from $122 in IPOs is expected to prompt an increase in the fact they take a long time to transact. You million in 2009 to $1.6 billion in 2012. According secondary direct and fund deals. And yet, Flower can spend a year working on it and the seller just to KPMG, in 2011, there were 19 such secondary says he is not aware of many deals being done changes their mind.” deals in India out of the total 84 exits. This at all. When there is no consensus, the compromise compares to 25 out of 94 exits the previous year. High valuations are often to blame for position might be single-asset sales, which GPs say they do not see much difference faltering sales. Many of these investments were bring liquidity to LPs and might give GPs the between selling to another PE fund or a strategic made at a time when entry valuations were sky exit momentum required to drum interest in investor. Secondary GP deals are a focus for high, but since then the rupee has depreciated a new fund. These don’t appeal to the likes of AGCA right now, with Soma Ghosal Dhar, partner and lowered the value of portfolios. Companies HarbourVest and LGT – they like portfolios, ideally and CEO, noting that “sellers are motivated, may have grown but perhaps not as aggressively with managers attached – but GP-to-GP deals are and reasonable, and at the end of the day you as originally projected. possible, and in some cases, actively sought. are talking to counterparts who understand “In some situations investors aren’t willing to NewQuest Capital Partners, which spun out valuation as well as you do.” bite the bullet around a realistic valuation. It’s not from Bank of America Merrill Lynch two years Flower is hopeful that secondary portfolio that they’re selling the assets to somebody else; ago, is a ready-made GP platform dedicated to transactions will eventually become as they’re just not selling the assets,” Flower says. “For secondary assets. It has a $400 million fund and commonplace in India as in developed markets, better GPs we see an adverse selection in terms $100 million in dry powder. but this will take time. “Frequently with these of the companies they’re looking to sell, and that According to Amit Gupta, NewQuest’s COO transactions when we eventually complete the brings the valuation issue back on the table. We and head of India business, single asset deals deal it’s at the second or third attempt because are happy to take a portfolio that includes assets fall into two categories: where companies are it takes the shareholders a little time to get their that aren’t that exciting, but if it’s a collection growing and need another round of primary heads around what their objective is.”

18 avcj.com | June 25 2013 | Volume 26 | Number 24 LP interview [email protected] Getting active in Asia New Zealand Superannuation Fund’s private equity program is only five years old but the fund is gearing up to make larger commitments to international managers. CIO Fiona Mackenzie explains the strategy

When New Zealand Superannuation allows the fund to make investments outside its managers.” Fund (NZ Super) published it first performance framework when markets diverge sharply from In the last few years, NZ Super has been and portfolio update back in 2006, domestic underlying fundamentals. The approach has involved in several deals of note at home. In private equity investments represented just gained wider appeal among sovereign funds March 2010 it joined Infratil in the $490 million NZ$17 million – or 0.17% – of its NZ$10 billion of looking to move away from a passive indexed joint acquisition of the downstream assets in assets under management. The fund had yet to portfolio to one that is actively managed and New Zealand of Dutch petroleum giant Shell. make any allocations to the asset class overseas. increasingly invested in private market assets. It was responsible for one of the largest private Over the last six years, the situation has The key benefit of the reference portfolio equity investments of 2012, buying a 31.25% gradually changed. As of April this year, NZ is that it guards against the volatility of capital stake in New Zealand’s Kaingaroa Forest from Super – which was set up by the government in markets. At present, the allocations in NZ Super’s Harvard Management Company for $2 billion. an effort to smooth the tax burden arising from reference portfolio – which is classified more Canada-based Public Sector Pension Investment costs of superannuation – had NZ$22.5 billion broadly that than the actual portfolio – are 70% Board also participated in the transaction. in assets. Nearly two thirds of this is in global global equities, 5% domestic equities, 5% global and domestic equities, followed by 10% in fixed listed property and 20% fixed interest. Access Asia income. Private equity and other private markets According to Mackenzie, of the fund’s total However, emerging Asia is becoming an receive 2% apiece. commitments to unlisted mandates, the majority increasingly significant part of NZ Super’s However, the proportion of the fund which is are domestic investments. This is mainly due to private equity exposure. It currently has three allocated to private equity is not necessarily fixed a large historical exposure to real estate assets relationships in emerging Asia – one generalist as NZ Super operates under an opportunistic in New Zealand. In terms of pure PE investment, fund and two real estate funds, covering China investment framework introduced in 2011. however, only 25% is invested domestically while and India, respectively. “We no longer have a target allocation to the remainder deployed overseas. These include China Infrastructure Partners, private equity as an asset class; we think of NZ Super’s private equity program is now five a $426 million fund sponsored by BOC private equity as a way to access underlying years old, having made its earliest commitments International and Temasek Holdings, and Red Fort India Real Estate Fund II, an India-focused property fund that reached a final close of $500 New Zealand Superannuation Fund’s asset allocation, June 2012 million in early 2012. NZ Super also invested in KKR’s first Asian fund in 2007. “We will increasingly use private equity managers where we don’t have in house Global equities 61% capabilities so I would expect more emphasis on Infrastructure 10% managers for non-Australasian investment, but it Fixed income 6% depends on what opportunities come down our Timber 6% research pipeline,” Mackenzie says. Property 6% NZ Super has also begun to dip its toes in New Zealand equities 5% co-investment deals. The fund has completed Other private markets 2% one transaction in the domestic market and Private equity 2% operates a co-investment vehicle in China with Rural farmland 1% two counterparts. However, capacity is limited by the small team size and its relative isolation in New Zealand. Source : New Zealand Superannuation Fund “[The domestic deal] was a great experience for the team but it was only NZ$30 million in size investment opportunities,” explains Fiona to HarbourVest International Private Equity so for the amount of work involved it probably Mackenzie, head of investments at NZ Super. “So Partners V and the Adams Street Partnership wasn’t of scale to be honest,” Mackenzie says. it makes us a little different in that one year me Fund Program. Instead, she sees the key development in might not be making any PE investments and “Fund-of-funds were our first and second the next few years as the amount the group is another year we might make a lot.” investments and then we took on an advisor prepared to commit to individual managers. At the core of NZ Super’s strategy is a relationship in 2009,” says Mackenzie. “That is Historically, NZ Super’s average check size has reference portfolio, a shadow portfolio that when started making investments into co- been NZ$25-30 million but in the future is will provides a benchmark appropriate to the fund’s mingled funds and at that point we were looking not deploy less than $100 million with a single long-term aims and associated risk profile. It to build of a diversified portfolio of private equity manager.

Number 24 | Volume 26 | June 25 2013 | avcj.com 19 Private Equity & Venture Forum Singapore 2013 17-19 July • Shangri-La 3rd Annual

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