Country Snapshot* Nvestors Continue to Be Extremely Optimistic About China

ChinaAn Overview of Trends in Select Sectors and Markets September 2009

Country Snapshot* nvestors continue to be extremely optimistic about China. The country’s growth story not only remains intact, but is also enabling China to ascend in the global eco- 2009 Population: 1.3 billion nomic order and lead other economies out of the financial crisis. China-focused I Population Growth (2009–2050): 8% private equity funds led the Emerging Asian region in 2008, with total funds raised of % of Population Under 15 Years-old (2009): 19% US$14.5 billion, an increase of 3.7x the amount raised in 2007. Investments in Chi- 2009 GDP: US$4.8 trillion na held steady at US$9 billion in 2008, from US$9.5 billion in 2007, making China 2009 GDP per Capita: US$3,622 home to the greatest amount of private equity investment dollars across the emerg- 2009 GDP Growth: 7.5% ing markets to date. As the effects of the global financial crisis have stalled private 2010 GDP Growth: 8.5% equity worldwide in 2009, China is among the few markets experiencing a relatively *All data projected. high degree of fundraising and investment activity, particularly as RMB-denominated Source: International Monetary Fund, Population Reference Bureau. funds are drawing greater investor interest, both at home and abroad. China is the only emerging market that compares in size to the U.S. and European private equity markets and, within Asia, it is on track to displace more developed private equity markets such as Japan and Australia for volume and investor attention. According to the 2009 EMPEA/Coller Capital Emerging Markets Private Equity Survey, investors have ranked China as the most attractive emerging market/region for private equity investment every year since 2004.

Despite the fact that the country’s GDP has contracted sharply from the 13% growth rate it boasted in 2007, China’s economic engine continues to hum along and, of the world’s leading economies, is the only one currently expanding. The McKinsey Global Institute projects China’s urban middle class will increase from 43% of the popula- continued on page 2 China Private Equity Fundraising and Investment, 2005-H1 2009 (US$B)

15 $14.5 Fundraising

12 Investment

$9.5 $9.0 9 $8.2

$6.5

US$ Billions 6 $4.3 $3.9 $3.0 $2.7 3 $2.2

0 2005 2006 2007 2008 H1 2009 Source: EMPEA.

tion today to 76% by 2025, or 612 million individuals. Ad- field Fund, which closed on its third China-focused vehicle ditionally, Chinese banks continue to lend and the country’s dedicated to technology investments at US$383 million in 4 trillion yuan (US$585 billion) stimulus plan, launched in early 2009. In September, Beijing-based CDH Investments, November 2008, has largely been viewed as successful thus a spin-off of China International Capital Corporation, raised far in its goal to ignite domestic demand and boost capital US$500 million for a first close on its fourth dollar-denom- spending. inated private equity fund, targeting US$1.4 billion in total commitments. China has traditionally been a difficult place for deals, but the landscape is changing. China’s challenges include unclear Local-currency denominated funds are not only grabbing rules and regulations for foreign investors regarding proce- headlines but are also comprising an increasing share of dures and taxation, but Chinese regulatory authorities seem capital being raised by both local and foreign players. RMB- committed to establishing a framework for private equity. A denominated funds accounted for almost half of all capital number of local and provincial government initiatives have raised in the first half of 2009. China-focused private equity been launched across the country, introducing incentives for firm New Horizon Capital is just one example, having closed foreign firms to establish wholly foreign owned and/or –in- its first RMB-denominated fund at RMB1 billion (US$146 mil- vested fund managers based in China, while the national gov- lion) in January 2009. In particular, government-backed in- ernment has signaled its intent to allow foreign firms to es- dustrial investment funds, designed to increase financing op- tablish local currency RMB-denominated funds via onshore tions for domestic companies, continue to account for a large vehicles. It remains to be seen how regulatory treatment percentage of local currency funds with approximately 15 of foreign investors will compare to that of wholly-domestic launched in the first six months of the year. During this time players and how transparent regulations will be. However, period, Zhongchuan Investment Fund Management’s Tian- with the government increasingly recognizing and promoting jin Ship Industry Investment Fund, targeting RMB20 billion private equity as a distinct asset class, China is poised to (US$2.9 billion), closed on RMB2.8 billion (US$410 million), continue to lead the emerging markets as the foremost des- while the Zhangjiang Biomedical Industrial Fund and the Bei- tination for both fundraising and investment. jing Zhongke Fangshan Venture Investment Fund closed on Fundraising Trends continued on page 3 EMPEA Insight Funds focused singularly on the Chinese market raised

US$14.5 billion in 2008, representing 36% of the total capi- Editorial Director Jennifer Choi [email protected] tal raised by Emerging Asian funds and more than 20% of Writing and Research Nadiya Satyamurthy satyamurthyn@empea. all capital raised by emerging market funds during the year. net, Harrison Moskowitz [email protected], Scott Scheide [email protected] Fundraising for China slowed in the first half of 2009, with a Production Manager Cristiane Nascimento [email protected] 77% decrease in funds raised at US$2.7 billion, down from US$11.8 billion in the same period in 2008. However, China Advertising Opportunities continues to account for the greatest single-country share of EMPEA Insight offers readers an overview of the data and drivers emerging markets funds raised during this time period, rep- behind investment trends in emerging markets private equity. Each issue of EMPEA Insight provides an opportunity for a single resenting 31% of funds with closes by number. exclusive back page advertisement. Issue-specific placements are On average, fund sizes among closed funds were smaller in on a first come, first served basis. For a list of upcoming issues the first half of 2009 at US$77 million, versus US$379 mil- and more information about advertising opportunities and rates, contact Cristiane Nascimento at [email protected]. lion in the first half of 2008, when three funds closed above About EMPEA the US$1 billion mark by mid-year. Private equity firms that The Emerging Markets Private Equity Association is is a non-profit, witnessed sizable closes in the first half of 2009 include Chi- independent, global industry association that promotes greater na-focused CITIC Capital Partners, which held a first close on understanding of and a more favorable climate for private equity its second fund at US$500 million in March, and GSR Ven- and venture capital investing in the emerging markets of Africa, tures, a China-based partner of U.S. venture capital firm May- Asia, Europe, Latin America and the Middle East.

Limited Partners’ Planned Changes to Their EM PE Investment Strategy Over the Next 1-2 Years Investment Trends Representing the largest single-country share of all investment dollars across the emerging markets, China was home Stay the same 80% to US$9 billion in investments in 2008, a 5% decrease from

70% Begin investing the US$9.5 it received in the previous year. Investments for the first half of 2009 totaled US$6.5 billion, accounting for 60% Expand investment 62% of capital disbursed by private equity investors in Asia 50% and making China the only BRIC country to experience year- 40% over-year growth in investment activity through mid-2009. % Respondents 30% For the first half of 2009, financial services accounted for the 20% bulk of investments by value, led by two large deals complet- 10% ed by local Hopu Investment Management Company. In the 0% China India Brazil Sub-Sah. Africa Middle East Russia/CIS largest deal in the region year to date, Hopu purchased a 3% stake in China Construction Bank for approximately US$3.8 Source: 2009 EMPEA/Coller Capital Emerging Markets Private Equity Survey. billion in May 2009. Singapore-based Temasek Holdings additionally participated in the deal. Earlier in the year, Hopu RMB1 billion (US$146 million) and RMB500 million (US$73 invested approximately US$400 million in Bank of China million), respectively. Although many industrial funds have by purchasing a small stake from Royal Bank of Scotland. been formed, they have been slow to invest. One recent ex- Both transactions were PIPE (public investments in private ample of deal activity is Bohai Industrial Investment Fund’s equity) deals, increasingly popular in 2009. Additional siz- recent partnership with a consortium of local investors in- able PIPE transactions include Bain Capital Asia’s purchase cluding Tianjin-based CDH Investments to acquire 20% of of a minority stake in Gome Electrical Appliances Holding for Chery Automobile for approximately RMB2.9 billion (US$425 US$418 million in June 2009 and the purchase of an 11% million) in June 2009, representing one of the largest deals stake in Hong Kong-listed supermarket operator Wumart by closed with domestic funding. Texas Pacific Group (TPG) Capital and China’s Hony Capital The recent increase in the number of private equity firms that for US$213 million. have, or intend to, establish RMB-denominated funds signals In 2008, the industrial and manufacturing sector accounted that the remainder of 2009 is likely to be an active fundrais- for the bulk of China’s investments, representing 44% and ing environment. Local governments in provinces such as 24% by transaction value and number of deals, respectively. Beijing, Shanghai, Tianjin and Shenzhen are competing to be- However, this sector concentration has decreased in 2009, come China’s leading financial center and have established as investors in China have begun to diversify into other sec- incentives such as reduced taxes, less restrictive registration tors. As the most populous nation, China is expected to be- requirements and the flexibility to invest without government come the world’s third-largest consumer market by 2025, approvals to entice foreign investors. As a result, several in- according to McKinsey data. Much of China’s future growth ternational private equity firms are exploring joint ventures opportunities are derived from the consumer and retail sec- with local investment firms and evaluating models for raising tors, which accounted for 18% of overall transaction value capital directly from local institutions. Firms including the in 2008. Examples of private equity firms investing in these Blackstone Group, Prax Capital, Hong Kong-based CLSA Asia- consumer-related sectors include TPG Capital’s US$81 mil- Pacific Markets and First Eastern Financial Investment Group lion investment in shoe and fashion retailer Daphne Inter- have been granted or are in the process of obtaining licenses national Holdings in May 2009 and Sequoia Capital China, to manage RMB-denominated funds. Additional foreign play- Legend Capital and CCB International’s joint investment of ers such as Dutch asset manager Robeco, and U.S. giants US$58.6 million in sportswear manufacturer and retailer The Carlyle Group and Kohlberg Kravis & Roberts (KKR) are Peak Group in April 2009. reportedly also interested in raising RMB funds. continued on page 4

One area benefiting from China’s growing consumer sec- China Private Equity Investment Sector Breakdown by tor is the dairy industry. Despite being hit hard during the Value of Transactions, 2008 (US$B, No. of Investments) 2008 tainted milk scandal, dairy is one of the fastest growing markets in China. The government has focused its attention Agribusiness ($0.2), 4 Banking & Fin. Services ($0.1), 3 on the expansion of dairy farming and milk production as it Infrastructure, ($0.2), 9 seeks to improve the diets of its population. Private equity firms are opportunistically investing in a number of leading dairy companies. Sequoia Capital China acquired a minority Energy & Natural Rscs. ($1.0), 15 stake in American Dairy, a leading producer and distributor

of infant formula and milk powder in August 2009 for ap- Industrials & Mfg. ($4.0), 53 proximately US$63 million. Hopu Investment Management and Chinese state-owned grains trader Cofco jointly invested . Consumer ($1.6), 52 approximately US$782 million for a 20% stake in dairy producer China Mengniu Dairy and, in June 2009, KKR com-

pleted a series of investments in dairy farm company Ma Telecom, Media, Technology ($1.9), 86 Anshan Modern Farming. Most recently, The Carlyle Group

announced that it had obtained a 17.3% stake in Yashili, a Source: EMPEA; n=222. Note: Total number of investments includes Chinese infant formula maker. transactions with undisclosed investment amounts.

The healthcare sector is also expected to be a key investment sector in 2009. In April, China’s State Council approved raised US$25 million from a consortium of investors led by sweeping reform of its health care system, infusing it with SAIF Partners in July 2009. Education, similarly, is expected $125 billion with the aim of providing universal medical cov- to attract a large amount of capital, and has already witnessed erage by 2011, leading many entrepreneurs to see new op- a number of investments including U.K.-based Actis’ US$103 portunities in both large-scale health projects and venture million investment in educational services provider Ambow capital-oriented medical device technologies. For instance, Education and Carlyle’s US$50 million investment in Hao Yue generic pharmaceutical maker Novast Pharmaceuticals Education Group, both executed at the end of 2008.

Sampling of Recent Investments

Fund Manager Company Sector Transaction Transaction Equity Amount (US$m) Date Stake (%) Bain Capital Gome Electrical Appliances Holding Consumer 418 Jun-09 N/A Baring Private Equity Asia PERA Global Software 42 Sep-09 N/A Bohai Industrial Investment Fund Chery Automobile Automotive 425 Jun-09 20 Management, CDH Investments, Others The Carlyle Group Ellassay Retail 20 Mar-09 N/A China New Enterprise Investment (CNEI) Feida Steel Plate Metals 50 Mar-09 N/A CITIC Private Equity, V-Stone Investments, China UnionPay Financial 117 Jul-09 10 Youngor Group Services Hony Capital North Cement Company Industrial 15 Mar-09 10 Materials Hopu Investment Management China Construction Bank Financial 3,800 May-09 3 Services Hopu Investment Management, COFCO China Mengniu Dairy Co. Ltd Dairy 782 Jul-09 20 TPG Capital Daphne International Holdings Retail 81 May-09 N/A TPG Capital, Hony Capital Wumart Retail 213 Aug-09 11

continued on page 5

The cleantech and renewable energy sectors continue to at- dia and defense, remain challenging to execute, and some tract private equity funding, as China actively works to com- sectors remain off limits to foreign investors altogether. bat an overwhelming pollution problem thrust into the world’s spotlight on the occasion of the 2008 Beijing Olympics and Exit Trends 2010 Shanghai World Expo. China announced its commit- To date, IPOs have been the preferred exit route for private eq- ment to derive 15% to 20% of its energy needs from renew- uity investors. Early signs of recovery in IPO acitivity, particu- able sources, such as hydroelectric, solar and wind projects, larly in foreign markets, have been encouraging but private by 2020. In March 2009, China’s Ministry of Science and equity-backed IPOs remain relatively thin. Chinese private Technology announced plans to invest RMB10-20 billion in equity-backed companies are increasingly listing in markets cleantech demonstration projects across the country. Shang- outside of China. U.S.-based Global Environment Fund (GEF) hai Alliance Investment and Cybernaut (China) Capital jointly portfolio company Duoyuan Global Water (NYSE: DGW), a do- invested US$50 million in renewable energy company Chint mestic water treatment equipment supplier, raised US$101 Solar in May 2009. Goldman Sachs and CDH Investments million when it went public on the New York Stock Exchange placed nearly US$100 million into solar water heater manu- in June 2009. Additionally, scrap metal recycler China Metal facturer Himin Solar Energy Group in December 2008. Recycling, which had previously received funding from Spin- Non-control growth capital and venture capital deals, which naker Capital Group and ADM Capital, raised approximately accounted for the vast majority of investments in the first half US$200 million when it listed on the Hong Kong Stock Ex- of 2009 by number, are likely to remain the focus of China’s change, also in June 2009. investment activity for the remainder of the year. Additionally, A number of developments within the domestic markets privatization of both state-owned enterprises and companies are signaling that home listings of Chinese companies may that went public prior to the global financial crash and want become an increasingly popular path to exit, which may fur- to raise capital without diluting value via a secondary public ther stimulate growth of a domestic private equity market. offering will be a continued source of deal flow for private Nine years in the works, the government-backed, Nasdaq- equity investors. However, foreign firms remain hindered in style Growth Enterprise Market (GEM), is targeted for launch their investment activities. Large foreign-sponsored invest- in October 2009. Designed as a trading board for startup ment in strategically sensitive domestic sectors, such as me-

Sampling of PE-Backed Exits and IPOs

Fund Manager Company Name Sector Exit Type Transaction Transaction Equity Date Value (US$m) Stake (%) 3i Group Little Sheep Food & Beverage Strategic Sale Mar-09 N/A 11 The Carlyle Group Wall Street English Education Strategic Sale Apr-09 145 100 Global Environment Fund Duoyuan Global Water Natural Resources IPO Jun-09 101 N/A Goldman Sachs Private Western Mining Mining Share Sale Jan-09 45 N/A Equity Haitong-Fortis Private Nanjing Yunhai Special Metals Metals Multiple Share Feb-09 – 14 N/A Equity Fund Management Sales July-09 Morgan Stanley Private China Shanshui Cement Group Industrial Share Sale Jun-09 80 N/A Equity Asia Materials Omaha Capital China MicroPort Scientific Corpora- Medical Strategic Sale Jul-09 16 5 tion Equipment Prax Capital Management Tianneng Power International Automotive Share Sale Jun-09 N/A N/A SAIF Partners Perfect World Online Gaming Share Buyback Jul-09 57 N/A TPG, Newbridge Capital, Lenovo Computer Share Sale Sep-09 133 N/A General Atlantic Manufacturing continued on page 6

companies to raise capital from local investors, the govern- ing to a Deloitte survey, industry players anticipate that over ment hopes that the GEM will fuel greater development of the the next several years domestic fund managers will be the country’s small and medium-sized enterprises. Additionally, most active private equity investors in China. Additionally, an after an IPO suspension lasting approximately nine months, improved ability to access China’s large, untapped investor the Shanghai and Shenzhen Stock Exchanges resumed op- base, including both financial institutions, such as insurance erations in June 2009 and nearly 100 IPOs are already in the companies, and wealthy individuals, will also fuel greater de- pipeline for the next 12 months. velopment of the asset class. Regulators have allowed several Chinese brokerages to begin investing in private equity. Realizations are occurring in China. In the absence of a more Additionally, insurance companies, such as Beijing-based robust IPO market in the first half of 2009, sellers have relied insurance and annuity provider China Life Insurance, which on trade sales as their primary exit route. Examples in 2009 have traditionally been unable to invest in alternative assets, include The Carlyle Group’s sale of its position in the Chinese are now taking a closer look at the industry as the China In- subsidiary of English-language school Wall Street English to surance Regulatory Commission is expected to relax restric- international education company Pearson for US$145 million tions. in April and 3i Group’s sale of its 11% stake in restaurant chain Little Sheep to Yum! Brands in March. To date, domestic interest has not been fully developed and regulatory reforms have been inadequate. While the govern- For fund managers who have invested in PIPEs or have seen ment is still grappling with its role vis-à-vis foreign investors, their portfolio companies execute an IPO, the recent upswing China had demonstrated that it is committed to developing in public market valuations is propelling them to begin the and supporting private equity as an asset class. By enabling process of realization. In July 2009, Morgan Stanley Private greater localization of the industry and continuing to formu- Equity Asia sold a block of its shares in China Shanshui Ce- late policies and regulations that allow foreign firms to raise ment Group on the Hong Kong Stock Exchange for approxi- local-currency funds and retain profits within the country, Chi- mately US$80 million, having previously sold US$129 million na, already the leading investment destination in the emerg- worth of shares alongside CDH China Fund in April 2009. In ing markets, will be difficult to surpass. September 2009, a consortium of investors including TPG, Newbridge Capital and General Atlantic sold shares worth US$133 million in Chinese PC maker Lenovo Group. Resources for Reference

Outlook Emerging Markets Private Equity Association: Insight China, Due to a challenging regulatory environment, the locus of January 2009 www.empea.net the private equity process has historically been offshore— meaning that China’s private equity market was vulnerable Emerging Markets Private Equity Association: Quarterly Review, “RMB Funds - The Current State and Way Forward: A Legal and Tax to the fundraising slowdown and to the drop in global public Wish List,” October 2009 markets. Additionally, China’s stimulus plan has flooded the www.empea.net market with inexpensive debt, making private equity less at- KPMG: Private Equity in China: Market Sentiment Survey, September 2008 tractive to companies seeking financing. Going forward, a www.kpmg.com/SiteCollectionDocuments/Private-equity-China-market- shift in focus to onshore firms and capital is not only crucial sentiment.pdf for the industry, but expected. AVCJ in Association with KPMG: Asian Private Equity Barometer Q2 2009, June 2009 While foreign fund managers may have longer track records, www.kpmg.com.cn/en/virtual_library/Private_equity/PE_Barom- eter_q2.pdf domestic players have a large role to play in the industry’s development as they are not sector-restricted, are subject to far fewer approvals and have a distinct advantage in their ability to leverage local relationships and knowledge. Accord-

Sampling of Firms Investing in China Fund Manager/Sponsor (s) Fund Name Sector Focus Geographic Focus

Actis Actis Emerging Markets 3 (2007, US$2.9B) Generalist China

AIF Capital AIF Capital Asia III (2006, US$435m) Generalist Asia

Aureos Capital Aureos China Fund (2006, US$37m) Generalist China

Bain Capital Bain Capital Asia Fund LP (2007, US$1B) Generalist Asia

Baring Private Equity Asia Baring Asia Private Equity Fund IV (2007, US$1.5B) Generalist Asia

Blue Whale Capital (Beijing Enterprises BlueWhale Fund (2008, US$150m) Generalist China Group, Kerry Group)

The Blackstone Group Blackstone Zhonghua Development Investment Fund (2009; RMB5B, US$730m) Generalist China

Blue Ridge China Blue Ridge China Fund II (2008, US$1.5B) Generalist China

Capital International Private Equity Funds CIPEF V (2007, US$2.3B) Generalist Emerging (CIPEF) Markets

Capital Today Capital Today China Growth Fund II (Raising, US$300m) Generalist China

The Carlyle Group Carlyle Asia Partners III (Raising, US$4B); Carlyle Asia Growth Partners IV (2009, US$1B) Generalist Asia

CBC Capital China Broadband Capital Partners (2006, US$286m) Telecom, Media, China Technology

CDH Investments CDH China Fund IV (Raising, US$1.4B); CDH Investments Fund I (Raising; RMB5B, Generalist China US$730m)

China New Enterprise Investment (CNEI) China New Enterprise Investment Fund I, LP (2007, US$113m); China New Enterprise Generalist China Investment Fund II, LP (Raising, US$250m)

China Ping An Trust & Investment Ping An / Chongqing Municipal Government Fund TBD (Raising; RMB5B, US$730m) Generalist China

China Science & Merchants Capital Beijing Zhongke Fangshan Venture Investment Fund (2009; RMB500m, US$73m); Nan- Generalist China Management (CSM / CSMVC) Group chang Zhongke Venture Investment Fund (Raising; RMB5B, US$730m)

CITIC Private Equity Funds Management Mianyang Technology City Industrial Investment Fund (Raising; RMB6B, US$876m) Generalist China

CITIC Capital China Green Energy Technology Fund (Raising; RMB1B, US$146m); Cleantech, China CITIC Capital China Partners LP II (Raising, US$500m) Generalist

EMP Global, Daiwa Securities Group EMP-Daiwa Capital Asia Limited (2007) Generalist Asia

DAC Management DAC China Special Opportunity and Situation Fund (2007, US$287m) Generalist Asia, China

The Fortman Fund Fortman Border Investment Fund (Raising; RMB4.5B, US$660m) Generalist China

Global Environment Fund Global Environment Emerging Markets Fund (GEEMF) I (2004, US$70m) Generalist Emerging Markets

Haitong-Fortis Private Equity Fund Manage- Haitong-Fortis Jinhui (Raising, US$440m) Generalist China ment (subsidiary of Haitong Securities)

Hony Capital Hony Capital Fund IV (2008, US$1.4B); Hony Capital Industry Fund I Generalist China (Raising; RMB5B, US$730m)

Hopu Investment Management Hopu USD Master Fund I, LP (2008, US$2.5B) Generalist China

Hupomone Capital Partners Hupomone Capital Fund LP (2008, US$134m) Generalist Asia

IDG Ventures / Accel Partners IDG-Accel China Growth Fund II (2007, US$550m) Generalist China

Keytone Ventures Keytone Ventures LP (2009, US$200m) Generalist China

Kohlberg Kravis Roberts & Co. (KKR) KKR Asia Fund (2007, US$4B) Generalist Asia

Legend Capital Legend Capital Fund IV (2008, US$400m) Generalist China

New Horizon Capital New Horizon Capital China Fund (2009; RMB1B, US$146m) Generalist China

Prax Capital Management Prax Growth Capital Fund III, LP (Raising, US$400m) Generalist China

SAIF Partners SAIF Partners Yuan-Denominated Fund (2008; RMB1.6B, US$219m) Generalist China

Sequoia Capital Sequoia Capital China II (2007, US$250m); Sequoia Venture Capital Generalist China (2008; RMB1B, US$146m)

Shenzhen Capital Group Oriental Fortune Capital (2007, US$121m) Generalist China, Asia

Shoreline Capital Management Shoreline China Value I LP (2008, US$178m) Generalist China

Softbank China Venture Capital Softbank China Venture Capital Fund III (2009, US$315m) Generalist China

Suzhou Ventures Group (SVG) / Hopu China-Singapore High-tech Industrial Investment Fund (Raising; RMB10B, US$1.3B) Technology China Investments Management