AVCJ Private Equity & Venture Forum 2012 AVCJ Private Equity & Venture Forum 2012

china hong Kong 30 - 31 may 2012 13 - 16 november 2012 avcjchina.com www.avcjforum.com ASIAN VENTURE CAPITAL JOURNAL

Asia’s Private Equity News Source avcj.com May 15 2012 Volume 25 Number 18

Editor’s ViEwpoint The surge in service providers and PRIVATE EQUITY ASIA secondaries houses as Asia’s PE industry matures Page 3 nEws ASK Pravi, Baring, Blackstone, Goldstone, GSR Ventures, IndoUS, M&A ASIA Inventus Capital, KKR, JAFCO, L Capital, Mandarin Capital, Oak, Ojas, PAG, Permira, Unison, Warburg Pincus Page 4 fund of thE wEEk Armstrong targets $150m for Southeast The forex eff ect Asia’s maiden clean energy vehicle Currency risks are proving to be a game changer for Asian GPs Page 7 Page 9

fund of thE wEEk foCus

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Managing Editor Tim Burroughs (852) 3411 4909 Senior Editor Brian McLeod (1) 604 215 1416 PRIVATE EQUITStaff WritersY ASIA Asian PE infrastructure Susannah Birkwood (852) 3411 4908 Alvina Yuen (852) 3411 4907 Creative Director Dicky Tang evolves with the industry Designers M&ACatherine ASIA Chau, Edith Leung, Mansfield Hor, Tony Chow

Senior Research Manager Helen Lee Research Manager Alfred Lam Everything always seems clearer for small to mid-size firms taking minority stakes Research Associates and easier to understand with the benefit of on deals shared by their tycoon friends). Each Tweety Lau, hindsight. While it seems pretty apparent now major investment bank and consulting firm now Kaho Mak, Jason Chong that Asian private equity would emerge as a has a person or team dedicated to Asian private Circulation Manager Sally Yip leading asset class for investors around the world, equity. With the ever-increasing complexity of Circulation Administrator it was actually quite difficult to imagine 12 years deals and the need to access financing beyond Prudence Lau ago that the kind of stories we have covered in the equity provided by PE investors, both GPs Senior Manager, Delegate Sales recent issues of AVCJ would be possible. and their portfolio companies have catalyzed the Anil Nathani For example, I hope that most of you will growth of such advisors in recent years. Senior Marketing Manager have read the excellent cover story focused on Another trend that was not easy to imagine Stacey Cross placement agents in the last issue of AVCJ. For was how big private equity secondaries would Director, Business Development those of us that have been in the Asian private become in Asia. Few people would have guessed Darryl Mag equity business for a long time, it is great to that the business of buying limited partnership Manager, Business Development see that the industry is able to support the interests in Asian funds would have grown Samuel Lau infrastructure it needs at all levels of fundraising, to the extent that market specialists such as Sales Coordinator and that the placement service is now available HarbourVest Partners, Partners Group, Lexington Debbie Koo to GPs of all sizes. and Paul Capital would set up shop here. Conference Managers Jonathon Cohen, Zachary Reff, Sarah Doyle I still remember the time when Merrill Lynch Indeed the above are proof of the reality Conference Administrator was battling it out with the team at DFJ for Asian that Asian private equity has come a long way Amelie Poon placement agent supremacy, while a number since AVCJ started covering the industry 25 years Conference Coordinator Fiona Keung, Jovial Chung of independent firms such as CP Eaton and ago. Watch this space for more changes as the Publisher & General Manager International Private Equity operated with few industry continues to spread its wings. Allen Lee competitors. This particular type of service has Managing Director now become a highly contested space with Jonathon Whiteley everybody from indigenous Asian agents to firms Chairman Emeritus that attempt to move the process online trying Dan Schwartz to link GPs to LPs. The same has happened with investment banking, due diligence, deal structuring and Incisive Media other advisory services that now come in all 20th Floor, shapes and sizes. In the past, such services were Allen Lee Tower 2, Admiralty Centre 18 Harcourt Road, a luxury that only larger firms could afford (not Publisher Admiralty, Hong Kong much negotiation and structuring was needed Asian Venture Capital Journal T. (852) 3411-4900 F. (852) 3411-4999 E. [email protected] URL. avcj.com

Capital under management by Asian PE rms, 1997-2012 Beijing Representative Office Room 1805, Building 10, 400 3,000 Jianwai SOHO, 39 East 3rd-Ring Road, Chaoyang District, Beijing 100 022, China 300 T. (86) 10-5869-6205 2,000 F. (86) 10-5869-7461 E. [email protected] 200 The Publisher reserves all rights herein. Reproduction in whole or US$ billion 1,000

No. of PE rms No. in part is permitted only with the written consent of 100 AVCJ Group Limited. ISSN 1817-1648 Copyright © 2012 0 0 1997 2000 2003 2006 2009 2012 YTD Number of PE rms Capital under Management (US$b) Source: AVCJ Research

Number 18 | Volume 25 | May 15 2012 | avcj.com 3 News

Creador invests $15m in engineering novel and differentiated protein- Australasia based biotherapeutics. Another $10 million OldTown was received from existing investors Third Rock KKR ends takeover talks India- and -focused investor Ventures and Flagship Ventures, expanding the Creador has injected RM45.7 million ($15 million) total Series A investment to $45M. with Pacific Brands in OldTown White Coffee, the number-one Asian Melbourne-based underwear manufacturer restaurant chain in Malaysia. In exchange for the Pacific Brands said on Tuesday that a takeover funding, the private equity firm will hold a 10% Greater China from parties including KKR is unlikely in the stake in the company, which equates to a P/E near term. Earlier in January, KKR launched an multiple of 11.3x. Cadwalader poaches three unsolicited takeover bid for the listed company at a reported amount of $614 million. Later in lawyers from Jones Day February, TPG also reportedly joined a group of Cadwalader’s Hong Kong office has poached eight banks to run for the company. three lawyers - Joseph Lee, Jeffrey Maddox and David Neuville – directly from rival Jones Day. New Zealand’s Waterman Lee, Maddox and Neuvill join Cadwalader’s Asia capital markets practice, having all been partners buys 20% of Manuka Health in Jones Day’s capital markets group, and served New Zealand-based Waterman Capital has on a range of cross-border debt and equity deals. acquired a 20% stake in natural health brand Manuka Health. Investing via the $30 million GSR, Oak lead $30m round fund it manages on behalf of the New Zealand Superannuation Fund, Waterman has injected for SunSun Lighting several million dollars in the business and OldTown was founded in 1999 and consists of China-based LED manufacturer SunSun Lighting Executive Director Chris Marshall will take a seat its restaurant outlets and instant coffee business. has raised $30 million in Series B financing from on the board. It started as a producer of three-in-one packaged GSR Ventures and Oak Investment Partners in instant coffee, but launched its restaurant chain addition to commitments from its original angel in 2005, which it has grown to 202 outlets, investors. The investment comes nearly a year Global including 16 in Singapore, Indonesia and China. after SunSun secured $10 million from GSR in a The company currency commands a 10% share Series A round. 3i to appoint Simon of the instant coffee market in Malaysia. Borrows as new CEO Baring backs Yongda Auto 3i is set to appoint Simon Borrows as its new equity houses that have submitted bids for IPO chief executive this week, replacing Michael Permira-backed Birds Eye Iglo. Blackstone, Baring Private Equity has become a cornerstone Queen, who announced his resignation in Bain Capital, BC Partners and PAI Partners were investor in the IPO of China Yongda Automobile March after spending three years as head of the reported to have made first-round offers for the Services, the number-one BMW dealer in China. company. Borrows joined 3i as chief investment UK-based frozen food firm last Friday. The sale The company could raise up to $435 million officer last year and was previously chairman of is expected to value the company at around through a listing in Hong Kong. The private investment bank Greenhill & Co International. EUR3 billion ($4 billion), with CPF likely to offer equity firm will invest between $96 million and approximately this amount. $120 million in the deal. Hong Kong’s ADM buys stake in Prista Oil IndoUS VP backs digital Ropes & Gray hires two in ADM Capital and the European Bank for magazine store Hong Kong Reconstruction and Development (EBRD) IndoUS Venture Partners has invested in New US-based law firm Ropes & Gray has appointed have provided EUR48 million ($62 million) of York-based digital magazine store Magzter two partners in Hong Kong, and announced replacement capital for a 30% stake in Bulgaria’s in a Series A funding round. The investment plans to double its number of Asia-based by the Prista Oil Group. The Hong Kong-based private is estimated at $3-5 million. Established by end of 2012. Julian Chung joins the Hong Kong equity firm and the EBRD have acquired hedge VijaykumarRadhakrishnan and GirishRamdas in office on May 28th, when Ropes & Gray gets its fund Gramercy Emerging Markets’ shareholding June 2011, Magzter claims to house around 400 license to practice Hong Kong law, while Gary Li in the lubricants and battery maker. The magazines from India, Singapore, Dubai, Malaysia, started work at the firm on May 10th. investment represents ADM’s first investment in the US and the UK. Bulgaria. Harvest Capital Partners JAFCO backs pharma CEO resigns CPF prepares bid for company with $10m Hong Kong-based real estate investment firm Permira-backed Birds Eye JAFCO has invested $10 million in the Series A Harvest Capital Partners faces a change of Thai food manufacturer Charoen Pokphand financing of Eleven Biotherapeutics, a US-based management, after CEO RongRen announced Foods (CPF) looks set to join the various private biopharmaceutical company designing and his resignation after seven years at the company.

4 avcj.com | May 15 2012 | Volume 25 | Number 18 News

Jiang Wei, vice-chairman of Harvest Capital and CalPERS commits $500m to LIC holds a first close of chairman of sister company China Resources Capital looks set to head up the firm following a Blackstone, $100m to PAG real estate fund at $47m transition period. California Public Employees’ Retirement System LIC Housing Finance, the mortgage unit of (CalPERS), the biggest US public pension fund, India’s biggest insurer, has reached a first close Mandarin Capital agrees JV is going to commit $500 million to a managed of its maiden real estate private equity fund at account overseen by Blackstone Group. Another INR2.5 billion ($46.5 million). Launched late last with China’s Dagong $100 million will be distributed to Hong Kong- year, the fund has a target size of INR5 billion Sino-Italian private equity group Mandarin based PAG. and is managed by LIC Housing Finance Asset Capital Partners has reportedly agreed to The $238 billion pension fund said the Management. Institutional investors including establish a joint venture with Chinese ratings Blackstone Tactical Opportunities Separate banks and corporates have participated in the agency Dagong. The two companies will Account was an opportunity “to target global fund, which has a target net IRR of over 22%. together establish Dagong Europe, which will investment opportunities in areas of market, have its headquarters in Milan, Italy, by the start regulatory, or other forms of dislocation”, Inventus, Ojas lead $3.5m of 2013.Former Fitch Italy executive Marco Cecchi according to details provided by the fund to di Rossi will oversee the start-up of the new Reuters on Wednesday. The news comes after Cbazaar round European subsidiary. Blackstone received $1.8 billion from the New US-India venture capital firm Inventus Capital Jersey Division of Investment last December. The Partners early-stage technology investor Ojas Squire Sanders expands $66.2 billion pension fund has brought its total Venture Partners have led a $3.5 million Series commitment to $2.5 billion since then. A round of funding for Indian fashion portal Greater China team Cbazaar. Following this investment, Samir Kumar, Squire Sanders has hired corporate law specialists managing director for Advisory Services at Jenny Liu and Xudong Ni as partners in its Beijing Inventus, and Ojas Partner Pavan Krishnamurthy, and Shanghai offices, while Sin Kiu Ng has will join the Chennai-based company’s board. joined the law firm in Hong Kong. Liu, formerly of Sheppard Mullin and DLA Piper, focuses on Warburg Pincus joins race private equity and venture capital investment in China, working primarily on behalf of foreign for India’s Future Capital funds. US buyout firm Warburg Pincus is thought to have joined the race to acquire a stake in India’s Goldstone Investment to Future Capital Holdings (FCH), the financial services unit of the Future Group. Media reports launch PE fund have indicated that the investor is in advanced CITIC Securities’ direct investment arm, Goldstone Southeast Asia talks to snap up the 56% stake held by Kishore Investment, has gained approval from the China Biyani-controlled Future Group, which has been Securities Regulatory Commission (CSRC) to set SingTel’s Amobee buys VC- considering its exit options for the past two years. up a private equity fund. It makes CITIC Securities backed ad startup the second brokerage to win approval to raise Moolchand raises $18.7m and manage third-party capital. Institutional Singapore Telecommunications, Southeast investors will be the targeted to participate as LPs Asia’s largest telecoms company, has acquired from Sequoia Capital in the fund, while Beijing JinshiShangde Equity AdJitsu, a VC-backed Silicon Valley startup in the Sequoia Capital has invested INR1 billion ($18.7 Investment Management will act as general mobile advertising sector. This is SingTel’s second million) into New Delhi-based Moolchand partner. acquisition in two months. AdJitsu, which was a Healthcare, with an aim to fund the company’s unit of California-based startup Cooliris, provides further expansion and acquisitions of hospitals tools to make three-dimensional animated ads in across India. The company plans to invest INR5 North Asia mobile apps for iPhone and iPads. billion over the coming five years in future expansion. It will build at least 700 beds and six Unison secures Showa South Asia specialty hospitals in the capital. YakuhinKako SBO ASK Pravi Capital appoints Unison Capital has emerged victorious in the L Capital hires Uday Mehra auction for Showa YakuhinKako, securing the operating adviser secondary buyout of the drug producer from as MD India’s ASK Pravi Capital Advisors has hired Tokio Marine Capital, Polaris Capital Group and L Capital, the private equity arm of luxury goods Naveen Kshatriya as an operating advisor PineBridge Investments. The Japanese private giant LVMH, has hired Uday Mehra, a former Asia- to its private equity fund. The private equity equity firm, together with Japanese dental Pacific operations executive for Tommy Hilfiger, firm, formed by the merger of Mumbai-based materials maker GC Corp, may have paid up to as a managing director. Mehra will be in charge financial services firm ASK Group and Pravi JPY50 billion ($650 million) for the company, of India operations at the firm. In February it was Capital Advisors, employed Kshatriya to assist according to market sources cited before the reported that L Capital could start raising a new its investment team in evaluating deals in the deal closed. fund of more than $1 billion this year. consumer product and services sector.

Number 18 | Volume 25 | May 15 2012 | avcj.com 5 Private Equity & Venture Forum China 2012 avcjchina.com 11th Annual

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY 30-31 May 2012 Maintaining growth amidst global turmoil Only 2 weeks left! Register now at avcjchina.com Participating LPs at the Forum represent more than US$1.3 trillion of assets under management and include representatives from: Allianz Capital Partners GmbH HarbourVest Partners StepStone Group APG Asset Management Hermes GPE LLP Sumitomo Mitsui Banking Asia Alternatives LGT Capital Partners Corporation Axiom Asia Private Capital Mitsubishi Corporation (China) SVG Advisers China Investment Corporation National Council for Social Taikang Life China Life Insurance Company Security Fund The Northern Trust Company Commonfund Capital Ontario Teachers’ Pension Plan The University of Chicago Booth Commonfund Group Pantheon School of Business EMAlternatives Asia Pinebridge University of Texas Investment Endowment of Southwest Rose Rock Partners LLC Management Company Petroleum University Shanghai Pudong Science & Wells Fargo Technology and GE Asset Management Technology Investment Co. Ltd Venture Banking Group Goldstone Investment Co Sofina Wychwood Capital Hamilton Lane Squadron Capital YiMei Capital and many more.

For the latest programme and speaker line-up, please visit avcjchina.com

Contact us: Sponsorship: Darryl Mag Registration: Pauline Chen T: +852 3411 4919 T: +852 3411 4936 / +86 10 5869 7481 E: [email protected] E: [email protected]

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Legal Sponsors Knowledge Partner Exhibitors

avcjchina.com Private Equity & Venture Forum CoVEr story China 2012 [email protected] avcjchina.com 11th Annual Know your risk Private equity fi rms are hedging the currency risk of their investments in Asia Pacifi c longer and later in the investment cycle than ever before GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY 30-31 May 2012 south KorEa, india and indonEsia If a GP is outbid and a deal falls through, that deal does not complete – unlike vanilla options share the dubious honor of possessing Asia’s hedge will no longer be required and hence will and forwards, which a PE fi rm has to honor Maintaining growth amidst global turmoil most volatile currency. For Korea, a big driver need to be unwound. Depending on prevailing whether or not its deal goes ahead. of short-term movement in the won is the market levels, this could end up costing money “This means that they do not have to explain geopolitical situation with the north; remittances that most PE fi rms only have in the form of dry to their LPs that they spent money on an FX Only 2 weeks left! Register now at avcjchina.com in and out of the country by non-resident Indians powder. hedge for a transaction that did not close,” play a role in how the rupee behaves; and the “Even if I am the only investor in that explains Nick Angove, head of GFFX structuring large number of foreign holders of Indonesia particular transaction, it’s still not a slam-dunk,” for North Asia at Deutsche Bank, which provides Participating LPs at the Forum represent more than US$1.3 trillion of government bonds has left the rupiah in a warns Rahul Badhwar, head of corporate deal-contingent options and forwards to private assets under management and include representatives from: constant state of fl ux. sales, Asia-Pacifi c ex-greater China at HSBC equity fi rms. Each Asia Pacifi c currency clearly carries a global markets in Hong Kong. Regulatory The convenience of the deal-contingent Allianz Capital Partners GmbH HarbourVest Partners StepStone Group certain amount of foreign exchange risk, and GPs approvals might not be forthcoming, or existing route doesn’t mean it’s a clear-cut decision for APG Asset Management Hermes GPE LLP Sumitomo Mitsui Banking in the region – who for the most part operate shareholders might raise objections about a GP, though: if there’s a 99% chance that a deal Asia Alternatives LGT Capital Partners Corporation US-dollar denominated funds – have started to selling their stakes. Once a deal is 100% signed will go through, one PE fi rm might be willing to Axiom Asia Private Capital Mitsubishi Corporation (China) SVG Advisers display more concern of late about the impact and sealed, it could be barely a week before do a non-deal contingent hedge because it’s these idiosyncrasies could have on the life cycle less costly, whereas another might decide to pay China Investment Corporation National Council for Social Taikang Life of their investments. “Prior to the global fi nancial the extra money for hedge because it doesn’t China Life Insurance Company Security Fund The Northern Trust Company crisis, the awareness of counterparty risk was “Prior to the crisis, the want to risk being out of pocket if the deal fails to Commonfund Capital Ontario Teachers’ Pension Plan The University of Chicago Booth low and the need to hedge against this wasn’t complete. Commonfund Group Pantheon School of Business as much of a priority as it is today,” says K.C. Lam, need to hedge against EMAlternatives Asia Pinebridge University of Texas Investment director and head of foreign exchange in Asia counterparty risk Down the line for CME Group, which allows clients to trade FX Hedging FX risk isn’t just an issue when a PE Endowment of Southwest Rose Rock Partners LLC Management Company futures and options via its online exchange. wasn’t as much of a fi rm fi rst acquires an asset either. If the currency Petroleum University Shanghai Pudong Science & Wells Fargo Technology and It’s not just a case of increased volatility either. moves 20% against an investor during the GE Asset Management Technology Investment Co. Ltd Venture Banking Group More subdued returns projections mean that priority as it is today” period of ownership, the underlying price of the Goldstone Investment Co Sofina Wychwood Capital every dollar counts and fi rms can no longer – K.C. Lam asset could change drastically, even wiping out Hamilton Lane Squadron Capital YiMei Capital and many more. aff ord to let currency movements erode the returns. Since 2011, a greater number of fi rms value they get out of their investments. “If you’re have begun to look at hedging the translation making very high returns and the FX market the capital needs to change hands, by which risk or the FX risk on the exit of their portfolio For the latest programme and speaker line-up, please visit avcjchina.com aff ects you 15-20%, it’s not so much of a big deal,” time the investor will have already been hit by companies, although still only an estimated points out Lim Wee Kian, managing director at currency movements over the six months past. 10% are focused on hedging at this point in the Contact us: Sponsorship: Darryl Mag Registration: Pauline Chen DBS in Singapore. “But the returns are now going The best way to limit exposure to volatility during investment cycle. to be a lot lower than in the past, around 20-25%, this waiting period is to try and hedge the risk as The main challenge when hedging post- T: +852 3411 4919 T: +852 3411 4936 / +86 10 5869 7481 so fl uctuations in the exchange rate will aff ect far in advance of the fi nancial close as possible. investment is knowing when to begin, as E: [email protected] E: [email protected] them dramatically because it can take away the Nevertheless, Badhwar believes that it would hedging for a period of 2-3 years can seem majority of their performance.” be rare for a PE fi rm to hedge themselves from like an unnecessary cost, especially when the Lead Sponsor Asia Series Sponsor the moment they start bidding for an asset; best laid exit plans come with no guarantee of The best laid plans most instead tend to wait until they are, at the execution on time - or at the expected value. Making use of a seemingly limitless selection very least, the preferred bidder and can start Although it seems doubtful that PE fi rms will of products available in the market, the vast conducting due diligence. want to hedge for the entirety of their holding, majority of PE fi rms now start hedging their One measure that allows fi rms fl exibility is Badhwar argues that this strategy makes sense FX risk the moment they invest in an Asian buying currency options. These products off er if extended periods of volatility and heightened Co-Sponsors company. Managing the risk on the way in is not a known level of protection, involve a known tail risks continue to be as frequent as they the easiest thing to do, however. It’s rare for a GP amount of money, and if the deal falls over, the have been in the last fi ve years. “Because you’re

FOUNTAINVEST to be the sole contender for the asset it’s seeking PE fi rm has only paid for the premium. However, removing FX risk totally from the equation, all PARTNERS to acquire, and in the typical 3-6 month period as GPs often don’t have excess cash fl ow to your return is dependent upon is the underlying between targeting a company and closing the support hedging, many favor the deal contingent equity performance of the business,” he says. Legal Sponsors Knowledge Partner Exhibitors deal, there could a material amount of volatility suite of products. These involve paying slightly This could be a consideration for Bain Capital, for in the FX markets. At the same time, paying for more than for generic options and forwards, but example, which bought MYOB from HarbourVest or locking into a hedge can be risky business: allow the fi rm to walk away from the hedge if the Partners and Archer Capital for A$1.2 billion avcjchina.com Number 18 | Volume 25 | May 15 2012 | avcj.com 7 Cover Story [email protected]

Foreign exchange best Practices ($1.3 billion) last August. The Australian dollar Asian country. The firm was going to receive $1.5- Managingnow appears to Foreign be an excellent exchange time for risk was trading at a record high of A$0.98 to the 2 billion from selling the local currency against companies to fix rates and benefit from the low US dollar when Bain won the auction for the the US dollar, but this wasn’t something that cost of funding. “When there are signs that this Victoria-based business software maker. It was could be executed in the country itself due to the is going to change, and it can do so very rapidly, trading at A$1.46 when HarbourVest and Archer lack of liquidity in the local market. The central people will be caught in a very bad position if Consideracquired the company the case for a mere of A$450 one million SVB bankexchange was also rates, concerned the thatforeign the sale exchange of such a they2. Determine haven’t hedged thetheir interest ways rate in exposure,” which in October 2008. large amount of currency would cause its value agrees CME Group’s Lam. “No one is immune client,In the past,a manufacturer post-investment riskof mightcleantech not torisk crash. was The removed answer was andto hedge the the USD currency cost fromforeign risk.” exchange hedging can equipmenthave been such an that issue signed because most a contract Asian riskwas offshore actually in orderunder to reduce budget. exposure to the benefitIn Asian private your equity, current which is still and relatively future currencies were on a one-way appreciation local market. young, this lesson hasn’t necessarily been withtrend against a supplier the US dollar based and forin mostGermany. PE firms DBS’ Wee Kian often advises clients to hedge learned.business Global plans. firms either rely on internal teams Thethe currency contract risk in Asia was was payablein sync with over the 12 offshoreGETTING for deals IT in RIGHTHong Kong, Singapore or to deal with hedging strategies or outsource underlying asset risk they were taking. However, India: “When the country has capital control, the the3. Planjob to independenthow you mightfinancial workadvisers with who a months. Based on the client’s foreign Although putting a hedging strategy a lot has changed since 2007, and two-way tendency to hedge is always offshore.” engagetrusted with foreign banks. Smaller exchange players – advisor typically to exchangevolatility with policy, large swings which is the called name of for the the in place is less complicated than many indigenous Asian firms – aren’t as well resourced set up a hedging strategy and monitor companygame. As an example,to hedge an almostall known 15-17% foreign move InterestCFOs rate expect, awareness there’s more to it than and are known to cut corners. Once they have in the rupee, such as that which occurred over Interest rates are another area of importance to beenits risks through and more results. fund cycles and seen exits exchangethe last seven months, exposures, could wipe the out company any equity Asia-focusedsimply calling private up equity your firms. neighborhood Unlike equity, go awry, it will sink in that losing 5% off one’s IRR enteredreturns in a market into in a which series returns of have forward so far thetrader. interest A ratediligent risk on companya loan doesn’t will take follow off because4. Establish of a risk that a could foreign have been exchange negated been lower than those of its Asian counterparts. until the deal actually goes through and there is far from best practice. Some are already taking contractsExtending the same that thought extended process, outBadhwar one tendsthese to six be lesssteps volatility to get than started: for FX. But some steps“policies in the rightand direction, procedures” but it remains document a work yearbelieves and that matched hedging translation its scheduled risk is not onlyA/P GPs – majority stakeholders that have used into progress. formalize your strategy — and useful to protect the downside risk but also an leverage in the initial acquisition – feel that it “All the PE firms are definitely going through payments.important tool The to capture euros and monetizewere purchased large makes1. Collect sense from data a balance about sheet your perspective business ando education this as process. you beginOver the to last expand 5-6 years they the throughcurrency swings forward in favor of the contracts investor. A classic and forto a portfolio develop company a either clear to fix picture the interest of havebusiness, become rather a lot more than sensitive after to the the impactfact. pricedexample offrom this is 1.35-1.37. the US dollar-Japanese yen rateyour of its foreigndebt or use swaps exchange to hedge exposure. the risk of FX and interest rate risks, instead of brushing it move in the last five years, which has seen some associated with it. While this only occurs in a away5. Select as part theand parcelright of financial the business toolsrisk they for PE firms interested in locking in gains of more minorityReview of cases, transactions it is most likely with to happen overseas undertake. In today’s uncertain markets, linear your business — and don’t overlook Nowthan 25%. the company had met its primary withcontractors, companies thatvendors have large and amounts customers, of interpolations of market and return expectations One problem which can present itself, leverage on their books, as their potential interest justinternal do not exist hedging and risk needs strategies to be assessed such objective: the euro-denominated as well as foreign currency invoices however, is that there is insufficient liquidity in payments could eat up a lot of the cash flows in andas dealt matching with at multiple exposure, levels,” says sourcing,HSBC’s cashthe underlying flow market had to amanage fixed risk of U.S. that size. dollar theand first monthly few years transfers.of the investment. Badhwar. “The second and third-tier firms are HSBC experienced this recently, when working Indeed, given that firms are currently comingproduction up through and the leading education and process lagging. to get cost based on the forward foreign with a PE client looking to sell a business in an operating in a very low interest rate environment, to where the top tier firms are.”

Foreign Exchange Hedging Products

Spot trades: these contracts are typically used for immediate delivery of foreign currency payments or converting foreign currency receipts into U.S. dollars at prevailing market rates. Forward contracts and forward window contracts: these contracts are used to lock in exchange rates for a specific future date, or for a range of dates. Forward contracts are often used as a tool to eliminate the impact of adverse currency movements and protect profit margins by determining a forward rate for the exchange. Currency swaps: A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another, and after a specified period of time to give back the original amounts swapped. Swaps are an effective tool to manage time difference of foreign currency cash flows. Currency options: by paying an upfront premium, over-the-counter option contracts provide the right to buy or sell a foreign currency at a predetermined rate (strike price) at a specific time frame in the future. Options are particularly useful when you need to hedge an uncertain or contingent exposure, such as one that involves tendering for a contract.

Source: Silicon Valley Bank

Source: Silicon Valley Bank 8 PREVIOUS NEXT avcj.com | May 15 2012 | Volume 25 | Number 184 fund of the week [email protected] / [email protected] CIPEF closes emerging markets fund at $3b

Capital International has closed it re-upped for this latest fund, including Lockheed The firm’s investment team of 24 will make sixth emerging markets private equity fund at Martin Corporation Master Retirement Trust and a total of 15-20 investments from the fund (or its hard cap of $3 billion, making it the largest fund-of-funds Portfolio Advisors. The minimum 4-5 per year), prioritizing 16 of the 138 emerging vehicle of its kind to be raised in the last five subscription from most LPs was $25 million, market countries in the world. When asked years. although there were a few exceptions. The fund whether the carried interest would be paid on Capital International Private Equity Fund will have a lifespan of 10 + 1 + 1 and the GP the fund as a whole or on a deal by deal basis, VI (CIPEF VI) exceeded its $2.5 billion target by contribution was described as “considerably McGuigan said that CIPEF was favoring a “hybrid” raising capital from more than 60 investors, such higher than 5%”. between these two models. In Asia, it will invest as the Ohio Public Employees “Experience has shown us in buyout and expansion deals - the latter having Retirement System, Oregon that Asia generally is obviously historically made up two-thirds of its investments Public Employees Retirement going to play a very important - in China, India and Indonesia. “We’re big Fund and Pennsylvania Public role in CIPEF VI,” says James E. believers of taking a step back and looking at the School Employees’ Retirement McGuigan, a private equity global EM universe on an opportunistic basis, System. managing partner at Capital which is what we’ve been doing for a long time,” Aside from these US-based International. “China is the explains McGuigan. “We’ve done enough to LPs, CIPEF VI also received CIPEF VI is the largest PE fund for world’s largest emerging know that the picking and choosing countries commitments from LPs emerging markets since 2007 market and our first investment or even regions can be a little bit treacherous.” across Asia and the Middle from the fund was in India.” Transactions commanding equity tickets of $100- East – including several sovereign wealth Indeed, almost 20% of the capital raised has 300 million will be targeted, with CIPEF taking an funds - and Europe, with the help of placement already been channeled into three transactions, equity stake of less than 50% in most cases. It will agent MVision Private Equity Advisers. CIPEF one of which is L&T Financial, the equipment and aim to invest alone rather than in concert with VI was oversubscribed, thanks to securing infrastructure affiliate of India’s largest private other PE firms. commitments from more than 60 institutional sector engineering and construction company, CIPEF VI was structured by law firm Debevoise investors. Around 90% of Capital International’s Larsen & Toubro. & Plimpton. Armstrong launches SE Asia cleantech fund

Southeast Asia has abundant solar in the initial round. Andrew Affleck, managing have shifted their focus to Thailand, Malaysia and radiation, agricultural resources and biomass partner of Armstrong Asset Management, tells Indonesia. The 10-year fund will invest primarily when compared to North Asian and European AVCJ that the vehicle is expected to hold a final in the three countries, while an allocation of countries. However, the use of clean energy in close in May 2013, with potentially as much as up to 25% of the fund’s gross assets will be put the region is still somewhat limited. Singapore- 40% of the total corpus being committed by into other Southeast Asian countries such as based clean energy asset manager Armstrong development finance institutions (DFI). and . Asset Management is hoping to change this by “ADB continue to support us with technical With a four-year investment commitment launching the region’s maiden clean energy fund. assistance funding, and other DFIs such period, the strategy of the Armstrong fund is With a target size of $150 million, the fund as International Finance to start small by targeting started approaching investors in early 2011. Corporation have also investments between $5 The key challenge for Armstrong was to find expressed initial interest in our and $15 million. “If you are cornerstone investors which were credible fund, given their mandate to looking at projects which are enough to attract other LPs. Securing its first support increased renewable larger than 10 megawatts in investor - European clean energy investor GEEREF, energy implementation Thailand’s solar and Indonesia’s the fund-of-funds advised by the European across Asia,” says Affleck. “We hydro sectors, you are required Investment Bank (EIB) and the European anticipate a further 40% being Armstrong’s fund is Southeast Asia’s to negotiate a power purchase Investment Fund (EIF) - was a milestone that committed by companies first dedicated clean energy vehicle agreement on an individual allowed them to garner commitments from and family offices, with the basis, which could take longer other parties. remaining 20% coming from institutional players to agree terms and potentially be less attractive The fund is expected to receive $66 million such as pension funds and fund-of-funds.” financially,” Affleck adds. from three investors for a first close later this As favorable policies on renewable energy The fund, which has an IRR target of over month. German investor DEG, a member of KfW are being enacted by governments across the 20%, is already in the process of negotiating Bankengruppe, and an unidentified Southeast region, Affleck adds that European investors investments in several companies. Two deals are Asian-based corporate have also participated whom have been looking at China and India expected to be completed this year.

Number 18 | Volume 25 | May 15 2012 | avcj.com 9 Fsocu [email protected] Indian infrastructure funds face rocky road ahead Private equity has been one of the engines for India’s infrastructure growth, but delays in project approvals, inexperienced GPs and the tough fundraising environment remain hurdles to overcome

I ndia is always said to have the 9.5% by 2017. The government is also targeting Average deal size in the Indian potential to become the world’s third largest $1 trillion of investment into infrastructure within infrastructure/construction sector economy. Following the global economic crisis, the coming five years. Half of this amount is India remains as one of the few countries with expected to be contributed by private sector. 100 $100-500M $100-500M as much as 7% economic growth per year. “If we apply a debt-equity-ratio of 70:30, $150 80 $50-100M However, the infrastructure deficit has tempered billion is required from private equity and this $50-100M this growth, as according to official estimates, provides an urge for larger private equity funds,” 60 annual growth could be as high as 9% if local Deepak Bagla, partner at 3i, tells AVCJ. 40 <$50M infrastructure were able to keep pace with the <$50M economy. Larger funds 20 Percent of respondents Percent Although infrastructure development has IDFC Project Equity will launch its second India 0 been the single-largest challenge within the infrastructure fund worth of $1 billion later this Last 2 years Next 2 years country, it has emerged one of the biggest year, M.K. Sinha, IDFC Project Equity’s CEO, told Source: Bain IVCA VC/PE research survey 2011 opportunities for private equity investors in AVCJ in April. Its predecessor India Infrastructure recent years. Private equity investment in Fund (IIF), which closed in 2009 on INR38 billion infrastructure reached $4 billion in 2010, up four- ($927 million), is almost fully invested. The vehicle assets, which are well within the reach of many fold from 2006, according to a 2011 report from bets on long-term equity investments in a private equity investors and so are typically Bain & Company. Deal values are also tipped to diversified portfolio of infrastructure projects in heavily competed for,” says Suresh Goyal, head grow 25-50% annually over the next three years. India. Its target sectors include transport, energy of Macquarie Infrastructure and Real Assets “Given public resource constraints, the and utilities, telecommunications and urban India. “The ability of the manager to raise a large government has realized the need to invite the infrastructure. fund has kept many of the classic private equity private sector to fulfill the nation’s infrastructure Sinha is certainly not the only person managers out of this space so far.” needs,” says Archana Hingorani, CEO of IL&FS who aims to launch a billion-dollar fund. 3i The increasing ticket size of infrastructure Investment Managers. “Consequently, Public Group, which held the final close of its 3i India investments has also pushed GPs to scale up their Private Partnerships (PPPs) have emerged as a Infrastructure Fund on $1.2 billion in 2008, has investment vehicles. What could be India’s largest ever private equity deal was recently announced: the buyout of Reliance Infratel, a telecoms Leading infrastructure funds active in India tower unit owned by Reliance Communications. Target size Capital under Fund Status (US$m) management (US$m) The Carlyle Group and The Blackstone Group 3i India Infrastructure Fund Final close 1,000 1,200.0 reportedly paid INR150-200 billion ($3-4 billion) Macquarie SBI Infrastructure Fund Final close 3,000 1,037.0 for 95% of the unit - the equivalent of INR310-410 The India Infrastructure Financing Initiative (IDFC Project Equity) Final close 1,250 927.0 million per tower. JPMorgan Asian Infrastructure & Related Resources Opportunity Fund Final close 1,500 858.6 In the road sector, meanwhile, investors are Standard Chartered IL&FS Asia Infrastructure Growth Fund (SCI Asia) Final close 800 658.0 no longer bidding for 100km toll projects but Shinsei UTI India Fund Final close 300 600.0 mega highways that cover 550 kilometers and IFCI - Sycamore Infrastructure Fund Final close 500 500.0 cost over INR7.5 billion. Asian Giants Infrastructure Fund (AMP Capital Investors) Final close 750 161.0 “When the government bid out road projects India Infrastructure Development Fund (UTI Capital) First close 250 114.0 several years ago, a $100-200 million deal was Infrastructure India (Guggenheim Global Infrastructure) Final close - 112.7 already considered to be very big in size and you Source: AVCJ Research could see seven to eight players running for it,” Bagla says. “Recently, the government bid out a core element of the government’s strategy to been looking to raise at least the same amount road project worth over $1 billion and received finance the infrastructure deficit in the country.” for its successor. Last October, Macquarie Group interest from more than a dozen players.” The government’s efforts to draw private and State Bank of India (SBI) also set up a $1-1.5 investors into the sector have seen significant billion target for their second India-focused Tough fundraising results. Investment in infrastructure as a infrastructure fund. There is no doubt that India requires more sizable percentage of GDP – which has increased to “The smaller the fund, the more likely it is funds to speed up the country’s infrastructure 7.5%, from 5% in 2007 – is expected to reach that the manager will be forced to target smaller development. However, long-term investors who

10 avcj.com | May 15 2012 | Volume 25 | Number 18 foCus [email protected]

target steady yields and returns from the asset the government fully allowing foreign direct more established and favorable investment class are yet to reach a critical mass. In many investment across the sector. environment, but right now professionals who cases, infrastructure funds are only talking about The power sector is a case in point. Although have an on-the-ground presence are better an IRR up to 20%, less than many of other sector- India holds 10% of global coal reserves, the positioned to understand the issues in India and focused funds. country has struggled to meet power producers’ to make the right investment decisions. “It is not GPs are facing a capital drought in the needs due to delays in environmental clearance, the ‘complexity’, if there is any, of the regulatory domestic market as the Indian state controls the land acquisition and price uncertainty. While environment which provides an edge to existing country’s largest pension funds and fi nancial India’s coal demand is set to jump to 981 million private equity players,” says IL&FS’ Hingorani. The institutions, and no more than 10% of their assets under management can be invested in equities of any kind. Foreign investors - who hardly “It’s a paradoxical world; while infrastructure have on-the-ground knowledge about Indian infrastructure – often require management teams projects require increasing capital, the to provide proven records of returns and steady fundraising environment has posted challenges yields. However, established track records simply don’t exist in some cases. for GPs to raise a sizable fund” – Gautam Bhandari “It is challenging to fi nd experienced infrastructure investment specialists at this time,” says Gautam Bhandari, head of Morgan Stanley tons by 2017, output in this period may only be professionals at Macquarie Infrastructure and Real Infrastructure Asia. “It’s a paradoxical world; 715 million tons. Last year, 3i-backed Adani Power Assets India, for example, have all been brought while infrastructure projects require increasing delayed its plans to expand its capacity by 6,500 up in India and have hands-on experience capital, the fundraising environment has posted megawatts due on the opaque environment on investing or managing funds in the country. challenges for GPs to raise a sizable fund.” coal issues. Non-banking engineers and developers are also Apart from having concerns over returns and “There is a concern between PE players as to recruited with the aim of driving the investment the experience of GPs, LPs also worry about the whether they can manage to achieve the typical decision process. “The key diff erentiator in favor fi nancial impact of changes in policy on their 15-20% IRR if they just depend on imported coal,” of existing home grown players is their ability investments, despite the fact that the regulatory says Vikram Utamsingh, head of transactions & to access deal fl ow, to be able to work with the framework in many of the key infrastructure restructuring services at KPMG India. developers and understand the nuances of segments in India is fairly well-defi ned, with India is on the road to becoming a operating in India.”

Asia has over US$318 billion in private equity funds under management

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