Asia’s News Source avcj.com February 25 2014 Volume 27 Number 07

EDITOR’S VIEWPOINT Bumper PE deal flow in 2013 flatters to deceive Page 3 NEWS Baring , CalPERS, CDH, EQT, Fosun, GGV, Hopu, IDFC, IFC, INCJ, Kendall Court, Morningside, NSSF, Origo, Samena, Temasek Page 4

ANALYSIS ’s mid-market GPs wait patiently for a rebound Page 16

INDUSTRY Q&A HESTA’s Andrew Major and QIC’s Marcus Simpson Page 11 Broken confidences Sebastiaan van den Berg of HarbourVest Partners Are PE players losing sleep over Australia’s super fund disclosure rules? Page 7 Page 19

FOCUS FOCUS

Diversity in distress The collective spirit GPs adjust to evolving special situations Page 12 gains traction down under Page 14

PRE-CONFERENCE ISSUE AVCJ PRIVATE EQUITY AND FORUM AUSTRALIA 2014 Anything is possible if you work with the right partner

Unlocking liquidity for private equity investors www.collercapital.com , , EDITOR’S VIEWPOINT [email protected]

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

Senior Research Manager this is now Helen Lee Research Manager Alfred Lam Research Associates Herbert Yum, Isas Chu, Jason Chong, Kaho Mak Circulation Manager FROM 2006 OR THEREABOUTS, AUSTRALIA pace during the second half of 2013. A total of Sally Yip Circulation Administrator suddenly became the destination in Asia for GPs nine PE-backed offerings raised record proceeds Prudence Lau focused on deals. In the space of $2.5 billion, and more offerings are expected in Subscription Sales Executive Jade Chan of 12 months, private equity investment in the the first few months of 2014. country jumped from $2.5 billion to more than Exits and returns are a good thing but the Manager, Delegate Sales Pauline Chen $16 billion. same bull market hasalso contrived to push up Over the next few years, global and regional valuations or at least expectation of business Director, Business Development Darryl Mag firms competed against – and collaborated owners, making value investment more difficult. Manager, Business Development with – top local managers to acquiring plumb The fundraising environment is hardly a Anil Nathani, Samuel Lau Australian assets. The list of targets included ringing endorsement, with Australia-focused Sales Coordinator the great and the good of domestic consumer managers attracting commitments of around Debbie Koo brands, including the likes of Cole Myers and $800 million in 2013, half the previous year’s Conference Managers . There was even an audacious, though total. It does suggest less dry powder coming Jonathon Cohen, Sarah Doyle, ultimately unsuccessful, bid for national carrier into the market but then it is not a particularly Zachary Reff Conference Administrator Qantas. deep market. None of the mid-market GPs closed Amelie Poon The global financial crisis inevitably funds in 2013; two might in 2014. Conference Coordinator dampened that mood and sharply reduced Nevertheless, it seems the stars are not yet Fiona Keung, Jovial Chung banks’ willingness to support large transactions. aligned for Australia to recapture its former Publishing Director Allen Lee However, AVCJ Research’s records indicate that glories – and some might argue this is a good Australia remains an active private equity market. thing, citing the arguably reckless ambition of Managing Director Jonathon Whiteley More than $15 billion was deployed in each of 2006-2007. However, as the markets saturate 2006, 2007 and 2010. Last year a total of $12 and business owners come back to reality, the billion was invested, not touching the pre- opportunity to buy will once again present itself. financial crisis peaks but not a long way off. Private equity investors are lying in wait. Incisive Media Yet for some reason 2013 didn’t really feel Unit 1401 Devon House, Taikoo Place like one of those boom years. The reason for this 979 King’s Road, Quarry Bay, Hong Kong is plain to see when you study the transactions T. (852) 3411-4900 – 2013 was a big year thanks to two large-scale F. (852) 3411-4999 E. [email protected] infrastructure deals, the ports of Botany and URL. avcj.com Kembla, and then the Port of Brisbane. Representative Office These assets, acquired by large global No.1-2-(2)-B-A554, 1st Building, No.66 Nanshatan, institutional investors – in one case in partnership Chaoyang District, Beijing, with a local manager – accounted for more Allen Lee People’s Republic of China T. (86) 10 5869 6203 than half of the total annual deal flow. Small Publishing Director F. (86) 10 5869 6205 transactions continued to flow but the upper Asian Venture Capital Journal E. [email protected] mid-market firms were, for various reasons, quieter than usual and large-scale corporate private equity remain patchy. The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of PE managers and advisors link the slower AVCJ Group Limited. investment environment to the robust capital ISSN 1817-1648 Copyright © 2014 markets. In the first half of 2013 a number of GPs busied themselves by making the most of the opportunity to refinance debt packages on more attractive terms. They have also taken advantage of a revival in the IPO markets, which gathered

Number 07 | Volume 27 | February 25 2014 | avcj.com 3 NEWS

GLOBAL Investors trade GMR Energy managed on a 50-50 basis by Origo and EMFI, an shares for infra exposure affiliate of EWPO CalPERS lowers investment A consortium of investors led by IDFC NSSF joins cornerstones for Alternatives and Temasek Holdings have agreed risk, trims PE allocation to restructure their investments in India’s GMR Poly Culture IPO Public Employees’ Retirement System Energy (GMRE) by purchasing INR11.4 billion China’s National Council for Social Security Fund (CalPERS), the largest public in the ($183 million) in convertible preference shares in (NSSF) will commit about $19.8 million as a US with more than $277 billion in assets, will GMR Infrastructure (GMRI). cornerstone investor in Poly Culture’s HK$2.57 reduce its target allocation for private equity from GMRI is a flagship company of industrial billion ($331 million) Hong Kong IPO. Poly 14% to 12%. The move is part of a broader effort conglomerate GMR Group and parent of GMRE. Culture, an auction business unit controlled to lower investment risk. It will issue INR7.9 billion and INR3.5 billion by state-owned Poly Group, plans to sell 77.78 in shares to the sovereign wealth million shares at HK$28.20-33 apiece. ASIA PACIFIC CDH pays $40m for 20% stake in China gold project IFC puts $25m to Olympus’ CDH Investments will acquire a 20% stake in Asia environment fund Eastern Dragon project, a gold reserve base International Finance Corporation (IFC), the owned by Canadian miner Eldorado Gold investment arm of the World Bank, plans to Corporation, for $40 million in cash.CDH will own invest $25 million in Olympus Capital Asia’s latest a 21.05% interest in Sino Gold Tenya, Eldorado’s pan-regional environment fund. The vehicle has a Hong Kong subsidiary, which indirectly holds the target size of $300 million. company’s 95% interest in Eastern Dragon, CSRC to restructure, AUSTRALIA fund and the IDFC consortium, respectively, via a preferential allotment, as per a regulatory introduce PE department EQT buys I-Med from hedge disclosure. Both parties had previously invested The China Securities Regulatory Commission INR13.9 billion in convertible preference shares in (CSRC) is undergoing a restructuring that will fund owners GMRE in 2010. While the bulk of these holdings see the creation of four divisions to oversee Australian radiology provider I-Med Network will be swapped for shares in GMRI, the investors fast-moving markets, including private equity. Radiology is being sold by its owners will retain a residual invesmtent worth INR2.58 The new divisions will cover bond trading, to a consortium led by EQT Partners. I-Med’s billion in GMRE. The transaction means the private equity, innovative businesses, and illegal current backers - a 25-strong group of investors company can avoid buying back the compulsory fundraising. led by US hedge funds Anchorage Capital and convertible preference shares. Fortis Investment - were approached by EQT In September, the investors dropped the Morningside raises $412m following the company’s A$240 million ($216 option of exercising the put option and started million) debt refinancing in November. negotiations with GMR. Management agreed across three China funds to offer preference shares in GMRI because the Morningside Technologies, an investment Artesian launches company was not in a position to buy back the company set up by Hong Kong’s Chan family - shares, given its debt burden of INR410 billion owners of property developer Hang Lung Group crowdfunding platform and 3.7x gearing.The deals also comes as GMR - has raised $412 million across three China Early-stage venture capital firm Artesian is looking to spin-out the energy business via an technology-focused funds. Venture Partners has launched its equity-based IPO. crowdfunding platform – VentureCrowd – in GGV targets $500m for new Australia with over 200 registered investors and 36 start-ups. VentureCrowd differentiates publicly traded companies and private equity to Sino-US fund itself from other crowfunding platforms such as 30% of total assets. GGV Capital, the US- and China-focused venture and by offering business capital investor, is seeking $500 million for its fifth ownership. Origo restructures China fund. A close on its new fund is expected in the first half of this year. It is expected to invest in cleantech fund companies based in China and the US. GREATER CHINA Origo Partners has restructured its China cleantech fund - China Cleantech Partners (CCP) Fosun Venture leads Series Chinese insurers approved - taking full control of the vehicle and paving an exit for co-investor Ecofin Water & Power B round for Kmsocial to commit more to PE Opportunities (EWPO). UK investment trust EWPO Fosun Venture Capital Investment has led a Series The China Regulatory Commission and Origo each committed $15 million to CCP B round of funding for Kongming, a Beijing-based (CIRC) has raised the cap on insurers’ exposure to when it was launched in 2011. The vehicle was social media marketing solutions provider, with

4 avcj.com | February 25 2014 | Volume 27 | Number 07 LP RebalanceAd AVCJ Weekly Web Vert DR020614.pdf 1 2/6/14 5:21 PM

When Rebalancing is your First Priority, Make Lexington your Secondary Priority.

Lexington Partners is a leader in the global secondary market. Since 1990, we have completed over 340 secondary transactions, acquiring more than 2,200 interests managed by over 580 sponsors with a total value in excess of $27 billion. For over 20 years, we have excelled at providing customized solutions to banks, nancial institutions, pension funds, endowments, family of ces and other duciaries seeking to restructure their private equity and alternative investment portfolios. Our unparalleled global sponsor relationships, capital resources, and reputation as a reliable counterparty are widely recognized, and we have skilled professionals to work with you in ve locations. To make an inquiry, please call us or send an email to [email protected].

Innovative Directions in Private Equity Investing

New York Boston Menlo Park London Hong Kong 212 754 0411 | 617 247 7010 | 650 561 9600 | 44 20 7318 0888 | 852 3987 1600

www.lexingtonpartners.com NEWS

participation from previous investor Fidelity Kendall ends Intrepid’s in Mahindra Two Wheelers, a scooter business Growth Partners Asia. The investment size is controlled by Indian conglomerate Mahindra about $10 million. Indonesia mine nightmare Group, from Kinetic Engineering. Kendall Court has acquired Intrepid Mines’ Hopu participates in $2.5b interest in the Tujuh Bukit copper-gold project in IFC commits $50m to Indonesia for $80 million, ending the Australia- warehouse investment listed resources company’s long-running Cholamandalam NBFC Hopu Investment Management is part of a ownership dispute over the asset. International Finance Corporation (IFC), the consortium that has agreed to invest $2.5 billion Kendall Court Resource Investments has investment arm of World Bank, is investing in Global Logistic Properties (GLP), a Singapore- acquired a convertible bond and option into INR3.15 billion ($50.7 million) in non-banking listed warehouse operator with interests in China, Merdeka Serasi Jaya (MSJ) - the holding company finance company (NBFC) Cholamandalam Japan and Brazil. for the Tujuh Bukit project - that would give it Investment & Finance . IFC will subscribe to a 22.5% stake in the business if fully converted. tier two debt in the form of unsecured non- Horizon leads $23m round MSJ is looking to raise up to $75 million through convertible debentures (NCDs) issued by the an IPO in Jakarta in the third quarter of 2014. Bombay Exchange-listed company. for Hampton Creek Food Intrepid said it was awarded the securities after Horizon Ventures has led a $23 million Series B Provident Capital and Saratoga Capital brokered Bamboo, Saama invest in financing round for Hampton Creek, a US- an agreement between all parties involved in based food technology firm. Yahoo co-founder the dispute. A deed of settlement has been Modern Family Doctor Jerry Yang, AME Cloud Ventures, entrepreneurs signed that will bring to an end to arbitration Bamboo Finance, a European private equity Ali and Hadi Partovi, Scott Banister, Morado proceedings in Singapore and a court case in firm that focuses on investments benefiting Venture Partners’ Ash Patel, and Google Vice Indonesia. low-income communities in emerging markets, President Jessica Powell also participated, as did and early stage investor Saama Capital have existing investors including Khosla Ventures and together taken part in a Series B round of funding Collaborative Fund. for Indian healthcare provider Modern Family Doctor. NORTH ASIA IFC pumps $91m into Indian NBFCs INCJ invests $9m in nternational finance Corporation (IFC), the animation tool developer investment arm of the World Bank, has The Innovation Network Corporation of Japan committed around $91 million in three PE- (INCJ) has invested JPY900 million ($8.7 million) backed non-banking financial companies in New, a start-up that develops tools for creating (NBFCs) in India: Magma Fincorp, Bandhan motion comics. Set up by Nobuyuki Muto in The settlement involves Indo Multi Niaga Financial Services and Au Financiers. 2012, New develops online animation tools used (IMN), one of Intrepid’s former Indonesian for the commercial production of motion comics partners, issuing a bond convertible into a ACT gets OCA Credit, - a form of comic that combines printed comic 15% pre-IPO stake in MSJ to Intrepid subsidiary books and animation. Emperor Mines, receiving a $70 million Kilimanjaro debt solution promissory note in return. The bond can be Atria Convergence Technologies (ACT), an Indian Goldman, Mitsui invest in exercised once MSJ goes public. In addition, broadband and cable TV access provider backed Emperor has the right to acquire a further 7.5% by India Value Fund Advisors (IVFA), has received Global Beverages & Foods stake in MSJ for $37.5 million at the time of the structured debt financing from Olympus Capital Goldman Sachs, Mitsui Global Investment (MGI) proposed IPO. Intrepid has signed over these Asia Credit (OCA Credit) and Kilimanjaro Credit and a number of other unnamed investors rights to Kendall Court for $40 million in cash plus Fund. are paying INR3.15billion ($50.4 million) for a standby letter of credit also worth $40 million. a undisclosed stake in Global Beverages and Foods (GBF). The business was founded by A. SOUTHEAST ASIA Mahendran, former managing director at Godrej on developing apps and teaching materials for Consumer Products. children. To date is has developed seven apps. Baring exits Indonesian aviation services provider Japapp Smart Education SOUTH ASIA Baring Private Equity Asia has sold its 41.65% raises $5.4m stake in air freight and passenger services CyberAgent Ventures and Infinity Venture Samena picks up stake in provider Cardig Aero Services (CAS) to Singapore Partners have invested JPY550 million ($5.4 Airport Terminal Services (SATS) for IDR1.1 million) in Smart Education, a -based Mahindra scooters business billion ($93.5 million). The PE firm invested developer of educational mobile apps for kids. Asia and Middle East-focused private equity approximately $41 million in CAS in December Founded in 2011, the start-up focuses purely firm Samena Capital has bought a 20% stake 2011.

6 avcj.com | February 25 2014 | Volume 27 | Number 07 COVER STORY [email protected] Indecent disclosure The Australian government is expected to halt and wind back superannuation fund disclosure requirements that go beyond global norms. Industry participants are hopeful for the best, but mindful of the worst

WHEN THE LETTER HIT DAVID RUSS’ DESK, refusing to do business with superannuation information if and when necessary. However, a the University of California Regents’ Endowment funds, thereby potentially denying members Hong Kong-based funds formation lawyer tells Fund had just under $650 million – or 1% of its the opportunity to invest in the top-performing AVCJ that he is advising GP clients to refuse these total portfolio – invested in VC vehicles run by managers. requests and pass the risk back to the investors. Sequoia Capital. Their relationship stretched back The new disclosure system was supposed It is, as more than one industry participant 22 years. But the missive from Michael Moritz, a to come into effect on July 1, 2013 and is observes, “a real mess” and the sooner the partner at the VC firm, brought it to a swift close. now nearing the end of a 12-month deferral. government steps in and offers a degree of Sequoia was dropping the University of Following the change in government last year clarity, the better for all concerned. California from its latest fund, Moritz told Russ, and a reopening of the consultation process, the university’s treasurer, citing “the spate of it is hoped the regulations will be amended to Best intentions Freedom of Information Act requests with which something nearer the global standard. The superannuation portfolio holding disclosure your office has been bombarded.” Several superannuation funds declined to requirements emerged as part of the broad With plaintiffs queuing up to demand the speak to AVCJ on the grounds that the situation review of Australia’s financial services sector endowment release performance data for funds has yet to be finalized. However, the dilemma in the wake of the global financial crisis. Many in its private equity portfolio, and several judges facing these LPs is what do they do right now – superannuation members lost a significant deciding disclosure was a good idea, Sequoia follow the law or be pragmatic and accept the portion of their retirement savings and so the concluded that its privacy was worth more than law is likely to change? government promised root and branch reform to the University of California’s continued custom. “Although I believe the regime will change, ensure this couldn’t happen again. Responding to the court ruling that triggered it is not appropriate to make commitments on The Cooper Report, published in 2010, Sequoia’s rejection, Russ noted that he wouldn’t the assumption that the law will change,” says identified a number of areas in which the be able to replace the fund positions with Andrew Major, general manager for investments superannuation system could be improved, similarly productive investments because they weren’t available. “This decision is going to cost Australia pension asset allocation the university hundreds of millions of dollars,” he added. It was one of numerous actions, all of which 2003 took place more than a decade ago, that set the terms of certain US venture capital firms’ relations with investors that endure to this day. Public 2008 disclosure of fund performance by LPs is frowned upon to the point that it can be a deal breaker. 2013 Blast from the past Sequoia’s exchange with the University of 0 20 40 60 80 100 % California has now resurfaced in an Australian Equities Bonds Other Cash context. Last year, the federal government passed legislation requiring superannuation funds to Source: Towers Watson publish full details on their portfolio holdings on a look-through basis – in a PE context, not only identifying the funds but also the assets that at healthcare sector superannuation fund HESTA. including a removal of the complexity and each fund is invested in – on a publicly-available “Therefore, when we make a commitment, we opacity surrounding investment products. section of their websites twice a year. have to be confident that we can comply with It advocated “systemic transparency,” whereby Disclosures made by US public pension our legal obligations as they currently stand.” the trustee would disseminate a wide range funds, the closest the industry has to a “global Geoff Sanders, a partner at Allens who of information on a superannuation fund’s standard,” do not extend to the specific contents specializes in superannuation and funds processes and portfolio holdings via a publicly of PE managers’ portfolios. The standard reason management, warns that another deferral accessible website. This was meant to go above is that revealing the value of unlisted assets doesn’t necessarily rescue the issue. He is and beyond the existing requirement that a could have a detrimental impact on investment advising superannuation clients that are superannuation fund disclose all investments performance. It is feared foreign PE firms making new commitments to put side letters or combinations of investments with a value in will respond to the Australian regulations by in place entitling them to disclose the relevant excess of 5% of total assets.

Number 07 | Volume 27 | February 25 2014 | avcj.com 7 COVER STORY [email protected]

“I don’t think anyone would disagree with no breakthrough with existing GPs, the LP is not annual investment report, which offers the most the fundamental premise of transparency and obliged to exit the position on the secondary detailed insight into its holdings, comprises 296 more meaningful information being put in the market. Rather, they can employ the “reasonable pages and 14,856 line items. hands of end users,,” says Yasser El-Ansary, CEO steps” defense. The bulk of these are public investment of the Australian Private Equity & Venture Capital “There is a point at which the super fund says, instruments, where the individual holdings are Association (AVCAL). “But this is a case of the ‘We have taken all reasonable steps to get the disclosed but the identities of the managers pendulum swinging too sharply in the direction information and we can’t. It is not reasonable responsible for them, where the function is of over regulation, which will not deliver the for us to sell the investment because we can’t outsourced, are not. Real estate and real estate outcome the government is looking for and get the information, so we’ve done what we can investment trusts account for 426 line items, will actually be detrimental to the interests of do and need to do no more,’” explains Sanders infrastructure for nine, and private equity funds superannuation fund members.” of Allens. “We don’t see it being an issue in a – divided up into corporate restructuring, credit, Indeed, it has swung past the point of practical sense for pre-existing investments.” expansion capital, opportunistic and venture comfort for most GPs. Lawyers attest that There is one caveat: the superannuation fund capital – for 349. domestic managers have little choice but to might already be in possession of the information With $277.2 billion under management, comply with the new regulations, should they be through the GP’s standard quarterly reporting. of which $31.2 billion in deployed in private equity, CalPERS is a giant among the Australian superannuation funds. AustralianSuper is the “This is a case of the pendulum swinging too largest, but at A$65.1 billion ($58.5 million) its asset pool is just over one fifth the size of its US sharply in the direction of over regulation, which counterpart. will not deliver the outcome the government is In its 2013 annual report, AustralianSuper names 34 external managers for listed equities, looking for” – Yasser El-Ansary 21 for global bonds, 32 for property, 30 for infrastructure, seven for capital guaranteed, absolute returns and cash, and 14 for private fully implemented. They are subject to Australian In this context it is questionable whether equity. Should this or any other superannuation securities laws and therefore bound to provide “reasonable steps” is valid. The fund might be fund be obliged to disclose the full extent of superannuation funds with information required compelled to disclose, regardless of whatever each manager’s holding it is estimated the list to meet disclosure requirements. restrictions the LPA tries to impose, simply could run to 5,000-10,000 line items. Offshore GPs, on the other hand, are not because the law does not respect confidentiality. “It’s a very significant cost burden on obliged to approve the disclosure of their As for new investments, superannuation superannuation funds and GPs,” says AVCAL’s portfolio holdings. Based on their discomfort funds are drawing up side letters. GPs that are El-Ansary. “At a time when we have a new with any fund information entering the public unhappy with this arrangement can walk away government that has made reducing red tape domain, venture capital firms in the US would from negotiations and seek to raise capital and compliance costs on business its number almost certainly reject the notion out of hand. elsewhere. one economic priority, this particular reform “It would be a serious issue for the US From an LP perspective, two issues have represents a very straightforward opportunity VCs,” says Richard Baker, investment director yet to become clear. First, would a trustee be to stop the implementation of changes that will at Blackbird Ventures, who until May 2012 able to make a commitment to a GP in the only serve to impose additional regulatory costs.” was venture capital portfolio manager at MLC knowledge that the manager won’t budge Even if the government is comfortable Private Equity. “I know freedom of information on LPA amendments? Second, given private with the compliance costs, there is a broader regulations in the US meant they didn’t accept equity accounts for a relatively small portion of consideration of whether or not full disclosure some institutions that were subject to those superannuation funds’ overall investments, are actually benefits superannuation members. A laws. It would have a significant effect on the they prepared to devote the time and energy balance must be struck between giving end super funds and their ability to access these required to resolve these issues? users access to information in the interests of investments.” Superannuation funds say they are able to transparency and overwhelming them with Anecdotal evidence indicates that venture reach satisfactory outcomes with GPs, with one so much information that only those with capital firms are threatening to exclude Australian manager describing the default position as “an accounting backgrounds will be able to process investors from their products while the response agreement to agree further.” However, there are it. from private equity has been more mixed, also cases in which commitments haven’t been This point is reinforced by submissions made with some of the larger managers reasonably pursued, in part due to discomfort with GPs’ by AVCAL and other industry associations, understanding of the situation. This is in keeping attitudes towards disclosure. including the Association of Superannuation with their respective strategies. While the Funds of Australia (ASFA) and the Australian typical VC manager can be guarded about his Red tape Institute of Superannuation Trustees (AIST), each investments, a big buyout firm would struggle to In addition to potentially denying of which calls for another deferral so the policy keep deals a secret given the need for approvals superannuation members exposure to top can be reconsidered and released in a workable and the size of supporting infrastructure. quartile managers, the regulations would format and with proper guidelines. Problems can arise when confidentiality introduce a compliance burden beyond anything “Disclosure of fund assets (on a full ‘look arrangements in the limited partner agreement that Australian LPs have seen before. through’ basis) will not assist members to better (LPA) that specifically restrict the disclosure of To put this in context, the California Public assess the level of diversification and risk in information have to be renegotiated. If there is Employees’ Retirement System’s (CalPERS) 2012 particular products of likely future returns,” ASFA

8 avcj.com | February 25 2014 | Volume 27 | Number 07 COVER STORY [email protected]

states. “Such information will be too voluminous, One pension fund manager tells AVCJ that his order to prepare itself for when the government not standardized and potentially too complex to disclosures would amount to a company name passes judgment. be of assistance to retail investors.” and valuation – much like CalPERS’ policy for Fortunately, this judgment, or at least another AVCAL also stress the need for an exemption public debt and equities. There is no requirement deferral of the implementation date, might not for unlisted investments from the public to link the company to a fund manager, in part be long in coming. disclosure of commercially sensitive information because four hedge fund managers could AVCAL’s El-Ansary believes a compelling case in order to avoid the breach of contractual have a position in a single company, so the has been made to the government for a proper confidentially arrangements. AIST takes a broader superannuation fund would aggregate its debate on this reform and a proper examination view, arguing that the exemption should apply exposure. of whether or not the balance between cost “where it is in the best interests of members.” As a result, people reading the disclosures obligations and more meaningful information The example given is an emerging markets wouldn’t necessarily be able to decipher an has been struck. Furthermore, the assistant fund that represents an excellent investment individual manager’s holdings. treasurer is said to regard the issue as a priority opportunity but is unwilling to see its assets “To really understand how a company is and recognizes the importance of providing a disclosed publicly. In the light of the new valued, you need to understand our percentage clear signal to the industry. regulatory requirements, a superannuation fund interest in the partnership; you then need to The much-desired compromise solution would either have to decline to invest in the understand the partnership’s percentage interest appears likely, one that addresses the fund or make a “blind” commitment. Both these in the company to get an equity valuation; and broad transparency imperative yet saves outcomes could be considered sub-optimal then to get an enterprise value you have to look superannuation funds from awkward and therefore detrimental to the interests of at the debt,” the pension fund manager says. conversations with GPs in which they offer no members. “There are a couple of steps to get to any clear definitive answers to questions about carve-outs valuation of a company using information that for materiality and sensitivity. Educated guesswork itself isn’t going to be disclosed.” “I am hopeful there will be some materiality In the absence of detailed guidelines, On this basis, while the disclosures are thresholds introduced into the current disclosure interpretations of the regulations are varied, potentially quite material, once you drill down requirements, or that there will be recognition particularly how information should be into the practicalities, the information might that certain information currently required to be presented on a superannuation fund’s website. not provide a huge amount of insight into disclosed is confidential and proprietary,” HESTA’s It is possible to create a scenario, for example, GPs’ investment strategies. This is just one Major adds. in which disclosures wouldn’t reveal much at all interpretation, however – the product of a fund Foreign GPs shouldn’t cancel marketing trips about a GP’s investment activity. trying to establish where it stands on an issue in to just yet.

Wider reach to everyone in your organisation

avcj.com site licence allows everyone in your organisation to have instant access to in-depth analysis, real-time news and information on private equity in Asia and beyond. Sign up for an avcj.com site licence now and empower your team with critical information and data to soar above your competitors in Asian private equity.

How does it work? We will arrange online access for your employees to avcj.com, either with individual passwords or by general access through IP address recognition.

How much does it cost That depends on how much access you want, but we can customise cost-effective packages to all firms, regardless of size. For more information, contact Sally Yip at +(852) 3411 4921 or email [email protected].

avcj.com De-risk your transaction with the market leaders in M&A insurance solutions

Risk Capital Advisors (RCA) is the market leader in advising on and structuring insurance solutions for transaction risks. With a wealth of experience across Asia-Pacific and an impressive track record of successful transactions, the RCA team provides expert, commercial advice on a range of transaction risk strategies and insurance-based solutions.

As the largest team in Asia-Pacific, RCA has a combined 60+ years of Private Equity, M&A and insurance experience, and is the preferred advisor to structure transaction risk insurance solutions.

In the past 5 years, RCA has successfully advised on and closed more than 400 transactions, making RCA the most experienced team in the Asia Pacific region.

The transaction risks we provide advice on include: Warranties & Indemnities Tax Litigation Prospectus Liability Environmental Contingent Liabilities

For more on how RCA can help contact Rick Glover on +61 401 123 235, [email protected] or visit riskcapital.com.au

LONDON I MELBOURNE I SYDNEY ANDREW MAJOR & MARCUS SIMPSON | INDUSTRY Q&A De-risk your transaction [email protected] Supers have their say with the market leaders in Andrew Major, general manager for investments at HESTA and Marcus Simpson, head of global private M&A insurance solutions equity at QIC, share their views on PE performance and where the best investment opportunities lie Q: How has your PE portfolio some superannuation funds can be made in Australian private performed in terms of strategy even closed their private equity, although experience has and geography? equity programs. However, shown that only the highest well-executed programs quality managers will be able MAJOR: Our portfolio had a strong have performed well and to produce these returns. Our year in 2013, with positive demonstrated lower volatility commitment size is increasing valuation momentum and relative to public markets, which as our fund grows, giving us the strong distribution flows. Over have bounced around like ability to be more selective with the longer term, performance kangaroos. We have noticed a our commitments and focus on of the portfolio is moving gradual build-up of appetite a smaller number of high quality closer to the benchmark and for the asset class coupled manager relationships. is consistent with that of listed with ongoing concern about Risk Capital Advisors (RCA) is the market leader in advising on and structuring insurance solutions for equity markets. All strategies in SIMPSON: QIC Private Equity has transaction risks. With a wealth of experience across Asia-Pacific and an impressive track record of successful various geographies performed from the outset sought the best “We have noticed transactions, the RCA team provides expert, commercial advice on a range of transaction risk strategies and well and there were no real global opportunities. Only 4% weak performers in the portfolio. of the total portfolio is invested insurance-based solutions. a gradual build- Investment activity in Australia in Australia, in part because remains relatively slow, however we believe that competition up of appetite As the largest team in Asia-Pacific, RCA has a combined 60+ years of Private Equity, M&A and insurance exit activity picked up as the for deals had, until recently, experience, and is the preferred advisor to structure transaction risk insurance solutions. IPO window opened and been overheated. We expect for the asset class remains open, which augurs our Australian exposure to coupled with In the past 5 years, RCA has successfully advised on and closed more than 400 transactions, making RCA the well for further exit activity and increase as there has been some ongoing concern most experienced team in the Asia Pacific region. distributions to investors in 2014. industry rationalisation, which has created a more attractive about perceived SIMPSON: QIC’s private equity was supply-demand situation. In The transaction risks we provide advice on include: started in 2005 by a team with Andrew Major fact, we are close to closing our high fees with Warranties & Indemnities deep global experience and our second direct deal in Australia no guarantees of Tax investments have performed perceived high fees with no and are aiming to do more with well to date. Direct investments, guarantees of alpha. There are a preference for agricultural alpha” – Marcus Simpson Litigation available at more attractive more implementation options services, mining services, and Prospectus Liability prices post-global financial crisis, available post-financial crisis, leisure – industries in which Environmental have helped to boost returns, as which goes some way towards Australia has acknowledged make co-investments selectively Contingent Liabilities have secondary fund purchases, meeting these concerns. competitive advantages. We are going forward. We utilize the venture and growth investments Excellent implementation and finding opportunities outside resources and expertise of our (mostly in the US), and emerging the correct alignment of interests traditional buyout structures external advisors for sourcing, markets investments. are keys to success. and pursuing arrangements that analysis and execution. provide attractive capital for For more on how RCA can help contact Rick Glover on +61 401 123 235, Q: How has your trustee board’s Q: What are the implications business owners. SIMPSON: The team has extensive attitude towards private of Australian LPs reducing direct investment experience [email protected] or visit riskcapital.com.au equity evolved? commitments to domestic GPs Q: Are you seeing more co- and we’ve been co-investing in favour of global mangers investment opportunities? since 2007 and have closed MAJOR: Our board retains a and other asset classes? How do you manage internal 16 co-investments to date. We cautious outlook on private resources to address these have a defined strategy focused equity and has supported a MAJOR: We are not actively opportunities? on specific sectors and types change in investment strategy reducing commitments to local of transactions, driven by close and, as a result, our ongoing managers in favour of global MAJOR: We see co-investments as partnership with a select group investments in the sector. managers, nor are we currently an important part of a private of top-tier managers. While many looking to reduce our allocation equity investment strategy. investors remain aspirational or SIMPSON: Sentiment towards to private equity in favour of We have executed a number are relatively new to co-investing, the asset class has fluctuated other asset classes. We continue of co-investments over recent we’re seasoned in this area have LONDON I MELBOURNE I SYDNEY over the last few years: to believe that suitable returns years and will look to continue to enjoyed good success so far.

Number 07 | Volume 27 | February 25 2014 | avcj.com 11 FOCUS [email protected] Sifting the strain The low-hanging fruit created by the post-global financial crisis troubles of highly-leveraged Australian companies has mostly been picked. Distress investors are looking in smaller and less obvious places

THE STORY OF PRIVATE DIAGNOSTIC managed ABN AMRO Capital II Fund, having hedge funds, which led to the debt-for-equity imaging business I-Med Networks is a familiar been brought in as a replacement GP to tend to restructurings – were probably the Lloyd’s one in Australia. Acquired by CVC Capital Partners a distressed portfolio – I-Med will inevitably be International’s sales of the BOS International in a A$2.6 billion ($2.3 billion) deal in 2006, it was name-checked. portfolio. one of a spate of highly-leveraged buyouts that The irony is that Allegro doesn’t expect to and Morgan Stanley came to typify the years preceding the global be doing many more of these deals. Most of were among those to take advantage, forming a financial crisis. CVC, fresh from almost doubling the low-hanging fruit has gone and Australia’s joint venture to acquire a GBP809 million ($1.25 its money on a buyout of Ramsay Healthcare, distress investors are now looking elsewhere. billion) portfolio of Australian corporate real had little reason to doubt its potential. Within five estate loans in 2012. That same year, KKR’s special years, though, things had soured. Happy coincidence situations unit teamed up with Allegro to acquire Bought as DCA, the business was later “From a distressed investor point of view, it was a portfolio of distressed corporate loans. A third renamed I-Med, following the sale of its aged a happy coincidence of three things going on: sale, said to be worth A$371 million, went to care arm to Bupa. But it couldn’t hide from its a number of overleveraged deals that were Sankaty Advisors last August. debts. In 2011, a group of 30 hedge funds led caught in a global slowdown; a group of mainly “The big wave of distressed activity that came by Anchorage Capital and Fortress Investment European banks were exiting the market quickly post-global financial crisis has largely played itself out,” says Jamie Weinstein, co-head of special situations at KKR. “There was a lot of primary Australasia syndicated debt volumes lending activity in 2005-2008 – a lot of it came 150,000 300 from non-domestic banks and a lot of it went into LBO deals – and most of those positions 250 120,000 have been cleansed. We don’t expect to see 200 90,000 many big portfolio sales on the corporate side.” 150 According to a restructuring expert at one 60,000 Deals of the Big Four domestic banks, there is plenty US$ million 100 30,000 of activity at the small end of the market. He 50 is getting 10 files in the A$20 million space for 0 0 every one file in the A$40 million space and 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014YTD nothing much at A$50 million and above. And No. of deals Volume (US$m) these positions aren’t necessarily trading. Source: Thomson Reuters LPC Australian banks didn’t suffer the adverse effects of the global financial crisis nearly as much as their European and North American Group took control of the company. Meanwhile, and looking to sell out; and local banks often counterparts and so they haven’t been under the one third of the I-Med’s doctors announced they did not have the appetite or the remit to stick same pressure to sell. planned to leave. around through protracted debt-for-equity “It’s hard when we’ve been through a period No single hedge fund had a dominant swaps so they sold as well,” says Alistair Dick, of significant deleveraging and the volumes position and so no one was willing to assume managing director and head of debt advisory in the secondary market have gone down,” control of the board. It was left to Allegro Funds and restructuring at Rothschild Australia. says James Marshall, a partner in Ashurst’s to come in as a minority investor, facilitate CVC’s On the leveraged buyout side, these low- restructuring and insolvency group. “But it would exit and lead the restructuring effort. hanging fruits included another CVC casualty, “Our aim was two-fold,” explains Chester media conglomerate Nine Entertainment. Moynihan, managing director at Allegro. “First Acquired between 2006 and 2008, the company “You do get situations we would provide capital to fix the balance ran into trouble as advertising spend plummeted sheet, sometimes in partnership with hedge following the financial crisis. Another hedge fund where somewhat funds. Secondly, we would to get control of the consortium, led by Oaktree Capital and Apollo unexpectedly business with like-minded people and drive the Global Management, completed a debt-for- turnaround.” equity swap worth nearly $3 billion, wiping out something happens to While I-Med is by no means the only entry on CVC’s equity in the process. create a market and Allegro’s track record, it is perhaps the most high- The most notable transactions to arise from profile entry. As the firm seeks to raise A$200 European banks beating a path to the exit – you see trading” – James Marshall million for its first institutional fund – it previously aside from trading out positions in LBOs to

12 avcj.com | February 25 2014 | Volume 27 | Number 07 FOCUS [email protected]

it’s moving into the corporate,” he says. ”We are seeing a mixture of family-owned businesses, Mean fields: Agriculture some public companies, and a smattering of private equity-owned portfolio companies.” The question is where does leave the large- in distress cap players. The hedge funds do appear to be less active, content to fly in for intermittent rought has made the precarious situation of Australia’s cattle farmers a whole lot worse. opportunistic plays along the lines of . DWith 70% of rural Queensland parched, land values are falling and banks are calling on cattle As for KKR, Weinstein says the focus is on private station owners to pay down a portion of their debts of face foreclosure. It is a vicious circle. One credit, which could involve mezzanine lending as distressed farm sale in area pushes down valuations of the surrounding properties, collateral part of a financing package or direct lending to a disappears and the process starts over. company, and broadly defined special situations Farm debt in Australia has risen from A$40.3 billion in 2004 to A$70 billion, of which A$5-10 plays. He notes that the firm is willing to do deals billion is classified as distressed. There have been calls for the government to step in and clean up as small as $50 million. the worst positions. PE investment would also be welcome, but is it economically viable? “The agriculture sector in Australia is ripe for foreign investment and remains overleveraged Asset heavy and quite illiquid,” says James Marshall, a partner in Ashurst’s restructuring and insolvency group. These special situations opportunities may well “Australian banks are struggling with some of their exposure and there is a lot of interest in how arise from the asset-heavy sectors, with several foreign investors might assist through roll-up strategies.” industry participants highlighting the potential There are two types of farming operation in Australia. At one end of the scale are the of agriculture, real estate, infrastructure, and corporates, with assets of A$500 million to A$1 billion that are able to raise new capital and get especially mining. Junior miners are the classic their debt down to a sustainable level. distressed case. Hit hard by the downturn in the Even then, large players are not immune to difficulty. Having lost approximately A$1.7 billion commodities cycle, they either have too much over the last five years, Elders has been forced to downsize and restructure its debts. Namoi debt on the books or want to raise capital but Cotton sold a stake to US agricultural trader Louis Dreyfus Commodities at the start of 2013 amid cannot because of falling commodities prices. concerns about its ability to service debts and stay in business. And then there is PrimeAg whose However, distress is not confined to mining shareholders voted to wind up the business last October. companies. Ancillary service providers and At the other end of the scale are the mom-and-pop farms. Typical distressed cases started with equipment manufacturers have also been the acquisition of a neighboring farm, backed by debt. After five bad years in a row the debt has impacted and demands on working capital, low swollen from A$10 million to A$20 million and is now worth more than the collective value of the margins and large project risks are expected to land and the cattle on it. create further challenges. For example, earlier this “There are lots of people in that A$10-30 million exposure range who are in trouble, rather month listed engineering company Forge Group than one owner with a distressed position of A$300-400 million,” according to a restructuring went into administration following weeks trading expert with one of the Big Four banks. “There is an opportunity to do a roll-up and someone will halts and profit deterioration. eventually do it. Then the drought breaks, cattle prices go up, the Australian dollar depreciates, “There are a lot of small to mid-cap mining and it’s happy times again.” service companies still reliant on one or two There are plenty of strategies and purported opportunities, but as yet no significant activity. clients,” says Chalothorn Vashirakovit, investment Politics – and the potential for government intervention in the sector through a state-backed associate at Clearwater Capital Partners. “This has reconstruction bank – may be partly responsible for private sector hesitancy. presented a lot of opportunity in the past when clients have pulled back on their projects or renegotiated their contract terms and companies be wrong to say there has been a drop-off in Blackstone, but later accepted a sweetened offer have faced a tremendous amount of stress- those activity.” Centerbridge-Oaktree. are opportunities which we think are quite He argues that the opportunities have “You do get situations where somewhat interesting.” become more situational rather than following unexpectedly retailers and other businesses get As to whether actual mining companies will a particular trend. One example is surf wear into difficulty and something happens to create a emerge as investment opportunities, industry company Billabong which got into difficulty market and you see some trading,” adds Marshall. participants are less certain. Bert Koth, managing in early 2012 after accumulating debts more “This will continue to be a factor of this market. director at Denham Capital, notes that, while on than A$300 million. The company had been the The deals have got smaller but there are still paper the average listed junior miner may appear subject of early bids from plenty of them out there.” to have another six months before it runs out and TPG Capital but after proposal were rejected, Indeed, turnaround specialists like Allegro are of money, the reality is the company will likely lenders started to off-load their debt exposure to targeting the smaller positions held by domestic reduce its cash burn rate until it effectively goes the group. banks, looking to leverage their operational into hibernation. The company then became the subject of expertise to work out difficult situations that “When you have a cash crisis there is the competing offers from two US consortiums: banks don’t want to address or no longer have opportunity to buy assets at a lower valuation one led by Altamont Capital Partners and the manpower to address. Moynihan credits but most junior mining companies do not Blackstone unit GSO Capital Partners; the other the large debt sales with alerting the banks’ constitute attractive mining companies, so the by Centerbridge Partners and Oaktree Capital restructuring divisions to the role private equity opportunity set is a little bit exaggerated,” says Management. Billabong initially negotiated a can play in resolving non-performing loans. Koth. “Like in every market you have to look $294 million refinancing deal with the Altamont- “It started with the institutional and now hard.”

Number 07 | Volume 27 | February 25 2014 | avcj.com 13 FOCUS [email protected] The IT crowd Australia has embraced crowdfunding as a supplement to an early-stage traditional VC market that has yet to regain its former strength. Industry participants are seeking differentiation and deregulation

SIX VENTURE CAPITAL PARTNERS ARE Research Innovation Fund, which is managed “I think the fundraising environment for sitting in their Sydney office looking for potential by non-profit organization AusBiotech and part- early-stage companies will shift towards deals. They have a mandate to invest in Australia bankrolled by the Australian government. crowdfunding platforms to allow access to a and New Zealand but without a permanent Industry participants say the superannuation national and international investor base,” says on-the-ground presence in the likes of Perth, funds no longer have an appetite for domestic Zachary Midalia, investment associate at M.H. Brisbane and Auckland, even the most astute venture capital, prompting newer firms to look Carnegie & Co. “Crowdfunding allows people to networker would struggle to assemble a full elsewhere for support, notably US VC players and invest smaller amounts of money across multiple opportunity set. high net worth individuals (HNWIs). The rise of deals and build their own portfolios. Whereas Technology – in the form of crowdfunding crowdfunding can be seen in a similar context. VC has traditionally been private and exclusive, platforms – can extend these investors’ reach. crowdfunding opens it up to every investor.” An entrepreneur from Perth appears on the No.of crowdfunding platforms in It is also suggested that crowdfunding fills radar without anyone needing to get on a plane. selected countries a gap in the market. While an individual angel Initial due diligence can also be conducted investor is generally reluctant to go beyond Country Platforms through the online platform, with video chat and $500,000, a traditional VC fund in Australia USA 344 document sharing. Suddenly VC investors and might not write checks smaller than $10 million. UK 87 start-ups have been brought closer together. Crowdfunding has the capability to exist in France 53 “Crowdfunding enables start-ups, especially between, typically focusing on companies at the Canada 34 those in the high-tech sector, to speed up seed or Series A stage. Netherlands 34 their capital-raising process,” says Jason Best, Furthermore, these platforms can address Spain 27 co-founder of industry consultancy Crowdfund particular market niches, be they defined by Germany 26 Capital Advisor. “They can get it done in four geography, sector or size. There is no remit Brazil 17 weeks rather than 6-9 months.” enshrined in a limited partner agreement, Italy 15 The global crowdfunding craze is only although those running the platforms recognize Australia 12 two years old. An estimated of $5 billion was the merits of diversification. India 10 raised through these platforms in 2013, almost OurCrowd, for example, focuses on global Russia 4 doubling the 2012 total. Crowdfunding has companies for individual global investors. South Africa 4 also taken off in Australia, with the Australian It conducts in-house due diligence, selects Belgium 1 Small Scale Offering Board (ASSOB) facilitating promising start-ups and invests $50,000 of its Hong Kong 1 more than $135 million in start-up funding last own capital before opening the funding round to China 1 year. The country’s traditional VC industry saw its accredited wholesale investors. UAE 1 investments totaling $149 million. Only 16 new companies are expected to Estonia 1 Last week, two more platforms launched Source: Crowdfund Capital Advisor be selected this year and they will all have a Australian operations: Israel-based OurCrowd and presence in multiple markets. “We are only VentureCrowd from local player Artesian Venture It has gained traction almost by necessity, looking for companies that want to address Partners. Private equity firm M.H. Carnegie & Co. providing capital to entrepreneurs who would worldwide markets. If a company doesn’t have is expected to join them with The Crowd in the not otherwise get any, and presenting HNWIs plans to go global, we are not interested,” says next few months. with a pipeline of potential investments. Jonathan Medved, CEO of OurCrowd. “I’m sure there will be more competitors, It is, however, important to separate the gift The platform itself has aspirations to grow which will be both a validation of the sector and givers from the professional investors. While the beyond Israel and Australia, with New York, Hong a good result for start-ups and investors,” says likes of Kickstarter and Indiegogo, which match Kong and Singapore on the agenda. It claims Jeremy Colless, managing partner of Artesian and investors with entrepreneurs and offer tangible to have built a network of 4,000 investors in the founder of VentureCrowd. awards to the former for backing the latter, past year, with 50-100 newcomers each week. are present in Australia, ASSOB, OurCrowd and Individuals commitments begin at $10,000. Meeting a need VentureCrowd operate under the equity model. “Being only local doesn’t make sense today,” Australian venture capital fundraising has They invest in start-ups and then take them to Medved adds. “Last year we invested about $34 struggle ever since the global financial crisis. the platform to source capital from the crowd. million in our deals. That may not sound like a lot, According to AVCJ Research, VC firms raised only Traditional venture capitalists are obviously but for a typical VC it is a lot for a single year. A VC $37 million and $96 million in 2010 and 2011, far more interested in equity-based platforms. firm might raise $100 million and invest only $15- respectively. Last year, the total soared to $250 There is the same element of quality control and 20 million a year, because capital must he held million, the highest level in six years. However, business development support, yet the capital- back for follow-on investments and fees.” the bulk of this capital went to the Medical raising mechanism has a much broader reach. VentureCrowd is arguably OurCrowd’s

14 avcj.com | February 25 2014 | Volume 27 | Number 07 FOCUS [email protected]

polar opposite. It concentrates exclusively on invest in various degrees in all of them. The people running the crowdfunding platforms and Australian investors, having opened with 200 platform allows co-investment from people VCs, to cooperate and co-invest together.” registered participants and 36 start-ups that outside our funds.” were pre-screened by more than 25 accelerators, In this respect, The Crowd is the odd-man The long game incubators, and angel groups and university out in Australia’s crowdfunding space. It wants to As it stands, crowdfunding tends to be limited to programs. The minimum investment is $1,000. attract capital for companies that already have high-tech start-ups, but over time Crowdfund’s “There are over 200,000 wholesale investors venture capital backing; the other equity-based Best expects it to extend into new areas, starting in Australia managing more than $680 billion in platforms as looking to bring potential deal flow with those that share borders with the tech assets. Even if platforms to traditional VC players. space, such as medical device manufacturing and drug development. Models for collaboration with the crowd will emerge for different sectors. “I’m sure there will be more competitors, which The growth driver could come from the Australian government. Regulators are will be both a validation of the sector and a good considering revisions to equity-raising laws to making them compatible with crowdfunding. result for start-ups and investors” – Jeremy Colless This would involve easing restrictions on capital- raising outside public markets, which is capped access just 0.04% of this market it would match Crowdfunding operates in the space from at A$2 million or 20 investors in a 12-month the paltry $300 million that VC firms invested in seed rounds through Series A, but rarely higher in period. Exemptions are made for sophisticated Australia in 2013,” Colless says. the institutional spectrum – the platforms aren’t or wholesale investors and it is here the For M.H. Carnegie & Co’s The Crowd, the able to provide that quantum of capital and government could be more accommodating. differentiating factor will be size. The platform is they are not set up to contribute on-the-ground “I would like to see a relaxation in the being positioned as a later-stage specialist that operational expertise. definition of a wholesale investor, which would is used to raise additional capital for portfolio “It’s very early for these platforms in terms of allow a larger universe of investors to support the companies already seeded by M.H. Carnegie & understanding their operational dynamic,” says future of innovation,” says VentureCrowd’s Colless. Co. through its venture funds. Gavin Appel, a partner at Square Peg Capital, “Encouragingly, Australian Communications “We are interested in Series A onwards,” a growth stage venture firm that focuses on Minister Malcolm Turnbull recently flagged explains Midalia. “We have many deals that internet technology investments. “There may support for the potential of crowdfunding models require follow-on capital and as a fund we will be opportunities for collaboration between the to address Australia’s lack of VC investment.”

The most authoritative and comprehensive guide to private equity investors in Asia Asian Private Equity Online Directory

The Asian Private Equity Online Directory is the most comprehensive online directory on private equity and venture capital in Asia. It is easy to navigate, enabling access to a listing of around 3,900 Asian private equity firms and over 9,600 professionals. For a free trial, please visit asianfn.com/VCDemo.

To subscribe, call Sally Yip at +(852) 3411 4921 or email [email protected] avcj.com ANALYSIS [email protected] Patience is a virtue Due to a combination of factors, not least the revival in Australia’s public markets, mid-market private equity deal flow was slower in 2013 than previous years. GPs are waiting for conditions to become more opportune

OZFOREX HAS COME A LONG WAY FROM The headline PE investment numbers also 2012 it invested double that amount. Similarly, its humble beginnings 16 years ago, when the look impressive, with $12 billion deployed, a 25% Archer’s slow 2012 followed a year in which it company was run out of a spare room in a house gain on 2012, although more than half came also committed more than $1 billion. in Sydney’s northern suburbs. It is now one of the from two infrastructure deals. Mega transactions “You are given 5-6 years to invest the money world’s largest online foreign exchange platforms, in this area are not uncommon – indeed, they it doesn’t always work out as two companies a with 170 staff, offices on four continents, accounted for a sizeable portion of the previous year for 10 in total,” Haddock explains. “There are partnerships with Moneygram and Travelex, and year’s deal flow. But the more telling difference ups and downs, and then once you’ve made A$9.1 billion ($8.2 billion) in transfers last year. between the two periods is the drop in activity in investments there is work to be done. It’s the job In October 2013, OzForex went public on the middle market. of the manager to take into account all those the Australian Securities Exchange (ASX), raising In 2012, 14 deals were completed with an constraints – getting the money deployed and A$440 million through its IPO and providing enterprise value of more than $150 million; four how quickly you deploy it.” exits for , Macquarie and Accel were in excess of $750 million and five were Of course, this doesn’t mean private equity Partners. The offering was priced at 12.7x the below $300 million. Last year, the deal count fell firms stopped looking for potential deals. company’s forecast earnings for 2014. A number to 12, of which three came to more than $750 PEP estimates there are 1,700 companies or of potential acquirers were circling the company million and six were below $300 million. The entities in Australia and New Zealand of A$250 ahead of the offering, say people familiar with number of deals in the $300-500 million range million to A$1 billion in enterprise value that the situation. None of these groups was willing to dropped from four in 2012 to zero last year. meet its broad investment criteria. On average, pay anything like the multiple OzForex thought it could obtain via the public markets. Australia mid- and large-cap PE deal ow It is a familiar refrain. While Australia’s record year for private equity-backed IPOs in 2013 has 30 presented managers with much-needed liquidity events, it has pushed up the valuations being 25 asked of those looking to buy. 20 “People see businesses out there at 10.5x EBITDA or more and they think their companies 15 are worth the same amount,” says David Willis, Deals 10 head of private equity at KPMG Australia. “I know of several forthcoming IPOs that also have a 5 trade sale mandate and, even at the low end of 0 the bankers’ book range, it is still a way off what 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 trade and secondary PE buyers are willing to pay.” $76-150m (US$m) $301-500m (US$m) >$751m (US$m) The view is echoed by a regional buyout $151-300m (US$m) $501-750m (US$m) manager who claims to have seen a number of Source: AVCJ Research deals fall through because the sellers are looking for higher valuations at IPO. “The investment banks tell them 12x is possible and the sellers Both (PEP) and CHAMP the GP will look at 80 per year or less than 5%, believe what they want to believe,” he adds. “In Private Equity, having each deployed in excess of which 14-15 are taken forward for deep due some of those cases the companies have yet to of $1 billion in 2012, were far less active last year. diligence. The number of deals presented in 2013 go public.” saw a less substantial was down slightly, but the standard 14-15 were drop – from $856 million to $420 million – while attractive enough to warrant closer consideration. Mixed feelings Archer Capital’s increase came after a relatively “We saw the same number of quality deals According to Thomson Reuters, 44 offerings quiet 2012. that we liked – many more in the second half between them generated A$9.6 billion in 2013, For PEP and CHAMP, the last 12 months than the first half, but in line with the 10-year the largest annual total since before the global have been spent digesting the earlier glut of average – but the number of those deals financial crisis. More than one third of these IPOs deals. John Haddock, managing director at that actually traded by calendar year end was and close to two thirds of the total proceeds CHAMP, admits that in 2013 the firm was “more significantly down,” says Tim Sims, co-founder and came in December alone. According to AVCJ portfolio company focused,” after completing managing director at PEP. “They were put into the Research, nine PE-backed offerings raised a three buyouts and one substantial bolt-on market, entered a process or we bid on them and record $2.5 billion, up from $156 million from acquisition the previous year. PEP’s annual the vendor has not yet dealt the asset.” three IPOs the previous year. average deployment is A$550 million equity; in Industry participants offer numerous

16 avcj.com | February 25 2014 | Volume 27 | Number 07 ANALYSIS [email protected]

reasons for deals failing to transact, and not all agree that the public markets revival had a Largest Australian PE deals, 2013 debilitating impact. CHAMP’s Haddock observes Amount that, although IPOs present another option Date (US$m) Investee Investor to business owners who might otherwise sell Apr-13 5,271.7 Port Botany & Kembla IFM Investors; ADIA; AustralianSuper; Construction & Building Industry Super; HOSTPLUS; HESTA to private equity, an active market is also an optimistic one and this can facilitate deal flow. Nov-13 916.3 Port of Brisbane Caisse de depot et placement du Quebec Indeed, the general upward trajectory Mar-13 901.7 Inghams Enterprises TPG Capital of the S&P ASX 200 mirrors feedback on Sep-13 733.8 Tourism Asset Holdings ADIA business sentiment and conditions in National Mar-13 646.5 Nextgen Networks OTPP Australia Bank’s latest monthly business survey. Conditions – an average of the indexes on Sep-13 582.8 RiverCity Motorway Group Queensland Motorways; QIC trading conditions, profitability and employment Source: AVCJ Research – swung from a multi-year low in the second half of 2013 to a three-year high in December. Business confidence subsequently improved for Largest Australian PE deals, 2012 the first time in four months in January. Amount NAB said that “confidence may continue its Date (US$m) Investee Investor run of surprising (post-election) resilience for a May-12 2,351.1 Sydney Desalination Plant Hastings Funds Management; OTPP while longer,” perhaps a nod to its assertion made Mar-12 917.4 Extract Resources China Development Bank Capital in August of last year that elections historically Dec-12 853.4 Talison Lithium Chengdu Tianqi Industry; CIC haven’t delivered an immediate improvement in business sentiment. Apr-12 755.2 Spotless Group Pacific Equity Partners However, Sims argues that the long Mar-12 668.0 Transurban Group Future Fund; RARE Infrastructure nine-month run up the announced election Aug-12 414.0 Super A-Mart/Barbeques Galore Quadrant Private Equity contributed to a period of uncertainty and Source: AVCJ Research temporary lull in PE investment, in line with well established precedents in other markets. traditionally lumpy Australian market, but even if a return of subordinated or mezzanine debt Uncertainty in terms of the crucial future of assets are put on the block, there is no guarantee layered on top of the senior tranche – Sinclair carbon pricing, to name but one example, was a PE firms will be interested or able to execute. believes there stage is set for more investment factor in the reduced deal flow. Just last week, Shell offloaded its Australian activity in 2014. This confidence is shared by In addition, domestic corporates in particular refineries and service stations to Vitol for CHAMP’s Haddock, who expects to complete a were reluctant to bring divestments to a head in $2.6 billion. Further down the scale, Catalyst couple of acquisitions in the next 6-12 months the second half of the year because in a climate Investment Managers has exited broadcaster based on the deal flow he is seeing. of low cash rates and appreciating stock markets, Global Television and refrigeration systems The unknown factor is the public markets and they were not under pressure to act. Some prefer supplier Actrol Group in the last two months, whether strong liquidity will continue to present to wait until the end of the financial year in June to an international trade buyer and a domestic business owners with an alternative to PE. and take the full consolidated earnings of a trade buyer, respectively. While the window remains open, investor business before selling; others hang on because “We have seen the reemergence of the appetite is not unlimited and the recent pricing they think the valuation tide is rising. trade buyer,” says Russell Sinclair, head of of CHAMP Ventures-backed SG Fleet’s offering “If you have a buyer that has done the work the acquisition finance division at Westpac. towards the low end of its indicative range and is interested and engaged and you think you “Australian corporates have enjoyed a rise in their might be a harbinger of things to come. KPMG’s know what their walk-away position is, then you stock prices rise but that natural lift is slowing. Willis warns that the next four months will be a may take the chance and hold out a bit longer,” As a result, they are re-leveraging, with a focus telling period, with institutional investors likely Sims says. on growing their businesses, leading them to to become pickier about the IPOs in which they examine capital expenditure opportunities and participate and how these offerings are priced. Silver lining acquisitions. This means more competition for PE “There are groups aiming for a first half IPO With UGL weighing up offers for its property firms, which has the potential to increase prices.” and my guess is that they are trying to get there services unit DTZ, Transpacific Industries looking For many private equity investors with assets as quickly as they can,” says Mark McNamara, to sell its New Zealand waste management unit, in Australia, the first half of 2013 was also a period global head of private equity at King & Wood and Orica mulling an exit from the chemicals of re-leveraging as deals were refinanced. In Mallesons. “There will some that fail to go public business, there is evidence to suggest that some cases, terms were improved, allowing for and look at other options.” corporates are now examining their portfolios dividend recaps. Term Loan B was the flavor of If and when these groups stop playing the with a view to focusing on core operations. the month for a while, as managers made the waiting game, a raft of transactions may open More M&A activity is expected in the mining most of the opportunity to secure competitively up for trade and private equity buyers. “When sector, where large players are considering priced financing out of the US. Since mid-2013 vendors decide to sell businesses they tend to get asset sales and their smaller counterparts are the industry has been preoccupied with IPOs. sold and if not in one window then in the next, struggling to raise capital required to stay in With most of the refinancing efforts now you can see this in the data over nearly 15 years” operation. It is hoped this will result in a few completed and local banks recognizing says PEP’s Sims. “These deals don’t disappear; they more sizeable leveraged buyouts come onto the borrowers’ capacity to leverage earnings – plus simply take longer to conclude.”

Number 07 | Volume 27 | February 25 2014 | avcj.com 17 The ultimate company information solutions for corporate finance research

Bureau van Dijk’s products are renowned for their detail and coverage. Simple to interpret and manipulate you can research companies and M&A deals quickly and comprehensively. Register for your free trial – bvdinfo.com/freetrial

Find target companies Do a detailed analysis for acquisition and to of a company, including generate deal flow financial analysis Get company financial Use our current, historical data and multiples for deal information company valuations – and rumours Get information on corporate Create Pitchbooks structures – directors, Pull data into your owners and subsidiaries own models Research and analyse Create league tables companies internationally

bvdinfo.com

[email protected] +61 2 9 2233 088 SEBASTIAAN VAN DEN BERG | INDUSTRY Q&A [email protected] Delivering down under Sebastiaan van den Berg, managing director and head of Asia at HarbourVest Partners, discusses his expectations for Australian deal flow, best practice for IPO exits, and co-investment opportunities The ultimate company information solutions for Q: Several of the larger Australian done much for two years or realize every deal stands on its In China, about 60% of all GPs invested less heavily in more, but the reason GPs have own. What is most important investment activity by value in corporate finance research 2013 compared to previous 5-6 year investment periods – to a new investor in an IPO is 2013 was in buyouts. Clearly, the years. Is this cause for and funds have 10-year life terms that the management team data are skewed by some very concern? – is so you can avoid the issue remains properly incentivized large transactions like Focus A: If you look at the broad M&A of needing to deploy capital through equity ownership and Media, but we are definitely Bureau van Dijk’s products are renowned for market, last year was fairly immediately. The j-curve is not participation in the company. If seeing more buyouts. We are also their detail and coverage. Simple to interpret quiet in Australia. It is also the driving parameter; it is all seeing increased activity in India, not unreasonable to say that about the ultimate return. and then Indonesia and Malaysia and manipulate you can research companies the election resulted in lower are as much buyout markets as corporate strategic activity Q: With the revived IPO market, they are growth equity markets. and M&A deals quickly and comprehensively. because people were waiting a number of GPs have seen Co-investments in part depend to see how things panned out. liquidity events and in some on how experienced the GP is in Register for your free trial – bvdinfo.com/freetrial Dry powder is still available but cases full exits. Is a full exit on running an efficient and effective a number of firms focused more IPO always a good thing? process. We don’t always see this on generating liquidity either A: As an investor, it is good that experience in emerging markets, through refinancing or outright the GP can achieve liquidity at but in Australia GPs tend to Find target companies Do a detailed analysis exits, either strategic or through the get go. In China, lock-up understand the dos and don’ts, IPOs. We aren’t worried about the periods can be as long as three and there is no need to spell for acquisition and to of a company, including slower investment. We still see years, which isn’t great. Having everything out. It is a pleasant generate deal flow financial analysis Australia as an important private that flexibility to sell down a environment to work in. equity market in the Asia Pacific significant stake – and I do think Get company financial Use our current, historical context and we will continue to 100% is less likely these days, 70- Q: What is Australian LPs’ see deal activity. 80% is reasonable – for the right “At the end of appetite for foreign versus data and multiples for deal information deal with the right sponsorship is domestic private equity? Q: If a manager deploys at a feasible. the day, it is A: Australian LPs are still investing company valuations – and rumours slower pace than expected in more important in domestic private equity the early stages, what does Q: Do you feel that retail but it’s true that the overall Get information on corporate Create Pitchbooks this do to the j-curve effect? investors would be reassured for us that quantum of commitments to A: The j-curve effect is always if private equity firms made Australian GPs has come down. structures – directors, Pull data into your there. It is something investors incremental exits? managers are Some of these groups haven’t owners and subsidiaries in private equity need to live A: The capital markets in Australia disciplined and done much outside of Australia own models with, but at the same time it is are deep, well developed and and they come to us and say Research and analyse something we can mitigate in there is significant investor stick to strategy” they want a more globally Create league tables the portfolios we construct – experience, so you don’t really diversified portfolio, but it’s companies internationally we don’t only invest in primary need that type of hand- hard to say whether that fully funds but do secondary holding. And if you look at they cash out you would wonder replaces what they are doing in transactions and co-investments the quantum of retail capital what their incentive is to keep Australia or only partially offsets as well. At the end of the day, versus institutional capital, the working. it. At the same time, a number it is more important for us that institutions are of course by far of superannuation funds are managers are disciplined and the largest player in that market. Q: Australia stands out in Asia playing catch up in terms of stick to strategy. If the pressure I don’t think the data support because of the number of their general PE exposure. They to invest is too great, the risk is the argument that private equity buyouts. Does this mean you recognize they made some that managers start doing deals guys are listing companies at the are a more active co-investor commitments in the past but that are either overpriced or ill highest possible valuation and there than in other markets? in hindsight these were too conceived, and this has a much then exiting before the stock A: Co-investments don’t only small because they are seeing greater impact on the long-term sinks. These stories come up happen in buyouts – we co- significant inflows and growing performance of a fund than the from time to time, but there is invest in venture, growth equity rapidly. They need to make much bvdinfo.com j-curve. In general, you do see a reason institutional investors and buyouts. And as to buyouts bigger commitments and more some investors getting nervous keep coming back to new IPOs predominantly happening in quickly because they aren’t when they see a manager hasn’t underwritten by PE firms. They Australia, I think that is changing. meeting target allocations. [email protected] +61 2 9 2233 088

Number 07 | Volume 27 | February 25 2014 | avcj.com 19 3rd Annual Private Equity & Venture Forum Indonesia 2014 20 March, InterContinental Jakarta Midplaza

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjindonesia.com More than 100 companies and 30 limited partners have already registered to attend the AVCJ Indonesia Forum: Confirmed limited partners include: 59 Capital Golden Gate Ventures Plowden Asset Management Actis Good Earth Capital LLC Prostar Capital Ali Budiardjo, Nugroho, Government of Alberta PT Bakrie & Brothers, Tbk. Reksodiputro Counsellors At Law Government of Victoria, Australia PT Sarana Multi Infrastruktur (PT SMI) Allianz Cap Partners Guggenheim Partners PT Wellington Capital Advisory Ancora Capital Management Herbert Smith Freehills LLP PT. Exploitasi Energi Indonesia, Tbk Asian Development Bank Indonesia Finance Today PT. Indonesia Private Equity Baring Private Equity Asia International Finance Corporation Consultants (IPEC) BlackRock Private Equity Partners (IFC) PT. Marsh Indonesia Capital Dynamics International Monetary Fund (IMF) PT. Nusantara Infrastructure Tbk Celadon Capital (M) Sdn Bhd J.P. Morgan PT. Sumatera Persada Energi China Development Industrial Bank JP Morgan Asset Management Pusat Investasi Pemerintah Citco KKR PwC Citi KPMG Indonesia Quvat Management CLSA Capital Partners Kroll SBI Islamic Fund (Brunei) Colliers International Indonesia KV Asia Capital Singapore EDB Control Risks SK Planet Int’l Creador LGT Capital Partners Sumitomo Mitsui Banking DEG Office Jakarta Liberty Global Partners Corporation DEG Representative Office Maj Invest Vietnam Management TA Associates Singapore Consultancy LLC Temasek International DEG-Deutsche Investitions-und Maples and Calder The Jakarta Globe Entwicklungsgesellschaft mbH Mapletree Investments Thomson Reuters Eagle Asia Partners Pte Ltd Marsh Vickers Venture Partners East Ventures Mergermarket Group Walkers Finance Indonesia Mizuho Bank Watiga & Co. FLAG Squadron Asia Limited OCBC Bank White & Case LLP FTI Consulting Oclaner Wilshire Private Markets GBG Indonesia Oriens Yishan Capital Partners GE Capital OTPP General Oriental Investments PEGP … and many others! View the speaker line up and programme at avcjindonesia.com The event starts in only 3 weeks! Join us now! Email us at [email protected] or register online at avcjindonesia.com

Asia Series Sponsor Co-Sponsors

avcjindonesia.com