The Mongol Lottery Baring Private Equity Asia’S Jean Eric Salata Foreign Investors Crave Mongolia’S Resources, but Fear Its Murky Politics Page 7 Page 15

Asia’s Private Equity News Source avcj.com March 26 2013 Volume 26 Number 12

Editor’s Viewpoint Nominations open for the AVCJ China Awards Page 3 News AMP, Canaan, Carlyle, CPPIB, CVC, CVCI, FountainVest, JAFCO, KKR, Quadria, Shoreline Page 4 Indonesia webinar What must Indonesia do to turn the hype into private equity returns? Page 10 Deal of the week Leopard Capital makes Cambodia agriculture investment Page 14 Industry Q&A The Mongol lottery Baring Private Equity Asia’s Jean Eric Salata Foreign investors crave Mongolia’s resources, but fear its murky politics Page 7 Page 15

Focus Deal of the Week

Digital down under Mekong mobile exit Angels back Australian venture revival Page 13 PE firm to sell rest of Mobile World in IPO Page 14

AVCJ WILL SKIP AN ISSUE NEXT WEEK FOR THE easter HOLIDAY. WE return on April 9 INNOVATION... SOPHISTICATION... INTEGRATION...

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Senior Research Manager Helen Lee the China Awards Research Manager Alfred Lam Research Associates Herbert Yum, Jason Chong, Kaho Mak INNOVATION... As anyone who has been reading • Private Equity Deal of the Year Circulation Manager AVCJ’s coverage in recent months will know, • Venture Capital Deal of the Year Sally Yip China fundraising disappointed in 2012. Country- • Exit of the Year Circulation Administrator focused funds attracted just $23.4 billion, down • Fundraising of the Year - US Dollar Prudence Lau 51.3% on the previous year. The damage was • Fundraising of the Year – Renminbi Manager, Delegate Sales SOPHISTICATION... done in the second half, and mainly by renminbi- Pauline Chen denominated vehicles. After attracting $15.7 Submissions can be made via email Senior Marketing Manager Rebecca Yuen billion in the first six months, local currency funds ([email protected]) or online and got just $4.2 billion in second six months. will be accepted until April 15. They should Director, Business Development Darryl Mag So where does this leave us for the 2013 AVCJ relate to investment, exit and fundraising activity China Awards? We have separate categories for between April 1, 2012 and March 31, 2013. Manager, Business Development Anil Nathani, Samuel Lau INTEGRATION... US dollar and renminbi fundraising and, based The AVCJ Editorial Board will evaluate the Sales Coordinator on the headline statistics, pickings for the latter entries and submit a long list in each category Debbie Koo should be pretty slim, especially when we strike to a select panel of industry judges. The judges Conference Managers out the government-driven entities. will consider these recommendations, and if Jonathon Cohen, Sarah Doyle, Zachary Reff, Last year, Co-Win Capital’s RMB2.5 billion necessary, propose alternative candidates. The Conference Administrator Amelie Poon ($402 million) Nanhai Growth Fund V triumphed final shortlists - no more than five per category - Conference Coordinator Shearman & Sterling has an established presence with a 139-year legacy. It in a category that was, with all due respect to the will then be drawn up. Fiona Keung, Jovial Chung nominees, lacking a truly big name. Fortunately, The shortlists will be posted online for the Publisher & General Manager is one of the world’s leading international law firms known for its expertise in this year we already have two: China International entire PE and VC community to vote on from May Allen Lee virtually every area of law relating to commercial and financial activity, from Capital Corp. (CICC) raised RMB5 billion for 2-16. As in previous years, voting is not limited Managing Director the CICC Jia Tai Private Equity Fund; and CDH to AVCJ subscribers but voters must register - Jonathon Whiteley advice on investment funds, capital markets, corporate/mergers and acquisitions, Investments reached a final close of RMB8 billion providing name, firm and contact details - so as Chairman Emeritus on its second local currency vehicle. to avoid vote packing. No more than 10 votes Dan Schwartz project development and finance transactions through to representation in On the US dollar side, it was difficult to will be accepted from employees of a single firm. international arbitration and litigation. look past Hony Capital Fund V, which took The AVCJ subscriber base has a 50% say in the barely four months to accumulate $2.4 billion final result, with the judges and the AVCJ Editorial Incisive Media 20th Floor, in commitments. It’s possible we will end up Board each accounting for 25%. Tower 2, Admiralty Centre with a similar situation in 2013: At $1.35 billion, The winners will be announced at the Awards 18 Harcourt Road, With a long-standing commitment to Asia for more than 30 years, we offer a Admiralty, Hong Kong FountainVest Partners’ second China fund is by a cocktail, held in Beijing on May 30 as part of the T. (852) 3411-4900 distance the largest US dollar vehicle out there. 2013 AVCJ China Forum. F. (852) 3411-4999 sophisticated approach to deliver innovative and integrated strategic, tactical E. [email protected] Who deserves the plaudits? Nominations for URL. avcj.com and technical advice to our clients. Our core practice areas include: the awards are now open, so you can have your Beijing Representative Office say. The categories are as follows: Room 1805, Building 10, Jianwai SOHO, 39 East 3rd-Ring Road, • Firm of the Year Tim Burroughs Chaoyang District, • Private Equity Professional of the Year Managing Editor Beijing 100 022, China ▪ Acquisition Finance ▪ Intellectual Property ▪ Privatizations T. (86) 10-5869-6205 • Venture Capital Professional of the Year Asian Venture Capital Journal F. (86) 10-5869-7461 ▪ Asset Management ▪ International Arbitration ▪ Project Development E. [email protected]

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KKR exits Intelligence products. The company has established four ASIA PACIFIC major R&D platforms: genetic engineering drugs, Holdings in $537m sale photodynamic therapy drugs, drug delivery Blackstone property fund KKR has agreed to exit Japanese recruitment systems and medical diagnostics products. gets New Jersey backing services provider Intelligence Holdings as Temp Holdings buys all shares held by the private Qiming, KPCB lead $21.3m New Jersey Division of Investment plans to equity firm and company management for JPY51 commit $500 million to The Blackstone Group’s billion ($537 million). The deal is expected to be investment in Origene debut Asia real estate fund. The vehicle’s completed next month. Qiming Venture Partners and KPCB China have existence was confirmed last December. Established in 1989, Intelligence offers several led $21.3 million of Series C funding in OriGene services including permanent job placement, Technologies, a biotech company based in the job advertising media, temporary staffing and US and China. Previous investors IDG-Accel also AUSTRALASIA outsourcing. Temp Holdings is one of Japan’s participated in the round. Origene develops, largest comprehensive recruitment services manufactures and sells tools for genetics- High-profile angels back companies and is in the process of expanding its related research and diagnostics. The firm has business in Asia. KKR acquired Intelligence from been looking to expand its presence in China’s Australian start-up Canva parent company Usen Corporation, for JPY32.5 burgeoning biotech industry. Australian online design start-up Canva has billion ($356 million) in July 2010. attracted $3 million in seed funding from a group During its three-year holding period FountainVest wins approval of high-profile angel investors, including Adrian Intelligence is said to have increased its revenues MacKenzie, who left his position as head of CVC by 45%, EBITDA by 170%, and operating profits for jewelry take-private Capital Partners’ local operations late last year. A consortium comprising FountainVest Partners Other backers include Bill Tai, a prominent US and and the chairman and CEO of NASDAQ-listed Asia angel investor, Seek co-founder Paul Bassat, jeweler LJ International has won board approval Yahoo CFO Ken Goldman and Lars Rasmussen, to take the company private in a deal worth director of engineering at Facebook. about $64 million. It is the seventh PE-backed privatization of US-listed Chinese company to Australian buyer fined in secure approval in the last five months, two of PE ‘bid rigging’ case which involve FountainVest. Australia’s Federal Court ordered engineering firm Distress-focused Shoreline Bradken to pay $22.4 million in damages over its takeover of a Canadian mining services company by 431%. The total number of employees at raises $303m for Fund II Norcast that was previously bought and sold on Intelligence also increased from 4,370 to 5,981. Shoreline Capital, a China-focused special the same day by US private equity firm Castle Temp and Intelligence will have combined situations investor, has closed its second fund Harlan. Bradken plans to appeal against the revenues of more than JPY320 billion and an at $303 million. It comes after distress-focused ruling, which arose from a complaint filed by EBITDA of more than JPY21 billion. investors in Asia raised a cumulative $2.4 billion in private equity group Pala Investments. 2012, the highest level seen in six years. Shoreline China Value II, which has already invested nearly AMP Capital hikes stake in made several partial exits from the luggage one third of its corpus, received commitments company since taking it public in July 2011. from a broad range of investors across North Australia Pacific Airports America, Europe, Asia and the Middle East. AMP Capital has increased its stake in Australia Lunar hires ex-Parker Pens Pacific Airports Corporation (APAC) to 43% Baring PE Asia abandons after exercising its preemptive rights to acquire executive as sector partner an additional 3.5%. The Australian investment Lunar Capital has appointed Vincent Sun as Ambow privatization manager paid A$157 million ($164 million) for the sector partner for high-end branded consumer Baring Private Equity Asia (BPEA) has abandoned additional stake in APAC, which owns Australia’s goods, with the expectation that he will be its $108 million take-private bid for Chinese Melbourne and Launceston Airports. seconded to children’s clothing retailer I Pinco education provider Ambow Education Holding, Pallino Asia as general manager. Sun was citing the resignation of four of the New York- previously China general manager for Parker listed company’s independent directors and GREATER CHINA Pens, the luxury pen business. its auditors in the 10 days since the offer was submitted. The private equity firm said it remains CVC, RBS complete CNEI invests in Chinese willing to consider potential transactions with Samsonite exit drug developer Ambow once the current situation is resolved. CVC Capital Partners and Royal Bank of Scotland China New Enterprise Investment (CNEI) has AID Partners invests in (RBS) have completed their exit from Hong Kong- committed $21 million to Shanghai Fudan- listed Samsonite International through a $528 Zhangjiang Bio-Pharmaceutical (FDZJ), a Hong movie special effects unit million share sale. The two investors previously Kong-listed developer of drugs and diagnostic Hong Kong-based private equity firm AID

4 avcj.com | March 26 2013 | Volume 26 | Number 12 News

Partners has invested $10 million in Prime Focus CVC completes $1.3b Investment Advisors. Milestone Capital, joint World (PFW), a global entertainment services owner of the asset alongside Religare Enterprises, company and wholly-owned subsidiary of Indian partial exit from Matahari had been looking for a buyer ever since its media company Prime Focus. The firm made CVC Capital Partners and its local partner founder, Ved Prakash Arya, died in a freak the investment via the purchase of optionally have priced sold a portion of their holding in accident in 2011. convertible preference shares of PFW, which can Indonesia’s Matahari Department Store for $1.3 be converted to 4% equity. The deal values the billion via the public market. A total of 1.167 Canaan Partners to invest subsidiary at $250 million. billion shares were priced at IDR10,850 apiece, close to the top of a revised indicative range. $100m in Indian tech A group of investors including BlackRock, Silicon Valley venture capital investor Canaan NORTH ASIA Fidelity, Schroders, Government of Singapore Partners is to invest $100 million in India over the Investment Corporation, Temasek Holdings, Och- next four years from its $600 million ninth fund. Carlyle exits Japan’s The firm will initially deploy $50 million, reserving Broadleaf through IPO the rest for follow-on investments. The Carlyle Group has exited its majority stake in Japanese software company Broadleaf though SOUTHEAST ASIA an IPO on the Tokyo Stock Exchange. The PE firm sold 16.48 million shares and allocated Singapore’s Golden Gate the remaining 2.81 million shares for an over- allotment. Based on Broadleaf’s most recent Ventures eyes Series A fund trading price of JPY1,267 per share, the private Singapore-based Golden Gate Ventures is equity firm generated JPY24.4 billion ($253 planning to raise a second fund focusing on million) through the sale. Ziff Capital Management and Azentus Capital Series A investments in Southeast Asian tech Management has agreed to cover $435 million of companies. A source with knowledge of the JAFCO invests $5.3m in the offering. The pricing is equivalent to a price- matter said the fund would launch within 12 to-earnings ratio of 27x Matahari’s 2013 forward months, targeting around $40 million. group buying site Luxa EBITDA. It is being benchmarked against the likes JAFCO has invested JPY500 million ($5.3 million) of Robinsons and Alfamart, which both currently Standard Chartered exits in Luxa, a Japanese group buying site, as part of trade at 34x forward EBITDA. a Series B round. The Japan-focused VC investor CVC bought a 72.6% stake in early 2010 from Shangri-La Malaysia stake committed the same amount to the company in Matahari Putra Prima, a company controlled by Standard Chartered Private Equity (SCPE) has sold November 2010. This brings Luxa’s total funding the Riady family’s Lippo Group, at an enterprise its 22.2% stake in Shangri-La Hotels Malaysia to to around $10.6 million since operations started valuation of $892 million. It remains Indonesia’s Robert Kuok, allowing the tycoon to increase his in August 2010. largest ever PE deal. The transaction was holding in the company to nearly 75%. Shangri- structured as a joint venture, with Lippo Group La’s stock opened MYR3.92 on March 20, when spinning off its 98.15% holding in the company the purchase was agreed, which values the stake SOUTH ASIA into vehicle that was 80%-owned by CVC. at MYR384.9 million ($105 million). CVCI invests in BPO firm Malaysia’s EPF eyes more develop projects without foreign partners. SourceHOV Of CPPIB’s $168.8 billion in assets under PE opportunities Citi Venture Capital international (CVCI) management, about 6% is in infrastructure. Malaysia’s Employees Provident Fund (EPF) plans has invested in SourceHOV, a largely India- to increase its private equity commitments based business process out-sourcing (BPO) Motilal Oswal invests in 2013, with a particular interest in regional firm. The deal will see CVCI buy out other co-investment opportunities. Compared to the minority shareholders including Apollo Global $6.5m in Magicrete pension fund still represents less than 1% of total Management. SourceHOV was formed in May Motilal Oswal Private Equity has invested INR350 assets under management, total commitments 2011 through a merger of HOV Services with million ($6.5 million) in Magicrete Building to private equity stood at MYR3.78 billion as of Sourcecorp, a portfolio company of Apollo, with Solutions, India’s second largest manufacturer of year-end 2012, EPF’s chairman told the inaugural each party holding 50% of the merged entity. Autoclave Aerated Concrete (AAC) Blocks. The EPF Global Private Equity Summit. company’s is primarily involved in manufacturing CPPIB prefers India to AAC Blocks under the brand Magicrete. Electric Sheep, DMP China as infrastructure play support AdzCentral Quadria Capital buys Canada Pension Plan Investment Board (CPPIB) Electric Sheep Capital and Digital Media Partners expects to make more progress in Indian India’s Milestone Religare provided $3.2 million in Series A funding in infrastructure as opportunities in the sector in Quadria Capital, which is currently raising a AdzCentral, an advertising technology company China are limited by the availability of cheap healthcare fund focused on South Asia and based in Singapore. The funding will be used to finance, which enables local governments to Southeast Asia, has acquired Milestone Religare aid its expansion into digital advertising.

Number 12 | Volume 26 | March 26 2013 | avcj.com 5 Asia’s private equity news source

The latest issue of Asia’s leading private equity magazine… now on iPad

The AVCJ app is part of the package for all journal subscribers. Download all the content from the latest AVCJ issue, build your archive of issues and view them offline. Cover Story Asia’s private equity [email protected] news source On rocky ground: PE’s Mongolia risk factor Rich in mining resources, Mongolia has a bright economic future, but vulnerability to commodity price shocks and an uncertain political climate have made many investors wary of taking the risk

Despite having just stepped off a According to AVCJ Research, the last five years million and few significant opportunities outside plane in Hong Kong to attend a mining have seen just over $2 billion of private equity of mining, the obvious investment thesis was conference, Alisher Ali, founder and managing investment across 13 deals. The lions’ share backing companies that benefited by proxy from partner of frontier investors Silk Road of this came in 2009 when China Investment the commodities boom, typically mining services, Management, is able to overcome his jetlag Corp (CIC) put $500 million in SouthGobi infrastructure and exports. to speak enthusiastically about Mongolia’s Energy Resources, $700 million in Iron Mining “Because of these early indications that prospects. International and then another $100 million in growth in the mining sector was set to “By 2030, Mongolia will become one of the SouthGobi alongside Temasek Holdings. Two PIPE accelerate, our aim was to try and support three richest countries in Asia by GDP per capita deals and one pre-IPO investment – and very companies in the non-mining sector,” says after Singapore and Japan,” explains Ali, whose much a sovereign wealth fund story. Mandar Jayawant, managing director and firm raised $30 million for its maiden fund, the This was the same year President Nambaryn founder of the Mongolia Opportunities Partners Mongolian Human Capital Fund, in 2011, $5 Enkhbaya of the Mongolian People’s (MOP). The firm, which was set up in 2009, million above target. Revolutionary Party (MPRP) lost an election to launched the Mongolian Opportunities Fund There is good reason to be upbeat about Tsakhiagiin Elbegdorj, who became the country’s the following year, with a target of $75 million. It Mongolia. Back in 2002, the country’s GDP per first ever Democratic Party leader. What followed reached a first close of $25 million in 2011. capita was just $500; now it stands at $4,500 and was a period of renewed openness to foreign “We look at drilling, drill blasting, geo-physical is expected to reach $30,000 by 2030. Citigroup investment. surveying, mining contracting, mine services Global Markets projects Mongolia will be the fastest growing economy in the world between Projected Mongolian nominal GDP 2010 and 2030, expanding at an annual average rate of 9.7%. It is safe to say these positive vibes 35,000 derive from the nation’s mineral wealth, which 30,000 accounts for nearly one third of GDP. 25,000 Yet the private equity industry remains in 20,000 its nascent stages. Silk Road is one of just a handful of PE firms focused on the country and 15,000 US$ million its mining-fueled growth. Others remain wary, 10,000 pointing to the volatility of commodities market s 5,000 and Mongolia’s near non-existent track record for 0 investment. 2009 2010 2011 2012 2013 2014 2015 2016 2017 The latest issue of Asia’s leading While commentators are keen to frame the Source: ACI Mongolia country as an Asian El Dorado, the road to wealth has been far from even. The mining sector has private equity magazine… now on iPad an all-too-evident and controversial track record The most significant deal came when Ivanhoe and pretty much the whole spectrum in brining on the environment and local politicians have Mines, now owned by Rio Tinto, finalized an the commodities to market,” says Jayawant. recently come under pressure to reassess the investment agreement with the government to Companies directly involved commodities country’s relationship with foreign investors. develop the Oyu Tolgoi project in South Gobi, trading are off limits so as not to expose the GP The AVCJ app is part of the package for all journal subscribers. Download all the content from A presidential election will take place in June, one of the world’s largest untapped copper-gold to price cycles. the latest AVCJ issue, build your archive of issues and view them offline. which only heightens the climate of uncertainty. deposits. Around $6.5 billion has been invested Silk Road has a similar approach, targeting The opportunity is still there, but whether so far to bring the mine into production, which businesses in the knowledge-based industries private equity can thrive in the country very is expected to happen later this year. In financial and services sector in order to minimize mining much depends whether it can stomach the risk. terms, it is the largest mining project Mongolia risk. “We believe that, on a risk adjusted basis you has ever seen. can actually create significant value in Mongolia History lessons Taking advantage of the positive sentiment, without taking too much risk on the geo-political Deal flow so far has been characterized by a smaller GPs started making their first forays implications,” explains Ali, “ It may not be like handful or large-ticket mining investments. into the country. With a population of just 2.7 other frontier markets like Myanmar where you

Number 12 | Volume 26 | March 26 2013 | avcj.com 7 Cover Story [email protected]

very diversified sector, never the less there is population of around three million, the country investors in the early Mongolian-focused enough deal flow.” is vastly over banked. There are four major private equity funds. This is done with a view One particular area that has been targeted by banks right now, offering a similar services to encouraging growth outside of mining the private equity is the logistics space. With 90% of which mostly involve retail banking,” says MOP’s mining sector. “There is a lot of talk about the all Mongolia’s exports going to China, investors Jayawan. diversification of the country in order to make are looking to capitalize on the cross-border He sees two potential inroads: there is room in it less vulnerable to external shocks and create movement of resources. the market for a lender that can serve companies employment,” explains ADB’s Hansen. In November 2011, Origo Partners became in the mining supply chain; and there is space The Mongolia Opportunities Fund counts IFC one of the first GPs to tap into this theme, at the underserved bottom end of the market, and EBRD among its cornerstone investors along forming a 50-50 joint venture (JV) with leading where there is scope for microfinance companies with Germany’s DEG. “When MOP first knocked global commodity trader Trafigura to develop to be developed. “It is very high-return business on our door we thought this would be a good iron ore and coking coal projects in Mongolia. in other places, because your risk is diversified opportunity to extend our reach further into The purpose of the JV was to export several and there is a lot of demand for smaller loans,” the market because obviously we have limited million tons of coal and ore to China by truck and Jayawan says of the latter opportunity. capacity on the ground,” says Philip ter Woort, rail each year. Origo and Trafigura also agreed Jan Hansen, senior country economist with head of EDRB’s Mongolia office. “So to extend to expand the scope of the project to other Asia Development Bank (ADB), agrees a deficit our capabilities through a PE fund with the same standards as us would make sense.” Their capital comes with one major condition PE investment in Mongolia attached: DFIs will only invest in private equity 1,500 6 funds that are not engaged directly in mining. Ter Woort explains that the policy and strategic 1,200 5 rationale behind this position. In addition to

900 4 wanting to promote economic diversification away from the mining sector, the DFIs also prefer 600 3 Deals to invest in mining without going through an US$ million intermediary. 300 2 Despite these restrictions, the consensus 0 1 among GPs, including those who do not count 2006 2007 2008 2009 2010 2011 2012 DFIs among their LPs, is that this kind of blue- No. of deals Total investment (US$ million) chip institutional support emboldens other LPs

Source: AVCJ Research who might not otherwise invest. “I think the role of DFIs is very important and a catalyst for risk taking and growth,” says countries in the region, such as Kazakhstan and in Mongolia’s finance sector, populated by a Origo’s Rynning. “I have huge respect for the Russia, and to other commodities. large number of relatively small institutions, has work of IFC and the way they combine world “We know there are resources available in created a capital gap in the country; one which class investment practice with sustainable, Mongolia but it is another thing entirely to bring could be serviced by private equity. responsible investing. IFC is a perfect example of them to market,” says Chris Rynning, CEO of “Mongolian banks are quite sophisticated an investor that can handle social, political and Origo. “The JV with Trafigura was a combination given the overall development of the country developmental risk while looking to create long of addressing those challenges. Origo has access but they are quite small so they do not serve the term investors returns.” to capital and expertise investing in frontier mining sector, where the funding comes totally This is not to suggest there are few willing markets, but we don’t necessarily have sales, from abroad,” he says. “So right now we have a LPs beyond DFIs. For example, Korean and marketing or logistics skills to bring resources funding gap of $30-100 million that is not served Japanese institutions have generally been keener to the market whereas Trafigura does. It was a by the market.” on investing in Mongolia than their western natural partnership.” Large capital investments – typically those of counterparts for example. In February, Japan’s $100 million or more – come almost entirely from Orix Corporation committed an undisclosed sum Banking matters abroad, usually in the form of investments from to Mongolia Opportunities Fund with the aim As these peripheral industries develop and GDP development finance institutions (DFI). Unlike using the fund to make its own first foray into the grows, then so has demand for financial services many investors, these institutions’ mandate country. The same fund also received backing in the country. With Mongolians will having means they have a much greater appetite for risk, from Mitsubishi Corporation. more income to deposits, investors are also so they have provided much of the muscle when “There is a lot of interest coming out of Japan looking at banks. So far the only significant deal it comes to funding Mongolian growth. Broadly because the countries have historical ties and in this space has been Goldman Sachs’ purchase speaking, their role is twofold. also because of the geo-political and strategic of a 4.78% stake in Trade & Development Bank First, DFIs are among the major investors in interests that Japanese companies have in of Mongolia in February last year. The stated mining projects. As recently as last month, the securing natural resources in the region,” says intention was to act as a passive investor hoping boards of the International Finance Corporation MOP’s Jayawant. to reap the returns generated by Mongolia’s rapid (IFC) and the European Bank for Reconstruction growth. and Development (EBRD) agreed to provide part Unclear rules Others, however, see a sector ripe for of the $4 billion project financing for the Oyu Yet, with the current political climate, the consolidation. “With around 15 banks for a Tolgoi mine. Second, DFIs have been significant likelihood of others wanting to put risk capital

8 avcj.com | March 26 2013 | Volume 26 | Number 12 Cover Story [email protected]

into the country has lessened. This has been “Looking at the first three years you had a fairly the country’s stance towards foreign investors in exacerbated by the government’s recent open environment. Investing was far less time limbo. President Elbegdorj’s announcement last alterations to investment laws. “Mongolia has consuming and document-intensive compared month that the nation should have more control become a politically unpredictable environment to mainland China.” of Oyu Tolgoi, of which it currently owns 37%, having gone from being everyone’s darling to A further problem cited by industry hasn’t helped matters. a place investors shy away from,” says Origo’s participants has been a lack of clarity concerning “The country is at a very interesting cross- Rynning. “Investors want consistency and the law, which is by no means precise in its terms. road,” says Aldrich. “Either it will continue to predictability, and Mongolian politics have provided little of that in the last year.” It was in May 2012 that the government, “We believe that, on a risk-adjusted basis you fearing increased foreign investment and potential loss of control of the country’s can actually create significant value in Mongolia resources, decided to introduce the “Law on without taking too much risk on the geo-political Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic implications” – Alisher Ali Importance (SSI).” In practice, it introduces a government and parliamentary approval requirement for foreign For example, there is no indication as to whether take this anti-foreign sentiment and entrench it investment in certain sectors, including most the 49% and the MNT100 billion thresholds refer further, in which case the economy will have a importantly the mining sector. This applies to to the market value of the SSI entity, the book down turn or by the time we get to October we any foreign investor acquiring more than a 49% value of the company’s assets or the value of the will have some clarity.” share of an SSI entity, worth more than MNT100 foreign investment transaction. Investors will only Opinion is divided as to the direction in which billion ($76 million). For many, this has meant not know where they stand once the government events will pan out. The EBRD’s ter Woort, for only greater government oversight but has also issues implementation regulations, but these example, is not so pessimistic. He believes the additional delay in effecting foreign investments. have yet to be forthcoming. government realizes it has gone too far and has “There has been something of a change in How this development pans out depends on begun to make investors nervous. “Now there the environment,” explains Michael Aldrich, a the election in June, but there is concern that a is concerted effort to win back the hearts and partner with Hogan Lovells in Ulan Bator, who resolution on whether the law will be clarified minds of foreign investors and the government is describes the movement as resource nationalism. or repealed won’t come before October, leaving trying in earnest,” he says.

aVcJ Private equity & Venture capital china awards 2013 nominations open until April 15. Act now!

Recognising excellence in china PRivate equity For the third year aVcJ will be holding the aVcJ Private equity & Venture capital china awards, to recognise and honour firms that are raising the bar for the industry, and professionals who continue to drive private equity and venture capital forward. Tell us who you think deserves recognition. Submissions for nominations are open until april 15, 2013. Simply visit www.avcjchina.com/nominations and fill out the form. For any enquiries, please e-mail [email protected]

The China Awards categories . Firm of the Year . Venture Capital Deal of the Year . Private Equity Professional of the Year . Exit of the Year . Venture Capital Professional of the Year . Fundraising of the Year - US dollar . Private Equity Deal of the Year . Fundraising of the Year - Renminbi

Want to associate your brand With excellence? Awards sponsorship opportunities are available. For details, please contact samuel lau on +852 3411 4963 or [email protected] Indonesia webinar [email protected] Turning hype into returns Indonesia has emerged as the next big thing in Asian PE, but there are concerns about rising valuations and whether the market is deep enough to meet expectations. Industry participants share their views

The participants: Veronica Lukito, CEO of Ancora Capital; Eri Reksoprodjo, partner at Saratoga Capital; Doug Coulter, partner and head of Asia Pacific private equity at LGT Capital Partners; with Mark Bruny, managing partner at Hydrasia Capital, acting as moderator. Veronica Lukito Eri Reksoprodjo Doug Coulter Mark Bruny On the bright spots in Indonesia’s PE investment landscape the market is relatively young. If people are LUKITO: We have already seen some prices looking for things that are established and have going up, but having said that, I also think we REKSOPRODJO: As Indonesia’s middle income scale, there are only relatively few of them and are at a stage where all the things you see on rises we see the consumer sector as one of the everybody else is off the charts in terms of scale. paper about high valuations basically point more brightest spots. It is not without challenges. Anybody looking at this sector should see this towards large-size deals. On the smaller size Prices are getting a lot more expensive – as an opportunity to grow businesses. A lot of deals, which are not so publicized, you can still Indonesia prices are at the top level in Southeast growth capital needs to be put in place and a find a good bargain if you spend the time and Asia at 16.2x EBITDA, with Malaysia in the 13-14x lot of governance. In the next 3-5 years you are look closely. range. The other challenge is we are seeing more going to see a lot of companies in the $300- diversified competitors, not only strategic players 500 million range, but as of today those size On how Indonesian private equity can but also family offices. These are conglomerates companies are fairly limited in number. avoid the same pitfalls as India that have sold assets and are sitting on lots of cash, trying to build PE-like units in a totally BRUNY: One other bright spot we see is the LUKITO: Institutional investors discovered India different business to where they have been in the infrastructure potential. Like all industrializing in the mid-2000s and then in 2006-2008 more past. We see mining conglomerates looking into nations, Indonesia has a great need for than $20 billion in PE capital flooded into the the consumer sector now. It’s also worth noting infrastructure and we feel as a firm that it is one country. The growth expectations were never that sellers in the consumer space know there of the biggest growth opportunities here outside going to be realistic. For Indonesia, the LPs have are a few more bidders so they aren’t necessarily of the consumer sector. probably learned some of the lessons of India following the sale protocol – signed letters of and we don’t see that kind of a rush. intent are not complied with any more. There are COULTER: We would have to mention natural challenges but we believe in this space because resources as well. Money has been made in that COULTER: Sometimes they learned the wrong it has so much potential in the next 5-10 years. space, whether it is oil and gas, liquefied natural lessons. Right now India is out of favor, but we Food and beverage, healthcare and education gas, or palm oil. There are all areas where one can are quite positive on the country: Only 4-5 funds are the areas we are currently looking at. invest. were raised last year and many of the GPs that raised first-time funds in 2006-2007 and don’t LUKITO: Despite the rush into the consumer- On concerns about spiraling valuations have exits won’t be around for the long term. facing sector people need to remember that If anything, that market is likely to get more COULTER: There will always be investment interesting as the amount of institutional capital opportunities, even in overvalued markets, but declines. Indonesia is still relatively shallow; “There have been by any measure Indonesia looks overvalued right company sizes are small and the overall economy now. There was a time in the recent past when is small, at least compared to China. So the situations where it took Indonesia was trading at double the multiple question is how many PE funds can the market us just six months to of the China market, and this just doesn’t make support? There are a number of first-time funds sense. There has been a flood of foreign direct getting capital; all the big regional funds are in nail a term sheet, but investment and portfolio inflows into the the country. There is clearly a lot more interest in country, and valuations are up. One needs to be the country so the hope is that what happened then one infrastructure careful. The Matahari Department Store listing [a in India doesn’t happen in Indonesia. It hasn’t deal took us almost partial exit for CVC Capital Partners] was priced at happened yet but clearly in the consumer space 27x forward earnings – that’s a rich valuation for a it’s getting a lot more competitive. four years to sign” retailer in any country, irrespective of the quality of the company and the opportunity ahead of On broadening your exit options – Eri Reksoprodjo it. Investors would be wise not to forget that valuations do matter. REKSOPRODJO: The most attractive exit option

10 avcj.com | March 26 2013 | Volume 26 | Number 12 Indonesia webinar [email protected]

is still through an IPO. We have a proven track allocations as a percentage of global allocation. is still in its infancy for Indonesia. There are four record in mining and telecom, but for current We came across an LP recently whose first incumbent players – ourselves, Saratoga, Quvat deals in the pipeline, we are putting all possible Asian emerging market commitment came in Management and Northstar Pacific Partners – options into the term sheet. We want to make Indonesia and we were a little bit surprised by and the way things have been set up in terms of sure that the sponsors are fully aware, pre- that. But once one has built up a reasonable legal, team organization, and so on, is reflective closing, that two possible exit options have been portfolio in other emerging markets, Indonesia of what the global private equity players look like. agreed upon. The reason for this is that, in other is a natural place to look. You are there for an With that kind of start, I hope we can form some deals, we come across situations where sponsors opportunity in a market that is somewhat kind of leadership in the industry that would be are only willing to look at one exit mechanism. I opaque, and perhaps can generate better than resonated to other players down the road. Once guess with the market dynamics now, we need average returns, in particular through local we have these players set up we believe the to be a little bit more flexible. Trade sales are networks. market will be sustainable. The second point is on the horizon, but IPOs are still the preferred obviously the market itself. People are learning option, although we want to pre-closing BRUNY: A major barrier is actually knowledge. what the private equity industry is about and, arrangements to be more transparent, and if In most of my first conversations about looking at the opportunities 5-10 years from now possible agreed upon by us and the sponsor. Indonesia, the current market opportunity, the and the trajectory on which Indonesia is headed, demographics and the macro statistics –the there is no reason why the market will not be On regulatory and other market barriers, fourth largest country in the world, the second- sustainable. and the time it takes to get deals done largest user of Facebook – people generally are surprised. That is the case for investors outside of On opportunities outside of Java LUKITO: It really depends on the deal. We closed Asia. People hear the China story and the wider one deals in about two months, which I think BRIC story but they don’t necessarily hear the LUKITO: For investments outside of Java, was a relatively short time. But there are also Indonesia story when they are sitting in Europe you typically see more resource-based deals. been deals we have been brewing for about a or the US and looking to invest. Balikpapan [on the east coast of Borneo] is one of year but never really get done. The reasons for the highest GDP-earning cities in Indonesia and this can vary. It might involve problems getting COULTER: I think on the one hand the challenges it’s been an oil city for a long time. Certainly you regulatory approval in BKPM [the Indonesia remain the same. The topic of today’s session is will see a lot of people getting into that area on a Investment Coordinating Board], but usually “turning hype into returns” and essentially that’s resource play. Having said that, the infrastructure that’s more of a process as opposed to whether what LPs are looking for – cash returns. There support in these cities is also growing – real or not the deal can get done. In relative terms, the government seems to be a lot more open in getting foreign investment into Indonesia. For “People need to remember that the market is example, there is now a one-stop service for new foreign money coming in. But in terms of getting relatively young. If people are looking for things deals done and dealing with entrepreneurs, it’s that are established and have scale, there are really a case-by-case basis. It’s not really a norm for us that it takes a very long time. only relatively few of them and everybody else is

REKSOPRODJO: Each sector has its own off the charts in terms of scale” – Veronica Lukito regulations in terms of foreign investment coming in. For example, in the banking sector, the threshold is 49% for foreign ownership, but has been a lot of hype and that hype is really estate is booming, there is a lot more investment in other sectors it is different. As for how long it relatively new. It’s important that people look in healthcare and education. This is expected takes to close a deal, there is really no one-size- back and remember that, even though most given how Indonesia has been growing in the fits-all ingredient. There have been situations LPs are fixated on the China story, there was a last five years, and that’s mainly due to the where it took us just six months to nail a term time pre-Asian financial crisis when Southeast resource sector. Certainly, the government has sheet, but then one infrastructure deal took us Asia and Indonesia were the focus. Things didn’t already identified a few key geographic areas almost four years to sign. We will take whatever work out so well last time, so how will they turn where it would like to see more development time required to get a deal done. out this time? This is really a fairly new market. A and money from foreigners being invested. small number of incumbent managers that have On LPs’ expectations of Indonesia and raised more than one fund. There are a lot of new On the implications for private equity of whether they will be met funds coming into the market, both Indonesia the 2014 presidential election only and Southeast Asia with an Indonesia focus, COULTER: If you are an LP that hasn’t yet because it’s the largest and most important REKSOPRODJO: It should only be a concern allocated any capital to China or perhaps India, market in Southeast Asia in many respects. I think if your investment has been in the country for Indonesia might be a bit of a stretch. In general, the challenges for LPs are very simple: trying to several years and you are planning to exit by what one is finding is that in terms of the LPs identify which managers will be able to deliver way of IPO in 2014. The IPO market might not be that are actually investing in the country – and returns which may compensate for whatever risks that conducive. A change of leadership will take 2006-2007 was really the start – they are groups may be in this market. That’s never an easy one. place in terms of the political party that rules the that have been in Asia for some years and already country, but it shouldn’t matter much in terms of have reasonable Asian or emerging markets LUKITO: Right now the private equity market investing in certain sectors.

Number 12 | Volume 26 | March 26 2013 | avcj.com 11 Private Equity & Venture Forum Korea 2013 16 April • Grand Hyatt, Seoul

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjkorea.com A new spring for South Korean private equity Hear from 25+ leading speakers including: PLUS Paul Hanrahan James Kim CEO Head of Private Equity AmERICAN CAPITAL ENERGY & INFRASTRUCTURE KOREA INvESTmENT CORPORATION

Jay Park Won Joon Park Managing Director Chief Investment Officer, BLACKROCK PRIvATE EQUITY PARTNERS Asset Management Division, CONSTRUCTION WORKERS mUTUAL AID ASSOCIATION minjun Chung Vice President Timothy Kim HARBOURvEST PARTNERS (ASIA) LImITED General Manager SAmSUNG C&T CORPORATION Yun Kyu Lee Chief Investment Officer michael Hwey-Hoon Chung KOREA TEACHERS PENSION FUND Executive Director mORGAN STANLEY PRIvATE EQUITY For the latest programme, please visit avcjkorea.com ONLY 3 WEEKS LEFT TO REGISTER! Simultaneous Book now at avcjkorea.com translation is available Registration enquiries: Pauline Chen T: +852 3411 4936 E: [email protected]

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avcjkorea.com Private Equity & Venture Forum Focus Korea 2013 [email protected] 16 April • Grand Hyatt, Seoul New faces A new generation of VC firms is emerging in Australia, despite little appetite for the asset class from domestic LPs. Success hinges on leveraging Silicon Valley networks and targeting particular market niches

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjkorea.com Will Australia’s struggling venture internet start-up Freelancer.com, also weighed What the latest start-ups VCs have in capital industry be delivered to safety by angels? in recently, declaring the Australian VC industry common is a focus on digital technology rather In certain areas this appears to be the case. Start- “dead,” and citing a decline in start-up funding. than cleantech and life sciences. They are A new spring for South Korean private equity up GP Blackbird Ventures recently reached a first “VC is definitely a dirty word around Australian also exclusively investing in companies with close of A$20 million ($22 million) on its A$30 investors right now,” says Daniel Girgis, managing business models that work internationally, taking Hear from 25+ leading speakers including: PLUS million internet-focused venture capital fund, director at Kaz Capital. advantage of how technology has reduced the with most of the capital coming from a cluster of Stuart Richardson, founder and managing cost of developing and distributing social media Paul Hanrahan James Kim Silicon Valley- and Australia-based super angels. partner at Adventure Capital, adds that funds applications or cloud-based enterprise software. CEO Head of Private Equity The fund’s LP roster reads like a who’s who raised before the financial crisis are now “The barriers to entry for going global have AmERICAN CAPITAL ENERGY & INFRASTRUCTURE KOREA INvESTmENT CORPORATION of the tech start-up community. It ranges from approaching the end of their investment periods dropped significantly in the last few years and longstanding US angel investors such as Bill Tai and LPs are starting to ask tough questions about we are looking at a number of companies that and Dave McClure to the entrepreneurs behind performance. He argues that VC managers raised could grow internationally,” says Kaz’s Girgis, also Jay Park Won Joon Park successful Australian technology plays such as stressing the importance of the emergence of a Atlassian, Campaign Monitor and Aconex. host of domestic entrepreneurs. Managing Director Chief Investment Officer, “There is a certain dynamic in the market With this approach, digital-focused VCs can BLACKROCK PRIvATE EQUITY PARTNERS Asset Management Division, “There is a certain CONSTRUCTION WORKERS mUTUAL right now whereby a bunch of US investors have dynamic in the market keep fund sizes and check sizes small. Kaz’s AID ASSOCIATION started to take an interest in Australia,” says Rick sweet spot is A$1-3 million, committing around Baker, Blackbird’s investment director. “Super whereby a bunch of US A$600,000 in equity in Series A rounds and minjun Chung angels and micro-VC guys are looking further calling on co-investors to contribute the rest. Vice President afield for deal flow because the US has become Adventure Capital plans to commit $500,000 to Timothy Kim investors have started HARBOURvEST PARTNERS (ASIA) LImITED very competitive in this space.” $5 million per investment, while for Blackbird the General Manager Australia venture capital fundraising has to take an interest in goal is $3-5 million rounds, with half coming from SAmSUNG C&T CORPORATION struggled ever since the global financial crisis. Australia” – Rick Baker the fund and the rest from LPs. Yun Kyu Lee According to AVCJ Research, VC investors While these VC firms would like to raise attracted $137 million in 2012, the highest level institutional money from Australia or elsewhere, Chief Investment Officer michael Hwey-Hoon Chung in six years, but the majority of this capital went funds that were too large in 2006-2007 and this at present high net worth individuals – the super KOREA TEACHERS PENSION FUND Executive Director into one fund – Carnegie Private Opportunities placed a strain on the economics, prompting GPs angels – are their most likely capital source. And mORGAN STANLEY PRIvATE EQUITY Fund – which is expected to make a mixture of to write larger checks and take on more risk. these experienced VC players are very much growth and venture investments. The reality is it depends where you are open to co-investment. For the latest programme, please visit avcjkorea.com However, Blackbird is not the only start-up coming from. Few would argue that Australia’s venture capital firm in Australia. Adventure superannuation industry has fallen out of love Horses for courses Capital is targeting $100 million for its debut fund with venture capital, but as with PE, there It represents an innovative solution to a tricky ONLY 3 WEEKS LEFT TO REGISTER! Simultaneous while Kaz Capital is seeking to raise at least A$10 are conflicting arguments as to why this has situation in Australian venture capital and Baker Book now at avcjkorea.com translation is available million. Adventure Capital in particular is looking happened and whether the reasoning is justified. hopes it can bring momentum – and returns – to leverage Silicon Valley connections. Brigitte Smith, managing partner of life back to the industry. But it is not for everyone. Registration enquiries: sciences-focused GBS Venture Partners, admits Those VCs who remain focused on life sciences Unpopular asset class that performance has been uneven, but that and cleantech and therefore require larger Pauline Chen T: +852 3411 4936 E: [email protected] These are encouraging signs in an uncertain doesn’t mean universally bad. “The average amounts of capital will have to find other backers. environment. The domestic VC industry has results are not great but you don’t go about GBS’ Smith notes that this is already recently been emboldened by the government investing in VC as an LP by backing the average happening, albeit slowly. Southern Cross Asia Series Sponsor Co-Sponsors pledging more capital for the Innovation manager; you invest in great managers,” she Ventures received roughly half the capital for a Investment Fund and a clarification on tax breaks says. “There have been investments by good VC fund that closed at $40 million in 2011 from for funds using the early stage and venture managers but it’s easier to say on average Softbank China, the first time a Chinese group capital limited partnership (ES/VCLP) structure. performance is not any good so why bother.” has participated as an LP in Australian venture But at the same time, entrepreneurs have Blackbird’s Baker attests there are quality capital. On the life sciences side, there are still been only too keen to lay into the industry. companies in the portfolios of Australian VC more options. After securing $25 million in funding from US- firms, it’s just taken a lot longer to commercialize “We will see more super angels, but in life Legal Sponsor Knowledge Partner Exhibitor based Summit Partners, one of the founders of the technologies than expected. This is in part a sciences we are seeing more corporates set up Australian online retailer The Iconic criticized result of focusing on intellectual property-heavy their own VC units or coming into funds as LPs,” domestic investors for being too conservative on companies that require more capital and time to says Smith. “Whatever your niche, you have to e-commerce. Matt Barrie, founder of prominent reach critical mass. evolve to survive.”

avcjkorea.com Number 12 | Volume 26 | March 26 2013 | avcj.com 13 deal of the week [email protected] / [email protected] Mekong trims Mobile World stake, looks to IPO

Is Mobile World the next Masan World in 2007, the private equity firm has now discount the experiences of others but the Consumer Corp? The as yet unnamed private trimmed its stake from 32.5% to 25.8%, securing Mobile World founders have been proactive equity firm that picked up part of Mekong an 11x return. The plan is to take the company about learning.” Capital’s stake in the Vietnamese mobile phone public in Ho Chi Minh in the first three months of When Mekong first invested in Mobile World retailer is certainly hoping so. 2014. “It’s an opportunistic exit,” says Chris Freund, it had only five stores under the TheGioiDiDong The two companies occupy different market Mekong’s managing partner. “Most of our exit (TGDD) brand but has since expanded its segments and Mekong Capital, which invested would be through the IPO but we wanted to network to 230 outlets and is responsible for in both, got involved with take some money off the table about 20% of mobile phone sales nationwide. Mobile World at a much earlier and the buyer was proactively The company has also created another brand, stage than Masan. But each pursuing this deal.” Dienmay, which operates 12 consumer company exhibited rapid Freund sees the success electronics stores in southern Vietnam. growth that marked them of Mobile World as a model Mobile World posted a net profit of $5.9 out as potential superstars for what’s possible in Vietnam million for 2012, with revenues of $353 million. in a Vietnam consumer story when the founders and top While TGDD has been responsible for driving that has so far produced few Mobile World: Expansion story management are open- growth, Dienmay is expected to become the obvious PE-backed successes. minded and develop a strong prime mover. This is a function of the consumer Mekong completed its exit from Masan in team. The company also has much in common electronics market being larger than mobile 2010, securing a gross multiple of 2x and a gross with Masan in this respect as well. phones and less penetrated by Mobile World. IRR of 61%. The company has since gone from “Masan was proactive in recruiting strong “In pretty much every Asian market you have strength to strength, receiving $359 million from professionals while for Mobile World it has been two players that dominate consumer electronics KKR across two rounds in 2011 and 2013 in what more about internal training and development,” and that is what we are aiming for,” says Freund. remain by far the largest PE commitments in he explains. “Mobile World’s founders come from “The largest company is Nguyen Kim with Vietnam’s consumer sector. a telecom background and they have previously a 7% share and then there are several other Having initially invested $3.5 million in Mobile worked for multinationals. A lot of companies companies, including Dienang, on about 2%.” Leopard backs cross-border kenaf play

When kenaf, an Asian plant known “People can use kenaf very flexibly. They use South Korea, Japan and a number of locations,” for its short growing cycle, high protein content the leaves, bask and the core for applications Intrator tells AVCJ. “It is just an interesting and strong fibers, was put to practical use, the in various industries with a lot of value-added place for us to be foreshadowing agricultural locals made ropes. Today, its applications are products,” says Richard Intrator, CIO at Leopard development in Asia.” expanding to encompass a wide variety of Cambodia Fund, which recently invested in Leopard declined to disclose the Engage industries. Engage. He is convinced that the plant can share of Southeast Asia’s kenaf products market, The high protein content makes kenaf an become the next pan-Asian but its customer base is known attractive and inexpensive complement for success story in the agricultural to extend to South Korea, France, animal feeding products. The strong fibers are of sector. the US and Thailand. Engage interest to car manufacturers and construction The fund, which was therefore represents something companies seeking to enhance or replace more launched by frontier markets- of an outlier in the Leopard expensive synthetic materials. Further demand focused GP Leopard Capital in portfolio – a company that can comes from the pulp and paper industry where 2008, has $34.1 million in assets claim an international client base kenaf is seen as an environmentally friendly under management. It has made in a niche area of a sector that alternative to wood pulp. more than 14 investments in has so far received little attention Engage Resources can take a lot of credit Cambodia, Thailand and Laos from private equity. for commercializing the plant. Four years ago, across the telecom, financial Kenaf: Strong fibers Although more is expected the company recognized the underestimated services, food and beverage, of Cambodian agriculture, potential of kenaf and committed capital agriculture, energy and utility sectors. AVCJ Research has only one other record of an to developing more efficient methods for A small but significant sum of $1 million has investment in the sector – Leopard’s $2 million producing the plant in Southeast Asia. Hundreds been committed to Engage so it can expand commitment to Cambodia Plantations in 2009, of local farmers were contracted to grow kenaf its operations throughout the region and in which was intended to support agricultural for processing or make kenaf-based products Cambodia in particular. “Even through kenaf modernization and broaden rice cultivation in themselves. grows in Thailand or Cambodia, it is used in the country.

14 avcj.com | March 26 2013 | Volume 26 | Number 12 Jean Salata | Industry Q&A [email protected] Dry powder Baring Private Equity Asia closed its fifth fund at $2.46 billion in early 2011. CEO Jean Eric Salata tells AVCJ why the firm has taken its time investing the capital and where he now sees value emerging in the market

Q: How has your approach to the valuations happen in the public A: Courts Asia, a retailer that gives you the money up front market changed during the market. The change in private recently listed in Singapore, was for the year. It is a business that initial years of Fund V? market valuations takes longer to one of the first companies where is relatively sticky in terms of A: We started investing the gestate. we deliberately invested in an recurring revenue; once people fund about one year ago. Our underperforming business with enroll they usually don’t leave investment pace was slow, Q: Presumably the same applies the thesis that we could improve until graduation. It’s also not that deliberately slow. We have been to China take-privates? its operations. Profit over the easy to penetrate. You can’t just through many investment cycles A: There is certainly a general last five years has grown from decide to set up a school; you so we understand that there are valuation decline in most need reputation, curriculums periods where liquidity is strong of these US-listed Chinese and quality credentials that allow and valuations are high and it’s companies and it has attracted you to operate in the top tier. a good time to take money off our attention because it means Many of the schools we come the table. Then there are periods there might be value there across aren’t necessarily being when it’s hard to exit assets but a or there might not. Generally run to their full potential from a better time to invest. If you look speaking, take-privates are financial or educational point of at the mid cap segment of the difficult to close because there view. They are owned by families PE market in Asia, a big source of are a lot of moving parts and or institutions or some sort of competition for us is IPOs. Over it is subject to you getting original founder and have never the last year the IPO market has enough access to information been professionally run. Nord not been functioning well and on the company, which can be Anglia brings benefits that come this creates an environment that challenging because of all the from a more scale business, such is conducive to investment as rules around disclosure. Another as central resources. valuations trend more towards challenge is how much you need “Take-privates what we want to see. to pay to get everyone to sell. Q: Nord Anglia last year also Just look at Dell in the US – even are difficult to used a high-yield bond for a Q: Baring took advantage of the there they are having difficulty close because dividend recap. What does this difficult IPO market by coming getting a deal done because say about exit options? in as a cornerstone investor the rules are set up in a way that there are a lot of A: We’ve done a couple of high- in China Yongda’s IPO. Why there is a clear process. yield bonds for Nord Anglia. participate in this fashion? moving parts” The first one, which raised $350 A: They launched an IPO but Q: How have you responded million, was the first-ever high- then had to pull it because to the greater emphasis on yield bond issued by a financial of market conditions. We had operational value-add? close to break even at the time sponsor in Asia that was used for been following the company A: The way to consistently make of investment to more than S$39 dividend recap purposes. In the and liked the sector, so we said money going forward is helping million ($31.6 million) last year. last 12-18 months we have also we would help to underwrite companies become more The other area in which we have exited Yingde Gases and Airtac the offering on terms that we efficient and valuable. That has developed our capabilities has International, both companies thought would be attractive been a big area of focus for been around sectors, particularly we listed and then sold down, and would also get it sold to the us in building up operational education. Nord Anglia and there was the IPO for Courts, market. And although Yongda capability in the firm. We advise Education is one of the biggest which we have yet to exit but is is now a public company, funds with $5 billion of capital investments we have ever made. now liquid. Going back to just we are engaged with them and we have about 100 people We acquired the business in after we raised the fund in 2011 on the HR side and assisting across seven offices in the 2008 and it has since tripled in we had a big trade sale of Hsu Fu with broader development of region. If you look at the size of size. Chi to Nestle for $1.7 billion. And after-sales services. We will only our funds versus the resources we are currently working on a become a corner stone investor we have, we have increased the Q: Why education? secondary exit to another fund. in situations where we think size of the team more than the A: If you look at it as an investment The breadth of different exits has we can add value. If you look at size of the fund. it has some fundamentally enabled us to get money back to what happens when the market attractive characteristics. It tends investors at a good rate of return comes out of a more buoyant Q: What has been the impact of to be pre-paid, negative working during a period when it hasn’t period, the initial change in this on investment? capital where the customer been easy to do this.

Number 12 | Volume 26 | March 26 2013 | avcj.com 15 Private Equity & Venture Forum China 2013 30 - 31 May • Park Hyatt Beijing 12th Annual

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