Country Snapshot Hina’S Private Equity Market Has Experienced Rapid Development Since the Coun- Try’S Accession to the World Trade Organization in 2001

An Overview of Trends in Select Sectors and Markets June 2008 China Country Snapshot hina’s private equity market has experienced rapid development since the country’s accession to the World Trade Organization in 2001. In the last few years, the • Population: 1.3 billion number of funds has grown dramatically, from 20 or so China-dedicated funds C • GDP: US$3,250 trillion entering the market in 2005 to at least 150 funds investing there as of June 2008. Cur- rently, China-dedicated funds represent approximately one-third of the Emerging Asian • GDP per capita: US$2,461 private equity market by number of funds and account for 15% of total capital raised. • Total value of private equity investment (2007): US $9.5 billion China has led the region in deal volume, drawing 33% of investment between 2003 and 2007. Deal volumes rose from US$1.7 billion to US$9.5 billion over that same period, • Total value of private equity investment (Jan. - May 2007): US$3.7 billion representing 0.29% of China’s GDP as of 2007. China is only now beginning to lose share as Emerging Asia’s top investment destination—slipping to 31% of total volume in 2007 • Total value of private equity investment (Jan. - May 2008): US$4.0 billion versus 37% in 2003—as growth of India’s private equity industry is gaining momentum.

The year of 2008 marks the localization of the Chinese private equity market. The gov- Sources: Asia Private Equity Review, IMF. ernment’s efforts to foster development of a domestic industry is yielding a number of Renminbi (RMB)-denominated funds deploying local capital. Emerging domestic sources of capital—pension funds, insurance companies, securities firms and municipalities—are gradually securing government approval to invest in private equity. A 2007 law allowing the formation of limited partnerships has created an additional foundation for further growth of the asset class.

Regulatory reforms and continued economic liberalization have created a more favorable environment for private equity, however the trajectory of growth for the asset class in China remains to be seen. The pace and direction of regulatory developments coupled with the government’s participation in the private equity market as both LP and GP—via continued on page 2 Number of Funds Raising Capital for Investments in China

100 Pan-Asia

80 China-dedicated

0 2005 2006 2007

Source: EMPEA

state-backed funds—will heavily influence the development of local operations. Large global firms such as Apax Partners, the the domestic PE landscape. Blackstone Group and Switzerland-based Partners Group are opening offices in Beijing this year. Arsenal Capital Partners and Sun Capital are building teams in Shanghai.

Fundraising Trends China’s financial services veteran Fang Fenglei is emblematic of the fervored localization taking place. Fang, founder of the Fundraising by China funds has grown dramatically from 2003 to joint venture between Goldman Sachs and Gao Hua Securities, 2007, with capital growing by 40% per year. During the first five launched Hopu Investment Management Company, an indepen- months of 2008 alone, capital commitments to China-focused dent private equity firm, in 2007. Temasek and Goldman Sachs private equity funds totaled US$4.5 billion, versus US$3.9 bil- have contributed US$1 billion and US$300 million, respectively, lion in all of 2007. The number of China-focused funds raising to Hopu’s inaugural US$2.5 billion fund. Through Hopu, Fang capital rose from 32 in 2006 to 67 in 2007. also manages the China-Singapore Hi-tech Industrial Invest- The fund universe has become larger, more local, and more di- ment Fund, a state-backed fund devoted to investments in the verse. Local funds accounted for 19% of capital commitments Suzhou Industrial Park within the Yangtze Delta region. in 2007. Due in part to 2007 legislation offering favorable treat- The National Development and Reform Commission (NDRC) has ment for locally-domiciled funds, RMB-denominated vehicles approved a number of local industrial funds, the first of which, are beginning to emerge alongside existing offshore, US dollar the Bohai Industrial Investment Fund, was launched in 2006. funds. Regulatory changes to promote the development of a The fund targets investments in the northern port city of Tianjin; domestic PE industry have included a limited partnership law it represents China’s first RMB-denominated fund. The NDRC and a change in the tax regime for foreign invested enterprises is soon expected to approve a second city-focused fund, the (FIEs). Fund managers faced with a regulatory model that fa- US$2.9 billion Shanghai Financial Industrial Investment Fund. vors RMB funds are taking notice. The local vanguard includes CDH Investments and Hony Capital, in the market with follow-on Financing these funds as part of a broader effort to develop the funds, both with fundraising targets of RMB 5 billion. Local VC domestic asset class, provident and pension funds have begun firms such as Softbank China Venture Capital, IDGVC Partners to play the role of LPs. Traditionally prohibited from investing in and Legend Capital have created RMB funds; Qiming Ventures the asset class, China’s National Social Security Pension Fund and Sequoia Capital are exploring the approach. (NSSF, with US$74 billion AUM), received approval to invest up to 10% of net capital in PE in April 2008. Since gaining ap- Following the lead of firms such as the Carlyle Group and KKR, proval, the NSSF has committed 2 billion yuan each to CDH foreign GPs are adapting to the changing model by establishing Investments and Hony Capital. In June 2008, the State Admin-

continued on page 3

EMPEA Insight Editorial Director Jen Choi Advertising Opportunities [email protected] EMPEA Insight, available free of charge to members, of- Writing and Research Harrison Moskowitz fers readers an overview of the data and drivers behind [email protected] investment trends in emerging markets private equity. Each Production Manager Cristiane Nascimento issue of EMPEA Insight provides an opportunity for a single [email protected] exclusive back page advertisement. Issue-specific place- About EMPEA ments are on a first come, first served basis. Upcoming The Emerging Markets Private Equity Association is a issues include: Central & Eastern Europe and Russia/CIS, broad-based membership organization founded in 2004 to the Middle East, India, Latin America, Southeast Asia, Africa focus on the emerging private equity markets of Africa, Asia, and Real Estate. Europe, Latin America, the Middle East, and Russia. For more information about advertising opportunities and To learn more about how to become a member, please rates, please contact Cristiane Nascimento at nascimento@ contact Farzana Hoque, Membership Manager, at hoquef@ empea.net. empea.net or +1.202.333.8171.

istration of Foreign Exchange (SAFE) agreed to invest US$2.5 position in Shanghai-basic Mecox Lane International Mail Order billion in TPG’s latest fund, marking the largest state investment Company for US$80 million in March. in private equity since CIC’s US$3 billion direct investment in the Leveraged buyouts are rare in China—only certain Chinese Blackstone Group in May 2007, and the largest indirect invest- banks are empowered to finance such transactions and foreign- ment to date. exchange controls prevent the use of China-based assets as col- lateral for loans made elswhere. A reversal of this trend appears unlikely in the near term. In 2006, Hong Kong-based Pacific Investment Trends Alliance Group executed China’s first and only leveraged buyout involving a foreign buyer to date—the acquisition of baby-stroller manufacturer Goodbaby Group for US$122.5 million through a Capital deployment has kept pace with rapid growth in fundrais- special purpose vehicle. ing, averaging 28.7% annual growth in total investment volume since 2003. Growth capital accounts for the vast majority of While the privatization of state assets offers some measure investment, at 74% of total value and 83% of transactions by of deal flow, control investments in state-owned enterprises number in 2007. Average deal size for the growth segment rose (SOEs) are marked by sometimes insurmountable regulatory 8% in 2007 to US$35.9 million, from US$33.2 million in 2006. difficulties, particularly for foreign funds. The Carlyle Group’s bid for state-owned Xugong Group Construction Machinery Co. Of the 198 investments recorded in 2007, only 14 were buyouts, Ltd. illustrates these difficulties. The firm’s initial bid for 85% of accounting for US$2.2 billion of the total. Control acquisitions Xugong, made in October 2005, was subsequently lowered to of Chinese companies have been limited primarily to domestic 45% in order to make the investment more palatable to regula- players; foreign fund buyouts have focused on Chinese compa- tors. As of June 2008, the deal had yet to be approved. nies listed on foreign exchanges. In May 2008, HSBC Private Equity bought out Singapore listed China-based clothing manufacturer Sing Lun Holdings in a transaction valued at S$119.59 Sector Trends million, while CVC Asia Pacific successfully completed the acquisition of Asia Dekor Group, a Singapore-listed Chinese floor- Sector trends reflect the growth of China’s middle class. A dou- ing manufacturer, for US$248 million. On the domestic front, bling of per capita GDP between 2000 and 2006 has acceler- CITIC Capital acquired 100% of Hunan AVA Holdings, one of the ated the development of a consumer market in China. Food nation’s largest dairy companies for US$82 million. Sequoia and beverage, consumer services and media have all proven Capital China completed its first buyout in China with a control attractive investment targets.

continued on page 4

State-backed Industrial Private Mandate Date of Approval Fund Goal (US$M)) Equity Investment Funds Bohai Industrial Investment Fund Municipal Dec-06 2,895 Guangdong Nuclear Power and New Energy Industrial State Sep-07 1,447 Investment Fund China-Singapore Hi-tech Industrial Investment Fund Municipal Sep-07 1,447 Shanghai Financial Industrial Investment Fund Provincial Sep-07 2,895 Shanxi Coal Investment Fund Provincial Sep-07 1,447 Sichuan Mianyang High Technology Industrial Investment Fund Provincial Sep-07 868 Tianjin Binhai New Area Venture Capital Investment Fund Municipal Dec-07 289 Fujian Jiuhua Development Holding Co., Ltd. Provincial Jan-08 144 China-Singapore Suzhou Industrial Park Investment Fund Municipal May-08 144

Source: EMPEA.

Goldman Sachs is pursuing Chinese food and beverage deals Total Investment Value (US$ billion) in earnest. In April 2008, Goldman Sachs and Whitesun Eq- 4.0 uity Partners teamed up to invest US$30 million in C. Straits 3.5 Café, a coffee shop chain operating 400 outlets in Hangzhou and Fuzhou provinces. A few months prior, Goldman Sachs and 3.0

Pinnacle Fund invested US$50 million in bottler and distributor 2.5 China Water and Drinks. 2.0 On the retail front, Hony Capital recently invested US$28.7 mil- 1.5 lion in retailer Longhao World Business Development Co., mar- keter of brands such as Nike and Timberland. Investors have 1.0 shown interest in professional services, such as employment 0.5 services firm Career International Inc. and translation company 0.0 Yuanpei Century Translation Co., as well as educational provid- Jan. - May 2007 Jan. - May 2008 ers like test prep company Wanxue Education. Source: Asia Private Equity Review While media represented only 3% of total private equity invest- additional US$83 million raised by Skyflying Media from existing ment value in 2007, the sector accounted for 11% in the first investors including Goldman Sachs and Sequoia Capital China— four months of 2008. Early in 2008, Sequoia Capital China and the largest PE investment in the outdoor advertising space to Intel Capital increased their existing investment in China’s Face- date. Beijing-based Towona Mobile TV Media Group, which runs book-style social networking site 51.com to US$50 million. WI content and advertising through LDC screens in China’s public Harper and Steamboat Ventures injected US$10 million in online transit system, drew US$50 million from Baring Private Equity games provider Troodon.net. Broadband and wireless providers Asia. drawing capital in 2008 include Shanghai Media Group, part of a larger collaboration with Intel Capital, and Airway Communica- China’s growing environmental woes have made cleantech in- tions, a wireless broadband operator that won US$30 million in vestments increasingly promising, rising 38% from US$400 mil- Daiwa Securities’ first investment in Asia ex-Japan. lion in 2006 to more than US$550 million in 2007, according to the Cleantech China Network. Goldman Sachs and CDH Invest- Outdoor advertising firms in particular have generated signifi- ments injected US$100 million in Himin Solar Energy Group in cant interest in recent months, among them: ICG-Accel China’s January 2008 in anticipation of a domestic IPO. Additionally, US$13 million investment in Beijing-based Take-one Media Co., Tsing Capital invested US$19 million in ET Solar in April 2008. Ltd.; a US$30 million investment in Aladdin Media Holdings by To date, investments in solar energy have dominated, however a consortium led by Credit Suisse Private Equity Asia; and an other 2008 investments have included wind power and meth-

continued on page 5 Investments by Sector in China (2006 - April 2008)

Other 2006 IT & Telecom

Consumer Goods 2007 Media

Infrastructure Jan - April Industrials 2008 Construction 0% 20% 40% 60% 80% 100%

Source: Asia Private Equity Review.

ane technologies. Baring Private Equity Asia and Chengwei Ven- in the first quarter of 2008: China Railway Construction Corpora- tures invested US$88 million in CCBM Investment Holdings, a tion, Want Want China Holdings, and Honghua Group Limited. company focused on coalbed methane exploration, extraction Private equity-backed IPOs picked up in June with four such and production. events taking place.

Once the preferred exit route for private equity investments in China, foreign listings appear to have begun to lose favor. His- Exit Trends torically, fund managers created offshore Special Purpose Ve- hicles (SPVs) in order to tap international markets. The Chinese China was not immune from the downturn in global financial government has since erected hurdles to impede this common markets in the first quarter of 2008. IPOs, which represented practice. SPVs must now be approved by the Ministry of Finance 90.7% of exit events in 2007, slowed to a total of six in the first and the China Securities Regulatory Commission. quarter of 2008 compared with 11 in the same period of the The increase in regulatory hurdles for foreign listings, coupled previous year. Goldman Sachs, the Carlyle Group and Pruden- with the deepening of China’s capital markets, has made the tial Financial postponed IPOs of Chinese companies on the prospect of a domestic IPO more attractive. China is expected Hong Kong Stock Exchange due to market conditions. to launch a NASDAQ-style growth enterprise exchange in Shen- However, significant exits are occurring in 2008. CDH Invest- zhen. A growth enterprise exchange would create another list- ments and Morgan Stanley Private Equity Asia partially exited a ing platform for private equity firms investing in start-up and US$155 million investment in Belle International Holdings with early stage companies in China. However, industry observers US$217.18 in realized capital 11 months after the company’s have expressed skepticism over China’s ability to replicate the IPO. The remarkable development of domestic capital markets transparent model of the American exchange. continued with China hosting three of the 10 largest global IPOs

Sampling of Private Equity Deals (January – June 2008)

Fund Manager Company Sector (US$M) Date Sequoia Capital China, New World Renhe Commercial Group Real Estate 315 Jan-08 Strategic Investment Limited, Capital International CDH Investments, New Horizon Capital Meihua Monosodium Glutamate Group Industrials 195 Mar-08 CVC Asia Pacific Hung Hing Printing Group Industrials 112 Apr-08 Goldman Sachs Group, CDH Invest- Himin Solar Energy Group Cleantech 100 Jan-08 ments Hony Capital, LEV Ventures Lenovo Mobile Communication Tech- Technology 100 Jan-08 nology Temasek Holdings Nineyou International Technology 100 Mar-08 Morgan Stanley, International Finance China Flooring Holding Co. Industrials 100 Jun-08 Corp. Blue Ridge China Xinjiang Tunhe Industrials 90 Apr-08 Standard Chartered Private Equity, China Golden Dragon Precise Copper Industrials 90 May-08 Goldman Sachs, Lehman Brothers Tube Group Baring Private Equity Asia, Chengwei China CDM Investment Holdings: Asian Cleantech 88 Mar-08 Ventures American Gas

Source: EMPEA.

Regulatory Developments

Three major pieces of legislation enacted in 2007 will affect Number of IPOs of PE-backed Companies the asset class in varied ways. Fund managers look favorably (2007 - Q1 2008) upon the amended Partnership Enterprise Law, which helps in- 35 stitutionalize the LP-GP structure in China by allowing the formation of Limited Partnerships. The new Enterprise Income Tax 30 law removes advantages held by foreign invested enterprises, which were created in order to adhere to the WTO membership 25 requirements. The effects of the National Competition Law on 20 the industry are to be seen in implementation. The law gives regulators the ability to carry out lengthy investigations into in- 15 vestments that are deemed monopolistic or threatening “national security.” 10

Despite the government’s strides in creating a regulatory en- 5 vironment for private equity and venture capital, execution of 0 investments and exits remains complicated, especially for for- Q1 Q2 Q3 Q4 Q1 eign firms subject to lengthy regulatory reviews of transactions. 2007 2007 2007 2007 2008 Regulators rejected bids by Jade Dragon Ltd., a wholly-owned subsidiary of Goldman Sachs based in Mauritius, for Guang- Source: Asia Private Equity Review. dong Midea Electric Appliances and Fuyao Glass in 2007, on the grounds that the bids were too low relative to value. Both companies’ stock prices had moved significantly during the ex- tensive regulatory review process.

Recent Legislation Affecting Private Equity in China

Law Key Provisions Affecting Private Equity Date Enterprise Income Tax • Reduces tax advantages for foreign-invested enterprises (FIEs) March 2007 Law (EIT) • “Resident enterprises” are subject to taxation based on worldwide income • Taxation of dividends from wholly-owned Chinese enterprises • Reinvestment incentives such as the 2+3 tax advantage are eliminated • Future incentives will be based on industry rather than location

Amended Partnership • Allows the formation of limited partnerships June 2007 Enterprise Law • Requires at least one general partner and one limited partner • Limits contribution of LPs to cash • Exemption of corporate income tax • Creates a more structured LP-GP relationship

National Competition • Transactions exceeding value thresholds require approval Sept. 2007 Law: Anti Monopoly Law • Investigations may last up to 180 days (AML) • “National security” reviews may be carried out • M&A activity that eliminates or restricts competition is prohibited • Price-fixing, group boycotts, and abuse of a dominant market position

Sampling of Firms Investing in China

Fund Managers Most Recent Fund Website

Pan-Asia Funds

Bain Private Equity Bain Capital Asia Fund (2007, US$1b) www.baincapital.com Baring Private Equity Asia Baring Private Equity Asia IV (2008, US$1.515b) www.bpepasia.com CVC Capital Partners Asia Pacific CVC Capital Partners Asia Pacific Fund III (2008, US$4.1b) www.cvc.com

HSBC Private Equity HSBC Asia Buyout Fund (2008, US$1b) www.hsbcnet.com/pi KKR KKR Asian Fund (2007, US$4b) www.kkr.com TPG TPG Asia V (2008, US$4.25b) www.texaspacificgroup.com China-Dedicated Funds

Blue Ridge China Blue Ridge China Fund II (TBD) (2008, US$1.45b) - CDH Investments CDH Venture Fund II (2008, US$500m) www.cdhfund.com Hony Capital Hony Capital IIII (2006, US$580m) www.honycapital.com IDG Technology Venture Investment IDG-Accel China Capital Fund I (2008, US$600m) www.idgvc.com Inc. Intel Capital China Technology Fund II (2008, US$500m) www.intel.com/capital Matrix Partners Matrix China Fund (2008, US$275m) www.matrixpartners.com NewMargin Ventures NewMargin Partners I (2008, US$350m) www.newmargin.com Northern Light Venture Capital Northern Light Venture Capital II, Ltd. (2008, US$350m) www.nlightvc.com Orchid Asia Group Management Orchid Asia IV (2008, US$420m) www.orchidholdings.com Qiming Venture Partners Qiming Venture Partners II (2008, US$320m) www.qimingventures.com Funds in the Market (as of June 2008)

Atlantis Investment Management Atlantis Star China Fund (US$200m) www.atlantis-investment.com (Hong Kong) Ltd Berun Group, APCIG Green Private Equity Fund (US$2b) - The Carlyle Group Asia Partners III (US$4b) www.carlyle.com CBC Partners, L.P. China Broadband Capital Partners, L.P. (US$300m) www.cbc-capital.com CCMP CCMP Asia Opportunity Fund III (US$3b) www.ccmpasia.com CITIC Industrial Fund Management Sichuan Mianyang High Technology Fund (US$798.9m) - CMIA Capital Partners CMIA China Fund III (US$300m) www.cmia.com CIVC - China Israel Venture Co. CIVC - China Israel Value Capital ($US200m) www.civcfund.com Dragonvest Partners Dragonvest Venture Partners II (DVP 11) (US$300m) www.dragonvestpartners.com Dubai International Capital, First China Dubai Capital (US$1b) - Eastern Investment Group Hopu Investment Hopu USD Master Fund I (US$2.5b) - Management Company NPEA Capital NPE China Fund II (US$200m) www.npeacapital.com.hk Tsing Capital China Environment Fund III (US$250m) www.cefund.com

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