Asia’s News Source avcj.com July 15 2014 Volume 27 Number 26

EDITOR’S VIEWPOINT WH Group IPO: Battling perception problems Page 3

NEWS ADIA, DeAWM, Everstone, Fidelity, GGV, Gree, , INCJ, JBIC, KKR, Navis, PEP, Sequoia, Standard Chartered PE, Steadview, Temasek Page 4

DEAL OF THE WEEK VCs back selfie craze with Nice China investment Page 12

FUNDS MSPEA’s post-Volcker Rule Asia fundraise Page 13

INDUSTRY Q&A Diving into distress Ascendent Capital’s Liang Meng and Kevin Zhang LPs look for stand-out strategies among Asia’s special situations GPs Page 7 Page 14

ANALYSIS DEAL OF THE WEEK

Looking for liquidity The next Nintendo? 2Q analysis: IPOs stay, Phillippines rise Page 10 WiL to take Japan gaming platform global Page 12 AVCJ SPOTLIGHT: 2nd Annual Real Assets Forum Private equity investment in infrastructure, energy and real estate 28 August, 2014 • Four Seasons Hotel, Singapore

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjrealassets.com Unlocking the Real Assets Potential SAVE Key reasons to attend: US$200 by 8 AUGUST 2014 1 Understand 2 Explore 3 Learn the macroeco- the real asset how to reap the BOOK nomic forces opportunities in rewards of Asia’s NOW shaping the 2015 real estate frenzy global real asset industry

4 Find out 5 Discover how to capitalize the LP’s on a changing perspective on China real assets

Connect Network with with over 160 Hear from 25+ PE leaders expert speakers 40+ LPs

Sponsorship enquiries: Registration enquiries: Darryl Mag T: +852 3411 4919 Carolyn Law T: +852 3411 4837 Enquiry E: [email protected] E: [email protected]

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Join your peers avcjrealassets.com Tweet #avcjrealassets AVCJ SPOTLIGHT: nd EDITOR’S VIEWPOINT 2 Annual Real Assets Forum [email protected] Private equity investment in infrastructure, energy and real estate

28 August, 2014 • Four Seasons Hotel, Singapore Managing Editor Tim Burroughs (852) 3411 4909 Staff Writers Andrew Woodman (852) 3411 4852 Winnie Liu (852) 3411 4907 The pigs will fly Creative Director Dicky Tang Designers Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow

Senior Research Manager Helen Lee Research Associates Herbert Yum, Isas Chu, Jason Chong, Kaho Mak

Circulation Manager Sally Yip GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjrealassets.com “I TOLD EVERYONE AT THE BEGINNING OF – and taking them offshore until regulations Circulation Administrator Prudence Lau the year, ‘The two biggest risks for our industry made it more difficult – in preparation for IPOs. Subscription Sales Executive are Shuanghui and Alibaba messing up.’ I knew This clean exit never seemed to happen for what Jade Chan there was going to be a pain trade but I thought was then Shuanghui, but everything changed Unlocking the Real Assets Potential Manager, Delegate Sales it would be Alibaba, not Shuanghui.” with the acquisition of US-based Smithfield Pauline Chen SAVE The China private equity investor who made Foods for $4.7 billion. Suddenly an IPO was on Director, Business Development the above observation added that his primary the table for the world’s biggest pork company. Darryl Mag Key reasons to attend: US$200 concern with Alibaba is escalating valuations – For all the hype about Alibaba, was WH Group Manager, Business Development by scenarios in which hedge fund sells to hedge undone by the fact that investors struggled to 8 AUGUST 2014 Anil Nathani, Samuel Lau fund and the demand for access is such that the grasp what the company had become? Certainly, Understand Explore Learn Sales Coordinator 1 2 3 numbers flying around bear little resemblance there were perception issues. 1 Debbie Koo the macroeco- the real asset how to reap the BOOK to the reality on the spreadsheet. And this Questions have already been asked about the for a company that, despite its undoubted number of banks involved in the original offering Conference Managers nomic forces opportunities in rewards of Asia’s NOW Jonathon Cohen, Sarah Doyle, size and success, carries numerous question and the revised prospectus issued last week has Conference Administrator shaping the 2015 real estate frenzy marks: corporate governance, regulation, whittled them down from 29 to two. Then there Amelie Poon ability to respond to upstart peers and industry were valuation concerns and the application of Conference Coordinator global real asset Fiona Keung, Jovial Chung industry fluctuations… a typically high China consumer multiple to a By contrast, Shuanghui – now known company with substantial exposure to upstream Publishing Director as WH Group – is more of a sure thing. Wan US hog farming. Market conditions might also Allen Lee Long, the company’s founder and chairman, have deteriorated less rapidly with the reassuring Managing Director 4 Find out 5 Discover famously explained his business to one Chinese presence of a few cornerstone investors, as is Jonathon Whiteley newspaper as follows: “What I do is kill pigs now the custom for large Hong Kong IPOs. how to capitalize the LP’s and sell meat.” It is a historically profitable Beyond that, investors were perhaps rightfully on a changing perspective on business within China too, a market in which the wary of a business that was still in the process economic fundamentals point to rising per capita of digesting a major acquisition. Where was the Incisive Media China real assets Unit 1401 Devon House, Taikoo Place consumption of meat. compelling evidence of synergies? With this 979 King’s Road, Quarry Bay, Hong Kong And yet it is WH Group, not Alibaba that in mind, a $597 million payout to two senior T. (852) 3411-4900 is in the process of rebuilding its IPO. The executives for their role in a highly-leveraged F. (852) 3411-4999 E. [email protected] first iteration, which launched in early April, transaction that has yet to bed down does URL. avcj.com targeted a $5.3 billion offering, enough to value not look good. And from a private equity Beijing Representative Office Connect Network with the entire company at up to $21 billion and perspective, no matter how many times WH No.1-2-(2)-B-A554, 1st Building, with over Hear from 25+ No.66 Nanshatan, 160 make it the second-largest IPO by a food and Group emphasizes the long-term value of uniting Chaoyang District, Beijing, PE leaders expert speakers 40+ LPs beverage player globally after Kraft Foods. CDH Shuanghui and Smithfield, there may always be People’s Republic of China T. (86) 10 5869 6203 Investments, Goldman Sachs, Temasek Holdings the perception in some quarters that assets have F. (86) 10 5869 6205 and New Horizon Capital all planned to sell a been glued together to facilitate a listing. E. [email protected] Sponsorship enquiries: Registration enquiries: portion of their shares. All criticisms, but none of them fatal and Darryl Mag T: +852 3411 4919 Carolyn Law T: +852 3411 4837 Come the end of the month and the size of so WH Group’s return – with a less banked and Enquiry the offering had been slashed by more than half, presumably more humbly priced IPO – is no The Publisher reserves all rights herein. Reproduction in whole or E: [email protected] E: [email protected] in part is permitted only with the written consent of with none of the aforementioned PE backers surprise. And after that, Alibaba. AVCJ Group Limited. set for a partial exit. Soon it wasn’t happening ISSN 1817-1648 Copyright © 2014 For the latest programme Asia Series Sponsor Co-Sponsors at all, the company citing “deteriorating market and speaker line-up, visit: conditions and recent excessive market volatility.” avcjrealassets.com WH Group is the work of many years and Tim Burroughs multiple funds for CDH. The private equity firm Managing Editor made its name restructuring Chinese companies Asian Journal Join your peers avcjrealassets.com Tweet #avcjrealassets Number 26 | Volume 27 | July 15 2014 | avcj.com 3 NEWS

Hony buys Pizza Express million ($1.6 million) in net assets; have individual ASIA PACIFIC financial household assets of at least RMB3 from for $1.54b million; or have an average annual individual DeAWM hires Sambanju for Chinese PE firm Hony Capital has agreed to buy income of at least RMB500,000 in the last three restaurant chain Pizza Express from UK-based years. Asia secondaries private equity firm Cinven Partners for GBP900 Jason Sambanju, formerly co-head of Asia at Paul million ($1.54 billion). The transaction is the GGV leads $10m round for Capital Partners, has joined Deutsche Asset & largest seen in Europe’s casual dining industry in Wealth Management (DeAWM) as head of Asia the past five years. gamer networking platform secondaries. In his newly created role, Sambanju Cinven owns Gondola Group, operator of Sino-US VC firm GGV Capital has led a $10 million will take responsibility for sourcing and executing restaurant brands including Zizzi, ASK Italian and Series B round funding for Curse, a US-based secondary private equity opportunities across Kettner’s, as well as Pizza Express. The social networking platform that targets online the region. gamers. The new financing – which also includes $6 million in from Multiplier Capital – will be used for product development. Curse AUSTRALASIA Voice adopts a similar business model to Chinese social networking service YY. KKR, PEP to make joint bid for Australia’s Sai Global Prologis raises more capital KKR is expected to team up with Australian for China logistics platform private equity firm Pacific Equity Partners (PEP) Prologis, an industrial real estate to bid for risk management and standards (REIT), has increased $588 million to Prologis compliance business SAI Global. In May, PEP China Logistic Venture, a platform used to acquire offered to buy all outstanding shares in SAI via a firm acquired the parent company in a public- and manage logistics properties in China. HIP scheme of arrangement, valuing the company at to-private transaction worth EUR1.34 billion ($1.8 China Logistics Investment – understood to be A$1.1 billion ($1 billion). billion) in 2007. The sale of Pizza Express follows a subsidiary of Abu Dhabi Investment Authority the sale of Byron Hamburgers, an up-market (ADIA) – will contribute $500 million, with burger chain owned by the Gondola Group, Prologis putting in the remainder. GREATER CHINA to European private equity firm Hutton Collins Partners for GBP100 million last year. SCPE backs China property Investors eye liquidity as Pizza Express currently has 436 shops in the UK and an additional 68 internationally, with 12 of joint venture WH Group revives HK IPO which in Hong Kong, nine in Shanghai and one in Standard Chartered Private Equity (SCPE) has led Private equity-backed Chinese pork processor Beijing. Richard Hodgson, Pizza Express’s CEO, will a $124 million financing round for a mixed-used WH Group is once again seeking to list in Hong remain with the business. “We have built a strong commercial property development project in Kong, three months after a HK$41 billion ($5.3 track record in helping Chinese enterprises to China. SCPE has paid $69.4 million for a 28% billion) IPO was scrapped. WH Group has filed a expand globally,” said John Zhao, CEO of Hony. interest in the joint venture, with the rest coming revised prospectus but with no further details “With Pizza Express, we have the opportunity from an undisclosed Chinese institutional on pricing or timing. The company is reportedly to leverage our local expertise to accelerate investor and an Asian family group. targeting $2-3 billion and will come to market in its growth in the Chinese market, as well as to late July or early August. continue to drive its business forward in the UK.” Chinese stationery firm launches PE fund PE consortium targets international school operator backed by Sequoia Shenzhen Comix Stationery, a Shenzhen-listed $1.5b China outbound fund Capital, has filed for an IPO on the Hong Kong stationery manufacturer, has won approval to A consortium of foreign and Chinese PE firms Stock Exchange. The company operates 33 launch a PE fund, which will be managed by has begun raising a $1.5 billion fund, which aims schools of different kinds across eight cities. Hejun Consulting. The vehicle, namely Comix to raise a combination of US dollars and Chinese Sequoia invested RMB180 million ($29 million) in Hejun Industry Fund, has an investment size of currency to invest abroad. The fund was set up Maple Leaf in 2008, taking roughly a 20% stake. RMB500 million ($80 million). in December by Chinese GPs Bohai Industrial Management and Harvest Fund Chinese regulator issues Horizons Ventures joins Management, alongside US Rosemont Seneca Partners and Thornton Group, with an original guidelines for domestic PE reputation site round target of $1 billion. The China Securities Regulatory Commission Horizons Ventures, a VC business owned by Hong (CSRC) has issued draft rules for the domestic Kong billionaire Li Ka-Shing, has participated Sequoia’s China Maple Leaf private equity industry, including a definition of in a $4.7 million for shopping- investors qualified to participate as LPs. Investors based social platform Traity. The round was led Education files for HK IPO committing more than RMB1 million to a by European VC firm Active Venture Partners, China Maple Leaf Education Systems, a Chinese privately-offered fund must: have at least RMB10 with participation from KRW Schindler Private

4 avcj.com | July 15 2014 | Volume 27 | Number 26 NEWS

Ventures, Bertelsmann Digital Media Investments, India announces $1.6b Everstone, Fidelity exit Lanta Digital Ventures, 500 startups and other individuals. fund to support start-ups Transpole to Japan’s SBS The Indian government has pledged to support Everstone Capital and Fidelity Growth Partners local start-ups by launching a INR100 billion will exit Transpole Logisitcs as Japan’s SBS Group NORTH ASIA ($1.6 billion) fund-of-funds. The fund is one agreed to acquire a 66% stake in the Indian of a raft of proposals put forward by Finance company for an undisclosed amount. Fidelity JBIC, Mitsubishi take stake Minister Arun Jaitley on Thursday with a view paid $13.5 million for a significant minority stake to boosting entrepreneurship and encouraging in the company in April 2011. It then made a in Mid East water company small enterprises, as part of the Union Budget for partial exit in January last year when Everstone The Japan Bank for International Cooperation 2014-2015. It will serve as a catalyst for attracting paid INR2.2 billion (around $40 million) for a near (JBIC) has joined Mitsubishi Corp. and Mitsubishi private capital by providing equity, mezzanine 25% stake. Heavy Industries in acquiring a stake in Middle capital, soft loans and other risk capital to start- Eastern water treatment firm Metito. JBIC will ups. However, as of yet, there is no more detail on App developer platform invest up to $92 million in new preferred stock, how the fund will be allocated. while a special purpose vehicle will acquire Plans were also unveiled to establish a gets Series A round 38.4% of Metito’s existing shares. technology center to promote innovation, Pokkt, an Indian alternative monetization entrepreneurship and agro-industry platform for mobile app developers, has secured INCJ, Fidelity in cloud accompanied by a fund with a corpus of INR2 $2.5 million in Series A funding from Singapore- billion. The government added that it will put based Jafco Asia and SingTel’s corporate VC arm storage provider round Innov8. Existing investors Jungle Ventures and Innovation Network Corporation of Japan (INCJ Ganesh Krishnan also participated in the round. and Fidelity Growth Partners have taken part in $24 million round for US-based Cloudian, a hybrid cloud storage solutions provider. Existing SOUTHEAST ASIA investors including Intel Capital also participated. Temasek ups investments, Japan’s Gree leads $4.5m boosts unlisted exposure round for HotelQuickly Temasek Holdings’ exposure to unlisted assets Japanese tech giant Gree has led a $4.5 million reached a record high as the state-controlled Series A-1 round of funding for HotelQickly, a Singaporean fund made S$24 billion ($19.3 Hong Kong-headquartered last-minute hotel aside other smaller pools of capital for early-stage billion) in new investments for the year ended booking platform. This follows a $1.15 million investment, including a INR1 billion for a “Start March 2014, the most in six years. Temasek ended Series A round in August last year. Up Village Entrepreneurship Program” for rural the 12-month period with a portfolio worth youths. S$223 billion, also a record high. SOUTH ASIA Jaitley said there was a need to “examine the financial architecture” of the micro, small and Navis buys Singapore oil medium enterprises (MSME) sector. He proposed and gas components maker SCPE commits $83m to appointing a committee of representatives from the Finance Ministry, the Ministry of Navis Capital Partners has acquired a majority Indian power business MSMEs and the Reserve Bank of India to make stake in Tri-Star Industries, a Singapore- Standard Chartered Private Equity (SCPE) will recommendations on how the sector can be headquartered component manufacturer for the invest INR5 billion ($83 million) in the power grid better financed. He also proposed that the oil and gas sector. AVCJ understands the deal subisiary of Sterlite Technologies, a listed Indian definition of MSME be reviewed to provide for a is worth $50-100 million. Key management will transmission solutions provider for the telecom higher capital ceiling, which will give companies remain in place as shareholders and operators of and power industries. This is said to be the first easier access to credit. the business. foreign investment in India’s power transmission sector, with most overseas players having DFI-backed vehicle invests focused on power generation. India lays ground for REIT in power plant developer Steadview, Sequoia lead roll-out Indonesia Infrastructure Finance, a vehicle owned India’s long-awaited real estate investments trusts by the Indonesian government and serveral $41m Olacabs round (REITs) inched closer to reality as the government development finance institutions (DFI), has Indian online taxi-booking and car rental offered clarification on the tax status of the committed $12.5 million for a minority stake in platform Olacabs has raised INR2.5 billion ($41.8 structures. Finance Minister Arun Jaitley said that the Indonesian subsidiary of gas power plant million) through a Series C round of funding led REITs would have pass-through status - which developer Maxpower. International Finance by and Hong Kong-based hedge means they are not liable for corporate tax. The Corporation (IFC), Asian Development Bank and fund Steadview Capital. Existing investors Matrix move is intended to create a single layer of tax for Germany’s DEG are all involved, plus Sumitomo Partners India and Tiger Global also participated. the structures. Mitsui Banking Corporation..

Number 26 | Volume 27 | July 15 2014 | avcj.com 5 Book Now Early Bird Expires and Save BIG! on 10 October Register online at 27th Annual www.avcjforum.com or email AVCJ [email protected] PRIVATE EQUITY & VENTURE FORUM 2014 11-13 November 2014 Four Seasons Hotel, Hong Kong

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LP summit sponsor Awards sponsors Exhibitor Join your peers Scan this QR code to register to Tweet #avcjforum this event NOW Book Now Early Bird Expires and COVER STORY Save BIG! on 10 October [email protected] Register online at 27th Annual www.avcjforum.com or email AVCJ [email protected] In credit? PRIVATE EQUITY & Whether disillusioned by the returns from conventional private equity or seeking to diversify their exposure, VENTURE FORUM LPs are more open to Asia credit strategies. The returns are there, provided you pick the right strategy

2014 IF FURTHER CONVINCING WERE REQUIRED Given the Asian market still lacks depth, the the credit and special situations track record, the that Asian distress funds have become a major numbers offer only a partial insight. On a global opportunity set looks increasingly interesting,” draw for LPs, perhaps May saw the last doubts basis, while distress fundraising has been slow he says. 11-13 November 2014 laid to rest. Within days of each another, two GPs so far in 2014 – with $13 billion committed to To better understand where LPs are looking Four Seasons Hotel, Hong Kong – one focused on India distress opportunities, 16 funds – managers have proliferated in recent for with regards to distressed debt one must the other a pan-regional special situations fund years. In 2013, $35 billion raised by 45 funds examine the areas that have seen the most – revealed they had raised $1.73 billion between compared to $26 billion by 39 funds in 2010. An activity to date. Meet 1,000+ them, both far exceeding their original targets. estimated 63 managers are currently seeking to Across the region, slower growth and global PE professionals The first was Aion Capital Partners, a joint raise $33 billion. increasing corporate debt are putting more venture formed by pressure on company balance sheets. Add and ICICI Ventures. It received commitments Growing appetites to this the number of Asian companies that of $825 million for its maiden special situations There are number of factors driving increased have run into trouble due to overexpansion Network with fund, having set out to raise a more modest $500 LP interest in debt-related assets, particularly or mismanagement and there are a number million just over a year ago. The fund will pursue in Asia. First and foremost, many investors of opportunities for distress investors. In 280+ LPs opportunities such as financial restructurings, say returns coming out of the region have many cases, these companies might be good recapitalizations and promoter financings. been disappointing. This leads LPs to look for businesses with bad balance sheets that – as a Then second was SSG Capital Partners, which alternatives and private debt is an option. result of unwise strategic moves – are unable to Hear from 170+ closed its third Asia special situations fund at the Barry Lau, managing partner as Adamas service their debt under current operations. expert speakers hard cap of $915 million after only five months in the market. The fund – backed by mixture of Fundraising for Asia-focused distressed PE funds large family offices, pension funds and companies, among others, from Europe and the 8 12 Join attendees US – targets numerous proprietary transactions 10 from 35+ countries but specializes in restructuring. 6 The two GPs’ strategies differ but both speak 8 of a broader trend of growing acceptance in the 4 Customer Enquiries: Registration Enquiries: Sponsorship Enquiries: investor community. Already part of the furniture 6 Funds US$ billion in developed markets, distress and private debt 2 Email us at CALL Carolyn Law on Darryl Mag T: +852 3411 4919 4 [email protected] +852 3411 4837 E: [email protected] are now more widely recognized as an asset class in Asia and LPs are looking to increase allocations. 0 2 Strategies and track records are being scrutinized, 2010 2011 2012 2013 2014 YTD Lead sponsors Asia series sponsor but will these niche managers receive enough Funds closed Aggregate capital raised (US$ billion) backing to enter the mainstream? Source: Preqin * Includes distressed debt, special situations and turnaround strategies “I think, from an Asian perspective, it is a factor of the maturation of the Asian private equity market, where investors have built significant Assest Management, observes that LPs had “The broader trend is that banks are not exposure to the region during the mid-to- historically overlooked private debt in favor of lending for their own reasons and there is a gap late 2000s and now they are seeking further seeking 2-3x returns by investing traditional in funding in Asia,” says Sharon Hartline, a fund diversification and yield,” says Jonathan English, and . But as the reality is formation lawyer and partner with White & Case Co-sponsors managing director with Portfolio Advisors. changing, so is investor appetite. “LPs are sort of in Hong Kong. “In particular, Asian debt-related According to Preqin, three Asia-focused having this awakening and realizing that actually strategies are popular among US pension plans distress funds have raised $1.9 billion so far this it is not bad to generate a quick cash return and and college endowments where they are looking year compared to $1.7 billion, across 11 funds, in therefore private debt has become more of an for steady returns instead of home-runs.” 2013. This is less than the 2012 tally of $6.5 billion, interesting topic,” he says. Within Asia, three jurisdictions have typically but it could be argued that Mount Kellett Capital Rob Petty, managing partner and co-founder been the focus of distress investors: India, China Management, which raised $4 billion for a global of Clearwater Capital Partners, contends that and Australia. The first two account for the bulk of Legal sponsor LP Breakfast sponsor VC summit sponsors VC summit legal PE leaders’ summit sponsors sponsor fund with a substantial Asia allocation, should the absolute yield for Asian credit relative to the opportunities in the region. be discounted. Meanwhile, there are around US and Europe is simply more compelling. “If While the election of a new government has seven Asia-focused funds currently in the market you compare growth capital or buyout return been a cause for optimism in India recently, over looking to raise a collective $5.8 billion. history and cash distribution timetables versus the past year economic growth has deteriorated

LP summit sponsor Awards sponsors Exhibitor Join your peers Scan this QR code to register to Number 26 | Volume 27 | July 15 2014 | avcj.com 7 Tweet #avcjforum this event NOW COVER STORY [email protected]

to its slowest pace in a decade, leaving is said to be targeting $500 million for Fund III, that making the system work requires a local companies struggling to raise capital. Aion is just buys NPLs and looks for ways to force payment or presence and a highly specific skill set. “I honestly one of a number of GPs looking at the country. extract value from related assets. believe that the whole game is about providing Data from the Reserve Bank of India indicate Adamas’ strategy is to provide credit capital and solutions, and a lot of the solutions that stressed assets, including bad debts and alternatives to companies that can’t access involve being on the ground,” he says. restructured loans, rose to 10.2% of total debt financing through conventional channels – held by Indian banks last year, the highest in a certainly not the capital markets and increasingly Region vs. country decade. In this context, the government has also not the banking system either. Lau explains that The diversity of the distress opportunity in Asia sought to encourage private-equity funds and with bank balance sheets shrinking so often, begs the question as to whether LPs are best asset reconstruction companies to play an active his firm is often one of few options remaining, served backing managers in individual markets role in stressed assets markets. which translates into creditor-friendly terms. “We rather as opposed to pan-regional players. It “Two years ago when we sat on the are looking at an emerging market risk but we should come as no surprise where the different conference panels and said India was interesting, are getting paid for taking that risk,” he adds. “For GPs stand on this. Much like Loader, Lau of people rolled their eyes,” says Petty. “Today, if you example, we are getting returns of 25% and you Adamas – which focuses exclusively on China – look at realized returns, India has performed very can’t get that from anywhere else in Asia.” emphasizes the advantages of a country specific nicely over the past 18 months.” However, not all of Asian distress approach and an on-the-ground presence. Specifically, more GPs are looking to target opportunities are limited to the region’s “Private debt is a localized business because debt opportunities in the country. KKR has emerging economies. Until recently, Australia credit protection is different from country to country and it is difficult to be experts in almost every single geography and jurisdiction,” he says. Fundraising for distressed PE funds globally “You need a local team for everything you do 40 50 and our vision was that we would focus on China because from a risk-return standpoint, it makes 30 40 perfect sense.” On the other hand, Petty of Asia-focused 20 30 Clearwater argues that debating the respective Funds merits of a regional versus a country-specific US$ billion 10 20 strategy somewhat miss the point. “It is not just about geography, but people 0 10 always chart Asia by geography. We emphasize 2010 2011 2012 2013 2014 YTD again and again that it is about sectors,” he says. Funds closed Aggregate capital raised (US$ billion) “For example, if you look at the commodities and Source: Preqin natural resources space, whether it is in India, Indonesia, Australia or China – coal is getting crushed. Shipping is also creating opportunities been providing local currency debt products tended to be seen in the context of highly- across a number of jurisdictions.” via its own non-banking finance company for leveraged companies struggling to unwind Indeed, the market has seen a number of several years. In January, the firm reached a final positions that became untenable in the wake deals in these areas. Clearwater previously close of $2 billion on a global special situations of the global financial crisis. Now most of this bought and sold both Griffin Coal Mining and fund. A month later, during a visit to India, KKR low-hanging fruit has been picked, investors are Carpenter Mine Management to Lanco Resources co-founder Henry Kravis said the firm was keen looking at smaller mid-market deals. Australia. Meanwhile, GPs like Denham Capital to capitalize on corporate indebtedness by The challenge is generating attractive returns and Helmsman Capital are targeted distressed investing in companies with distressed balance in a market that is far more mature than China mining opportunities. sheets that have difficulty raising capital through and India and doesn’t offer the same risk-return However, regardless of strategy, convincing conventional channels. profile. Allegro Private Equity is an example of some LPs of the Asian distress opportunity is still China’s economic expansion has yet to slow an investor with a strategy closer to traditional a challenge. “For the nascent LPs in this space, to Indian pace, but for companies with business private equity. It focuses on control positions there always tends to be an issue with return models predicated on the hyper-growth rates in distressed business where operational multiples, as the multiples are typically going to of recent of years the financial pressure is very improvements are used to drive returns. be lower than with a pure PE play,” says Portfolio real. According to the China Banking Regulatory “The large restructurings have been done so Advisors’ English. “That is an issue for some LPs Commission, non-performing loans (NPLs) rose I don’t think that space is as rich in targets,” says – getting comfortable with the return profile by RMB28.5 billion ($4.7 billion) in the last quarter Adrian Loader, managing director at Allegro. “But and where it fits into their broader portfolio of 2013 to reach RMB592.1 billion, the highest businesses below $150 million dollars are in need construction.” level seen since September 2008. of solutions that involve more than just money He is not alone in this view. While an These debts represent a complex patchwork because we you have to fix the board and solve increasing number of LPs are focused on of state and private interests, making it difficult operational issues.” private debt and building out their absolute to quantify the size of the opportunity, but The combination of strong a rule of law returns coverage, education remains an issue. Shoreline Capital is the forefront of those looking supported by predictable creditor laws and strict Speaking to AVCJ after announcing the final to take advantage of it. The China-focused GP, director laws means Australia is can be attractive close of Fund III, Edwin Wong, managing partner which raised $303 million for its second fund and to more risk-averse LPs. But Loader cautions of SSG, observed that receptiveness to credit

8 avcj.com | July 15 2014 | Volume 27 | Number 26 COVER STORY [email protected]

The other difficulty facing GPs is the lack of Case’s Hartline. She adds that LPs remain cautious “If you compare growth track records in Asian distress. One LP observes about stepping in too soon, especially in China that pan-regional funds have served investors where some expect the economy to deteriorate. capital or buyout well these past few years, providing liquidity even If distress is to sustain the broader interest it return history and cash when markets are tough. But at the same time, has been receiving, a larger manager universe few data points are available for a fully-realized, is essential. But are there sufficient people distribution timetables liquidated portfolio in Asia. with experience and expertise in executing “In some cases, the returns are locked-in from transactions across the ? versus the credit and a current yield perspective,” the LP explains. “You Clearwater’s Petty says no. special situations track can try to goose the IRR with an equity kicker, “It is a pretty small group of GPs that run and the upside can drive the multiple, but there institutional capital of $1 billion plus and have a record, the opportunity are very few data points from a fully realized track team across multiple geographies that can do record that demonstrate that outcome.” deals of $25-100 million,” he explains. “There are set looks increasingly perhaps 10 of us – that is not many for a $30 interesting” – Rob Petty Chicken and egg trillion market. Because of the complexity of Despite the recent fundraising success stories, the deals, it takes larger teams, generally more question marks over strategy and track record still systems and analytical firepower to play across strategies had improved since the firm’s previous present obstacles for distress-focused GPs as they the capital structure.” fundraising cycle, but defining the opportunity make the transition from niche to mainstream. It The more managers, the easier it becomes set can be challenging. is arguably the same for many managers in Asia, to fill the gaps in investor education. The Needless to say, explaining a portfolio of but particularly the more specialist players, as caveat is LPs have to be comfortable enough to 25 credit or special situations investments they deal with investor inquiries. Certainly, the support new GPs as they emerge. Adamas’ Lau relating to companies with varying levels of phenomenon of capital being concentrated in understands the need to tread carefully when an financial health is more complicated than 10-12 fewer hands is common to all. industry is in its nascent stages, but stresses that buyout or growth capital deals that may follow “We have had people coming in to talk to us early movers might have the most to gain. coherent sector patterns. “It is just more complex, for the last years two years on these strategies, “So long as investors are willing to consider especially when you layer in structures, cash- flow but in the past six months we have noticed more the space and willing to take a leap of faith in this characteristics, and multiple scenario analysis of people in the market are having trouble raising emerging sector I think they will be handsomely different exit routes,” notes Clearwater’s Petty. even their third or fourth fund,” says White & rewarded,” he says.

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To subscribe, call Sally Yip at +(852) 3411 4921 or email [email protected] avcj.com ANALYSIS [email protected] Still open for business The IPO window remains open, especially in Australia; VCs continue to dominate China fundraising, but probably not for much longer; the Philippines stakes its claim as Southeast Asia’s emerging PE star

1) Exits: The roll continues Group also goes public in the US. the uptick in activity in 2008. There are other Three months ago, the question was whether , DST Advisors, factors – fundraising is always going to be easier bumper first-quarter trade sale and IPO numbers Hillhouse Capital Management and Capital Today on the back of a string of IPO exits, for example could be sustained. It appears they can – at least all made partial exits, sharing approximately – but historically the big names in China tend to for the time being. $674 million. But what they retain is far more seek new capital around the same time. It begs According to provisional data from AVCJ valuable. Six disclosed PE and VC investors – the the question of what happens from the third Research, trade sales for May-June generated aforementioned four plus Bull Capital Partners quarter onwards and the reality is the headline $7.3 billion, just short of the first quarter’s $7.5 and Sequoia Capital – have between them number will drop off, perhaps dramatically. billion, while overall exits came in at $13.2 billion, an economic interest of more than 40% in a Of the 20 largest funds in Asia to reach a compared to $13.3 billion for the previous business with a market capitalization of $38 final close in the second quarter, eight were three months. As with the previous quarter, one billion and net revenues that increased threefold China venture capital vehicles. GGV Capital led large-ticket item moved the needle: Australia’s to $11.5 billion in the two years to 2013. the way with $621.9 million for its fifth Sino-US QIC scooped $6.2 billion by selling Queensland Capital Today invested $18 million in JD.com fund, followed by IDG Capital Partners, Legend Motorways to Transurban Group, AustralianSuper between 2007 and 2009, and held 6.8% of the Capital, Matrix Partners and Lightspeed China. and Abu Dhabi Investment Authority. Without it, company immediately after the IPO and is the total looks far more ordinary. said to be sitting on an unrealized return of As is usually the case, trade sales account for more than 100x. China PE and VC funds with the bulk of the top 25 exits for the quarter. More notable is that seven of the entries were IPOs (i.e. 2) Fundraising: A China VC story a consumer-tech focus full or partial exits from companies on listing). The rich seam of China VC fundraising Fund US$ million Australia figures prominently, confounding continued into the second quarter of 2014, Yunfeng Fund II 1,100.0 observations that sparse first-quarter activity was with an astonishing $3.7 billion raised evidence of the public markets window closing. across 16 vehicles. This is more than double GGV Capital V 621.9 Having abandoned its IPO in the first quarter, CVC the total for January-March and takes VC IDG China Venture Capital Fund IV 586.0 Capital Partners-owned Mantra is now listed. This fundraising for the first half to $5.6 billion. Vision Knight Capital (China) Fund II 550.0 was one of eight PE-backed IPOs in Australia that To put that in context, it is 79% of all capital Shunwei China Internet Fund II 525.0 between them raised $2.7 billion between April entering Asian VC funds during the period. and June, the highest quarterly total on record. With six months left to run, 2014 is LC Fund VI 500.0 More than half of these proceeds were already the second-biggest year on record Matrix Partners China III 350.0 generated by two offerings: catering and for China VC fundraising, trailing only 2011, Lightspeed China Partners II 260.0 cleaning contractor Spotless Group (A$994.6 which represented not only the peak of the BioVeda China Fund III 200.0 million, $931 million) and hygiene and paper pre-IPO investment boom but also the last products manufacturer Asaleo Care (A$655.7 time a lot of the established firms were in Sailing Capital Yingli Renewable Energy Fund 161.0 million). Pacific Equity Partners and its co- the market. This phenomenon also explains Source: AVCJ Research investors retain a minority interest in the former and fully exited the latter, taking approximately Private equity exits by type A$537 million from both IPOs. Ironbridge Capital also received proceeds of A$168.4 million 25,000 200 through the exit of all but a 5% holding in in vitro fertilization specialist Monash IVF. Meanwhile, 20,000 Quadrant Private Equity secured A$241.5 million from the IPOs of media monitoring business 15,000 150 iSentia and Burson Auto Parts. Exits 10,000 Asia-wide PE-backed IPOs generated $8.3 US$ million billion for the quarter from 40 offerings, down 5,000 from $9.7 billion for the previous three months. A large portion of this came from Chinese 0 100 online retailer JD.com, which raised $1.78 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 billion – pricing its offering above the indicative No. of exits Public market sale Seconadry buyout Share buyback Trade sale range due to investor demand and whetting Source: AVCJ Research the appetite for what may follow when Alibaba

10 avcj.com | July 15 2014 | Volume 27 | Number 26 ANALYSIS [email protected]

GIC Private was responsible for two of these Private equity investments by type transactions, backing Metro Pacific Investments’ 25,000 800 hospital business in a deal that could be worth $234 million and committing $76.6 million to 700 20,000 Century Canning Corporation (CCC) ahead of an 600 IPO. The third came as TPG Capital and Malaysia’s 15,000 500 Khazanah Nasional invested $132 million in

400 Deals housing developer 8990 Holdings. 10,000 US$ million The Philippines accounted for close to one 300 third of Southeast Asia’s $2 billion in private 5,000 200 equity investment for the quarter, contributing 0 100 to a first half total of $3.6 billion, the highest 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 sixth-month total in nearly three years. Needless Investments Buyouts Growth/pre-IPO PIPE Start-up/early-stage Other to say, KKR’s agreed $1.1 billion privatization Source: AVCJ Research of Singapore-listed container manufacturer Goodpack was the dominant factor, but the Philippines represents the more interesting trend. The country’s private equity industry is still at a Private equity-backed IPOs very early stage but this activity gives credence 15,000 80 to reports of rising investor interest. What with 70 the widely-expected relaxation on foreign 12,000 60 investment restrictions in the banking sector, momentum may continue to gather. 9,000 50 Asia PE investment reached a three-year high

40 IPOs 6,000 of $23.4 billion in the first quarter of 2014 and US$ million 30 3,000 this was never likely to be matched in the second 20 quarter. Deal value did drop to $16.7 billion but 0 10 January-June still represents the most active 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 six-month period since the second half of 2010, No. of IPOs Funds raised (US$ million) suggesting that a relatively disappointing 2013 Source: AVCJ Research will not be repeated. In addition to Southeast Asia, Australia and China saw an uptick in quarter-on-quarter and there are All closed at or above target, and all can claim a Yu and Alibaba Group founder Jack Ma secured snippets worth noting in each case. loyal following among blue chip US institutional $1.1 billion for its second fund, while Vision The Australian total was predictably buoyed investors. Knight, which was founded by former Alibaba. by a big infrastructure deal as Abu Dhabi The outlier is arguably com CEO David Wei, raised $550 million. Investment Authority invested $779 million in Partners, which raised $525 million for its second VC funds accounted for 60% of the capital Queensland Motorway. Less predictably, the fund. There is no US affiliation or legacy; the GP committed to Chinese private equity in the country also saw its largest-ever VC investment as was co-founded by Lei Jun, and second quarter; include Yunfeng and Vision Insight Venture Partners committed $250 million CEO of smart phone manufacturer . It Knight and it rises to 86%. The VC contribution to to global marketing specialist Campaign Monitor. is an example of the China technology story Asia fundraising as a whole was a more modest The software-as-a-service industry is indeed going full circle: entrepreneur receives venture 30% as the three-month total reached $14.8 unconstrained by geography. capital backing and builds a successful business; billion, the highest level since the first quarter In China, the food thesis remains of entrepreneur then uses a portion of the proceeds of 2013. The China venture capital impact was huge relevance. Four sizeable dairy industry to invest in the next generation of start-ups counterbalanced by activity from the pan- transactions announced since September 2013 before going one step further and raising a regional buyout funds, with CVC Capital Partners will see PE capital used to develop farms with a formal VC fund. In this respect, China is following and TPG Capital announcing final closes on their view to meeting consumer demands for higher a path already marked out in Silicon Valley. most recent vehicles, at $3.5 billion and $3.3 quality milk. The most recent of these came in Two more funds that reached final closes in billion, respectively. June as and CITIC PE agreed to the second quarter tick a number of the same invest $320.5 million in Mongolia Yili Industrial boxes. Neither Yunfeng Capital nor Vision Knight 3) Investment: Philippines rising? Group’s livestock subsidiary. Capital is a VC firm; the former also does later When CVC Capital Partners acquired SPi Global A consortium comprising KKR, Baring Private stage investments and the latter is operationally- in early 2013 it was the Philippines’ largest- Equity Asia, Hopu Investments and Boyu Capital focused. However, they exist at the nexus of ever private equity buyout. Unsurprisingly, the also took the food thesis one step further, consumer and technology; they have roots transaction sent PE investment in the country to committing $270 million to COFCO Meat, a hog in successful tech businesses; and they relied a quarterly high of $340 million. Now that figure farm and meat processing plant operator. As with heavily on entrepreneur contributions for Fund I has been bettered, but the $444 million deployed the dairy investments, the PE firms will contribute before tapping institutional investors for Fund II. in the second quarter of 2014 was spread more technology and expertise from overseas in order Yunfeng, set up by Target Media founder David evenly across four deals. to boost quality and capacity.

Number 26 | Volume 27 | July 15 2014 | avcj.com 11 DEAL OF THE WEEK [email protected] / [email protected] WiL aims high with Japan’s ‘next Nintendo’

FROM NINTENDO’S SUPER MARIO BROS. Isayama’s confidence is arguably justified. has strong ties to the founding team, was all the way through to Sony PlayStation’s Final Gumi is in the process of achieving what so many best-placed to support Gumi’s US expansion Fantasy, there was a time when Japan ruled the Japanese mobile game start-ups have failed alongside Sega. “The fact we speak the same gaming industry. Microsoft’s Xbox and recent to do – a breakthrough in the US market. One language also made things easier,” he adds. Western successes such as Call of Duty and title in particular, role-playing game (RPG) Brave This is not Gumi’s first attempt at international Grand Theft Auto have dented this dominance, Frontier, has been a big hit across the Pacific, expansion. In 2012, the company ranked top but now developers are looking to new becoming one of the top 15 of a Deloitte list of Japan’s platforms. bestselling RPGs on the App fastest-growing tech Fast-growing mobile app maker Gumi is latest Store. It previously topped the start-ups, with revenues great hope of a resurgent Japan – or at least charts in Japan and Korea. expanding 3,950%. An office that’s the hope of Gen Isayama, founder of WiL Gumi was set up in 2007 and opened in the US but then (World Innovation Lab), which led a $50 million has about 10 games under its Gumi scaled back. “This funding round for the company. The round – belt. With an office in Singapore was before Brave Frontier,” which included Sega Networks – brings Gumi’s and plans to expand further, it is Isayama says. “If you think total capital raised to $94 million. The investor one the few Japan mobile start- about future growth, they roster also features Incubate Fund, East Ventures, ups – along with Gree and DeNA Japan’s Gumi: Levelling up will inevitably need a DBJ Capital, Nissei Capital, B Dash Ventures, – to make significant headway presence in Silicon Valley Shinsei Bank and Jafco Ventures. overseas. and that is our mission.” “I have come across so many Japanese game “If you look at most Japanese mobile start- Now Gumi has the traction – and user base developers over the past 10 years but Gumi has a ups, each one is doing something interesting but – it previously lacked, there appears to be little unique profile,” says Isayama, who was a partner I would say around 99% have a very domestic- standing between the company and an IPO on with DCM in Japan before founding WiL in focused business,” says Isayama. first section of the Tokyo Stock Exchange later Silicon Valley last year. “To my mind they have the Despite competition from other investors in this year. According to rumors, the offering could potential to become the next Nintendo.” Asia and the US, Isayama says that WiL, which be worth as much as JPY100 billion ($1 billion). Nice targets selfies with style

THE WORLD HAS SEEN PLENTY OF SELFIES. in 10 of these users are based outside of China. developed in the US, while Chinese-made From dining tables to football matches, there is Matrix Partners and Morningside Technologies products haven’t gained a following overseas. always someone, arm outstretched and phone were suitably convinced and put up $8 million in But we think Nice can develop domestically and in hand, keen to capture a photo of themselves Series A funding two months ago. internationally,” Zhou says. for posterity. It was only a matter of time before “Our company was set up earlier last year VY Capital and H Capital recently joined the mobile apps enabling people to beautify these and we wanted to launch a mobile product to existing investors in a Series B round worth $20 images emerged. address the young demographic. But it has taken million. Both are newly-established funds. VY was Nice is a Chinese mobile app that has taken time for us to find our market position,” explains set up by Xiaohong Chen, ex-China managing the process one logical step further. Alex Zhou, co-founder of Nice. partner at Tiger Global, while H is led by It allows users to tag photos of Zhou’s previous online ventures Alexander Tamas, previously of DST Advisors. themselves in order to showcase include streetwear magazine “We weren’t really looking for capital in this the brands they are wearing. In Kidulty and e-commerce site round, rather expansion strategies offered by addition to being uploaded to Kongdao. He then teamed up with global VC firms. Chen has invested in almost Facebook and Instagram, selfies Dapeng Cao, formerly Sina and every leading technology firm in China and find their way to the Nice platform Baidu, and they created male- Tamas has seen all cutting edge technologies with the Gucci or Starbucks logo focused app KK Shopping – which developed in Silicon Valley,” Zhou says. also logged for posterity. failed to gain traction – before Nice now supports Facebook and Instagram A brand-tagging function Nice: Self-aware conceiving Nice. Matrix and as well as Chinese platforms Weibo and WeChat has been available on Instagram Morningside have both provided as it seeks to broaden its user base. An online for some time without really taking off. China assistance since then, notably helping the chatting function, which groups users who like is a completely different proposition, though. company create an online community for users similar brands, has also been introduced, and Nice launched last October and has built up a to share lifestyle information rather than a pure new users have increased tenfold since January. following of more than 2 million registered users e-commerce platform selling products. “For us, developing a strong data base is the who share about 100,000 images each day. One “China has been seen as a copycat of apps most important task right now,” Zhou adds.

12 avcj.com | July 15 2014 | Volume 27 | Number 26 FUNDS [email protected] MSPEA rides out Volcker impact

FOR MOST ASIA-FOCUSED GPS THAT WERE pipeline. Two investments have already been Fund IV follows a similar strategy to that of once captive units of investment banks, the completed from Fund IV – Korean tissue paper its predecessor, pursing minority and control shadow of their former parent has long since manufacturer Monalisa and India’s Janalakshmi investments across the consumer, financial faded. Restrictions on financial institutions as LPs Financial Services – and at least five more are services, industrial products sectors, as well as is a problem, but they are already accustomed to contracted. These include take-private deals for service-related businesses in general. China and life without balance sheet capital. US-listed Sino Gas Holdings and Noah Education. Korea will account for 80% of the corpus with the Morgan Stanley Private Equity Asia (MSPEA) Chin Chou, CEO of MSPEA, sees take-privates rest deployed mainly in India and Taiwan. is in a different place; it is still affiliated to a bank. as the most significant development in the There have been two disclosed investments Raising $1.49 billion for its third fund in 2007, firm’s China business in the last 4-5 years. While in Korea in the past two years – Monalisa MSPEA received $400 million from Morgan he expects growth capital deals to remain and restaurant chain Nolboo – while the Stanley and employees of the bank. The firm dominant in the country, he acquisition of a construction launched Fund IV in 2012 knowing that – under sees privatizations as part of a materials business from a local the Volcker Rule – the bank share was capped at broader opportunity set. Control conglomerate Hanwha Group 3%, or $50 million out of a $1.5 billion target. transactions are part of this. has been reported but not Filling the balance sheet hole represents “In the past a number of announced. as significant challenge in an already difficult the control deals in the market “We have done two buyouts fundraising environment. However, MSPEA have been for export-oriented in Korea in the last two years of announced last week announced a final close businesses and our preference companies facing succession of approximately $1.7 billion. Capital from has been on businesses catering MSPEA: Life after Volcker planning issues and we expect institutional third parties is about 50% higher in to the domestic market,” Chou these to continue,” Chou says. dollar terms compared to Fund III. tells AVCJ. “Eighteen months ago we acquired “The large conglomerates in Korea also continue Having reached a first close in late 2012, control of Hi-24, Beijing’s largest convenience to streamline and focus their business objectives MSPEA went into the second phase of the store chain, and there will be more control- and that leads to deal flow involving non-core fundraising with a number of deals in the oriented deals in China in the new fund.” businesses.”

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avcj.com INDUSTRY Q&A | LIANG MENG & KEVIN ZHANG [email protected] Corporate consigliore M&A advisors turned PE investors, Liang Meng and Kevin Zhang pooled their experiences at J.P. Morgan, D.E. Shaw and Goldman Sachs to create Ascendent Capital Partners, and pursue a different kind of China strategy

Q: What led to the creation of more open to interesting a person? Is there a personal Ascendent in 2011? transactions that they wouldn’t guarantee next to it and, if so, MENG: Chinese private equity have been open to 10 years ago. does the person have sufficient has changed significantly since And then the Chinese economy assets? Is the enforcement 2004-2005. At that time there is slowing. If a company is mechanism strong enough. We were fewer players, and therefore growing at 40%, all it needs is the take precautionary measures investment banks were key to cheapest cost of capital; there to protect equity pledges – we introducing and brokering deals. is not much interested in other get pre-signed instruments However, most international opportunities. But as growth of transfer with full power-of- banks didn’t really have much in slows, even industry leaders attorney allowing us to date terms of advisory, as they were must deal with challenges such and effect the transfer upon a mostly focused on IPOs. My M&A as rising costs, increasing capital Liang Meng default. But in most cases we team at J.P. Morgan served as intensity and consolidation. have known the company for a sell-side advisors for some of the At this juncture, if you show long time through the advisory earliest PE deals. When I moved them not only capital but also “Downside angle. We understand them, we on to D.E. Shaw in 2007 to start opportunities such as M&A that know they are creditworthy, and and lead the firm’s Greater offer synergistic combinations protection could we are comfortable working with China investment business, and change the competitive be as simple as a them. A lot of conversations run it was a similar approach. We landscape, it is very interesting along the lines of us saying, “Let’s helped companies think about to them. put option, but develop this idea together and their issues and opportunities, then you have to we will put in money to show we and then provided capital in Q: So you would describe your believe in the idea. If things go combination with advice and strategy as different to ask if it’s really well, we get some equity upside. solutions. Kevin and I first met conventional private equity? If things go really badly, just treat when we were both advising ZHANG: Chinese private equity protected” – Liang Meng it as a loan and return the money CNOOC on the attempted has seen its good days when plus some interest.” acquisition of Unocal in 2005 everyone was making money, – he was at Goldman on the driven mostly by beta plays from conventional private equity Q: So you wouldn’t use capital markets side and I was – GDP growth and multiple because we look at things from a protection mechanisms such on the M&A side. Between 2007 expansion. In a slower growth credit angle and an equity angle. as ratcheting? and 2011, we co-invested around environment and with a lot We protect our downside using MENG: We don’t like those $600 million in China PE deals, of dry powder chasing those structured mechanisms but situations because there is a so we knew each other’s style. opportunities, you really have without sacrificing too much of misalignment of interest – some Spinning out from D.E. Shaw in to deliver alpha. Our objective the equity upside. Everyone talks founders might fudge the 2011, I decided to partner with is to deliver attractive risk- about downside protection but accounts rather than face losing him. adjusted returns. We do that by how many of them have really 30% of their equity. We do it generating our own ideas and gone through the exercise of the other way around. We tell Q: And the advisory approach advising Chinese companies loan-to-value, credit, analytics, the founder that we think the still prevails? on how to accelerate growth. asset and equity pledges, and business is capable of 10-15% MENG: Today’s environment is Through that process we enforcements? We are one of few growth, and our valuation even more uncertain than a few develop a trusting relationship with knowledge and experience reflects this assumption. But years ago, so the combination with entrepreneurs, which in this area. if we together manage to of capital and advice is very means we get in at reasonable achieve higher growth we will powerful. Our strategy is all valuations and can structure Q: What are the challenges return equity to him. Downside about having a lot of influence, deals not only towards meeting involved with downside protection is not a zero-sum thinking about what companies a company’s capital needs but protection in China? game. There is often some kind want to do and in a lot of cases optimizing our risk-return profile. MENG: Downside protection could of trade-off, incentives to get helping them do it. We stay very involved post- be as simple as a put option, but them to return cash sooner ZHANG: The market is maturing investment, actively managing then you have to ask if it’s really rather than later. For example, we and entrepreneurs are becoming the portfolio. protected. Is your counterpart might own 40% of a company more sophisticated. They are MENG: Our approach also differs a special purpose vehicle or with a 2x put option after four

14 avcj.com | July 15 2014 | Volume 27 | Number 26 LIANG MENG & KEVIN ZHANG | INDUSTRY Q&A [email protected]

years and a preferred dividend And we are in the process of and right now it is not operations. stream that guarantees us a bringing in one of the company’s certain payout until we have largest customers as a strategic Q: Doesn’t your strategy – covered 1x cost. If capital can be investor. building relationships with the returned earlier we don’t mind possibility of investing later – reducing the 40% ownership to Q: Most private equity firms limit the number of deals you 37.5%. It is less challenging when emphasize the operational can look at? interests are aligned and you are side of value creation… MENG: We can probably do no giving them money not just to ZHANG: We work with industry more than two or three deals pursue organic growth but do leaders and established each year, but that’s okay. When something strategic to maximize companies. A food packaging we launched Fund I we said shareholder value. Kevin Zhang business doesn’t need us to there would be 7-9 investments come in and explain how to in total with a $30-70 million Q: What sort of strategic benefits 4% coupon and an 18% put make a metal can at lower sweet spot. Three years on, we have you achieved with your option. Our entry valuation is cost. But they might need us have made five investments and portfolio companies? very competitive. But from the to advise on how the company are currently working on a sixth. ZHANG: We have been involved entrepreneur’s perspective, can reposition itself as a multi- If you see us doing one deal a in one take-private of a Chinese he owned 45% and post- product food and beverage month then we have deviated company on the Korean Stock privatization his stake has risen packaging company. They might from our strategy. The deals Exchange. It is a complicated to 70% without putting in any have identified an acquisition will probably become larger in process and few people have additional capital. We have target and need help on the size but overall number won’t done it before – our deal invested and also helped the transaction, or they might increase much. And you won’t was announced last May company make some small want us to look at their capital see us opening four offices in and completed in October acquisitions to enter new areas. structure, not only to lower China either. It doesn’t make any and it wasn’t until last week We have been working with a financing costs but also to match sense. We don’t need a lot of that the remaining minority bank on an offshore syndicated assets and liabilities in order to people but it is an advice- and shareholders finally exited. We loan that will extend financing reduce potential risks. We want intelligence-intensive strategy invested $54 million in the form from one-and-a-half years to to add value in areas where – there is a lot of dialogue with of a convertible bond with a three years, lowering the risk. companies most need support companies.

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