Asia

Asia
Monitor

What's in store?
Last year was a mixed bag for Asian private equity, but ultimately one that saw victory snatched from the jaws of defeat. What can we expect in 2004? Asia Monitor speaks to people across the region to gauge their thoughts.

If it were possible to describe as complex a year as the one just passed in two words, the phrase on most people's lips would be “hard work”. That seems to be the general consensus from practitioners across the region. A year blighted by virus, war and economic uncertainty nonetheless spawned a number of landmark transactions and gave many people a degree of confidence for the year ahead.

This feeling of confidence possibly betrays relief that the wheels didn't come off after such a tentative start. There was a determination to keep things going after what one practitioner described as a “screaming great halt” brought about by SARS. What followed SARS was a steady year, something that would have seemed unfeasible at the height of the epidemic. “All the positives remain in place and the momentum has been established,” says Josephine Price, a Hong Kong-based managing director of CLSA, the Asian private equity unit of Credit Lyonnais, who believes that 2003 paved the way for a strong year ahead. “It takes a while to get deals done in Asia. In 2004 we will see the results of a lot of hard work done in 2003. Also 2004 will be good for realisations and this will improve the overall mood of confidence.”

It is an opinion that resonates at Carlyle, which, fresh from a bumper fundraising campaign for its Japanese buyout fund, is ready for a busy year. “Our view is that 2004 will be more active than 2003,” says Ken Albolote, a vice president of the firm's Japanese buyout team. “Attractive entry prices makes the current environment a very attractive investing opportunity. In addition, limited competition, vendors under pressure to sell, and more acceptance of buyout funds as well as foreign acquirers all point to increased activity in 2004.”

The country occupying most people's thoughts seems to be Japan, but not because there is a shared view about the country's prospects. “Sentiment about Japan is generally a lot more positive, but it is not out of the woods yet,” explains Tuck Seng Low, a partner at London-based STAC Partners. “People are wondering whether the upturn in the economy is sustainable. If it remains stable into the second half, it will be a good year for Japan.” However, Chris Meads, a Hong Kong-based partner at Pantheon Ventures, remains cautious: “The big deals are one-off in nature. We think that it remains a market that favours the local players and there is still not enough pressure to being about corporate restructuring. We're confident in the long term, but the number of deals is not commensurate with the size of the economy.”

Beyond Japan, China and India have been singled out as promising markets, but maybe not in the coming year. According to one source: “India and China have enjoyed a fair amount of attention, but a lack of exits in these areas makes investors a lot more circumspect.” Particularly in respect of private equity transactions, China still seems some distance from a major buyout market, due to the ongoing difficulty in securing local fundraising for leveraged buyouts. “It remains difficult to get control of assets because regulatory clearance is rarely possible. It's moving in the right direction, but it's not there yet,” says the source. According to most, South Korea and Australia remain the only markets that can achieve the critical mass required by private equity investors. “Australia is a steady performer both in terms of the size and number of deals,” says Meads. “There is likely to be an increase in the number of small mid-market deals there, due in part to the fact that the regulatory situation is better than elsewhere and businesses are more mature.”

One of the biggest tests of the region's strength will be the level of fundraising achieved this year. “SARS threw a spanner in the works in terms of fundraising last year,” one GP explains. “A number of funds in the market were forced to cancel their fundraisings, including a number of quality firms.” 2004 looks set to be a big year however, with Affinity Capital, formerly UBS Capital (Asia Pacific), MKS (the ex-Schroders business in Japan), CVC Asia Pacific, Taiwan-based Asiavest Partners, GS Private Equity and Deutsche Bank all about to embark on or proceed with fundraising programmes. They will act as a litmus test of market buoyancy.

Perhaps the prospects for the year are best summed up by one Hong Kong-based GP who, when asked what the prospects were for the coming year, simply said: “We're busy”. If the same can be said eleven months from now, 2004 will have been a good year.

Asia
News

Asian investment hits record high
Asian private equity investment levels have reached a record high, according to data published for 2003, despite the dual problems of SARS and war in Iraq.

The report, published by the Asian Venture Capital Journal, revealed that a total of $17.9 billion (€14.24 billion) was invested in 2003, compared with $10.45 billion in 2002, an increase of 91 percent. Japan was the leading market for investors with approximately $7.3 billion. South Korea placed second with $3.3 billion invested.

Other top destinations for private equity capital last year were Australia ($2.8 billion), China ($1.28 billion), India ($774 million) and Indonesia ($653 million).

The increase in activity came against a backdrop of economic uncertainty, particularly in the first half of the year, when the SARS epidemic brought a temporary halt to deal activity across the region.

Activity picked up in the second half of the year, which saw landmark deals such as the $2 billion buyout of Japan Telecom's fixed line business by Ripplewood Holdings, and the acquisition of a minority stake in South Korea's Hanaro Telecom by AIG and Newbridge Capital in a $500 million deal.

The report also highlights a pick-up in fundraising activity in 2003, which it says is likely to gather pace in 2004. Asian private equity firms raised a total of $3.32 billion in 2003, up eleven percent from the previous year's total of $2.99 billion.

South Korea plans PE boost
South Korea's Finance Ministry has announced plans that it hopes will encourage home-grown private equity funds to compete with overseas rivals targeting the country's distressed financial services sector.

The regulatory changes are intended to help domestic institutions pool their resources in order to set up large-scale private equity funds capable of bidding for major financial services acquisition targets. “For domestic capital to compete with foreign capital in the process of privatisation and restructuring of financial institutions, they need large-size investment funds,” the Finance Ministry said in a statement.

The announcement comes in the light of growing concerns over a series of buyouts by foreign private equity funds of South Korean banks and other financial services companies. Most recently, Lone Star agreed to buy a majority stake in Korea Exchange Bank in a $1.2 billion deal. South Korea does not currently permit domestic private equity funds to take control of financial institutions.

PPM Ventures closes Asian offices
PPM Ventures, the private equity unit of UK insurance group Prudential, has announced that it is to streamline its Asian operations, closing three of the firm's four Asia Pacific offices.

The offices affected by the decision are Seoul, Singapore and Tokyo. A source close to the firm, who declined to be named, said all the closures were expected to take effect by the end of the first quarter of 2004.

A number of professionals from the closing offices will relocate to Hong Kong, while others will be leaving the company. “The firm will continue to make investments across the region from its offices in Hong Kong,” the source said, “and existing investments will also be managed from there.”

Four months ago PPM announced its first exit in Asia, achieving what was described as “a strong multiple” on the sale of a 65 per cent stake in Japanese logistics company Vantec Corporation to Mizuho Capital Partners MBO Fund, marking Japan's first secondary buyout. PPM and 3i had backed the original $128m MBO of Vantec, a former Nissan Motors subsidiary, in January 2001.

Carlyle raises debut Japanese fund
US private equity house Carlyle has closed its first Japanese buyout fund, raising Y50 billion ($470 million; €370 million) following the launch of the firm's Japanese operations in 2000.

Carlyle Japan Partners LP is targeting management buyouts of companies in the firm's preferred sectors of manufacturing, consumer goods, corporate outsourcing services, telecom/ IT services, and healthcare. The firm will typically invest between Y3 billion and Y10 billion per transaction.

“We are pleased to have attained this important milestone,” said Tamotsu Adachi, Carlyle managing director and head of the Japan team, in a statement. “Reaching this level, coupled with the three buyout transactions we have completed, demonstrates that the Japanese business community understands the positive and important role that private equity can play.”

Carlyle is hoping to take advantage of corporate restructuring currently under way in Japan. The Japanese Government is pressuring banks to resolve non-performing loan issues and has established the Industrial Rehabilitation Corporation (IRC) to facilitate corporate revitalisation. Corporations are also starting to put greater emphasis on profitability and efficiency, divesting non-core subsidiaries in the process, which is likely to increase the level of opportunity on offer to private equity firms.

The fund is Carlyle's first dedicated Japan fund and one of the largest raised in the country. The firm also has an Asia fund, which raised $750 million in 1999.

Colony plans Japan fund
US private equity firm Colony Capital said Wednesday it would launch its first yen-based investment fund worth to Y50 billion ($468 by the end of the year buy Japanese real estate and other assets.

Speaking to Reuters, Colony chief executive Thomas Barrack Junior and Robert Zulkoski, chief executive of Colony Capital Asia Pacific, said that the company planned to invest between $1.5 billion and $2.5 billion in Japan over the next five years.

Colony said it would initially target office buildings and other properties that large corporations are willing to sell as part of their restructuring. The equity investment firm had already sunk around $500 million into Japan before the Daiei deal, which saw the firm invest Y100 billion to buy a baseball stadium and hotel in southern Japan from struggling retailer Daiei.

Shinsei close to TSE listing
Shinsei Bank, Japan's first foreign-owned bank, has been approved for a listing on the Tokyo Stock Exchange (TSE) in what will be the first flotation of a rescued bank in Japan. Shinsei became Japan's first bank under foreign ownership in early 2000, when it was re-launched from the failed Long-Term Credit Bank of Japan by a consortium led by US investment fund Ripplewood Holdings.

The IPO will see Ripplewood sell 440 million existing shares, of which 198 million will be offered overseas. Including 36.3 million additional shares earmarked under a greenshoe option, the offer will involve up to 35 percent of Shinsei's total 1.36 billion outstanding common shares.

Using the assumed IPO price of Y435 per share – which is used in making tentative calculations as to how much money will be raised through an IPO – the size of Shinsei's listing is estimated at up to Y207.1 billion ($1.95 billion).

Morgan Stanley, Nikko Citigroup – the venture between US Citigroup and Nikko Cordial Corp – and Nomura Holdings will lead manage the IPO.

ING Real Estate acquires Baring Capital Partners China
ING Real Estate has reached agreement over the acquisition of Baring Capital Partners, the Chinese business of Baring Private Equity Partners. The acquisition forms part of ING Real Estate's strategy to increase its exposure in the China market.

Baring Capital Partners manages the China Property Development Fund and a listed fund in Hong Kong focusing on the Beijing property market. The China Property Development Fund is currently invested in two property development projects in Beijing. The two projects are located in the Northeast section of Beijing's Chaoyang District with total gross floor area in excess of 4 million square feet. The acquisition is subject to the approval of the Securities and Futures Commission in Hong Kong.

The offices of Baring Capital Partners in Hong Kong and Beijing will be combined with the existing offices of ING Real Estate Investment Management. The combined team in China will have over 20 staff with extensive fund management and development capability and experience.

CLSA Private Equity invests in China
ARIA Investment Partners II, a private equity fund managed by CLSA Private Equity Management, has announced plans to invest up to $7 million in Fuji, a Chinese restaurant operator based in Shanghai and Suzhou. The company operates three restaurants under the Fuji brand in Shanghai and Suzhou seating just under 8,000 people in total. The company also provides industrial catering services.

The money will help finance new restaurants and processing facilities, and increase the firm's clientele of industrial catering customers, CLSA said, including the opening of two new central processing facilities and the addition of several restaurants in the next two years.

Intel Capital acquires Japan Communications stake
Intel Capital, the venture capital arm of Intel Corp, has become the fourthlargest investor in wireless data and communications services provider Japan Communications (JCI), taking a six per cent stake in the company for a price of between $1 million and $5 million. JCI was founded in May 1996 and is the first licensed wireless communications reseller for the corporate Japanese market.

Motorola Ventures invests in Shanghai NewMargin Ventures
Motorola Ventures, the strategic venture capital arm of Motorola, has invested in Shanghai NewMargin Venture Capital, the recently launched Chinese venture capital fund. Details of the investment – Motorola Ventures' first in a China-based venture fund – have not been disclosed.

Shanghai NewMargin Ventures is one of China's oldest domestic venture capital companies. Its investment philosophy focuses on high-growth companies based in China. Shanghai NewMargin invests in IT, communications, bio-medical, material sciences and other emerging growth areas.