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page 108 private equity annual review 2010 a s i a m o n i to r Growing up Extracts from PEI’s ‘Asia Monitor’ column show a region developing its own identity. By Jenny Blinch j e n n y b l i n c h Though private equity firms worldwide hang their reputation on their key men, the Chinese key man (singular) phenomenon has been exaggerated to the extreme FEBRUARY On the establishment of a Carlyle-managed RMB fund “For Carlyle, becoming an insider has been a long and painful journey. Back in 2007 the attempted buyout of state-owned Xugong, a construction machinery firm Carlyle had been negotiating to buy for three years, finally fell through. Cynics saw it as symbolising the futility of Western LBO shops trying to export their practices to China. Carlyle’s subsequent success in its latest partnership lends weight, however, to an alternative view: that in three years of negotiations over Xugong, Carlyle and the local officials developed a healthy respect for one another that laid the foundation for future engagement. It also reinforces the old adage that persistence pays – as Western GPs now busily launching RMB funds are no doubt inclined to acknowledge.” MARCH Australia’s tax office gets aggressive “Australia’s reputation as an investor-friendly destination, with a supportive government and a solid tax regime, has kept it at the forefront of Asia’s buyout market and enabled it to hold its place among the top investment destinations for private equity capital entering Asia, behind China and India. This despite lacking the alluring economic growth of some of its emerging neighbours. However, this perceived attractiveness has been put on the line – and with it foreign investor confidence – by the Australian Taxation Office (ATO), which is pushing for stricter rules on the tax paid (or not paid, according to them) on private equity transactions and private equity business in general. And once again, it all started with a US firm, in this case TPG, and a highly lucrative exit.” APRIL Western firms look East “In only the past two months, firms including US- and UK-headquartered fund of funds Northgate Capital and UK-based private equity investor network Pi Capital announced plans to move into Asia; and emerging markets specialist Aureos Capital stated its intention to set up a regional hub in Singapore as part of a rapid expansion in Asia. In the case of Quandrangle, however, moves to ramp up its Asian activities have come in tandem with steps to reduce the headcount in firm’s London office, which was opened in 2007. In fact, at the time of going to press, the firm’s website listed only one London employee: vice president Sebastien Briens. While at this stage Quadrangle appears to be an extreme case, it is likely only a matter of time before we see more Western firms shift their resources – along with their focus – from West to East.”
private equity annual review 2010 pa g e 109 MAY The Mongolian opportunity “Although interest in Mongolia, which is rich in largely untapped resources including coal, gold, copper and iron ore, is coming from investors and mining companies around the world, the success of their investments there may depend to a large extent on the appetite of one Asian country: its resource-hungry neighbour China. Since the two countries signed a ‘Treaty on Friendship and Cooperation’ in 1994, China has become Mongolia’s largest trading partner and biggest importer of natural resources. China is, of course, a significant trading partner to other natural resource-rich regions and countries, such as Australia, Brazil and South Africa. However, the advantage Mongolia has lies in sharing a land border with China.” JUNE The rise of the Asian secondary buyout “Secondary buyouts are an attractive exit route, especially in a market like Australia where recent private equity-backed IPOs have performed poorly. However, while secondary buyouts offer GPs a relatively straightforward way to both deploy capital and return cash, such deals can make LPs wary. ‘For the LP, there’s always the concern that when a GP raises a large fund, it’s under pressure to invest money and will pay a high price,’ said one Singapore-based LP. ‘In general, it’s not usually been a good experience when one buyout fund is buying from another. The sellers – being private equity investors – always try to extract the best price, so it’s not easy to buy from them.’” JULY/AUGUST On the departure of TPG’s China boss “Weijian Shan is the latest in the long line of big-name Chinese finance professionals to strike out alone and launch private equity funds. Notable precedents include former Goldman Sachs China head Fang Fenglei, who launched his own firm Hopu Investment Management in 2007; and, most recently, Fred Hu, former Greater China chairman at Goldman Sachs, who retired this April amid a flurry of media reports that he was also setting up his own fund. Shan’s departure served to highlight once again the tendency of private equity firms in China, whether domestic or foreign, to build their businesses on the shoulders of one very prominent local business or finance professional. Though private equity firms worldwide hang their reputation on their key men, the Chinese key man (singular) phenomenon has been exaggerated to the extreme in a country where it’s almost impossible to do business without the right name to get you through the door.” SEPTEMBER Australian fundraising woes “Clearly, Australia is still a good place to invest money – the economy is growing and, while it may only be 2 percent of the world’s GDP, it is considerably more than 2 percent of the world’s investable universe. However, in the post-downturn environment it will be a case of survival of the fittest – and, based on portfolio performances coming out of the recent downturn, most insiders are pretty clear on which firms make the cut. ‘If there were a dozen managers, then there are six who have jostled themselves into a go-forward position. Then there are the six who are not credible competitors to good firms anymore,’ commented a fund of funds manager. As Darwinism slowly sets in, and LPs vote with their feet, the landscape of Australia’s domestic private equity market will evolve dramatically.” OCTOBER Chinese insurers get the green light for private equity “Though unsurprisingly the measure comes with a fair amount of small print, the news is nothing but good for China’s GPs and LPs alike. For domestic fund managers, the most obvious plus is the creation of yet another rich vein of capital to potentially tap into on the fundraising trail. According to China-focused private equity research body Zero2IPO, the new rules mean as much as RMB226 billion (€26.2 billion; $33.2 billion) would be allowed to enter China’s private equity market, given total Chinese insurance industry assets stood at RMB4.52 trillion at the end of June this year. But perhaps more significant than the capital itself, is the change the CIRC measure could bring about in the make-up of China’s domestic LP base, which until now has largely consisted of high net worth individuals (HNWIs) and government-related bodies.” NOVEMBER India struggles to define its market “China, as the indisputable king of the BRIC markets, is big and self-sufficient enough in terms of funding to afford the luxury of being able to ignore its emerging market peers. However, many Indian GPs (and there are many – up to 400 according to most estimates), rely on a largely foreign LP base, and therefore feel a keen sense of competition with China – and increasingly Brazil – in what is still a constrained fundraising environment. Perhaps because of this need to compete, much of the content of the Private Equity International India Forum in Mumbai sought to define the specific characteristics of the Indian market and bring uniquely Indian interpretations to familiar private equity terms.” DECEMBER/ JANUARY The relative merits of MENA “In MENA, meanwhile, oversupply of capital is hardly the problem. There are many reasons why so many investors shun it. According to a PEI white paper, most LPs see managers with questionable track records, a blinding lack of transparency, poor governance practices and scary politics. Ignorance also plays a part, if you believe those who know the region well. Take Saudi Arabia, for example. With a young and growing population of 27 million, the country has a large, diversified economy and a government that has worked hard to attract foreign investment.” n
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