DEAL OF THE WEEK LP INTERVIEW Cultivation capital · 2014-05-07 · Asia’s Private Equity News Source avcj.com May 06 2014 Volume 27 Number 16 FOCUS DEAL OF THE WEEK Cultivation

Asia’s Private Equity News Source avcj.com May 06 2014 Volume 27 Number 16

FOCUS DEAL OF THE WEEK

Cultivation capitalPrivate investors lay down roots in Australasian agricultural assets Page 7

The perfect match?PE fundraising solutions extend online Page 10

PE bites the biscuitActis backs top China baked goods player Page 13

Australia’s portfolio disclosure problem

Page 3

ADB, DCM, EQT, GIC, Gresham PE, Harvest Capital, L Capital, Legend, Mahanusa, Multiples, RRJ, SAIF, Temasek, Yunfeng, Zoyi

Page 4

EDITOR’S VIEWPOINT

NEWS

JAIC spin-out WM secures debut secondary deal

Page 13

Data f ile Page 15

DEAL OF THE WEEK

AVCJ RESEARCH

China Reinsurance’s John Qu discusses onshore and offshore allocation plans

Page 14

LP INTERVIEW

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Kazushige KobayashiManaging DirectorCAPITAL DYNAMICS

Shigeki KimuraManaging Executive Officer (Global Head of Industry Finance Group)JAPAN BANK FOR INTERNATIONAL COOPERATION

Tatsuya KuboManaging DirectorHARBOURVEST PARTNERS (JAPAN) LIMITED

Hidekazu IshidaInvestment Officer,OSAKA GAS PENSION FUND

Kosei TeramiInvestment Officer and Deputy Representative, Tokyo Office, INTERNATIONAL FINANCE CORPORATION (IFC)

Yoshisuke KiguchiChief Investment OfficerOKAYAMA METAL AND MACHINERY PENSION FUND

Tomotaka GojiManaging PartnerTHE UNIVERSITY OF TOKYO EDGE CAPITAL

Anthony MillerPartner & Chief Executive OfficerPAG JAPAN

Megumi KiyozukaManaging DirectorCLSA CAPITAL PARTNERS JAPAN KK

Hideaki Sakurai Director and Partner J-STAR CO., LTD 櫻井秀秋, 取締役パートナー, J-STAR株式会社

Richard FolsomRepresentative Partner ADVANTAGE PARTNERS, LLP

Tamotsu AdachiManaging Director, Co-Representative CARLYLE JAPAN, LLC

Hirofumi HiranoMember and Chief Executive OfficerKKR JAPAN

William SaitoPresident & CEOINTECUR, K.K.

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Number 16 | Volume 27 | May 06 2014 | avcj.com 3

EDITOR’S [email protected]

IN AN INDUSTRY SEEMINGLY OBSESSED with global standards, the Australian government’s requirement that superannuation funds publish the full details of their portfolio holdings on a look-through basis was a step away from the norm. The delays in its implementation – the legislation was supposed to come into force last July but was deferred for 12 months – spoke volumes for the challenges it presented.

Many will be hoping this week’s decision to postpone introduction for another 12 months, allowing for a full consultation, ultimately results in substantial amendments.

To put the disclosure framework in a private equity context, it requires superannuation funds to reveal not only the identity of funds in which they are invested but also details of each fund’s portfolio holdings. This information would be posted online on a twice-yearly basis. The closest the industry has to a global standard – disclosures made by US public pension funds – stops short of naming the specific contents of PE managers’ portfolios.

The new Australian system threatens an ugly impasse between foreign PE firms and superannuation funds, potentially resulting in the former refusing to do business with the latter. Several superannuation funds responded by requesting side letters for new commitments to GPs entitling them to disclose the relevant information if and when necessary. Fund formation counsel for GPs told AVCJ they were advising clients to refuse to acquiesce, citing confidentiality arrangements in limited partner agreements that specifically restrict the disclosure of commercially sensitive information.

The rules were drawn up with the best of intentions but apparently with little thought to the realities and practicalities of private equity.

A post-global financial crisis review of Australia’s finanical services sector identified several areas of improvement in the superannuation system. These included a removal of the complexity and opacity surrounding investment products, with more information on superannuation funds’ processes and holdings put into the public domain.

What they ended up with was overregulation. Domestic GPs apparently have little choice but to comply as they are bound by more stringent Australian securities laws. But if foreign managers cut off dealings with LPs subject to these

disclosure requirements, the superannuation members would be the ones to lose out by potentially being denied access to the best-performing funds.

The burden of compliance would also be beyond anything superannuation funds have seen before. It is estimated that disclosing the full extent of each manager’s holdings would create a list of 5,000-10,000 line items. In its 2013 annual report, AustralianSuper merely gives the names of 34 external managers for listed equities, 21 for global bonds, 32 for property, 30 for infrastructure, seven for capital guaranteed, absolute returns and cash, and 14 for private equity.

Even if the government is comfortable with costs involved, it is debatable whether or not full disclosure benefits superannuation members. A balance must be struck between giving end users access to information in the interests of transparency and overwhelming them with so much information that only those with accounting backgrounds will be able to handle it.

Given the rules have yet to enter circulation or the regulators offer full implementation guidance, there are countless unknowns.

For example, it has been suggested that superannuation funds make a “reasonable steps” defense, saying they have tried and failed to access the information required. However, it is unclear what this would mean for new commitments – they would be investing in the knowledge that they can’t comply – or for confidential information that LPs receive as matter of course through quarterly reporting. Similarly, there are several interpretations of how holdings would be displayed, which may limit the amount of actionable information released.

When AVCJ asked superannuation funds where they stood on the disclosure issue earlier this year, several said they had reached “an agreement to agree further” with GPs. This may have been shorthand for: “We want this regulation to go away; we think it will go away; so let’s just wait and see what happens.”

They are still waiting, but perhaps there is light at the end of the tunnel.

Tim BurroughsManaging EditorAsian Venture Capital Journal

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GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY

Japan 2014 15th Annual Private Equity & Venture Forum

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26-27 June, Conrad Tokyo

Prospering in the New Japan

Confirmed speakers include:

For the latest programme and speaker line-up, please visit avcjjapan.com

Contact us

Asia Series Sponsor Co-Sponsors

Registration Enquiries: Carolyn Law T: +852 3411 4837 E: [email protected] Enquiries: Darryl Mag T: +852 3411 4919 E: [email protected] Speaker Enquiries: Sarah Doyle T: +852 3411 4842 E: [email protected]

Simultaneous translation between Japanese and English will be available throughout the event開催言語：日本語および英語通訳同時あり


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Kazushige KobayashiManaging DirectorCAPITAL DYNAMICS

Shigeki KimuraManaging Executive Officer (Global Head of Industry Finance Group)JAPAN BANK FOR INTERNATIONAL COOPERATION

Tatsuya KuboManaging DirectorHARBOURVEST PARTNERS (JAPAN) LIMITED

Hidekazu IshidaInvestment Officer,OSAKA GAS PENSION FUND

Kosei TeramiInvestment Officer and Deputy Representative, Tokyo Office, INTERNATIONAL FINANCE CORPORATION (IFC)

Yoshisuke KiguchiChief Investment OfficerOKAYAMA METAL AND MACHINERY PENSION FUND

Tomotaka GojiManaging PartnerTHE UNIVERSITY OF TOKYO EDGE CAPITAL

Anthony MillerPartner & Chief Executive OfficerPAG JAPAN

Megumi KiyozukaManaging DirectorCLSA CAPITAL PARTNERS JAPAN KK

Hideaki Sakurai Director and Partner J-STAR CO., LTD 櫻井秀秋, 取締役パートナー, J-STAR株式会社

Richard FolsomRepresentative Partner ADVANTAGE PARTNERS, LLP

Tamotsu AdachiManaging Director, Co-Representative CARLYLE JAPAN, LLC

Hirofumi HiranoMember and Chief Executive OfficerKKR JAPAN

William SaitoPresident & CEOINTECUR, K.K.

Yuji SugimotoManaging Director,BAINCAPITALASIALLC

Katsuyuki TokushimaChief Pension Consultant, Pension Research CentreNLI RESEARCH INSTITUTE

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avcj.com | May 06 2014 | Volume 27 | Number 164

ASIA PACIFIC

ADB commits $60m to OrbiMed’s second Asia fundThe Asian Development Bank (ADB) is to commit up to $60 million to Orbimed Advisors’ second Asian healthcare fund - OrbiMed Asia Partners II. The vehicle launched early last year and is looking to raise $300 million - believed to be revised from an earlier target of $500 million. The fund is considerably larger than its 2008 vintage predecessor, which raised $188 million.

AUSTRALASIA

Gresham PE exits freight business to McAleeseSilk Logistics Group has sold its last operating division, WA Freight Group (WAFG), to McAleese for A$15.4 million. WAFG is the leading small freight carrier on Australia’s east-west corridor. Gresham Private Equity acquired the business in 2008, combining five family-owned transport and logistics businesses to form Silk Logistics.

GREATER CHINA

Alibaba, Yunfeng invest $1.2b in Youku TudouAlibaba Group and Yunfeng Capital will acquire a combined 18.5% stake in Youku Tudou, a US-listed Chinese online video firm, for $1.22 billion. Yunfeng is a private equity firm co-founded by Jack Ma, Alibaba’s executive chairman. The purchase will give Alibaba a 16.5% stake in Youku Tudou, while Yunfeng will have about 2%.

EQT to sell Taiwan cable TV network to trade buyerEQT Partners will sell Taiwanese cable TV network Gala Television Corp. to domestic conglomerate Formosa Plastics Group. Formosa and several local financial investors were previously said to be in the hunt for the PE firm’s 95% stake in the business, with a purported price of NT$6 billion ($200 million).

Texas County & District backs Legend VC fundTexas County & District Retirement System (TCDRS) has committed $30 million to Legend Capital’s latest China venture capital fund.

According to sources familiar with the situation, LC Fund VI has a target of around $500 million and is nearing a final close. The venture capital firm’s previous US dollar-denominated vehicle closed in May 2011 at $515 million. TCDRS invested $5 million.

EmergeVest invests $20m in Asian apparel supplierEmergeVest, a Hong Kong-based PE boutique set up in late 2013 by two former executives from HSBC’s Asia principal investments division, has committed $20 million in equity financing to apparel supplier JD United Manufacturing.

The company used a portion of the proceeds to buyout another PE shareholder and the rest will support business growth. It plans to go public in the next 18-24 months.

Zoyi invests in Taiwanese pineapple cake makerGreater China-focused mid-cap investor Zoyi Capital has acquired a minority stake in Vigor Kobo, a Taiwan-based retailer best known for selling pineapple cakes to tourists. Vigor Kobo, which trades on Taiwan’s over-the-counter GreTai Securities Market, was set up in 1992 as a traditional bakery chain but subsequently transformed itself into a souvenir shop operator specializing in baked goods.

DCM to re-up as China’s Tuniu sets terms for US IPODCM and two Chinese strategic investors, Ctrip and Qihoo 360, will invest $35 million in Tuniu through a private placement alongside the online package tour provider’s NASDAQ IPO. Tuniu will sell 8 million shares at an estimated $9-11 apiece, putting the company on course to raise up to $88 million. DCM, Temasek Holdings, Gobi Partners and Sequoia Capital will not exit any of their holdings in the offering.

Harvest Capital closes second offshore fundHarvest Capital, formerly Sino-Can Harvest Capital, has closed its second US dollar-denominated fund – Great China Motivation Fund Phrase I – at $300 million. LPs include ABC International, China Orient International, onshore and offshore listed companies, insurers and high net worth individuals.

China’s Ctrip invests $200m in VC-backed TongchengTongcheng Network Technology, the VC-backed business behind travel site 17u.com and ticketing site LY.com, has received $200 million Ctrip International. Tongcheng previously received RMB500 million ($82 million) in February from Tencent Holdings, Boyu Capital and Oriza Holdings, specifically for its 17u.com platform.

SAIF joins Series B as Ayla eyes China expansionSAIF Partners has participated in a $14.5 million Series B round of funding for Ayla Networks, a US-based internet of things (IoT) platform that wants to expand its cloud-based services into China.

PE-backed WH Group scraps HK IPO planWH Group, the PE-backed Chinese meat processing company that bought US pork producer Smithfield Foods, has abandoned its HK$41 billion ($5.3 billion) Hong Kong IPO. The decision comes after the company slashed the size of the offering by more than a half last week. The downsizing also prompted the private equity

investors, including CDH Investments, Goldman Sachs, Temasek Holdings and New Horizon Capital, to withdraw their plans to sell shares.

The pork producer, formerly known as Shuanghui International Holdings, rolled out an option to sell 20% more shares on top of 3.66 billion shares on its IPO plan in April, paving a way for PE investors to partially exit their interests. Initial projections of a $5.3 billion offering - valuing the company at $21 billion - looked set to turn WH Group into the second-largest IPO by a food and beverage firm globally after Kraft Foods.

WH Group bought Smithfield in September last year for $4.7 billion. It was the largest-ever buyout by a Chinese company in the US. It is understood that the capital raised from the offering would have been used to pay down debt tied to the Smithfield acquisition. Shanghui borrowed around $4 billion to buy Smithfield and took on $3 billion of the US firm’s debt.

NEWS


Cisco, International Finance Corporation (IFC), Linear Venture and SJF Ventures also participated alongside existing backers Crosslink Capital and Voyager Capital.

DT Capital invests $19m in China decorating companyDT Capital Partners has invested RMB120 million ($19 million) in Zhejiang Yasha Decoration, a Shenzhen-listed building design and decorating company. The PE firm will subscribe 5.1 million shares issued by Zhejiang Yasha at RMB23.52 apiece. The company is offering a total of 49 million new shares to raise RMB1.15 billion.

NORTH ASIA

Japan’s AIC appoints Yasufumi Hirao as CEOJapanese fund-of-funds Alternative investment Capital (AIC) has appointed Yasufumi Hirao as its new president and CEO. Hirao previously managed the private equity portfolio of Mitsubushi Corp. Mitsubishi owns 51% of AIC.

Japan VCs invest $4m in game developer AimingJapanese gaming company Aiming has received a JPY450 million ($4.3 million) round of investment from YJ Capital, Mitsubishi UFJ Capital and Mizuho Capital. Set up in 2011, Aiming develops online smart phone games both in-house and through collaborations with partner companies.

UTEC invests $2m in Japan broadband serviceUniversity of Tokyo Edge Capital (UTEC) has invested JPY200 million ($1.9 million) in Nabiq, a Japanese provider of wireless broadband services for businesses, as part of Series A round of funding. The investment was made via UTEC3 Investment, which launched last October and is seeking to raise up to JPY20 billion. It has so far reached a first close of JPY13 billion.

SOUTH ASIA

Multiples targets $500m for Fund IIMultiples Alternate Asset Management, the private equity firm set up by Renuka Ramnath after departing ICICI Venture, is said to be

targeting around $500 million for its second India fund. Prakash Nene, Multiples’ managing director and CFO, said that about 71% of the $405 million raised for Fund I in 2010 has now been invested. The new vehicle has been soft-launched.

PE-backed GMR Energy shelves IPOGMR Energy (GMRE), an Indian energy firm backed by PE investors including Singapore sovereign wealth fund Temasek Holdings and IDFC Alternatives, has withdrawn from its IPO. The decision comes less than month after the firm - a unit of GMR Infrastructure (GMRI), which is in turn the flagship business GMR Group - filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India.

Piramal commits $131m to Shriram City Union FinancePiramal Enterprises - the flagship business of India healthcare conglomerate Piramal Group - has agreed to buy a 9.99% stake in private equity-backed non-banking finance company (NBFC) Shriram City Union Finance (SCFU) for INR7.89 billion ($130 million). SCUF’s current backers include TPG Capital, Norwest Venture Partners, Bessemer Venture Partners and ICICI Venture.

Bessemer leads Series B round for TaxiForSureBessemer Venture Partners has led a $10 million Series B round of funding for Indian car rental and taxi booking site TaxiForSure.com. Existing backers Accel Partners, Helion Venture Partners and Blume Ventures also participated.

SOUTHEAST ASIA

L Capital buys restaurant chain Crystal JadeL Capital Asia, a private equity firm sponsored by French luxury goods conglomerate LVMH, has agreed to buy a majority stake in Chinese restaurant group Crystal Jade. Financial details were not disclosed but Singapore media reported that the deal is worth around $100 million. L Capital confirmed it would take a more than 90% stake in the business.

GIC backs Philippines canned foods firmGIC Private has agreed to invest PHP3.4 billion ($76.6 million) in Philippines-based canned foods distributor Century Canning Corporation (CCC). The move comes as CCC’s subsidiary, Century Pacific Foods (CNPF), prepares to go public. While the investment is structured as a one-year exchangeable loan, GIC also has the option to exchange both the principal and accrued interest into CNPF shares for an 11% stake.

SE Asia power developer Navigat gets PE backingIndonesia-focused PE firm Mahanusa Capital and Gunung Sewu Group have invested $21 million in Navigat Group, a distributed power plant developer and power equipment distributor in Southeast Asia. The proceeds will support the rollout of Navigat’s distributed power plant business, which is targeting 1,000 megawatts of installed operating capacity by the end of 2015.

RRJ, Temasek back ING insurance unitRRJ Capital and Temasek Holdings have agreed to invest EUR1.28 billion ($1.8 billion) in NN Group (NNG), the insurance unit of Dutch lender ING Group. ING will receive EUR750 million in cash from RRJ, EUR425 million from Temasek, and another EUR100 million from Temasek-owned Seatown Holdings, in exchange for subordinated ING notes that will be mandatorily exchangeable into NNG shares by 2016.

ING will also sell additional shares in NNG - which comprises its European and Japanese insurance and investment management operations - to each investor, totaling EUR150 million at the unit’s forthcoming IPO. Of this

amount, EUR88 million will come from RRJ, EUR50 million from Temasek and EUR12 million from SeaTown. There will be no lock-up on the shares, which will be acquired at the IPO price. If the offering does not take place in 2014, the transaction will be unwound, and the subordinated notes will be redeemed.

ING has been in the process of disposing its global operations under orders of EU regulators as a condition of its 2008 bailout.

NEWS

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China 2014

Early confirmed speakers include:

For the latest programme and speaker line-up, please visit www.avcjchina.comCo-SponsorsAsia Series Sponsor

Linbo HeManaging Director and Head of Private Equity Investment Dept., CHINA INVESTMENT CORPORATION (CIC)

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关注我们：

Roy KuanManaging PartnerCVC CAPITAL PARTNERS

Robert HuManaging DirectorINFINITY GROUP

Gordon ShawManaging Director, ShanghaiBARING PRIVATE EQUITY ASIA

Jixun FooManaging PartnerGGV CAPITAL

JP GanManager PartnerQIMING VENTURE PARTNERS

Richard HsuManaging DirectorINTEL CAPITAL

David H. LiuMember & HeadKKR CHINA

Weichou SuPartnerSTEPSTONE

Alex ZhengChairmanSHENZHEN COWIN VENTURE CAPITAL CO.

Peter KimInvestment PrincipalCOLLER CAPITAL

John QuVice General ManagerCHINA RE ASSET MANAGEMENT CO., LTD.

Sally ShanManaging DirectorHARBOURVEST PARTNERS (ASIA) LIMITED

James MiCo-Founder and Managing DirectorLIGHTSPEED CHINA PARTNERS

Hurst LinGeneral PartnerDCM CHINA

Pak-Seng LaiManaging Director and Head of AsiaAUDA

Peter CookSenior Investment OfficerIFC VENTURE CAPITAL

Toshiyuki KumuraCo-head of Private Equity InvestmentsTOKIO MARINE ASSET MANAGEMENT CO., LTD.

Jonathan ZhuManaging Director BAIN CAPITAL ASIA, LLC


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COVER [email protected]

WHEN CHINESE FABRIC PRODUCER Shandong Ruyi wanted to make an acquisition in Australia, Lempriere Capital Partners was a logical first port of call. The two companies were already acquainted via the PE investor’s parent company, Lempriere, a 150-year-old family-owned agribusiness player that supplies wool to Ruyi.

Lempriere Capital looked for opportunities all along the textile supply chain, ranging from clothing brands to farms, although few of the latter were of sufficient scale. Eventually they settled on Cubbie Station, a Queensland-based cotton farm with nearly 94,000 hectares of land and around A$320 million ($299 million) in debt.

Cubbie Station wasn’t a bad business, but its business model was unable to withstand a prolonged drought. The company went into voluntary administration in 2009 and ironically the rains returned soon afterwards, turning the stressed finances on their head. Ruyi and Lempriere bought the business in early 2013, dividing the equity 80-20.

The transaction bought a hint of controversy – foreign investment in Australian farmland can be a sensitive issue – but it points to a situation that might establish itself as the norm. As Chinese companies became more prolific purchasers of industrial commodities in Australia, they began to consolidate supplies through vertical acquisitions. A similar scenario is envisaged for the broad agriculture space, from beef and dairy to cotton and timberland.

Last December, Australia’s fourth-largest abattoir in Kilcoy, Queensland, was sold to a fund backed by Chinese agricultural giant New Hope Group, while China Investment Corporation is said to have been engaged in protracted, and intermittent, negotiations with Tasmania-based dairy operator Van Diemen’s Land Company.

Baby stepsThese are tentative first steps, though. While Tony McKenna, managing director of Lempriere Capital, has a clear ideas of how the environment will evolve, it is happening gradually. “There is no question that we see a lot of interest from China in Australian farmland but the conversion of that interest to actual transactions is still fairly minimal,” he says.

Data points such as the 1,093% year-on-year

increase in Australian beef exports to China in 2013 – some industry participants expect shipments this year to be more than double the 2013 figure of 92,279 tons – are readily bandied about in support of agricultural investment theses. It adds impetus to a real assets story seen as increasingly compelling by institutional players globally for reasons that stretch beyond farming.

Yet it remains a relatively new and underrepresented presence in portfolios. With relatively few proven management teams – particularly in Australia and New Zealand – agriculture still needs to prove itself. This means overcoming historical preconceptions and particular concerns about risk-return dynamics.

“If an investor doesn’t have a mandate for agriculture I’ll never be able to convince him to

look at whatever fund we may be raising in that space,” says Enrique Cuan, managing partner at placement agent Mercury Capital Advisors. “However, if they do have an allocation it’s likely they would want to meet the manager because there just aren’t many viable investment options out there.”

He estimates there are fewer than 20 high-quality institutional managers in the space.

Preqin doesn’t have a specific classification for farmland-focused funds. Taking in the entire gamut of agribusiness from production to distribution, and including managers with a significant but not sole focus on agriculture, only 49 funds globally have reached a final close since 2010, raising $8.9 billion between them. A further

28 are still in the market, seeking $11 billion.Of the 10 largest funds raised to date, only

two, Macquarie Pastoral Fund and TIAA-CREF Global Agriculture, include Australia or New Zealand in their mandates. The Americas tend to feature most prominently.

TIAA-CREF and Hancock Natural Resources Group are generally acknowledged as the largest farmland investors in Australia and New Zealand, although their respective approaches may differ from smaller operators. For example, TIAA-CREF predominantly buys land and leases it back to the incumbent farmers, with any additional capital expenditure wound into the rental fees. Others try to bring their competitive edge to bear by being more operationally active.

“Some investors would rather get a stable

return from a lease than the volatility associated with being an owner-operator where you are the landlord and you have soft commodity and seasonal exposure,” says John McKillop, managing director at AgCap, formerly known as Australian Farms Fund Management. “It is a consistent return of 4-5% versus wild swings from losses through to 15%-plus.”

These swings translate into a model under which 80% of the profit comes in three out of 10 years, with 50% of the return generated by capital gains on the land when exiting. It requires discipline in pinpointing which projects and management teams to back, when to enter and at what price, but also a long-term commitment. A typical seven-year PE holding period might not

Mean fields?The Australasian agricultural space is increasingly interesting to LPs that want an inflation hedge and a proxy to rising demand for quality food in emerging Asia, but local superannuation funds are slow to bite

No. of funds (�nal closes only)

Global private equity agriculture fundraising

Source: Preqin Note: Includes funds with a significant but not sole focus on all agribusiness segments

3,000

2,500

2,000

1,500

1,000

500

0

15

12

9

6

US$

mill

ion

Fund

s

Capital raised (US$m)

2008 20102009 2011 20132012 2014YTD

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GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjchina.com

10-11 June • Park Hyatt, Beijing


China 2014

Early confirmed speakers include:

For the latest programme and speaker line-up, please visit www.avcjchina.comCo-SponsorsAsia Series Sponsor

Linbo HeManaging Director and Head of Private Equity Investment Dept., CHINA INVESTMENT CORPORATION (CIC)

KEYNOTE

关注我们：

Roy KuanManaging PartnerCVC CAPITAL PARTNERS

Robert HuManaging DirectorINFINITY GROUP

Gordon ShawManaging Director, ShanghaiBARING PRIVATE EQUITY ASIA

Jixun FooManaging PartnerGGV CAPITAL

JP GanManager PartnerQIMING VENTURE PARTNERS

Richard HsuManaging DirectorINTEL CAPITAL

David H. LiuMember & HeadKKR CHINA

Weichou SuPartnerSTEPSTONE

Alex ZhengChairmanSHENZHEN COWIN VENTURE CAPITAL CO.

Peter KimInvestment PrincipalCOLLER CAPITAL

John QuVice General ManagerCHINA RE ASSET MANAGEMENT CO., LTD.

Sally ShanManaging DirectorHARBOURVEST PARTNERS (ASIA) LIMITED

James MiCo-Founder and Managing DirectorLIGHTSPEED CHINA PARTNERS

Hurst LinGeneral PartnerDCM CHINA

Pak-Seng LaiManaging Director and Head of AsiaAUDA

Peter CookSenior Investment OfficerIFC VENTURE CAPITAL

Toshiyuki KumuraCo-head of Private Equity InvestmentsTOKIO MARINE ASSET MANAGEMENT CO., LTD.

Jonathan ZhuManaging Director BAIN CAPITAL ASIA, LLC


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be enough to ride out the volatility.McKillop cites Stanbroke Pastoral Company,

a 500,000-head cattle enterprise where he spent two years in the early 2000s, as the extreme example. AMP’s life insurance unit sold the asset in 2003 for approximately A$490 million – a substantial undervaluation given the reported cash returns when it was sold on less than two years later – but the investment still generated an IRR of 24%. AMP’s holding period was 39 years.

As manager of the Sustainable Agriculture Fund (SAF), which was set up to aggregate cropping, livestock and dairy assets in Australia, AgCap places itself in the owner-operator category, typically partnering with management teams. So does Milltrust International Group, a farmland investor in Asia, Latin America and Africa that targets a net IRR in excess of 15% on combined capital appreciation and production income.

An acquired tasteAssessments of LPs’ appetite for these assets should begin with the broader contextual question regarding their approach to inflation hedging. Over the past 30 years investors have enjoyed relatively low levels of inflation, allowing portfolios dominated by public debt and equity instruments to deliver returns that exceed inflation rates. There is increasing awareness that, should macroeconomic conditions change, performance will be driven by exposure to assets that preserve value in an inflationary environment, notably real assets.

“When we talk to clients, the story we get was in the 1990s we had a 5% allocation to real assets and today it’s 15% and by 2025 it will be 25% of these institutional portfolios. There is a huge search for the assets that fit the bill in terms of what they are trying to do,” David Brands, CEO of New Forests, told the AVCJ Australia & New Zealand Forum in Sydney earlier this year.

Agriculture and timberland – New Forests’ specialty – are two of numerous real assets classes that offer an inflation hedge. The question is whether LPs are comfortable with the volatility that comes with agriculture.

A few showed their faces in February when the Adveq Real Assets Harvested Resources Fund acquired 18,000 hectares of Australian almond orchards from Olam International for A$211 million. LPs that participated as co-investors included Municipal Employees’ Retirement System of Michigan and Danica Pension from Denmark. Although this is a lease-back deal, Tim McGavin, CEO of Laguna Bay Pastoral Company, which sourced the deal and now manages the local holding structure, describes these groups as classic real assets investors.

Laguna Bay Pastoral’s target market comprises

pension funds and endowments. “Our perfect investor would be a defined benefit pension fund that is unlikely to have redemptions or need huge cash flow and dividends, so we can re-invest,” McGavin adds. “It is long term, patient capital. And at the moment it comes from North America.”

Simon Hopkins, CEO of Milltrust, adds European institutions to this list. The firm recently closed an investment in an Australian cotton project, having identified a business that was grappling with the succession planning issues faced by so many family-owned farming groups where the founder is approaching retirement.

A European pension fund made a sizeable seed commitment to the deal. Another European pension fund put money into a Milltrust dairy venture in New Zealand.

Not so superOne constituency rarely mentioned is the Australian superannuation funds, despite the fact that many of them arguably should be in the market for long-dated assets to match their long-dated liabilities. The SAF is backed by seven foundation investors, five of them superannuation funds. In response to an interview request on opportunities in agriculture, one of these groups played down its involvement in the fund, saying the commitment was small and others would be better placed to comment.

There are several reasons for this wariness. First, superannuation funds have struggled with the risk-return dynamics. Members are entitled to move their pension savings between providers and fund performance is marked to market every year to facilitate comparison. The volatile short-term returns tied to agriculture could undermine a portfolio and result in members cashing out and taking their savings elsewhere.

Second, there have been numerous high-profile failures in agriculture investment in Australia. Managed investment schemes (MIS) are the classic example.

The schemes were set up in the 1990s as a retail structure that allowed individuals to invest in timber plantations and agribusinesses and receive an immediate tax deduction on the sum committed. Interest mounted in the years running up to the global financial crisis and a host of MIS providers emerged. They borrowed substantially to finance the acquisition of land assets used to create their products and when the crisis hit many providers went bankrupt.

The difficulties encountered by the likes of PrimeAg, a cropping and cotton investor that was taken private last November after consistently trading below the value of its net tangible assets, have contributed to a loss of confidence in listed agriculture vehicles.

A key issue is that so much of the investment return comes from the capital gain on the land and this can’t feature in annual financial reports. It leaves analysts targeting a price-to-earnings ratio of 10-11x EBITDA while returns might be only 4-5% until an asset is exited. “These vehicles aren’t right for land-rich agricultural investments because the capital gain is so critical to overall performance and you can’t bring it into the profit and loss accounts,” says AgCap’s McKillop.

Third, the headlines created by farmers who borrow money to fund expansion but then find themselves on the wrong side of a drought or land price correction and unable to service their debts has resulted in a perception problem.

It is debatable to what extent these headlines reflect the reality – mass bankruptcies or quiet debt rollovers by accommodating banks – but the seeds of negative sentiment may already be there. McGavin of Laguna Bay Pastoral notes that it is not unusual for the superannuation fund employees tasked with assessing the space – if indeed there is anyone at all – to have a previous acquaintance with it, perhaps through family farming connections.

“Most of the pension fund managers are cynical. There are guys whose fathers or uncles were farmers but couldn’t make a good living out of it because they were sub-scale. They didn’t see what I have seen, which is large-scale, profitable corporate farming,” McGavin explains. “There is a lot of misperception because people have been tainted buy a model that was broken.”

There is a long-term expectation that Australia’s pension funds will follow their US and European counterparts and include agriculture in real assets allocations. The vision of the future shared by several industry participants is of farmland operating in a similar fashion to real estate with aggregated assets held in publicly traded investment trusts or in the hands of private funds and large institutions.

However, the only person willing to put a date on this estimated that agriculture is where


“Our perfect investor would be a defined benefit pension fund that is unlikely to have redemptions and need huge cash flow and dividends, so we can re-invest” – Tim McGavin

real estate was 25 years ago. Even on a global level, the industry trails real estate enormously in terms of advisory talent. An institutional investor looking to buy an office building has the luxury of countless consultants at its disposal plus in-house expertise. Not so agriculture.

“The pension fund professionals who run the real estate programs have typically been investing in the asset class for many years and have relevant experience. Many are often hired from one of the big real estate firms,” says Mercury’s Cuan. “Unfortunately the number of people in this industry who transition to a pension fund is almost zero.”

Customized solutions?The manager pool must therefore also deepen, with GPs proving their credibility to a skeptical domestic LP base by executing on investment theses. An interesting characteristic of a nascent asset class is that, particularly with larger institutions, the structures through which they participate are not yet a function of habit – there is room for experimentation and customization.

Milltrust, for example, operates the Emerging Markets Land Opportunities Fund, which offers investors exposure to a diversified portfolio of assets, but each project is structured as an individual special purpose vehicle with shares

issued according to the size of individual investments. This means institutions also have the option of picking and choosing their exposure. Each deal is highly scalable, with a target of $250 million per project, so there is scope for flexibility in timing – a group could come in at the seed stage or once an asset is running and requires capital for expansion.

AgCap is likely to follow a similar hybrid model of direct and fund exposure for its next investment structure. The firm is looking at a roll-up deal in Australia’s dairy space, leveraging relatively high milk prices but depressed land prices due to debt burdens. Initial discussions with potential Chinese investors indicated a preference for direct exposure.

“The average herd size is 220 cows so there is capacity to do a roll up and list it,” says AgCap’s McKillop. “The hardest thing is finding the right management. You can’t just go into the street and advertise for a dairy manager; it is very specialized and you need the right structures in place.”

In using operational expertise to bridge the gap between Chinese groups and Australian natural resources, it is possible that private equity investors might also devise a means of addressing the volatility issue in agriculture.

What is required is a partner to underwrite

part of the risk by agreeing to buy a certain portion of future output. Lempriere’s McKenna claims to have held discussions with one large corporate that was keen to follow the model. Lempriere would then be able to package up the investment in the farm as something that “looks more like an infrastructure investment” in that the guaranteed returns could effectively be divided up to produce a more consistent returns profile.

This would be easier for the superannuation funds to handle, although there is some skepticism as to whether it can work in practice.

Queensland government-controlled investment manager QIC has been engaged in broadly the same discussions with Chinese companies through its Beijing office. The idea is that these agreements would be the precursor to lasting relationships and equity partnerships on new projects – taking the trickle of deals exemplified by Ruyi and Cubbie Station to a steady flow.

“The first step could be guaranteed supply through an off-take agreement that allows farmers to plan production better,” says James Ieong, senior advisor at QIC. “By creating these relationships, the farmers are able to prove they can operate efficiently and then perhaps work together with their Chinese customers on future projects.”


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STYLED ON POPULAR GAME SHOW Blind Date, the “investor selector” session at last year’s AVCJ Forum – which saw one LP, seated behind a screen, put questions to three unnamed GPs and pick her favorite based on their answers – highlighted some of parallels between investment and courtship: the challenge of finding the right fit, making the decision to commit, and building a lasting relationship.

Antoine Dréan takes the metaphor a step further when talking about his latest venture, Palico, which he describes as an online “dating service” for GP and LPs. Dréan, who previously founded and spent 22 years at placement agent Triago, set up Palico in 2012 in response to a

couple of key developments in the asset class. “When I first started out in private equity

the question was who in world would invest in PE? The asset class was easier to understand and most GPs and LPs could be found in US,” he explains. “Now it is the opposite; GPs and LPs are everywhere, they cover different formats and most of them don’t know about each other or have a place to meet.”

Dréan is not alone is seeing an opportunity for bringing a disparate global community together via the internet. Palico is but one of a number of private equity platforms to emerge in recent years, offering a set of tools that allow GPs and institutional investors a means of connecting outside of conventional channels.

Palico, and its competitors, already claim PE players are signing up to the idea. But some may still need to be convinced of the utility of these platforms and be made comfortable that they will not fall foul of regulators.

Online PE platforms are not a new concept. DealMarket, for example, has been around since 2011. While the platform does not focus on fundraising – instead specializing in direct investment opportunities and equity fundraising – it has helped set a precedent for a new way of conducting business.

Urs Haeusler, CEO of Deal Market, claims the move towards online platforms has been long overdue for private equity. “We see in almost every industry the internet has brought transparency and efficiency via online platforms, whether its real estate or dating,” he says. “The PE and VC market is still very opaque and inefficient in a way – we wanted to create an one-stop shop

that can bring together investors, sellers and service providers on the sell side and buy side.”

Over the last two years, in addition to Palico, UK- headquartered research firm Preqin has launched Preqin Investor Network, while iCapitalNetwork and Bison – which operate along similar lines – have been set up in the US.

Regulatory wrangles But GPs are wary of jumping in feet-first. Perhaps the chief concern among industry participants are rules over general solicitation. If a GP approaches an LP via an online platform would it fall foul of the regulators?

To a degree, this has already been addressed. The US Jumpstart Our Business Startups (JOBS) Act – signed into law in April last year – included an amendment to Rule 506 of Regulation D under the Securities Act. This removed the prohibition on general solicitation and general advertising in certain private placements.

However, participants in these offerings must still be accredited investors according to the Securities and Exchange Commission (SEC) definition, and a greater burden is placed on the issuer to verify that these investors are indeed accredited. The potential issues do not stop there.

“The problem is that investors are scattered across the world. There are various registrations and regulations, and we are seeing this clearly with Europe – with Alternative Investment Fund Managers Directive (AIFMD) – as well as in countries like Japan and Korea,” says Albert Cho, a Hong Kong-based partner with law firm Weil. “Unless a platform is being regulated, has coverage globally and is registered in every single jurisdiction, it is hard to get comfortable.”

AIFMD is one of several measures introduced by the European Markets and Securities Authority in the past year, which require GPs marketing funds within the EU meet certain standards on transparency, capital adequacy, remuneration and delegation restrictions, risk and valuations.

Japan and Korea are known for having strict rules that preclude unregistered investors from qualifying for the private placement exemption that allows them to solicit domestic GPs, but the likes of Hong Kong and Singapore also have well-established regulatory regimes.

Palico has sought to tackle these concerns head on. It claims to be the first electronic platform approved for a broker-dealer license and the first to be regulated in the EU by France’s Autorite des Marches Financieres. Meanwhile, Palico’s US affiliate is a member of the Financial Investor Regulatory Authority (FINRA).

Currently, the platform allows LPs to conduct anonymous searches for GPs and even bid on or list secondary stakes. GPs can offer information about their firms, fundraising plans and road shows, as well as follow up on those leads, if an LP decides to reveal itself.

Other platforms entering the market have sought to avoid general solicitation obstacles altogether by keeping the process passive on the GP side. Preqin treats its Investor Network as an extension of its pre-existing research database.

“The beauty of the service is that the fund manager will be passive and cannot see who is looking at its information,” says Stuart Taylor, head of investor products at Preqin. Six thousand accredited investors will have access to general

Matchmakers Several online platforms have been launched with a remit to make exchanges between GPs and LPs more transparent and convenient. Do they complement existing processes or is fundraising set for reinvention?

Private equity platformsName Launch Country Coverage Membership

Palico May 2012 France 7,200 GPs and 12,000 funds 1,400+ GPs, LPs and service providers

Preqin Investor Network

2012 UK Over 2,100 PE, real estate and infra funds and over 11,000 hedge funds

6,000 individuals, 3,300 institutions

DealMarket March 2011 Switzerland 595 service providers, 1,558 private equity deals

61,330 recurring visitors

iCapitalNetwork November 2013 USA Aproximately 2,000 funds Not disclosed

Bison June 2013 USA 4,000 GPs Not disclosed

Source: AVCJ Research

[email protected]

information on GPs, and then can use the platform to ask a fund manager to disclose further details if they want to take a closer look.

“Simply put, it is the investors that have the power so there are no concerns whatsoever about solicitation on the manager side,” he adds.

Information nexus Some industry participants stress that it is the ability to access and share additional information that will be key in differentiating platforms.

This is particularly the case when some GPs are reluctant or unable to actively reach out to LPs.

“There have been platforms in the past that have not worked because the quality of information has not been accurate, so people have tended to stick to meetings and email rather than use any kind of social network,’ says Guarav Ahuja, a director with of Indian private equity firm ChrysCapital, who has been exploring possible uses for platforms. “But there is a space for it and, if it is done well, it can be a great utility.”

Whether the platforms will evolve into something more – as a place where GPs and LPs can actually transact as opposed to just exchanging information – remains to be seen.

There will always be several filters and techniques that can be used to access institutional investors, including conferences, advisors and the phonebook. However, as one placement agent notes, LPs still require assistance in identifying what is missing in their portfolio, understanding where they can find it,

and building a research database to work from. The chances of online platforms fulfilling

this role to the point of performing transaction functions largely depends on how the regulatory environment evolves and on the industry’s willingness to adopt new the norms.

Palico’s Dréan does not rule it out but he expects it to take a while. In the meantime, the transparency and convenience brought by private equity platforms can complement traditional methods of private placement. “I don’t

see online transactions happening in the short to medium term,” he says. “Private equity is still about human beings – it is more art than science – but the potential is there.”

The success of these platforms ultimately rests on how many people actually adopt the service. With thousands of investors already signed up, some claim they are close to building a sustainable online community.

For Preqin, this process has been eased by drawing upon existing users of its data services. “We are leveraging what we have been doing for years really, so the network is the next step for us, rather than a starting point,” says Taylor. “It is a new service, but we hope it will become the default platform for the industry.”

Needless to say, everyone else has the same ambition and with multiple platforms ultimately targeting a similar pool of investors there will be winners and losers. Indeed, some firms may wait and see which platform emerges as the industry standard before committing.

“The biggest challenge is the speed at which the market can adopt this kind of tool,” says Dréan, “It’s a volume game, it is about reaching critical mass and we are getting there.”

Only then will be know if these platforms can establish themselves as an essential tool for GPs and LPs looking for their perfect match.

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“The biggest challenge is the speed at which the market can adopt this kind of tool” – Antoine Dréan

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AVCJ database is the ultimate link between Asian dealmakers and those who provide advisory, financial, legal and technological services to the private equity, venture capital and M&A industries. The AVCJ Database gives subscribers access to more than 125,000 companies and facts and statistics on over 90,000 transactions.

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Deal Report

NASDAQ listed Focus Media has received a non-binding tender offer of $5.4 per share, or $27 per ADS, of its entire outstanding

common shares from a consortium of investors, including company chairman Nan-chun Jiang, CDH Investments, China Everbright

Limited, CITIC Capital Partners, FountainVest Partners and The Carlyle Group. The consideration would be approximately $2.88

billion based on the 532.95 million common shares outstanding and not held by the chairman.

Announced Date:

Announced (US$mln): Previous Stake:

Deal Stake:

Final Stake:

Company Name Deal Role Industry

Private Equity Buyout

Buy-outs (MBO/MBI/LBO)

Deal Type:

Deal Status:

Stage:

Nationality

17.56%

Involved Companies

82.44%

100.00%

Agreement in Principle

Acquisition Technique:

Acquisition Attitude:

Leveraged Buyout

Neutral

Closed Date: n/d

Aug 12, 2012

Amount(US$mln) Deal Stake

$2,877.9400

Closed (US$mln): n/d

United StatesCarlyle Asia - China Investor n/d n/d Private Equity

Hong KongCDH China Management Co.,

Ltd.

Investor n/d n/d Private Equity

Hong KongChina Everbright Ltd. Investor n/d n/d Finance

Hong KongCITIC Capital Partners Ltd. Investor n/d n/d Private Equity

China (PRC)FountainVest Advisors Ltd. Investor n/d n/d Private Equity

China (PRC)Nan-chun Jiang Investor n/d n/d Unclassified

China (PRC)Focus Media (China) Holding

Co., Ltd. (FocusMedia)

Investee n/d n/d Advertising

China (PRC)Fosun International Ltd. Seller n/d -17.20% Steel

United StatesUndisclosed Shareholder(s) Seller n/d -65.24% Unclassified

United StatesCitigroup Global Markets Asia

Ltd.

Financial Adviser,

Investor (Carlyle Asia

- China)

n/d n/d Securities/Investment

Banking


Ltd.

Financial Adviser,

Investor (CDH China

Management Co.,

Ltd.)


Banking


Ltd.

Financial Adviser,

Investor (China

Everbright Ltd.)


Banking


Ltd.

Financial Adviser,

Investor (CITIC

Capital Partners Ltd.)


Banking


Ltd.

Financial Adviser,

Investor

(FountainVest

Advisors Ltd.)


Banking


Ltd.

Financial Adviser,

Investor (Nan-chun

Jiang)


Banking

United StatesJP Morgan & Co Inc. Financial Adviser,

Investee (Focus Media

(China) Holding Co.,

Ltd. (FocusMedia))


Banking

United StatesMorgan Stanley - Beijing

Representative Office

Financial Adviser,

Investor (CITIC

Capital Partners Ltd.)


Banking

United KingdomConyers Dill & Pearman Legal Adviser,

Investor (Nan-chun

Jiang)

n/d n/d Legal Services

1

Copyright 2012 AVCJ Group Ltd. All rights reserved.

✔ New features on selection ✔ Performance data on exits ✔ Portfolio holding period

Plus


DESPITE HAVING AN ESTABLISHED BRAND name and a history that goes back over half a century, biscuit maker Jiashili has a battle on its hands. Like other Chinese snack producers, the company faces competition not only from domestic rivals but also from multinational brands. Mondelez – the US-owner of Oreo and Chips Ahoy! – controls 16% of the domestic biscuit market, according to Euromonitor.

“In the tier-one cities especially, multinationals have carved out a much bigger market share and – with their large advertising budgets – they have been ahead of the game for a long time,” explains Max Lin, a director in Actis’ Beijing office. “Those domestic brands that have prospered and moved up the value chain are those that have traditionally focused on lower tier cities.”

Lin sees Jiashili as one such brand, which is why Actis decided to take a significant majority stake in the business earlier this month. The financials of the investment – made alongside Jiashili’s chairman and owner Xianming Huang – were not disclosed, but the deal falls within Actis’ sweet spot of $50-100 million.

Jiashili was founded in 1956 in Guangdong province as part state-owned operation Kaiping Sweet Pancake Factory. The business merged with Guangdong Jiashili Group to form Kaiping Jiashili Food in 2005 before being made into a private enterprise by Huang in 2007 and taking its current name.

Jiashili produces crackers, wafer biscuits and egg rolls, claims to be the number two player in the plain biscuit market. Sales came to around RMB900 million ($143 million) last year, having grown fourfold since Huang assumed control.

“The overall brand image is value and quality,” explains Lin, who sits on the board of Jiashili. “It is not the most expensive product but it is a well-known brand in the provinces and in the distribution channels where it is present.”

The company will use this new funding to increase its distribution and its product range within China. Actis intends to leverage its previous experiences of investing of the food and beverage sector to shepherd the company through its next stage of growth.

Since 2001 the emerging markets-focused

firm has invested more than $600 million in consumer companies in China, including casual dining chain Bellagio and hotpot chain Xiabu Xiabu, which it exited to General Atlantic in 2012. Meanwhile, it has made similar snack food investments elsewhere including two Egyptian snack companies: cake maker Edita and sesame

snack producer El-Rashiidi El-Mizan.

Lin’s aim is to help turn Jiashili into a business, and a brand, that can make its presence felt more widely in China.

“The company has done very well but we do see future opportunities for Jiashili to move further up the value chain.” He says. “The business has already started experimenting with higher value products and enjoyed some success. So, there is potential for us to take market share from the multinationals.”

WHEN MORIYOSHI MATSUMOTO SPUN out from JAIC to form WM Partners (WMP) last year it was with a view to targeting a very specific need. The secondaries story in Japan has typically been dominated by pan-regionals scouring the portfolios of mid-market players for scale-up opportunities or specialists reaching out to lower mid-market GPs that want to jettison legacy portfolios. WMP, however, focuses elsewhere - it seeks to bridge the gap between early stage VC and growth capital.

The appropriately named Project Bridge – WMP’s debut deal – is a taste of the kind of bespoke solutions the GP is offering.

A $3 million bulk secondary transaction, Project Bridge comprises of two LP interests – one managed by an early stage investor, the other by mid-cap private equity firm - and two portfolio investments acquired from an unnamed VC firm looking for liquidity. The two portfolio investments include a stake in an undisclosed e-commerce firm and a 12% interest in Japanese B2B marketing platform Shanon, which has also received follow-on investment from WMP via a

convertible bond issues as part of the package.“It is hard for Japanese GPs and promoters

to find good investors to provide these kinds of package transactions,” Matsumoto tells AVCJ. “While we do not expect these kinds of deals to happen all the time, we are able to provide these kinds of tailor-made solutions.”

Set up in 2000, Shanon runs an online software-as-a-service (SaaS) platform that focuses on event management and allows users to automate marketing processes via email, social media and websites. The business claims to serve 600 clients, with sales growing at a compound annual rate of 40% over the past five years. WMP hopes to support the firm’s continued expansion as it plans to go public later this year.

Matsumoto notes that while there are a number of early-stage investors and mid-market buyout firms in Japan, there is a dearth of growth-stage investors in between, creating a strong pipeline for deals like Project Bridge. He adds that many early-stage investors provide opportunities for traditional secondary deals as

they look to exit their fund commitments.“We often have discussions with GPs who - at

a later stage in the fund’s life - have developed a different strategy,” he said. “We help these GPs unlock these issues by providing solutions and

offering both our experience and investment.”

The Project Bridge investment was made via JSPF No.3 which was launched last year following the spin-out. Matsumoto, a

former CEO of JAIC, ran the group’s secondaries business for more than a decade.

The fund reached a first close of JPY5.25 billion ($50.1 million) in January and is targeting a final close of JPY10 billion. LPs include several institutional and strategic investors, such as the government-backed Organization for Small & Medium Enterprises and Regional Innovation, Japan (SMRJ), which put in JPY2 billion.

DEAL OF THE [email protected]

Actis seeks cookie fortune

WM Partners in debut secondary deal

Jiashili: Second-tier strength

WM: Bridging the growth gap


LP [email protected]

CHINESE INSURERS RECEIVED THE GREEN light to invest in offshore private equity and real estate funds in October 2012. Progress since then has been tentative. China Reinsurance was the first to make the jump, committing $30 million to KKR’s North America Fund XI, which reached a final close of $8.3 billion in October 2013.

KKR remains the sole offshore manager in China Re’s portfolio; the other five are domestic. Reputation, longevity and track record featured prominently in the selection criteria.

“It’s more difficult for us to select overseas GPs because we don’t know much about them and it is not as easy to communicate with them as with domestic managers,” says John Qu, vice general manager of asset management at China Re. “When we looked at previous KKR vehicles in the same series, there were virtually no losses. Performance might not be as strong as some others, but returns have been very stable.”

The insurer’s allocation to offshore GPs is limited, with $100-200 million earmarked for deployment over the next two years. As a result there is a bias towards bigger funds. KKR got the nod in the US and similar criteria will be used to vet larger managers in Europe. There are plans to invest via fund-of-funds to get mid-market exposure, while secondaries and co-investment are also on the agenda.

Expansion plansChina Re originated from the People’s Insurance Company of China (PICC) and remains the country’s only state-controlled reinsurer. It is jointly owned by the Ministry of Finance and Central Huijin Investment Corporation, which is a unit of China Investment Corporation.

The firm set up a two-man alternative investment team in 2011, one year after the insurance industry was allowed to invest in domestic private equity funds. At the time there was so much red tape – the regulator had to approve each investment and only managers with a certain sum in assets under management could be considered – that only around 10 leading GPs qualified.

The system continues to liberalize. In 2012, the cap on insurers’ exposure to PE funds and private companies was raised to 10% from 5% and earlier this year it was decreed that investments in public and private equities could

account for 30% of the total assets. China Re’s involvement has increased accordingly. A total of RMB1 billion ($160 million) has been deployed in private equity out of a total investment pool of RMB120 billion. The alternatives team, which covers private equity and real assets, now numbers 12.

“Under the new rules, over 50 Chinese GPs now qualify for investment by insurers,” says Qu.

Insurers must appoint at least two third-party consultants, including one financial advisor and one legal advisor, to review fund due diligence and asset allocation. On the domestic front, the goal is to establish a diversified portfolio encompassing different strategies, with commitments of RMB100-300 million per fund. GPs are expected to contribute at least 5%, and sometimes up to 10%, of the corpus to ensure an alignment of interests.

“I wouldn’t require the same size commitment from an overseas GP that has been in the market long enough to convince me that it can execute its strategy,” Qu explains.

“China’s private equity industry is just at its beginning. The GPs that have been around longest may have just 10 years of history. At this

stage, it is hard for us to identify which ones are the best.”

JD Capital, formerly known as Jiuding Capital, is the youngest GP in China Re’s portfolio. The private equity firm, which made its name as a pre-IPO investor, reached a first close of RMB1 billion on its latest renminbi-denominated vehicle – Jiuding Strategic Fund – in November. The full target is up to RMB3 billion and China Re has put in RMB200 million.

“Jiuding is a special and localized GP, although there have been a lot of negative comments about its pre-IPO strategy. Few people try to understand the investment rationale and put into a broader context – why a pre-IPO strategy worked in China years ago and Jiuding executed it better than the others. A lot of renminbi funds made pre-IPO investments at that time, but not as successfully as Jiuding,” Qu says.

He adds that JD has now modified its approach to place greater emphasis on post-investment operational involvement as well as becoming more sector specialized. The firm has a total headcount of around 300 and deal-sourcing capabilities in almost every Chinese city. Whereas a lot of private equity firms are run by 2-3 investment professionals and deals come from third parties, “90% of Jiuding’s deals are sourced proprietarily,” Qu says.

Spin-out some day?The other four domestic managers in China Re’s portfolio are generalist and tend to focus on later-stage investments. As it stands, insurers are barred from investing in venture capital but China Re plans to look at growth stage or even early stage private equity.

The group’s ultimate aim is to establish itself as a fund-of-funds, following in the footsteps of overseas counterparts HarbourVest Partners, which was originally a subsidiary of John Hancock Insurance; or Ardian, known as Axa Private Equity until its spin-out from Axa Group last year.

“In the initial stage we will be a LP and then partner with GPs to co-invest in some deals. When our investment team is better-equipped, we expect to make some direct investments into portfolio companies,” Qu says. “However, direct investment will not be our core business; our main job is seeking out the best fund managers.”

First moverThree years after setting up an alternatives team, China Reinsurance became the first local insurer to back an overseas GP. John Qu, vice general manager of assets management, outlines the firm’s strategy

“In the initial stage we will be a LP and then partner with GPs to co-invest in some deals”


PRIVATE EQUITY DATA FILE | AVCJ [email protected]

PRIVATE EQUITY IN ASIA

Investment Breakdown by Country From January to April 2014Investee Country Amt. Invested US$m No. of Deals (Disc.) No. of Investees

China (PRC) 7,479.1 175 123 175

Hong Kong 5,893.6 9 5 9

India 3,847.1 149 118 149

South Korea 3,727.3 26 24 26

Singapore 2,349.5 17 14 17

Japan 2,228.5 128 101 128

Australia 2,063.0 27 22 27

New Zealand 372.5 5 4 5

Indonesia 80.0 4 1 4

Malaysia 34.7 1 1 1

Taiwan 29.1 4 3 4

Myanmar (Burma) 7.4 1 1 1

Thailand 1.8 3 2 3

Mongolia 0.4 1 1 1

Philippines - 1 - 1

Vietnam - 2 - 2

CLOSED FUND

Location: Australia

Fund Name: Pacific Equity Partners Fund V, L.P. & Pacific Equity Partners Supplementary Fund V, L.P.

Closing Amount: A$1.1 billion (first close)

Launch Date: February 2013

Fund Manager/Advisor: Pacific Equity Partners Pty Ltd.

Stage Focus: Buy-outs (MBO/MBI/LBO), Mezzanine/Pre-IPO, Privatization, Public to Private

Industry Focus: No Preference

Geographical Focus: Australia, New Zealand

Contact: Paul Shaw

Phone: (61) 2-8238-2600

Email: [email protected]

Website: www.pep.com.au

Update: Pacific Equity Partners has held a first close of A$1.1 billion for its fifth fund. Pacific Equity Partners Fund V is targeting up to A$3.5 billion including A$2 billion of core equity and a further $1-1.5 billion earmarked for a co-investment pool. Pacific The fund will invest in Australasian leveraged and management buyout opportunities. The investment strategy is in line with the previous funds.

NEW FUNDS

Location: India

Fund Name: Zodius Capital II

Target Amount: US$500 million

Launch Date: April 2014

Fund Manager/Advisor: Zodius Advisors Pvt. Ltd.

Stage Focus: Mezzanine/Pre-IPO

Industry Focus: Computer-related, Information technology, Telecommunications

Geographical Focus: India

Contact: Neeraj Bhargava

Phone: (91) 22- 2204-0537

Email: [email protected]

Website: www.zodius.com

Update: Zodius Advisors, partnered with Avendus Capital, to set up a new multi-stage technology fund named Zodius Capital II, which will focus on late-stage and pre-IPO technology companies. The fund will be focusing on India-centric digital businesses and SMAC (Social, Mobile, Analytics and Cloud) based Business Services companies and plans to invest in around $400-$500 million in the next three to four years. The fund will be raised from investors in three tranches of $100-150 million each.

FUND-RAISING MONITOR

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Meredith Jenkins Co-Chief Investment Officer CARNEGIE CORPORATION

Taisuke Sasanuma Representative Partner ADVANTAGE PARTNERS, LLP

Stuart Schonberger Managing Director, Head of

Investor Relations CDH INVESTMENTS

Euan Rellie Senior Managing Director BDA

Jonathan A. English Managing Director PORTFOLIO ADVISORS

(HONG KONG) LTD

Robert Petty Managing Partner and Co-

Founder CLEARWATER CAPITAL

PARTNERS

Robert W. van Zwieten President & Chief Executive

Officer EMPEA

Sanjiv Kapur Managing Director WOLFENSOHN FUND

MANAGEMENT

Scott Voss Managing Director HARBOURVEST PARTNERS,

LLC

Stephen Wesson Managing Director AUDA

Peter Keehn Global Head of Private Equity ALLSTATE INVESTMENTS, LLC

H. Chin Chou Chief Executive Officer MORGAN STANLEY PRIVATE

EQUITY ASIA

Jay Park Managing Director BLACKROCK PRIVATE EQUITY

PARTNERS

Daniel R. Mintz Founding Managing Director OLYMPUS CAPITAL ASIA

Igor Rozenblit Co-Head Private Funds

Unit, Office of Compliance Inspections and Examinations

SEC

Jim Hildebrandt Managing Director BAIN CAPITAL ASIA

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Documents

DEAL OF THE WEEK LP INTERVIEW Cultivation capital · 2014-05-07 · Asia’s Private Equity News Source avcj.com May 06 2014 Volume 27 Number 16 FOCUS DEAL OF THE WEEK Cultivation