Editor’s ViEwpoint · financing of Eleven Biotherapeutics, a US-based biopharmaceutical company designing and engineering novel and differentiated protein-based biotherapeutics

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PRIVATE EQUITY ASIA

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Asia’s Private Equity News Source avcj.com May 15 2012 Volume 25 Number 18

foCusfund of thE wEEk

The forex eff ectCurrency risks are proving to be a game changer for Asian GPs Page 7

CIPEF raises $3bCIPEF closes emerging markets fund VI Page 9

India’s infra defi citTrouble’s ahead for infrastructure funds Page 10

Armstrong targets $150m for Southeast Asia’s maiden clean energy vehicle

Page 9

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ASK Pravi, Baring, Blackstone, Goldstone, GSR Ventures, IndoUS, Inventus Capital, KKR, JAFCO, L Capital, Mandarin Capital, Oak, Ojas, PAG, Permira, Unison, Warburg Pincus

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EvErything always sEEms clEarEr and easier to understand with the benefit of hindsight. While it seems pretty apparent now that Asian private equity would emerge as a leading asset class for investors around the world, it was actually quite difficult to imagine 12 years ago that the kind of stories we have covered in recent issues of AVCJ would be possible.

For example, I hope that most of you will have read the excellent cover story focused on placement agents in the last issue of AVCJ. For those of us that have been in the Asian private equity business for a long time, it is great to see that the industry is able to support the infrastructure it needs at all levels of fundraising, and that the placement service is now available to GPs of all sizes.

I still remember the time when Merrill Lynch was battling it out with the team at DFJ for Asian placement agent supremacy, while a number of independent firms such as CP Eaton and International Private Equity operated with few competitors. This particular type of service has now become a highly contested space with everybody from indigenous Asian agents to firms that attempt to move the process online trying to link GPs to LPs.

The same has happened with investment banking, due diligence, deal structuring and other advisory services that now come in all shapes and sizes. In the past, such services were a luxury that only larger firms could afford (not much negotiation and structuring was needed

for small to mid-size firms taking minority stakes on deals shared by their tycoon friends). Each major investment bank and consulting firm now has a person or team dedicated to Asian private equity. With the ever-increasing complexity of deals and the need to access financing beyond the equity provided by PE investors, both GPs and their portfolio companies have catalyzed the growth of such advisors in recent years.

Another trend that was not easy to imagine was how big private equity secondaries would become in Asia. Few people would have guessed that the business of buying limited partnership interests in Asian funds would have grown to the extent that market specialists such as HarbourVest Partners, Partners Group, Lexington and Paul Capital would set up shop here.

Indeed the above are proof of the reality that Asian private equity has come a long way since AVCJ started covering the industry 25 years ago. Watch this space for more changes as the industry continues to spread its wings.

Allen LeePublisherAsian Venture Capital Journal

Asian PE infrastructure evolves with the industry

Managing Editor Tim Burroughs (852) 3411 4909

Senior Editor Brian McLeod (1) 604 215 1416

Staff Writers Susannah Birkwood (852) 3411 4908

Alvina Yuen (852) 3411 4907

Creative Director Dicky Tang Designers

Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow

Senior Research Manager Helen Lee

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Kaho Mak, Jason Chong

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The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of

AVCJ Group Limited. ISSN 1817-1648 Copyright © 2012


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Capital under management by Asian PE �rms, 1997-2012

Source: AVCJ Research

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avcj.com | May 15 2012 | Volume 25 | Number 184

AustrAlAsiA

KKr ends takeover talks with Pacific Brands Melbourne-based underwear manufacturer Pacific Brands said on Tuesday that a takeover from parties including KKR is unlikely in the near term. Earlier in January, KKR launched an unsolicited takeover bid for the listed company at a reported amount of $614 million. Later in February, TPG also reportedly joined a group of eight banks to run for the company.

New Zealand’s Waterman buys 20% of Manuka HealthNew Zealand-based Waterman Capital has acquired a 20% stake in natural health brand Manuka Health. Investing via the $30 million fund it manages on behalf of the New Zealand Superannuation Fund, Waterman has injected several million dollars in the business and Executive Director Chris Marshall will take a seat on the board.

GloBAl

3i to appoint simon Borrows as new CEo3i is set to appoint Simon Borrows as its new chief executive this week, replacing Michael Queen, who announced his resignation in March after spending three years as head of the company. Borrows joined 3i as chief investment officer last year and was previously chairman of investment bank Greenhill & Co International.

Hong Kong’s ADM buys stake in Prista oilADM Capital and the European Bank for Reconstruction and Development (EBRD) have provided EUR48 million ($62 million) of replacement capital for a 30% stake in Bulgaria’s Prista Oil Group. The Hong Kong-based private equity firm and the EBRD have acquired hedge fund Gramercy Emerging Markets’ shareholding in the lubricants and battery maker. The investment represents ADM’s first investment in Bulgaria.

CPF prepares bid for Permira-backed Birds Eye Thai food manufacturer Charoen Pokphand Foods (CPF) looks set to join the various private

equity houses that have submitted bids for Permira-backed Birds Eye Iglo. Blackstone, Bain Capital, BC Partners and PAI Partners were reported to have made first-round offers for the UK-based frozen food firm last Friday. The sale is expected to value the company at around EUR3 billion ($4 billion), with CPF likely to offer approximately this amount.

indous VP backs digital magazine storeIndoUS Venture Partners has invested in New York-based digital magazine store Magzter in a Series A funding round. The investment is estimated at $3-5 million. Established by VijaykumarRadhakrishnan and GirishRamdas in June 2011, Magzter claims to house around 400 magazines from India, Singapore, Dubai, Malaysia, the US and the UK.

JAFCo backs pharma company with $10mJAFCO has invested $10 million in the Series A financing of Eleven Biotherapeutics, a US-based biopharmaceutical company designing and

engineering novel and differentiated protein-based biotherapeutics. Another $10 million was received from existing investors Third Rock Ventures and Flagship Ventures, expanding the total Series A investment to $45M.

GrEAtEr CHiNA

Cadwalader poaches three lawyers from Jones DayCadwalader’s Hong Kong office has poached three lawyers - Joseph Lee, Jeffrey Maddox and David Neuville – directly from rival Jones Day. Lee, Maddox and Neuvill join Cadwalader’s Asia capital markets practice, having all been partners in Jones Day’s capital markets group, and served on a range of cross-border debt and equity deals.

Gsr, oak lead $30m round for sunsun lightingChina-based LED manufacturer SunSun Lighting has raised $30 million in Series B financing from GSR Ventures and Oak Investment Partners in addition to commitments from its original angel investors. The investment comes nearly a year after SunSun secured $10 million from GSR in a Series A round.

Baring backs Yongda Auto iPoBaring Private Equity has become a cornerstone investor in the IPO of China Yongda Automobile Services, the number-one BMW dealer in China. The company could raise up to $435 million through a listing in Hong Kong. The private equity firm will invest between $96 million and $120 million in the deal.

ropes & Gray hires two in Hong KongUS-based law firm Ropes & Gray has appointed two partners in Hong Kong, and announced plans to double its number of Asia-based by the end of 2012. Julian Chung joins the Hong Kong office on May 28th, when Ropes & Gray gets its license to practice Hong Kong law, while Gary Li started work at the firm on May 10th.

Harvest Capital Partners CEo resignsHong Kong-based real estate investment firm Harvest Capital Partners faces a change of management, after CEO RongRen announced his resignation after seven years at the company.

Creador invests $15m in oldtownIndia- and Southeast Asia-focused investor Creador has injected RM45.7 million ($15 million) in OldTown White Coffee, the number-one Asian restaurant chain in Malaysia. In exchange for the funding, the private equity firm will hold a 10% stake in the company, which equates to a P/E multiple of 11.3x.

OldTown was founded in 1999 and consists of its restaurant outlets and instant coffee business. It started as a producer of three-in-one packaged instant coffee, but launched its restaurant chain in 2005, which it has grown to 202 outlets, including 16 in Singapore, Indonesia and China.The company currency commands a 10% share of the instant coffee market in Malaysia.

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Jiang Wei, vice-chairman of Harvest Capital and chairman of sister company China Resources Capital looks set to head up the firm following a transition period.

Mandarin Capital agrees JV with China’s DagongSino-Italian private equity group Mandarin Capital Partners has reportedly agreed to establish a joint venture with Chinese ratings agency Dagong. The two companies will together establish Dagong Europe, which will have its headquarters in Milan, Italy, by the start of 2013.Former Fitch Italy executive Marco Cecchi di Rossi will oversee the start-up of the new European subsidiary.

squire sanders expands Greater China teamSquire Sanders has hired corporate law specialists Jenny Liu and Xudong Ni as partners in its Beijing and Shanghai offices, while Sin Kiu Ng has joined the law firm in Hong Kong. Liu, formerly of Sheppard Mullin and DLA Piper, focuses on private equity and venture capital investment in China, working primarily on behalf of foreign funds.

Goldstone investment to launch PE fundCITIC Securities’ direct investment arm, Goldstone Investment, has gained approval from the China Securities Regulatory Commission (CSRC) to set up a private equity fund. It makes CITIC Securities the second brokerage to win approval to raise and manage third-party capital. Institutional investors will be the targeted to participate as LPs in the fund, while Beijing JinshiShangde Equity Investment Management will act as general partner.

NortH AsiA

unison secures showa YakuhinKako sBoUnison Capital has emerged victorious in the auction for Showa YakuhinKako, securing the secondary buyout of the drug producer from Tokio Marine Capital, Polaris Capital Group and PineBridge Investments. The Japanese private equity firm, together with Japanese dental materials maker GC Corp, may have paid up to JPY50 billion ($650 million) for the company, according to market sources cited before the deal closed.

soutHEAst AsiA

singtel’s Amobee buys VC-backed ad startupSingapore Telecommunications, Southeast Asia’s largest telecoms company, has acquired AdJitsu, a VC-backed Silicon Valley startup in the mobile advertising sector. This is SingTel’s second acquisition in two months. AdJitsu, which was a unit of California-based startup Cooliris, provides tools to make three-dimensional animated ads in mobile apps for iPhone and iPads.

soutH AsiA

l Capital hires uday Mehra as MDL Capital, the private equity arm of luxury goods giant LVMH, has hired Uday Mehra, a former Asia-Pacific operations executive for Tommy Hilfiger, as a managing director. Mehra will be in charge of India operations at the firm. In February it was reported that L Capital could start raising a new fund of more than $1 billion this year.

liC holds a first close of real estate fund at $47mLIC Housing Finance, the mortgage unit of India’s biggest insurer, has reached a first close of its maiden real estate private equity fund at INR2.5 billion ($46.5 million). Launched late last year, the fund has a target size of INR5 billion and is managed by LIC Housing Finance Asset Management. Institutional investors including banks and corporates have participated in the fund, which has a target net IRR of over 22%.

inventus, ojas lead $3.5m Cbazaar roundUS-India venture capital firm Inventus Capital Partners early-stage technology investor Ojas Venture Partners have led a $3.5 million Series A round of funding for Indian fashion portal Cbazaar. Following this investment, Samir Kumar, managing director for Advisory Services at Inventus, and Ojas Partner Pavan Krishnamurthy, will join the Chennai-based company’s board.

Warburg Pincus joins race for india’s Future Capital US buyout firm Warburg Pincus is thought to have joined the race to acquire a stake in India’s Future Capital Holdings (FCH), the financial services unit of the Future Group. Media reports have indicated that the investor is in advanced talks to snap up the 56% stake held by Kishore Biyani-controlled Future Group, which has been considering its exit options for the past two years.

Moolchand raises $18.7m from sequoia CapitalSequoia Capital has invested INR1 billion ($18.7 million) into New Delhi-based Moolchand Healthcare, with an aim to fund the company’s further expansion and acquisitions of hospitals across India. The company plans to invest INR5 billion over the coming five years in future expansion. It will build at least 700 beds and six specialty hospitals in the capital.

AsK Pravi Capital appoints operating adviserIndia’s ASK Pravi Capital Advisors has hired Naveen Kshatriya as an operating advisor to its private equity fund. The private equity firm, formed by the merger of Mumbai-based financial services firm ASK Group and Pravi Capital Advisors, employed Kshatriya to assist its investment team in evaluating deals in the consumer product and services sector.

CalPErs commits $500m to Blackstone, $100m to PAGCalifornia Public Employees’ Retirement System (CalPERS), the biggest US public pension fund, is going to commit $500 million to a managed account overseen by Blackstone Group. Another $100 million will be distributed to Hong Kong-based PAG.

The $238 billion pension fund said the Blackstone Tactical Opportunities Separate Account was an opportunity “to target global investment opportunities in areas of market, regulatory, or other forms of dislocation”, according to details provided by the fund to Reuters on Wednesday. The news comes after Blackstone received $1.8 billion from the New Jersey Division of Investment last December. The $66.2 billion pension fund has brought its total commitment to $2.5 billion since then.

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HarbourVest Partners Hermes GPE LLP LGT Capital Partners Mitsubishi Corporation (China) National Council for Social Security Fund Ontario Teachers’ Pension Plan Pantheon Pinebridge Rose Rock Partners LLC Shanghai Pudong Science & Technology Investment Co. Ltd Sofina Squadron Capital

StepStone Group Sumitomo Mitsui Banking Corporation SVG Advisers Taikang Life The Northern Trust Company The University of Chicago Booth School of Business University of Texas Investment Management Company Wells Fargo Technology and Venture Banking Group Wychwood Capital YiMei Capital and many more.

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south KorEa, india and indonEsia share the dubious honor of possessing Asia’s most volatile currency. For Korea, a big driver of short-term movement in the won is the geopolitical situation with the north; remittances in and out of the country by non-resident Indians play a role in how the rupee behaves; and the large number of foreign holders of Indonesia government bonds has left the rupiah in a constant state of fl ux.

Each Asia Pacifi c currency clearly carries a certain amount of foreign exchange risk, and GPs in the region – who for the most part operate US-dollar denominated funds – have started to display more concern of late about the impact these idiosyncrasies could have on the life cycle of their investments. “Prior to the global fi nancial crisis, the awareness of counterparty risk was low and the need to hedge against this wasn’t as much of a priority as it is today,” says K.C. Lam, director and head of foreign exchange in Asia for CME Group, which allows clients to trade FX futures and options via its online exchange.

It’s not just a case of increased volatility either. More subdued returns projections mean that every dollar counts and fi rms can no longer aff ord to let currency movements erode the value they get out of their investments. “If you’re making very high returns and the FX market aff ects you 15-20%, it’s not so much of a big deal,” points out Lim Wee Kian, managing director at DBS in Singapore. “But the returns are now going to be a lot lower than in the past, around 20-25%, so fl uctuations in the exchange rate will aff ect them dramatically because it can take away the majority of their performance.”

The best laid plansMaking use of a seemingly limitless selection of products available in the market, the vast majority of PE fi rms now start hedging their FX risk the moment they invest in an Asian company. Managing the risk on the way in is not the easiest thing to do, however. It’s rare for a GP to be the sole contender for the asset it’s seeking to acquire, and in the typical 3-6 month period between targeting a company and closing the deal, there could a material amount of volatility in the FX markets. At the same time, paying for or locking into a hedge can be risky business:

If a GP is outbid and a deal falls through, that hedge will no longer be required and hence will need to be unwound. Depending on prevailing market levels, this could end up costing money that most PE fi rms only have in the form of dry powder.

“Even if I am the only investor in that particular transaction, it’s still not a slam-dunk,” warns Rahul Badhwar, head of corporate sales, Asia-Pacifi c ex-greater China at HSBC global markets in Hong Kong. Regulatory approvals might not be forthcoming, or existing shareholders might raise objections about selling their stakes. Once a deal is 100% signed and sealed, it could be barely a week before

the capital needs to change hands, by which time the investor will have already been hit by currency movements over the six months past. The best way to limit exposure to volatility during this waiting period is to try and hedge the risk as far in advance of the fi nancial close as possible. Nevertheless, Badhwar believes that it would be rare for a PE fi rm to hedge themselves from the moment they start bidding for an asset; most instead tend to wait until they are, at the very least, the preferred bidder and can start conducting due diligence.

One measure that allows fi rms fl exibility is buying currency options. These products off er a known level of protection, involve a known amount of money, and if the deal falls over, the PE fi rm has only paid for the premium. However, as GPs often don’t have excess cash fl ow to support hedging, many favor the deal contingent suite of products. These involve paying slightly more than for generic options and forwards, but allow the fi rm to walk away from the hedge if the

deal does not complete – unlike vanilla options and forwards, which a PE fi rm has to honor whether or not its deal goes ahead.

“This means that they do not have to explain to their LPs that they spent money on an FX hedge for a transaction that did not close,” explains Nick Angove, head of GFFX structuring for North Asia at Deutsche Bank, which provides deal-contingent options and forwards to private equity fi rms.

The convenience of the deal-contingent route doesn’t mean it’s a clear-cut decision for a GP, though: if there’s a 99% chance that a deal will go through, one PE fi rm might be willing to do a non-deal contingent hedge because it’s less costly, whereas another might decide to pay the extra money for hedge because it doesn’t want to risk being out of pocket if the deal fails to complete.

Down the lineHedging FX risk isn’t just an issue when a PE fi rm fi rst acquires an asset either. If the currency moves 20% against an investor during the period of ownership, the underlying price of the asset could change drastically, even wiping out returns. Since 2011, a greater number of fi rms have begun to look at hedging the translation risk or the FX risk on the exit of their portfolio companies, although still only an estimated 10% are focused on hedging at this point in the investment cycle.

The main challenge when hedging post-investment is knowing when to begin, as hedging for a period of 2-3 years can seem like an unnecessary cost, especially when the best laid exit plans come with no guarantee of execution on time - or at the expected value. Although it seems doubtful that PE fi rms will want to hedge for the entirety of their holding, Badhwar argues that this strategy makes sense if extended periods of volatility and heightened tail risks continue to be as frequent as they have been in the last fi ve years. “Because you’re removing FX risk totally from the equation, all your return is dependent upon is the underlying equity performance of the business,” he says. This could be a consideration for Bain Capital, for example, which bought MYOB from HarbourVest Partners and Archer Capital for A$1.2 billion

Know your riskPrivate equity fi rms are hedging the currency risk of their investments in Asia Pacifi c longer and later in the investment cycle than ever before


11th Annual

China 2012 avcjchina.com

Only 2 weeks left! Register now at avcjchina.com

Maintaining growth amidst global turmoil

Participating LPs at the Forum represent more than US$1.3 trillion of assets under management and include representatives from:

Asia Series SponsorLead Sponsor

Co-Sponsors

Knowledge Partner Legal Sponsors Exhibitors

avcjchina.com

30-31 May 2012GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY

Sponsorship: Darryl MagT: +852 3411 4919E: [email protected]

Registration: Pauline ChenT: +852 3411 4936 / +86 10 5869 7481E: [email protected]

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Allianz Capital Partners GmbH APG Asset Management Asia Alternatives Axiom Asia Private Capital China Investment Corporation China Life Insurance Company Commonfund Capital Commonfund Group EMAlternatives Asia Endowment of Southwest Petroleum University GE Asset Management Goldstone Investment Co Hamilton Lane

HarbourVest Partners Hermes GPE LLP LGT Capital Partners Mitsubishi Corporation (China) National Council for Social Security Fund Ontario Teachers’ Pension Plan Pantheon Pinebridge Rose Rock Partners LLC Shanghai Pudong Science & Technology Investment Co. Ltd Sofina Squadron Capital

StepStone Group Sumitomo Mitsui Banking Corporation SVG Advisers Taikang Life The Northern Trust Company The University of Chicago Booth School of Business University of Texas Investment Management Company Wells Fargo Technology and Venture Banking Group Wychwood Capital YiMei Capital and many more.

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

“Prior to the crisis, the need to hedge against counterparty risk wasn’t as much of a priority as it is today” – K.C. Lam


($1.3 billion) last August. The Australian dollar was trading at a record high of A$0.98 to the US dollar when Bain won the auction for the Victoria-based business software maker. It was trading at A$1.46 when HarbourVest and Archer acquired the company for a mere A$450 million in October 2008.

In the past, post-investment risk might not have been such an issue because most Asian currencies were on a one-way appreciation trend against the US dollar and for most PE firms the currency risk in Asia was in sync with the underlying asset risk they were taking. However, a lot has changed since 2007, and two-way volatility with large swings is the name of the game. As an example, an almost 15-17% move in the rupee, such as that which occurred over the last seven months, could wipe out any equity returns in a market in which returns have so far been lower than those of its Asian counterparts. Extending the same thought process, Badhwar believes that hedging translation risk is not only useful to protect the downside risk but also an important tool to capture and monetize large currency swings in favor of the investor. A classic example of this is the US dollar-Japanese yen move in the last five years, which has seen some PE firms interested in locking in gains of more than 25%.

One problem which can present itself, however, is that there is insufficient liquidity in the underlying market to manage risk of that size. HSBC experienced this recently, when working with a PE client looking to sell a business in an

Asian country. The firm was going to receive $1.5-2 billion from selling the local currency against the US dollar, but this wasn’t something that could be executed in the country itself due to the lack of liquidity in the local market. The central bank was also concerned that the sale of such a large amount of currency would cause its value to crash. The answer was to hedge the currency risk offshore in order to reduce exposure to the local market.

DBS’ Wee Kian often advises clients to hedge offshore for deals in Hong Kong, Singapore or India: “When the country has capital control, the tendency to hedge is always offshore.”

Interest rate awarenessInterest rates are another area of importance to Asia-focused private equity firms. Unlike equity, the interest rate risk on a loan doesn’t take off until the deal actually goes through and there tends to be less volatility than for FX. But some GPs – majority stakeholders that have used leverage in the initial acquisition – feel that it makes sense from a balance sheet perspective for a portfolio company either to fix the interest rate of its debt or use swaps to hedge the risk associated with it. While this only occurs in a minority of cases, it is most likely to happen with companies that have large amounts of leverage on their books, as their potential interest payments could eat up a lot of the cash flows in the first few years of the investment.

Indeed, given that firms are currently operating in a very low interest rate environment,

now appears to be an excellent time for companies to fix rates and benefit from the low cost of funding. “When there are signs that this is going to change, and it can do so very rapidly, people will be caught in a very bad position if they haven’t hedged their interest rate exposure,” agrees CME Group’s Lam. “No one is immune from risk.”

In Asian private equity, which is still relatively young, this lesson hasn’t necessarily been learned. Global firms either rely on internal teams to deal with hedging strategies or outsource the job to independent financial advisers who engage with banks. Smaller players – typically indigenous Asian firms – aren’t as well resourced and are known to cut corners. Once they have been through more fund cycles and seen exits go awry, it will sink in that losing 5% off one’s IRR because of a risk that could have been negated is far from best practice. Some are already taking steps in the right direction, but it remains a work in progress.

“All the PE firms are definitely going through an education process. Over the last 5-6 years they have become a lot more sensitive to the impact of FX and interest rate risks, instead of brushing it away as part and parcel of the business risk they undertake. In today’s uncertain markets, linear interpolations of market and return expectations just do not exist and risk needs to be assessed and dealt with at multiple levels,” says HSBC’s Badhwar. “The second and third-tier firms are coming up through the education process to get to where the top tier firms are.”

CoVEr [email protected]

Foreign exchange best PracticesManaging Foreign exchange risk

4

Consider the case of one SVB client, a manufacturer of cleantech equipment that signed a contract with a supplier based in Germany. The contract was payable over 12 months. Based on the client’s foreign exchange policy, which called for the company to hedge all known foreign exchange exposures, the company entered into a series of forward contracts that extended out one year and matched its scheduled A/P payments. The euros were purchased through forward contracts and priced from 1.35-1.37.

Now the company had met its primary objective: the euro-denominated cash flow had a fixed U.S. dollar cost based on the forward foreign

exchange rates, the foreign exchange risk was removed and the USD cost was actually under budget.

GETTING IT RIGHTAlthough putting a hedging strategy in place is less complicated than many CFOs expect, there’s more to it than simply calling up your neighborhood trader. A diligent company will follow these six steps to get started:

Collect data about your business 1. to develop a clear picture of your foreign exchange exposure. Review transactions with overseas contractors, vendors and customers, as well as foreign currency invoices and monthly transfers.

Spot trades: these contracts are typically used for immediate delivery of foreign currency payments or

converting foreign currency receipts into U.S. dollars at prevailing market rates.

Forward contracts and forward window contracts: these contracts are used to lock in exchange rates for a

specific future date, or for a range of dates. Forward contracts are often used as a tool to eliminate the impact

of adverse currency movements and protect profit margins by determining a forward rate for the exchange.

Currency swaps: A currency swap is a foreign exchange agreement between two parties to exchange a given

amount of one currency for another, and after a specified period of time to give back the original amounts

swapped. Swaps are an effective tool to manage time difference of foreign currency cash flows.

Currency options: by paying an upfront premium, over-the-counter option contracts provide the right to buy

or sell a foreign currency at a predetermined rate (strike price) at a specific time frame in the future. Options

are particularly useful when you need to hedge an uncertain or contingent exposure, such as one that involves

tendering for a contract.

Foreign Exchange Hedging Products

Determine the ways in which 2. foreign exchange hedging can benefit your current and future business plans.

Plan how you might work with a 3. trusted foreign exchange advisor to set up a hedging strategy and monitor its risks and results.

Establish a foreign exchange 4. “policies and procedures” document to formalize your strategy — and do this as you begin to expand the business, rather than after the fact.

Select the right financial tools for 5. your business — and don’t overlook internal hedging strategies such as matching exposure, sourcing, production and leading and lagging.

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Source: Silicon Valley Bank

Source: Silicon Valley Bank


capital intErnational has closEd it sixth emerging markets private equity fund at its hard cap of $3 billion, making it the largest vehicle of its kind to be raised in the last five years.

Capital International Private Equity Fund VI (CIPEF VI) exceeded its $2.5 billion target by raising capital from more than 60 investors, such as the Ohio Public Employees Retirement System, Oregon Public Employees Retirement Fund and Pennsylvania Public School Employees’ Retirement System.

Aside from these US-based LPs, CIPEF VI also received commitments from LPs across Asia and the Middle East – including several sovereign wealth funds - and Europe, with the help of placement agent MVision Private Equity Advisers. CIPEF VI was oversubscribed, thanks to securing commitments from more than 60 institutional investors. Around 90% of Capital International’s

re-upped for this latest fund, including Lockheed Martin Corporation Master Retirement Trust and fund-of-funds Portfolio Advisors. The minimum subscription from most LPs was $25 million, although there were a few exceptions. The fund will have a lifespan of 10 + 1 + 1 and the GP contribution was described as “considerably higher than 5%”.

“Experience has shown us that Asia generally is obviously going to play a very important role in CIPEF VI,” says James E. McGuigan, a private equity managing partner at Capital International. “China is the world’s largest emerging market and our first investment from the fund was in India.”

Indeed, almost 20% of the capital raised has already been channeled into three transactions, one of which is L&T Financial, the equipment and infrastructure affiliate of India’s largest private sector engineering and construction company, Larsen & Toubro.

The firm’s investment team of 24 will make a total of 15-20 investments from the fund (or 4-5 per year), prioritizing 16 of the 138 emerging market countries in the world. When asked whether the carried interest would be paid on the fund as a whole or on a deal by deal basis, McGuigan said that CIPEF was favoring a “hybrid” between these two models. In Asia, it will invest in buyout and expansion deals - the latter having historically made up two-thirds of its investments - in China, India and Indonesia. “We’re big believers of taking a step back and looking at the global EM universe on an opportunistic basis, which is what we’ve been doing for a long time,” explains McGuigan. “We’ve done enough to know that the picking and choosing countries or even regions can be a little bit treacherous.” Transactions commanding equity tickets of $100-300 million will be targeted, with CIPEF taking an equity stake of less than 50% in most cases. It will aim to invest alone rather than in concert with other PE firms.

CIPEF VI was structured by law firm Debevoise & Plimpton.

southEast asia has abundant solar radiation, agricultural resources and biomass when compared to North Asian and European countries. However, the use of clean energy in the region is still somewhat limited. Singapore-based clean energy asset manager Armstrong Asset Management is hoping to change this by launching the region’s maiden clean energy fund.

With a target size of $150 million, the fund started approaching investors in early 2011. The key challenge for Armstrong was to find cornerstone investors which were credible enough to attract other LPs. Securing its first investor - European clean energy investor GEEREF, the fund-of-funds advised by the European Investment Bank (EIB) and the European Investment Fund (EIF) - was a milestone that allowed them to garner commitments from other parties.

The fund is expected to receive $66 million from three investors for a first close later this month. German investor DEG, a member of KfW Bankengruppe, and an unidentified Southeast Asian-based corporate have also participated

in the initial round. Andrew Affleck, managing partner of Armstrong Asset Management, tells AVCJ that the vehicle is expected to hold a final close in May 2013, with potentially as much as 40% of the total corpus being committed by development finance institutions (DFI).

“ADB continue to support us with technical assistance funding, and other DFIs such as International Finance Corporation have also expressed initial interest in our fund, given their mandate to support increased renewable energy implementation across Asia,” says Affleck. “We anticipate a further 40% being committed by companies and family offices, with the remaining 20% coming from institutional players such as pension funds and fund-of-funds.”

As favorable policies on renewable energy are being enacted by governments across the region, Affleck adds that European investors whom have been looking at China and India

have shifted their focus to Thailand, Malaysia and Indonesia. The 10-year fund will invest primarily in the three countries, while an allocation of up to 25% of the fund’s gross assets will be put into other Southeast Asian countries such as Philippines and Vietnam.

With a four-year investment commitment period, the strategy of the Armstrong fund is

to start small by targeting investments between $5 and $15 million. “If you are looking at projects which are larger than 10 megawatts in Thailand’s solar and Indonesia’s hydro sectors, you are required to negotiate a power purchase agreement on an individual basis, which could take longer

to agree terms and potentially be less attractive financially,” Affleck adds.

The fund, which has an IRR target of over 20%, is already in the process of negotiating investments in several companies. Two deals are expected to be completed this year.

fund of thE [email protected] / [email protected]

CIPEF closes emerging markets fund at $3b

Armstrong launches SE Asia cleantech fund

CIPEF VI is the largest PE fund for emerging markets since 2007

Armstrong’s fund is Southeast Asia’s first dedicated clean energy vehicle


[email protected]

india is always said to havE thE potential to become the world’s third largest economy. Following the global economic crisis, India remains as one of the few countries with as much as 7% economic growth per year. However, the infrastructure deficit has tempered this growth, as according to official estimates, annual growth could be as high as 9% if local infrastructure were able to keep pace with the economy.

Although infrastructure development has been the single-largest challenge within the country, it has emerged one of the biggest opportunities for private equity investors in recent years. Private equity investment in infrastructure reached $4 billion in 2010, up four-fold from 2006, according to a 2011 report from Bain & Company. Deal values are also tipped to grow 25-50% annually over the next three years.

“Given public resource constraints, the government has realized the need to invite the private sector to fulfill the nation’s infrastructure needs,” says Archana Hingorani, CEO of IL&FS Investment Managers. “Consequently, Public Private Partnerships (PPPs) have emerged as a

core element of the government’s strategy to finance the infrastructure deficit in the country.”

The government’s efforts to draw private investors into the sector have seen significant results. Investment in infrastructure as a percentage of GDP – which has increased to 7.5%, from 5% in 2007 – is expected to reach

9.5% by 2017. The government is also targeting $1 trillion of investment into infrastructure within the coming five years. Half of this amount is expected to be contributed by private sector.

“If we apply a debt-equity-ratio of 70:30, $150 billion is required from private equity and this provides an urge for larger private equity funds,” Deepak Bagla, partner at 3i, tells AVCJ.

Larger fundsIDFC Project Equity will launch its second India infrastructure fund worth of $1 billion later this year, M.K. Sinha, IDFC Project Equity’s CEO, told AVCJ in April. Its predecessor India Infrastructure Fund (IIF), which closed in 2009 on INR38 billion ($927 million), is almost fully invested. The vehicle bets on long-term equity investments in a diversified portfolio of infrastructure projects in India. Its target sectors include transport, energy and utilities, telecommunications and urban infrastructure.

Sinha is certainly not the only person who aims to launch a billion-dollar fund. 3i Group, which held the final close of its 3i India Infrastructure Fund on $1.2 billion in 2008, has

been looking to raise at least the same amount for its successor. Last October, Macquarie Group and State Bank of India (SBI) also set up a $1-1.5 billion target for their second India-focused infrastructure fund.

“The smaller the fund, the more likely it is that the manager will be forced to target smaller

assets, which are well within the reach of many private equity investors and so are typically heavily competed for,” says Suresh Goyal, head of Macquarie Infrastructure and Real Assets India. “The ability of the manager to raise a large fund has kept many of the classic private equity managers out of this space so far.”

The increasing ticket size of infrastructure investments has also pushed GPs to scale up their investment vehicles. What could be India’s largest ever private equity deal was recently announced: the buyout of Reliance Infratel, a telecoms tower unit owned by Reliance Communications. The Carlyle Group and The Blackstone Group reportedly paid INR150-200 billion ($3-4 billion) for 95% of the unit - the equivalent of INR310-410 million per tower.

In the road sector, meanwhile, investors are no longer bidding for 100km toll projects but mega highways that cover 550 kilometers and cost over INR7.5 billion.

“When the government bid out road projects several years ago, a $100-200 million deal was already considered to be very big in size and you could see seven to eight players running for it,” Bagla says. “Recently, the government bid out a road project worth over $1 billion and received interest from more than a dozen players.”

Tough fundraisingThere is no doubt that India requires more sizable funds to speed up the country’s infrastructure development. However, long-term investors who

Indian infrastructure funds face rocky road aheadPrivate equity has been one of the engines for India’s infrastructure growth, but delays in project approvals, inexperienced GPs and the tough fundraising environment remain hurdles to overcome

Average deal size in the Indian infrastructure/construction sector

Source: Bain IVCA VC/PE research survey 2011

Last 2 years Next 2 years

100

80

60

40

20

0

Perc

ent o

f res

pond

ents

$100-500M

$50-100M

<$50M

$100-500M

$50-100M

<$50M

Top 10 infrastructure funds in IndiaFund name Fund status

target size (us$m)

current capital under management: (us$m)

3i India Infrastructure Fund Ltd. Final Close 1000 1200

Macquarie SBI Infrastructure Fund Final Close 3000 1037

The India Infrastructure Financing Initiative (IDFC Project Equity) Final Close 1250 927

Shinsei UTI India Fund Final Close 300 600

IFCI - Sycamore Infrastructure Fund Final Close 500 500

Asian Giants Infrastructure Fund (AMP Capital Investors) Final Close 750 161

India Infrastructure Development Fund (UTI Capital) 1st Close 250 114

Infrastructure India Plc. (Guggenheim Global Infrastructure) Final Close - 112.7

Axis Infrastructure Fund 1 1st Close 453.3 112.2

Pan-Asia Project Development Fund (IL&FS Investment Managers) Final Close 100 45Source: AVCJ Research

[email protected]

target steady yields and returns from the asset class are yet to reach a critical mass. In many cases, infrastructure funds are only talking about an IRR up to 20%, less than many of other sector-focused funds.

GPs are facing a capital drought in the domestic market as the Indian state controls the country’s largest pension funds and fi nancial institutions, and no more than 10% of their assets under management can be invested in equities of any kind. Foreign investors - who hardly have on-the-ground knowledge about Indian infrastructure – often require management teams to provide proven records of returns and steady yields. However, established track records simply don’t exist in some cases.

“It is challenging to fi nd experienced infrastructure investment specialists at this time,” says Gautam Bhandari, head of Morgan Stanley Infrastructure Asia. “It’s a paradoxical world; while infrastructure projects require increasing capital, the fundraising environment has posted challenges for GPs to raise a sizable fund.”

Apart from having concerns over returns and the experience of GPs, LPs also worry about the fi nancial impact of changes in policy on their investments, despite the fact that the regulatory framework in many of the key infrastructure segments in India is fairly well-defi ned, with

the government fully allowing foreign direct investment across the sector.

The power sector is a case in point. Although India holds 10% of global coal reserves, the country has struggled to meet power producers’ needs due to delays in environmental clearance, land acquisition and price uncertainty. While India’s coal demand is set to jump to 981 million

tons by 2017, output in this period may only be 715 million tons. Last year, 3i-backed Adani Power delayed its plans to expand its capacity by 6,500 megawatts due on the opaque environment on coal issues.

“There is a concern between PE players as to whether they can manage to achieve the typical 15-20% IRR if they just depend on imported coal,” says Vikram Utamsingh, head of transactions & restructuring services at KPMG India.

India is on the road to becoming a

more established and favorable investment environment, but right now professionals who have an on-the-ground presence are better positioned to understand the issues in India and to make the right investment decisions. “It is not the ‘complexity’, if there is any, of the regulatory environment which provides an edge to existing private equity players,” says IL&FS’ Hingorani. The

professionals at Macquarie Infrastructure and Real Assets India, for example, have all been brought up in India and have hands-on experience investing or managing funds in the country. Non-banking engineers and developers are also recruited with the aim of driving the investment decision process. “The key diff erentiator in favor of existing home grown players is their ability to access deal fl ow, to be able to work with the developers and understand the nuances of operating in India.”

Asia has over US$318 billion in private equity funds under management

Just where and how are these funds distributed? Read all about it in AVCJ Private Equity and Venture Capital Report, the annual series of regional reports by the leading source of information on Asian private equity, venture capital and M&A.

Reviewing the year’s activity in the industry, the regional reports are filled with up-to-date data and intelligence on fundraising, investments, exits and M&A. They also feature information on key companies and transactions. Offering global perspective alongside local opportunities, the regional reports include Australasia, China, India, North Asia, and Southeast Asia.

For more information or to order, call Sally Yip at +(852) 3411 4921 or email [email protected].

7th annual edition

AVCJ private equity and venture capital report

India 2012


PRIVATE EQUITY ASIA

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7th annual edition ASIAN VENTURE CAPITAL JOURNAL

PRIVATE EQUITY ASIA

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Southeast Asia 2012

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PRIVATE EQUITY ASIA

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Australasia 2012

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PRIVATE EQUITY ASIA

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North Asia 2012

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M&A ASIA


China 2012

* as of September 30, 2011. Source: AVCJ avcj.com

“It’s a paradoxical world; while infrastructure projects require increasing capital, the fundraising environment has posted challenges for GPs to raise a sizable fund” – Gautam Bhandari

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Documents

Editor’s ViEwpoint · financing of Eleven Biotherapeutics, a US-based biopharmaceutical company designing and engineering novel and differentiated protein-based biotherapeutics