High-time-Strategies-200511.pdf

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Contents

1 Key insights

2 The Asian context — Churning investments

8 Regulatory influences on exit considerations — China, Japan and Korea

10 Exit strategies — Mitigating value leakage

11 Managing the exit process — Perceived success factors

14 Agenda for action

16 How KPMG’s Private Equity Group can help

Asia Pacific PE Group Leadership

David Nott

+61 (2) 9335 8265

[email protected]

Robert Stoneley

+852 3121 9850

[email protected]

Australia

Jonathan Dunlop

+61 (2) 9335 7633

[email protected]

China and Hong Kong SAR

Gavin Geminder

+852 3121 9808

[email protected]

India

Abizer Diwanji

+91 (22) 2498 0473

[email protected]

Indonesia

David East

+62 (21) 574 0877

[email protected]

Japan

Tom Whitson

+81 (3) 5218 6789

[email protected]

Korea

Edward Kim

+82 (2) 2112 0770

[email protected]

Malaysia

Hock Eng Lim

+60 (3) 2095 3388

[email protected]

New Zealand

Ian Thursfield

+64 (9) 367 5858

[email protected]

Philippines

Fernando Castro

+63 (2) 894 1779

[email protected]

Singapore

Diana Koh

+65 6213 2519

[email protected]

Taiwan

Jay Cheng

+866 (2) 2715 9716

[email protected]

Thailand

Tanate Kasemsarn

+66 (2) 677 2750

[email protected]

Vietnam

Warrick Cleine

+84 (8) 821 9266

[email protected]

For more information on KPMG’s Private EquityGroup in Asia Pacific, contact:

High time to exit: Strategies to help maximise value 1

© 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

In order to better understand the disposals processes employed by private equity

funds and identify how they seek to maximise the returns for disposals, KPMG has

been actively surveying private equity houses, both in Asian and Western markets.

Our surveys found that areas where the approach to disposals can certainly be

improved include:

• the importance of the vendor identifying issues in the business prior to prospective

purchasers doing so

• the need to commit sufficient and appropriate resource to the process

• the need to try to ensure the value in the business is not eroded by rumour and

uncertainty

• setting a detailed and realistic timetable for the disposal process

It is a common misconception that buyers face most of the challenges in a transaction.

In fact, divesting a business is as complicated and resource-intensive for the seller as

the acquisition is for the buyer. There is room for improving the disposals process. This

will become more important in Asia Pacific as more funds become available and

buyers become more sophisticated.

Key insights

2 High time to exit: Strategies to help maximise value


Private equity houses in the Asia Pacific region have been churning their investments.

The value of exits in the nine months to September 2005 is over four times that of the

whole of 2002 and shows no sign of abating.

The prospect of greater returns as well as a global increase in the allocation of funds to

private equity as an alternative asset class brought a large amount of such funds to

Asia Pacific during the late 1990s and early 2000s. This year the trend has been

magnified by the closing of three large, Asia focused funds:

• CVC Asia Pacific’s CVC Capital Partners Asia Pacific II, the largest Asia Pacific

focused fund — closed in May with US$1.975 billion; 1

• JP Morgan Partners’ Asia Opportunities Fund II — closed in September with

US$1.574 billion; 2 and

• Warburg Pincus’ Warburg Pincus Private Equity IX, LP, closed in August at

US$8 billion. This fund had Asia as one of its target markets.3

One factor which may be encouraging this increased inflow of money to Asia-specific

private equity funds is the profits made on recent exits which have delivered stellar

returns to their investors. China Mengniu Dairy,4 Petra Foods,5 Ping An Insurance

Company,6 just to name a few, all produced record returns for their investors. The

anticipated divestments of Mando Corp and Korea Exchange Bank in Korea 7 as well as

Mphasis in India 8 are equally promising.

Overall, this reflects an uptrend for divestitures in Asia Pacific. The number of private

equity backed trade sales and IPOs increased by 33 percent between 2002 and 2004,

from 186 to 247.9 2005 looks to be less active in terms of numbers, with 160 exits

over nine months.10 The value of exits via trade sales is set to break the 2004 record

while the value of IPO exits falling off significantly from the 2004 peak.11

The Asian context —churning investments

________________________________

1 Press release by CVC Capital Partners, 4 May 2005

2 Press release by JP Morgan Chase, 7 September 2005

3 Press release by Warburg Pincus 15 August 2005

4 China Milk, Asia Private Equity Review, 1 July 2005

5 Sweet Return for CLSA Private Equity, Asia Private Equity Review, 1 June 2005

6 Goldman Sachs and Morgan Stanley units sell Ping An Insurance Holdings, Asia Private Equity Review, 1 June 2005

7 In Anticipation, Asia Private Equity Review, 1 September 2005

8 Time to Exit, Asia Private Equity Review, 1 August 2005

9 AVCJ Database, September 2005

10 Ibid

11 Ibid



________________________________


Three years ago, private equity-backed IPOs were nearly double trade sales; for the

first nine months of 2005 the balance between trade sales and IPO exits is much

closer.12 This substantial increase in the number of exits via the trade sales route

reflects a general strong flow of funds to equity investment in this region from

strategic buyers, giving private equity houses a favourable market in which to realise

gains.

________________________________

Source: AVCJ Database, September 2005

16,000

14,000

12,000

1,000

8,000

6,000

4,000

2,000

0

3,148

1,735

6,357

2,299

13,631 13,97612,918

5,205

2002 2003 2004 200515 Sept

Trade sales transaction amount

Private equity-backed IPO fund

raised

US$

mill

ion

Value of private equity-backed exits in Asia Pacific

includes Australia, New Zealand and Japan

________________________________


160

140

120

100

80

60

40

20

0

64

122

103

140

93

154

72

88

2002 2003 2004 200515 Sept

Number of trade sales

Number of private equity-backed

IPOs

Number of private equity-backed exits in Asia Pacific

includes Australia, New Zealand and Japan



Table 1: Top 5 private equity-backed IPOs 2004

Issuer Name Stock Exchange Listing Total Funds Financial InvestorsDate Raised

(US$m)

Shinsei Bank, Ltd. Tokyo Stock Feb 04 2,164.37 ABN AMRO Capital Investment - Tokyo OfficeExchange 1 Ripplewood Japan Inc.

RIT Capital Partners Plc.

Ping An Insurance Stock Exchange Jun 04 1,840.86 Goldman Sachs (Asia) Ltd.(Group) Company of Hong Kong Morgan Stanley Private Equity Asia Ltd.of China, Ltd. - Mainboard

Semiconductor Stock Exchange Mar 04 1,779.31 Fortune Venture Management Pte. Ltd.Manufacturing of Hong Kong Goldman Sachs (Asia) Ltd.International Corp. - Mainboard Goldman Sachs Capital Partners, Inc.(SMIC) H&Q Beijing

New Enterprise AssociatesOak Investment PartnersShanghai Fortune Venture Ltd.Temasek Holdings (HK) Ltd.Vertex China InvestmentVertex Management (III) Pte Ltd.Walden International Hong Kong Ltd.Walden International China Ltd.

China Netcom Stock Exchange Nov 04 1,138.90 Goldman Sachs (Asia) Ltd.Group Corporation of Hong Kong Shanghai Alliance Investment Ltd. (SAIL)(Hong Kong) Ltd. - Mainboard

Elpida Memory Inc. Tokyo Stock Nov 04 1,056.56 Development Bank of Japan (DBJ)Exchange 1 Intel Capital Japan

________________________________


________________________________


The value of exits from trade sales and from IPOs in 2004 was over US$27 billion

compared to nearly US$5 billion in 2002.13 For the first nine months of 2005 trade sales

are nearly the same as the whole of 2004 while the value of exits via IPO has declined

substantially with the slew of listings in Hong Kong in excess of US$1 billion not being

replicated (Tables 1 and 2).



Table 2: Top 5 private equity-backed IPOs 2005 (Jan-Sept)

________________________________


Issuer Name Stock Exchange Listing Total Funds Financial InvestorsDate Raised

(US$m)

ACCA Networks JASDAQ Mar 05 2,458.54 GE Equity JapanCo. Ltd. - Japan Ignite Japan KK

NIF Ventures Co., Ltd.Nissay Capital Co. Ltd.ORIX Capital CorporationSMBC Capital Co., Ltd.Temasek Holdings (HK) Ltd.The Diamond Capital Co. Ltd.Tokio Marine Capital Co., Ltd.UFJ Capital Co., Ltd.

AMS Life Science JASDAQ Mar 05 330.48 Shizuoka Capital Co. Ltd.- Japan

kabu.com Securities Tokyo Stock Mar 05 172.85 ITOCHU Finance Corp.Co., Ltd. Exchange 1 ITOCHU Technology Ventures, Inc.

Focus Media (China) NASDAQ Jul 05 171.7 3i Asia PacificHolding Co., Ltd. USA CDH China Holding Management Co., Ltd.

China Merchants & Fortune Assets Management Ltd.Draper Fisher Jurvetson ePlanet International AdvisorsGoldman Sachs (Asia) Ltd.Milestone Capital Management Ltd.SOFTBANK China Venture CapitalUnited Capital Investment Group (China) Ltd.Venture TDF Shanghai Co. Ltd.WI Harper Group

Olam International Ltd. Singapore Feb 05 141.88 AIF Funds Management Ltd.Exchange International Finance Corporation (IFC)- Mainboard Temasek Holdings Pte. Ltd.



In 2005, the value of trade sales has far outstripped that of IPOs, being over double,

reflecting the preferred exit route this year for certain large investments (Tables 3

and 4).

Table 3: Top private equity-backed trade sales 2004

Target/ Amount Date Deal Target/ Sellers AcquirersInvestee (US$m) Stake InvesteeName % Country

Japan Telecom 3,069.75 May 04 100 Japan Goldman Sachs (Asia) Soft Bank CorpCo., Ltd. Ltd. (Hong Kong) (Japan)

Goldman Sachs CapitalPartners, Inc.(United States)

Newbridge CapitalJapan (Japan)

PPM Ventures Japan(Japan)

Telecom Venture GroupLtd. (Hong Kong)

KorAm Bank 2,710.63 Feb 04 100 South Carlyle Asia - Korea Citigroup Inc.Korea (South Korea) (United States)

CDP Asia InvestmentsInc. (Hong Kong)

JP Morgan Corsair, Inc.(United States)

PAMA Group Inc.(South Korea)

Standard Chartered PLC(United Kingdom)

Epic Energy – 1,315.58 Aug 04 100 Australia AMP Capital Investors Alcoa Inc. (United States)Dampier-to-Bunbury Ltd. (Australia) Alinta Ltd. (Australia)pipeline DB Capital Partners Macquarie Bank Ltd.

(Australia) (Australia)

Dominion Resources Inc(United States)

Hastings FundsManagement Pty Ltd.(Australia)

Singapore 1,240.47 Jan 04 5.5 Singapore Temasek Holdings Undisclosed Investor(s)Telecommunications Pte. Ltd. (Singapore) (Singapore)Ltd. (SingTel)

Epic Energy 'Rest' 504.68 Apr 04 100 Australia AMP Capital Investors Utilities Trust IIgas pipeline assets Ltd. (Australia) (Australia)

CNG Energy (United States)

DB Capital Partners(Australia)

El Paso EnergyInternational(United States)

________________________________




Table 4: Top private equity-backed trade sales 2005 (Jan-Sep)

Target/ Amount Date Deal Target/ Sellers AcquirersInvestee (US$m) Stake InvesteeName % Country

Korea First Bank 3,257.20 Jan 05 100 South Korea Deposit Insurance Standard CharteredKorea Corp. (South Korea) PLC (United Kingdom)

Newbridge CapitalLLC (South Korea)

Ministry of Finance andEconomy (South Korea)

Affinity Health Ltd. 1,103.14 Apr 05 100 Australia Affinity Health- Ramsay Health Caremanagement (Australia) Ltd. (Australia)

CVC Asia Pacific(Australia) Ltd.(Australia)

GIC Special InvestmentsPte Ltd. (Singapore)

Ironbridge Capital Pty.Ltd. (Australia)

Ping An Insurance 1,040.04 May 05 9.91 China Goldman Sachs (Asia) HSBC Insurance(Group) Company (PRC) Ltd. (Hong Kong) Holdings (Hong Kong)of China, Ltd. Morgan Stanley Private

Equity Asia Limited(Hong Kong)

BPL 1,011.03 Jul 05 100 India Actis Capital LLP. (India) Essar Group (India)Communications AIG Global InvestmentLtd. Corporation (Mauritius)

Ltd. (India)

AIMAC Group (Singapore)

BPL Communications Ltd.(India)

TVG Capital Partners Ltd.(Hong Kong)

Taiwan Broadband 632.44 Apr 05 100 Taiwan Carlyle Asia (Hong Kong) Taiwan Fixed NetworkCommunications Co. Telecom (Taiwan)

________________________________


It should be noted that the total value of transactions in 2005 looks to be less than

that of 2004 (US$18,123 million over the first nine months of 2005 against

US$27,607 million in 2004). Taken together with the plateau in the number of trade

sales and the decrease in the number of IPO backed exits, these numbers suggest a

possible slowdown or plateau in exits for private equity as the sector reacts to some of

the government intervention around the region (see pages 8 and 9). This is likely to

result in an investment overhang given the amount of funds invested in the region.

Certainly in the short term, economic uncertainty driven largely by raising oil prices and

the twin spectres of terrorism and bird flu will temper the appetites of equity markets

and strategic buyers.



ChinaIn terms of private equity investment and

exit strategies, China has been a bit of a

paradox. Private equity investment has

gained more attention among local

businesses, but successful exits are

largely subject to the availability of

offshore vehicles.

Chinese entities or individuals usually set

up an offshore special purpose vehicle

(SPV), usually with a mirroring structure

to the domestic company. They then

transfer their equity in the domestic

company to the SPV through a share

swap, thus changing the legal structure of

the company to a Foreign Invested

Enterprise (FIE) and converting the

controlling equity interests to the SPV.

Then the offshore SPV can conveniently

seek investment through private equity

investors or through an eventual listing.

This structure, although great for foreign

private equity investors and foreign

listings, led to some internal difficulties

for China. As a result, in 2004, the

Chinese Academy of International Trade

and Economic Cooperation issued an

extensive report 1 isolating some of the

internal challenges related to offshore

SPVs. Some of which included:

• Internal taxation — as a new FIE, the

offshore SPV is no longer subject to

higher Chinese tax rates or taxation of

offshore investment returns;

• Dissipation of assets — many

managers or controllers of Chinese

State-owned Enterprises (SOEs) would

acquire equity or assets through an

offshore SPV at a price substantially

lower than the market. The offshore

SPV could then sell the shares at a

significantly higher price, clearly a loss

to the Chinese state; and

• Weak domestic stock market —

allowing offshore SPVs did little to

encourage listing on domestic

markets, when an overseas listing

could easily yield a much higher return

on investment.

It was these aforementioned areas that

were generally believed to lead to some

stringent regulations imposed by the

State Administration of Foreign Exchange

(SAFE) to limit the flight of capital and

assets.2 The regulations, generally

referred to as SAFE Circulars 11 and 29,

and their replacement 75, restricted the

ability of Chinese companies to

restructure using offshore vehicles by

imposing strenuous application

processes. To many investors’ delight,

the revised draft Circular 75 is less

restrictive than the former two, but their

net effect is still uncertain.3

The rationale of the Circulars was

originally to address internal issues the

Chinese central government wanted to

rectify, but ended up having far greater

reach. As one could guess, this onerous

application process only complicated

private equity investments, where the

freedom of exits is vital. The net effect

was a decrease in private equity-backed

investments. According to Zero2IPO (a

Beijing-based venture capital research

firm), venture investment was down by

8.1 percent in 2005, compared to the first

half of 2004.

Given the stringent internal measures

that exist on foreign currency transfers

out of mainland China, and the lack of

robust and liquid stock markets,

managing successful exits in China is

highly dependent on the availability of

offshore structuring. To maximise the

potential for solid returns, while

mitigating downside risks, we advise

private equity investors to seek quality

professional service firms that are familiar

with the changing Chinese legal and

regulatory environment.

Regulatory influences on exit considerations

________________________________

1 Research on Issues of Transnational Capital Flight between the PRC and Offshore Financial Centres; August 2004

2 New rules from the State Administration of Foreign Exchange: the impact on offshore restructurings and cross-border transactions into China; Lovells 2005

3 In short, the circulars state that PRC residents-including non-Chinese citizens-must gain prior approval from SAFE and often the Ministry of Foreign Commerce (MOFCOM) before they can set up and hold shares inoffshore companies; a process which is retroactive as well.



JapanFive years ago, private equity funds had

many attractive investment opportunities

in Japan but exits were difficult to

imagine. The IPO market was dead and

possible industrial buyers were mainly

focused on cleaning up their own balance

sheets.

Since then, Ripplewood’s sale of Japan

Telecom to Softbank, and the Shinsei

Bank and Tokyo Star Bank IPOs are high

profile exits that show how the Japanese

market is maturing. There is more “fund

to fund” activity. Other creative exits

include the formation of Real Estate

Investment Trusts for real estate assets

that have been acquired through NPL and

other transactions. Ripplewood’s

European listing of its Japanese portfolio

of companies as part of RJH International

is an especially creative way to monetise

a group of investee companies which

may not be individually ready for disposal.

Although Japanese industrial sellers

previously preferred quiet sales of non-

core businesses on an exclusive basis,

we are now seeing more auctions as

sellers realise that they can get a better

price and a quicker sale through a well

executed auction process.

Public outcry over the perception that

foreign private equity funds are spiriting

enormous profits out of Japan nearly tax

free was a factor in the 2005 tax

programme to widen the scope of those

who will pay Japanese tax on exits from

certain Japanese equity investments. The

Japanese tax authorities are now able to

apply related party treatment to partners

under certain foreign partnership

arrangements to determine whether the

partners should be subject to Japanese

tax on a disposal of shares in a Japanese

company held by the partnership. While

there is some relief available under

various tax treaties, the relief process can

place arduous disclosure requirements on

certain types of investors. Another key

recent practical development is that the

Japanese tax authorities are starting to

take a more aggressive stance in

assessing whether a foreign fund’s

Japanese operations can be considered

as a “permanent establishment” in Japan

for Japanese tax purposes. Where such a

“permanent establishment” is found to

exist, this can lead to the imposition of, or

an increase in, Japanese taxation on the

fund’s income.

KoreaPrivate equity activity in Korea grew

rapidly after the financial crisis in 1997,

with foreign private equity funds

brokering distressed asset deals with

limited competition from sophisticated

local players.

Several of these investments have

proven to be very successful. Two such

success stories are Lone Star’s 2001

purchase of Star Tower for approximately

US$600 million and subsequent sale to

GIC for nearly US$950 million, and

Newbridge’s 1999 investment in Korea

Exchange Bank for approximately

US$500 million and sale to Standard

Chartered Bank for close to US$1.6

billion.

This success has been met with

increased scrutiny from Korean regulators

and the tax office, and has fueled

negative public sentiment towards

foreign private equity capital. Korean

regulators and the National Tax Service

recently took a hard line against several

foreign funds in Korea, including Lone

Star, Carlyle and Goldman Sachs,

following investigations into capital gains

tax on the sale of local investments and

what Korean regulators perceive as

inappropriate business practices.

How will changes in the regulatory

environment and increased scrutiny

impact future private equity exits? Private

equity exit activity has been limited in the

third quarter of 2005, so it may be too

early to say. However, the Government’s

stance may present significant challenges

to private equity funds, and the litmus

test may come with Lone Star’s

rumoured sale of Korea Exchange Bank.

Given the increased scrutiny on private

equity funds, careful consideration needs

to be given to tax implications when

approaching a sale, and specifically the

impact of any changes to tax regulations

that may have occurred during the

investment period.



Exit Strategies —mitigating value leakage

Divestment of an investment is clearly part of the private equity fund strategy. It is a

core part of their mandate. Is there anything we can learn from their divestment

processes that can be used to derive industry best practice processes which can be

applied more generally?

KPMG conducted two surveys of M&A decision makers, one covering European and

American and the other Asian private equity houses to identify approaches, practices

and problems associated with and encountered during the disposals process.14 The

surveys also included corporations — strategic buyers — in order to see if there were

any observable differences in the processes they employed compared to private

equity funds.

The surveys found that areas where the approach to disposals can certainly be

improved include:

• the importance of the vendor identifying issues in the business prior to prospective

purchasers doing so

• the need to commit sufficient and appropriate resource to the process

• the need to try to ensure the value in the business is not eroded by rumour and

uncertainty

• setting a detailed and realistic timetable for the disposal process

More than anything else, value erosion is closely associated with delays in the process

— and decision-makers acknowledged that delays were one of the most common

problems they faced when implementing a disposal.

However, value erosion does not end with agreement of the final price. Post-

transaction problems are common. These include managing the post-disposal

transition, unforeseen warranty and indemnity claims, tax consequences and higher

than expected deal costs.

Based on the results of these surveys, over a third of respondents suffered value

leakage by a reduction in bid price during the disposal process. In fact, 35 percent of

our respondents completed their most recent disposal at a price significantly below

(20 percent on average) their own valuation and expected selling price.

Interestingly, our Asia Pacific research found that private equity houses devote more

resources to obtaining a clear understanding of the business, accurate performance

forecasts, and a realistic valuation, and they put more effort to developing a

presentation of the divested business’s future opportunities than corporations. Overall

private equity houses experienced less value leakage than their corporate

counterparts, probably reflecting their competency in buying and selling portfolio

companies.

________________________________

14 Increasing value from disposals — A case for professionalizing the sell side, KPMG International, 2004; Extracting more value from disposals —A survey of current practice in the Asia Pacific region, KPMG Transaction Services (Australia) Pty Limited, 2004



Managing the exit process —perceived success factors

With a view to understanding what respondents had done right, these surveys also

looked at the tactical goals which they focused on to maximise the value of the exits.

The most important tactical goals identified by respondents to the survey were finding

the right purchaser, minimising value erosion and maintaining control over the process.

It is interesting to note that private equity houses seem to place less emphasis on

managing tax consequences than corporates. It is likely that the low priority assigned

by private equity houses reflects the fact that potential tax issues would have been

considered as part of deal structuring at the time of the acquisition to try to ensure

there is a clean exit.

As serial deal makers, private equity houses clearly see the value in finding the right

purchaser — the right purchaser will see more value enhancement in doing a deal than

other potential purchasers and that should assist in the achievement of other tactical goals.

In the Asia Pacific research we found private equity houses were concerned about

reducing warranties and indemnities than their corporate counterparts. The fact that

private equity houses usually distribute the proceeds of a disposal explains their

concerns over post-sale risk and liabilities.

Tactical goals

Finding the best purchaser

Reducing value leakage

Maintaining control of the process

Minimising warrantiesand indemnities

Managing tax consequences

Minimising the time frameof the transaction 38%

92%74%

88%73%

82%77%

74%60%

40%67%

32%

Private equity houses

Corporates________________________________

Source: Increasing value from disposals, KPMG International, 2004



With a view to controlling the divestment process, respondents were asked to identify

critical elements in the disposals process.

________________________________


Both corporates and private equity houses agreed on the importance of clearly

evaluating the disposal options. Among corporates, restructuring is the most favoured

alternative to a disposal. Among the private equity house respondents, 52 percent

identified refinancing as the main alternative if a straight exit was not a viable option,

as this released cash to the investors. In addition, refinancing is being used as a

method of releasing equity at a relatively early state, allowing for risk mitigation. It

certainly changes the profile of cash flows being returned to limited partners and may

result in more fund extensions if holding periods increase.15

________________________________


Restructuring/re-organisation

Continue to run the business

Closure/Equidation

Joint venture

Refinancing

46%

21%

15%

14%

10%

Evaluating disposal options

Reducing value leakage

Collation of financial, commerical,legal and other information

Completion statements andprice adjustments

Vendor due diligence

Production of informationmemorandum

78%78%

74%54%

70%74%

56%72%

55%44%

53%60%

Private equity houses

Corporates

________________________________

15 Insight into realising value 2004, KPMG LLP (UK)

Alternative options to disposal – corporates

Critical elements in the disposals process



Besides refinancing, there are other alternative realisation strategies available to

private equity houses. These include:

• Secondary buyouts

• Dividend returns

• Development of new exit routes such as Canadian Income Trusts for US private

equity houses

While these are currently not popular due to the IPO and trade sale activity in the Asia

Pacific, the possibility of a slowdown in exits based on the volume and value of

transactions in 2005 could force some private equity houses to consider them more

seriously.

There is however, less clarity on other aspects of the process. Corporates identified

pre-sale review and due diligence as more important than private equity houses did. In

our opinion this reflects in part the fact that private equity houses are preparing to exit

from the time of the initial investment and are more likely to have an understanding of,

and deal with, many of the likely disposal issues well in advance of the “sale” or

“auction” process. Private equity houses are considerably more concerned with

avoiding surprises in their disposal process compared to corporations. Private equity

houses were clearly more focused than corporations on the completion accounts and

price adjustments: as serial deal makers they realise that this is a common area of

value erosion as poor contract drafting, unforeseen working capital adjustments and

due diligence/warranty adjustments can cause price adjustments from the preferred

bid price which are unexpected.



Corporate organisations and private equity funds which focus on certain key areas and

have well defined processes can increase the value from disposals and in so doing

reduce, if not avoid, value leakage during the process. KPMG’s Private Equity practice

believes the key areas of focus in a high quality disposal process include:

Strategic assessment• Validate the selling opportunity and likely market for the target before commencing

the process.

• Conduct a pre-sale review and carry out sufficient due diligence on the business.

• Assess alternative options to the disposal process and the pros and cons for each

of these.

Preparation and planning• Establish a realistic timetable and set clear objectives by which success can be

measured.

• Assess bidders’ requirements up front and, allowing for commercial sensitivities,

provide as much information as possible to allow bidders to put a value on any

upside in the business plan or potential synergies.

• Produce a credible and dispassionate valuation which can be substantiated with

detailed information.

• Consider human resources aspects including how to keep employees motivated/

incentivised throughout the process.

• Give early consideration to the drafting of shared service arrangements including

the establishment of transitional management arrangements to protect the vendor’s

interests.

Value preservation• Keep tight control of the process and the timetable.

• Package bad news up front in order that bidders value it in the same way.

• Monitor the value and timing of a disposal at board level — it is not a process that

can be delegated.

Agenda for action



Completion• Be aware of what can go wrong after the deal is signed and incorporate this into the

drafting of the sale and purchase agreement.

• Perform sufficient due diligence on warranties and indemnities to be provided.

Post transaction• Conduct a formal review of the process to determine whether objectives have been

met and capture key learning points for future disposals.

Follow-up research is under way to identify how perceptions have changed since the

initial reports were issued and to what degree private equity houses have focused on

the key areas in a high quality disposal process identified above.

With the possibility of a shortfall in liquidity as evidenced by the volume and value of

transactions in 2005, increasing value for exits will certainly come into the forefront of

decision makers.



KPMG’s Private Equity Group is well-positioned to assist private equity groups in

managing the key areas of the disposals process. We are a group of experienced

private equity professionals from across the network of KPMG member firms, focused

on the needs of the private equity community and its investors.

We offer a coordinated approach to the industry, helping both middle market and large

leveraged buy-out private equity houses with their strategic, deal and portfolio

management issues. We believe in adopting a broader “investment life-cycle”

approach to creating value for investments.

Assisting private equity groups with disposals — how KPMG can help:

• Advise on tax issues especially in multi-jurisdictional businesses

• Perform pre-exit business valuations

• Assist in building credible plans to support a re-financing case

• Assess whether a company is groomed effectively for disposal

• Plan realisation strategies at the pre-investment deal stage

• Carry out independent reports on projections underpinning re-financing cases

• Perform vendor searches and due diligence

• Provide sales strategies and partial exits advice

• Provide personal tax advice

• Provide debt advisory

• Run the auction process

How KPMG’s Private EquityGroup can help

Contents

1 Key insights

2 The Asian context — Churning investments

8 Regulatory influences on exit considerations — China, Japan and Korea

10 Exit strategies — Mitigating value leakage

11 Managing the exit process — Perceived success factors

14 Agenda for action

16 How KPMG’s Private Equity Group can help

Asia Pacific PE Group Leadership

David Nott

+61 (2) 9335 8265

[email protected]

Robert Stoneley

+852 3121 9850

[email protected]

Australia

Jonathan Dunlop

+61 (2) 9335 7633

[email protected]

China and Hong Kong SAR

Gavin Geminder

+852 3121 9808

[email protected]

India

Abizer Diwanji

+91 (22) 2498 0473

[email protected]

Indonesia

David East

+62 (21) 574 0877

[email protected]

Japan

Tom Whitson

+81 (3) 5218 6789

[email protected]

Korea

Edward Kim

+82 (2) 2112 0770

[email protected]

Malaysia

Hock Eng Lim

+60 (3) 2095 3388

[email protected]

New Zealand

Ian Thursfield

+64 (9) 367 5858

[email protected]

Philippines

Fernando Castro

+63 (2) 894 1779

[email protected]

Singapore

Diana Koh

+65 6213 2519

[email protected]

Taiwan

Jay Cheng

+866 (2) 2715 9716

[email protected]

Thailand

Tanate Kasemsarn

+66 (2) 677 2750

[email protected]

Vietnam

Warrick Cleine

+84 (8) 821 9266

[email protected]

For more information on KPMG’s Private EquityGroup in Asia Pacific, contact:

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Documents

High-time-Strategies-200511.pdf