Page 12 Industry outsiders Deal of the Week · Deal of the Week analysis Industry outsiders What can female GPs do to shatter private equity’s glass ceiling? Page 7 Indian power

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Deal of the Week analysis

Industry outsidersWhat can female GPs do to shatter private equity’s glass ceiling? Page 7

Indian power playBlackstone closes in on Visa Group deal Page 13

Third-party flawsPRC investment structures spark concerns Page 14

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3i, Actis, CalPERS, Carlyle, CHAMP PE, CICC, CITIC PE, IDG, Khazanah, KIC, LaSalle, Lone Star, Sequoia, Warburg Pincus

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Hony Capital makes Japan debut through Tokai Kanko investment

Page 13

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Deal of the Week

Retirement homes have emerged as a private equity hot spot in Japan

Page 12

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I’ve saId befOre tHat It’s HIgH tIme GPs based in US and Europe resume plans to set up offices in Asia. Before these ambitions were mothballed during the global financial crisis, I was often asked where in the region it is best to locate an office. The same question was posed to me at a recent event by an American fund manager.

But it seems that most GPs have become sufficiently familiar with Asia to realize that there isn’t much of a debate – it falls down to logistics and focus.

In the past, the choice for the one Asian office is usually between Hong Kong and Singapore. Those that opted for Hong Kong did so because of, amongst other advantages, its proximity to the major markets of Greater China and North Asia. The Singapore faction tended to be either primarily interested in the Southeast Asian and Indian markets or keen to have easy access to many of the region’s most established LPs such as GIC and Temasek.

The Hong Kong vs. Singapore question is probably only relevant for the larger buyout firms that get a large part of their deal flow from sell-side bankers as neither city – despite their popular IPO markets – have shown little activity in terms of investments. For venture firms and those focused on minority stakes, it is difficult to compete with country-specific firms with an on-the-ground presence and local networks.

Now we see that even the larger firms are setting up offices in countries with strong activity such as Australia, India, China, Japan and, most recently, Indonesia.

For LPs, in particular fund-of-funds, the realities have traditionally been somewhat different. Most of these players are visited by funds seeking to raise capital so there is no real need for more than

one office, although professionals can expect to spend plenty of time living out of hotel rooms as they conduct due diligence. Perhaps this is now changing as we see some fund-of-funds – notably HarbourVest in Japan and Partners Group in South Korea – branch out into countries where they feel the competitive landscape requires closer relations with GPs.

As the Asian private equity industry continues to evolve, the question of where to establish a regional headquarters is blurring. A number of exceptional firms like Navis Capital and MBK Partners – run out of Kuala Lumpur and Seoul, respectively – have shown that regional private equity can be successfully conducted from elsewhere in Asia.

That said, both Navis and MBK are also prime examples of the hub-and-spoke model: They cultivate local networks out of offices in other parts of Asia while senior partners lead the fund with a regional perspective.

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AustrAlAsiA

CHAMP looks to sell Australian fuel transporterCHAMP Private Equity is looking to sell portfolio firm International Energy Services (IES) for A$375 million ($405 million), and has attracted interest from Australian and Asian logistics firms, Reuters reported. IES is said to be the largest fuel transporter in Australia, with additional operations in Singapore and the US..

lasalle buys trinity Funds ManagementLaSalle Investment Management has agreed to acquire Trinity Funds Management (TFM) from Australian property groups Trinity Group and Clarence Property Corp. for A$9.25 million ($9.9 million) plus the net assets of the business. Upon completion of the deal, LaSalle will increase its assets in Australia to A$1.7 billion.

GreAter CHinA

CiCC tipped to buy stake in Chinese trust companyChina International Capital Corp. (CICC) is poised to buy a 35% stake in Zheshang Trust, stretching its financial industry scope to include the country’s innovative yet opaque trust sector. The company, which is part-owned by TPG Capital and KKR, will likely launch the new venture later this week, the Financial Times reported.

China launches first car-focused Pe fund China’s first auto sector-focused private equity fund is looking to raise RMB30 billion ($4.6 billion), the Financial Times reported. The Shanghai Automotive Industry Fund is a joint venture between the China Machinery Industry Federation and the government of the city’s Jiading district. It is looking beyond car production to auto-related services such as rental, logistics and exhibitions.

CitiC Pe to launch $773m mezzanine fundThe private equity unit of CITIC Securities is looking to tap into debt finance by launching a RMB5 billion ($773 million) mezzanine fund, Reuters reported. Zhonghong Real Estate said in an exchange filing that it plans to invest

RMB100 million in the fund, which would provide financing for acquisitions as well as resources and property companies.

More China audit concerns for CarlyleAuditing procedures and financial controls have been called into question at China Energy Recycling and Concord Medical Services, both of which are in The Carlyle Group’s China portfolio. This comes after fraud investigations at China Forestry and China Agritech, which have also received investment from the private equity firm.

Mandolin Fund ups stake in sino-ForestSingapore-based Mandolin Fund has upped its stake in Toronto-listed Sino-Forest by 1%, bringing its total minority stake in the firm to 10.9%. The move prompted Sino-Forest’s shares to rise 12% to a 52-week high. Its stock has fallen more than 75% percent since early June due to accusations of fraud. The firm denies the charge.

3i names Paul su senior partner in China3i China has appointed Paul Su as a senior

partner in Beijing. He joins the firm after 10 years at Credit Suisse, where he was most recently managing director and vice-chairman of investment banking in Greater China. Su is charged with sourcing and executing private equity investments, banking on his past experience dealmaking in the areas of energy, consumer, healthcare, real estate, technology and industrials.

China’s HnA Group tipped to win battle for Ge seaCoChinese conglomerate HNA Group is likely to outbid private equity firm Kelso for container leasing business GE SeaCo, the Financial Times reported. The company has been put up for sale by General Electric (GE) and its joint venture partner and could fetch $2.5-3 billion, including debt..

sequoia leads $10m investment in MobotapSequoia Capital led a $10 million Series A round of financing into US- and China-based mobile browser developer MoboTap, marking the venture capital firm’s first investment in a mobile browser. Matrix Partners also participated in the funding. MoboTap is the developer of Dolphin Browser, a product that enables Google Android mobile users to create web pages through faster and simpler gestures than traditional handset browsers.

indiA

Warbug Pincus begins Kotak Mahindra divestmentWarburg Pincus has begun to divest its 9%-plus stake in Kotak Mahindra Bank, selling a nearly 2% in the open market. The PE firm had a 9.28% stake in Kotak Mahindra worth approximately $700 million. It sold a 1.88% stake in first quarter of this year, with some reports suggesting that more shares have been sold recently.

strategic Ventures sells stake in CBaysystemsStrategic Ventures Fund (SVF), a Mauritius-based private equity fund managed by Frontline Strategy Limited, has sold its stake in in Indian clinical-services outsourcing specialist CBaySystems, for a 4x return on its original investment, AltAssets reported. SVF has made 15 investments in India and this is its 11th completed divestment..

CalPers, Calstrs announce gains in excess of 20%US pension fund CalPERS announced a 20.7% return for the year ending June 30, a 14-year high, while sister fund CalSTRS reported its best performance in 25 years with growth of 23.1%. The results suggest that the pension funds have rebounded from the lows of the global financial crisis, but both remain underfunded due to poor performance in the past decade.

CalPERS’ assets have a market value of around $237.5 billion, up from $200.5 billion a year earlier. Gains from private equity came in at 25.3%. The value of CalSTRS’ portfolio increased by $29 billion to $154.3 billion over the course of the year, with private equity gaining 22.5%.

neWs


idG india invests $3m in mobile advertising firmIDG Ventures India has invested $3 million in mobile advertising company Vserv as part of a first round of institutional funding. Mumbai-based Vserv.mobi launched in January 2010 and claims to deliver in-app adn WAP advertising to clients in more than 200 countries.

trinity Capital exvits indian property stake to KeystoneTrinity Capital has sold its 16% stake in Kapstone Constructions, a subsidiary of Mumbai-based developer Keystone Realtors, back to the parent company for about £12.6million ($20.2million). The sale comes five years after the UK-based real estate fund bought the holding from Keystone for a reported $17 million.

sCPe invests in PepsiCo’s top indian bottlerStandard Chartered Private Equity (SCPE) is set to pay INR250 crore ($56 million) for a 5% stake in PepsiCo’s top bottler in South Asia, Varun Beverages International, The Economic Times reported. That commitment would value the company at more than $1 billion. The funding would be used to support the company’s expansion in India as well as in markets including Morocco, Nepal and Sri Lanka.

nortH AsiA

lone star to begin tokyo star divestment US-based buyout fund Lone Star has begun preparations to divest its 30% stake in Japanese lender Tokyo Star Bank, Reuters reported, adding that Lone Star has asked investment banks to submit proposals to advise on the potential sale. Lone Star and other investors acquired Advantage Partners’ shares in the distressed bank, which gave up its ownership stake due to difficulties in repaying debt.

KiC’s new Ceo pledges to boost Pe exposureKorea Investment Corp.’s (KIC) new chief executive has pledged to boost the sovereign wealth fund’s exposure to alternative investments such as private equity and commodities. Making his inauguration speech, Choi Chong-suk added that the $46 billion fund would continue to actively invest overseas, potentially partnering

on deals with other sovereign wealth funds. Choi also pledged to strengthen ties with foreign private equity and pension funds.

lone star’s former Korea head taken into custodyPaul Yoo, the former head of Lone Star in South Korea, has been detained after a Korean judge labeled him a flight risk amid allegations that he, Lone Star and the Korean Exchange Bank (KEB) manipulated KEB’s stock prices. The news comes as the buyout firm looks to sell its majority stake in KEB, whose board Yoo is still on, for $4.1 billion to Hana Financial Group.

A&P wins approval for takefuji rehabilitation planTakefuji, a failed Japanese consumer lender, has finally received court approval for its rehabilitation plan. Korean firm A&P Financial, which beat the likes of Cerberus Capital Management, TPG and J Trust to win the bankruptcy administrator’s backing, will take over the company. A&P’s involvement means Takefuji’s lending business will continue and as much as 24% of its debts will be repaid.

soutHeAst AsiA

Actis exits Asia Books in thailandActis Capital and Thailand Equity Fund (TEF) have jointly exited their 100% stake in Asia Books, a leading foreign-language books and magazine vendor in Thailand, to Bangkok-based Berli Jucker. The exit comes five years after Actis led the MBO of Distri-Thai, which was the largest distributor of foreign-language magazines in the market and managed the Bookazine chain.

ClsA buys into indonesian auto financing firmCLSA Capital Partners (CLSACP) has paid $20 million for a minority stake in PT Sinar Mitra Sepadan Finance (SMS Finance), an Indonesian auto financing firm. The transaction was made through the $333 million Aria Investment Partners III fund, which closed in July. It is the fund’s ninth investment.

Hermes GPe to open in singapore this yearHermes GPE, the European private equity and infrastructure investment firm, will extend its operation to Singapore and the US this year. The limited partner has already invested $600 million in more than 30 private equity funds in Asia Pacific over the past decade. Hermes has been investing in the US since 1996, and manages more than $1 billion in US-based assets.

lazard appoints Peter Kuo as MdFinancial advisory and asset management firm Lazard has appointed Peter Kuo as managing director and head of equity capital markets in Asia, effective immediately. Kuo joins from diversified management group Cowen and Company, where he was managing director.

Khazanah names QiA’s shen as executive directorKhazanah Nasional Bhd, the investment holding fund of the Malaysian government, has appointed Kenneth Shen as executive director of investments. Shen was formerly adviser to the chief executive officer of Qatar Investment Authority (QIA) where he oversaw direct investments in public and private companies as well as investments in private equity, special situations and venture capital funds.

Vodafone wants Pe partner for its india businessVodafone is in talks with at least two private equity companies as it seeks a replacement for its Indian partner Essar, The Economic Times reported. The UK-based telecom carrier took Essar’s 33% in the business for $5.46 billion earlier this month. In doing so it exceeded the foreign ownership limit for India’s telecom sector by 1%, which means it must divest a portion of its holding to a domestic entity.

Separately, Vodafone is looking for a foreign partner to take a stake in its India operation. The company is thought to have invested around $18 billion in its India assets but analysts say that the business is only worth $12-14 billion, given the current state of the market.

neWs

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coVer [email protected]

WHeN asKed tO Name tHe mOst difficult aspect of being a woman in private equity, Lisa Suennen, co-founder and managing member of California-based venture capital healthcare investor Psilos Group, cites the adage that women need to work twice as hard to get half as far as men in the industry. “It’s annoying that women have to work to have their ideas taken seriously while men’s ideas are presumed to be worthy of serious consideration,” she explains. “Just the idea that there is an inequity for no reason drives me crazy.”

Women from the US to Asia and everywhere in between hear their predecessors say that, in business, it’s still a man’s world. The imbalance is all too apparent in private equity, where women make up less than 10% of executives globally. Strenuous work schedules, constant traveling and the general testosterone level in offices have been cited as reasons why women have instead gravitated toward other areas of finance.

Yet female industry participants in Asia and the US contest these claims, saying that the job specs are comparable to those in other high-pressure environments. The difference is that it is much harder to open the door in private equity.

“I think the main reason we’re seeing few women in the industry is because it is predominantly comprised of smaller partnerships that don’t necessarily have the same pressure to hire a diversified staff,” says Sheryl Schwartz, senior managing director or general partner Perseus in New York, where she is also surrounded by men. “I think people like to hire people who are like themselves. As long as you have white men at the top doing the hiring, they’re going to be inclined to hire men.”

A proactive human resources department might make a difference but these are lacking in companies that, in the vast majority of cases, aren’t publicly traded and so aren’t really accountable to anyone apart from their LPs. So too might a broader-minded outlook among industry leaders. Regardless of where blame is pinned, the outlook is not positive: For all that women and men hope that the industry’s glass ceiling can be shattered, they are at a loss to name a factor that could have a significant enough impact.

Women occupy a paltry 8.7% of executive positions in private equity outside Europe and North America, according to a Prequin report released in February. Europe leads the field with 9.1%, while North America is on 8.9%. Statistics on the topic are difficult to come by, and Prequin’s figure itself is wide-reaching, encompassing buyout, venture, mezzanine, distressed debt and other private equity vehicles. If the number of women GPs were specifically examined, representation would undoubtedly fall below 8.7%.

Unappealing lifestylesWomen are seemingly more prevalent in the venture and LP space. According to Prequin, 6.7% of executives in global buyout funds are women, compared to 9.5% in venture funds and 11.3% in real estate funds. Female managers in Asia corroborate these findings.

This, sources add, has much to do with the lifestyle attached to these roles, which are oftentimes less rigorous than being a fund manager. A GP’s lifestyle includes long hours and non-stop travelling, which plays into the age-old axiom that women largely opt to spend more time with their families and children. While this archaic mindset has been outgrown by many, both women and men say there is an element of truth in the thinking. “If I had to pinpoint a reason why there are fewer women in GP roles I would guess that it has something to do with the job nature and the balance of work life and family,”

says Anna Cheung, a partner at 3i in Hong Kong. “In society men are viewed as the breadwinners and women find their own compromises to strike their balance.”

This hasn’t been lost on men. GPs operate under tight quarters when managing funds and companies, and dependence on each member of the team is crucial. Given this dynamic, fear that a woman might depart a fund to focus on her home life has been know to be taken into consideration at interviews – whether such an event is founded or not.

Minority reportPrivate equity is a man’s world, in Asia and everywhere else. What can women on the inside do to bring about change?

Archana Hingorani, IL&FS Investment Managers

Proportion of senior female PE employees by discipline

Source: Prequin Research

% of female senior employees

Dis

cipl

ine

0 4 8 12

Buy out 6.7

Venture 9.5

Real Estate 11.3


Archana Hingorani, CEO and executive director of IL&FS Investment Managers in Mumbai, recounts stories in which male interviewers ask prospective junior-level female employees “how many people are at home” as a way to decipher whether they are married, single or has children. “It’s an emerging market mentality,” she says. “Even if they don’t ask, they may think it in their heads. This is really only relevant for entry-level spaces because once you’re beyond middle management it’s not as much of a concern.”

Although most sources who spoke to AVCJ have seen or experienced some form of inequality, they agree that the key to overcoming these obstacles is to “perform the hell out of your job,” and “never play the family card.”

Schwartz admits to missing important moments in her children’s lives for her job – something that both men and women constantly

struggle with – but refuses to use this to evoke special treatment. She passes this wisdom along to female staff who struggle with competeing demands of work and children. “The women who struggle with it are the ones who have trouble delegating. They don’t want someone else taking their kids to the doctor,” she says. “My advice is that you need to have significant support at home in terms of family, staff or your spouse.”

Time will tellTime may ultimately level the playing field. It is also possible that as more of the large private equity firms go public there will be a trickledown effect in terms of investment in human resources infrastructure, adherence to industry best practice and compliance with equal opportunities standards.

But suggesting that the number of women in private equity could be bolstered through policy initiatives is a slippery slope. “That’s like saying women can only be successful when funds are told they must be diversified,” Cheung says.

Nevertheless, earlier this month a group of 19 headhunting firms in the UK signed a pact to ensure that at least 30% of all candidates on the long lists of FTSE 350 directors are women. This comes as the UK government aims to see 25% of all FTSE 100 boards comprise women. Currently, the boards of Norwegian companies

must be at least 40% female, while Belgium, Italy, the Netherlands and Spain have mandated that female representation on corporate boards reaches 30-40% by 2015 or 2016.

It is difficult to say what knock-on effect this might have on private equity. Even at the larger firms, the KKRs, Blackstones and Carlyles of the world with established human resources departments, women are still very much the minority.

More than 13% of The Carlyle Group’s executives at managing director level or above are women, although this figure is smaller in Asia, according to Dorothy Lee, a spokeswoman for Carlyle Asia. Lee was quick to mention that female representation is higher in other areas, such as human resources, corporate communications and back-office operations. The firm also works to foster women’s careers internally by sponsoring social gatherings and

workshops that connect women in the firm across all pay grades.

Blackstone Group and KKR did not respond to AVCJ queries by press time.

Interestingly, there is a global trend for women to create their own opportunities. Rather than work their way up the ladder to the top of existing firms, women are launching

independent funds. Asia has been a hotbed of spinoff vehicles. In China, former Baring Private Equity executive Kathy Xu launched Capital Today, Melissa Ma, Rebecca Xu and Laure Wang started Asia Alternatives, and, most recently, Mary Ma departed TPG to launch Boyu Fund. Activity in India has been led by Renuka Ramnath, who departed ICICI Venture to launch Multiples Alternate, and Veronica John, who started Serasi Capital after leaving IL&FS.

This kind of autonomy, though, is usually only achieved after years of hard work proving one’s worth in a male-dominated environment. Extensive networking and a thick skin are crucial to getting a place at a firm, but once there, women can still feel like outsiders in a way that men don’t necessarily appreciate. Plenty of female industry participants admit to reading the sports pages in order to have something to chat about over the water cooler. Some still do for the benefit their LPs in the US.

“You never want to walk into a meeting where there was a big baseball or basketball game in whatever state you’re visiting and not know about it,” says one Asian-based GP. “It’s also not just sports. When we complete a big deal the guys want to go out to bars and celebrate. I’d rather go home and put my feet up or get a massage, but I still go to the bar with them.”

Not everyone feels that the social aspect of firms is so linear. Women in Asia and the West say that they’ve been able to broker relationships with their male coworkers by talking about politics, current events and the business at hand.

According to Psilo’s Suennen, the one thing women can do to make the workspace less isolating is to jump in and initiate change. Women tend to shy away from the places where the guys congregate to talk money, and forget to mix business with pleasure.

“If you’re standing on the sideline of the kids’ soccer match with a male private equity executive or entrepreneur, talk about your


Rebecca Xu, Asia Alternatives Management

Anna Cheung, 3i Group

“We are invested in a couple in funds in China that have women managing entire offices, and they’re actually some of our best-performing funds” – Jason Sambanju


fundraising strategy,” she advises. “And most important is a wicked sense of humor. When you inevitably face the anti-female comment, it is best to respond with wit and a shot right back over the bow.”

She says, he saysOn the whole, the women who spoke to AVCJ say they see few inklings of discrimination in terms of day-to-day duties, especially from their direct teams. It is generally accepted by both sexes that men in private equity can be crude, whether it’s their sense of humor of the way they banter, but there is no willful desire to cause offense. And while the amount of work required to gain credibility is wearing, once it is achieved, women feel that the value and outlook they bring to funds and management are a unique asset.

“Women tend to be more intuitive of other people than men,” the Asia-based GP describes as one way women can make a difference. “That makes women better at relationships, which is very conducive to the LP-side of things.”

In terms of LPs, Jason Sambanju, co-head of Paul Capital in Asia, says that a GP’s returns are far more important than the gender of the person running the fund. Due to the low female representation among Asia’s GPs, Paul Capital hasn’t invested in many funds run by women.

However, there are a handful of professionals – ranging from Capital Today’s Xu, to Kendall Court’s Yeo Kar Peng in Singapore, to Multiples Alternate’s Ramnath – whose reputations precede them.

“We are invested in a couple in funds in China that have women managing entire

offices, and they’re actually some of our best-performing funds,” Sambanju says. He adds that approximately 25% of Paul Capital’s own investment staff is women, largely on the more junior side of the spectrum for the time being.

Another Asia-focused LP has a somewhat different view. Based on his experiences in

China, the LP observes that it is so difficult for female fund managers to rise to the top that some overcompensate and behave in an overly aggressive manner. Others, meanwhile, aren’t aggressive enough, and this costs them business.

Unsurprisingly, most female GPs find this attitude chauvinistic. “Why is it when women are tough then it is viewed negatively? And if men are tough, they like it? It’s a difference in perception,” 3i’s Cheung says. “What I’ve largely seen in this industry is that people are judged by their ability.”

Asian private equity professionals are to a large extent a product of their nascent industry, which has fewer protocols in place to address equality. The expectation is that this will change as more women flood into the entry levels of the financial services sector, taking up positions as analysts and associates before slowly graduating to higher ranks.

In the meantime, Psilo’s Suennen suggests that female PE professionals forget about gender and get on with their jobs. “Don’t be afraid to hang with the guys on their terms, put your head down and deliver. Find a mentor or colleague that is gender-blind and perform the hell out of your job,” she says. “When you produce cash returns to investors, they are eager to see you do it again and forget you are wearing a bra.”

Asia has over US$270 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].

* as of August 31, 2010. Source: AVCJ

avcj.comASIAN VENTURE CAPITAL JOURNAL

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“When you produce cash returns to investors, they are eager to see you do it again and forget you are wearing a bra” – Lisa Suennen

Limited PartnersKeynotes

senior industry ProfessionaLs

• JosephWFerrignoIII,Managing Partner,AMCG PARTNERS

• RichardFolsom,Representative Partner,ADVANTAGE PARTNERS, LLP

• TomotakaGoji,Managing Partner,ThE UNiVERSiTy of Tokyo EDGE CAPiTAL

• GregoryR.Hara,President & Representative Director,J-STAR

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JapaN may be tHe WOrld’s secONd-largest economies but, by Asian standards, it is also one of the most mature. GDP growth is lackluster and the consumer market is pedestrian compared to those of the region’s emerging nations, which are still driven by urbanization, industrialization and young demographics.

“Invest in Japan? No, we are focusing on China and India at the moment; Japan’s economy is no longer growing,” is one global LP’s withering assessment.

Although Japan’s economy has been on the slide for the past decade, there is one pocket of vibrant growth: the country’s aging population. Japan is the world’s fastest-aging market – 14% of its population is 65 or above, up from 7% of its population 24 years ago. France, another rapidly aging country, took 115 years to reach that 14% mark.

Don’t miss the boatOpportunities tied to this demographic are abundant, and funds that exclusively target emerging markets with high GDP growth look set to lose out on it. Some, though, have taken notice and responded by broadening their healthcare mandates.

Earlier this month, Amsterdam-based Composition Capital Partners, acquired an undisclosed stake in a senior residential asset in Japan. The move surprised the country’s private equity industry as this space has so far been dominated by local players. But the European fund knew it had identified a profitable niche.

“Japan’s senior residential assets make stable rental income and investment risk is low,” says William Shaw, Asia director and principal at Composition Capital. He adds that these assets are often mispriced and can be purchased at a discount.

Composition Capital currently manages a $171 million Asia fund that is nearly fully invested. A second fund is set to follow and it will likely target more senior residential assets. This conforms to the firm’s global strategy: it

has been investing in this asset class since 2005, executing transactions with an average ticket size of $30-40 million. Composition Capital’s Japanese investments are made in partnership with local firms, which it does not name.

The firm has a particular sweet spot within the senior residential market: residencies that are operated as a chain business and that

offer clear exit opportunities through industry consolidation.

One Tokyo-based lawyer notes that housing for the elderly is not yet a major target trend for real estate investors, although this may well change. Services related to aging, meanwhile, have seen some activity. As the industry matures, it’s possible that strategies will become even more refined, for example targeting shopping services for those with limited movement and specialized outpatient clinics.

One firm that has ventured into this residence space is Tokyo-based J-Star, which acquired nursing home and senior-care operator HCM KK in April. At the time, George Hara, director and president of J-Star, told AVCJ that healthcare and senior care-related businesses are among the firm’s core targets because of the continuous

rise in Japan’s senior citizen demographic. J-Star entered the deal with a view to expansion.

In 2008, another significant transaction was The Carlyle Group’s $130 million investment in Goodwill Group, which owned real estate assets in an up-market residential area in Tokyo. That same year, mid-cap focused buyout firm J-Will Partners purchased Bon Séjour, which was sold on two years later to Benesse Corporation for JPY4.3 billion ($54.8 million). Asian Capital Alliance has also launched a specialized fund dedicated to investments related to senior homes and Japan’s healthcare sector.

Older and poorer?Japanese politicians are currently immersed in debates on pension reform, asking whether these programs can stretch far enough to meet the needs of an aging population. It has been suggested that the government increase the monthly allowance senior citizens receive for healthcare and insurance payments. This may in turn allow retirement home chain operators – which are currently run on a shoestring with all income directed to core operations – to improve their services.

Hirotaka Uchiyama, managing director of CLSA Capital Partners in Japan, has met with these concerns first hand during his time spent managing Fudo Capital, CLSA’s real estate fund. As the cost of independence rises, Uchiyama expects demand for nursing homes to increase and foreign interest in the market to deepen.

However, he warns that that investing in elderly residential homes comes hand in hand with key operational risks, namely failed payments by tenants.

“Nursing homes maintain cash flow through rental income from tenants, who depend on their retirement funds to pay their bills,” Uchiyama says. “If tenants are for some reason unable to make their monthly payments, what will happen to that person? Are they going to be kicked out? I do not think that our culture allows us to do this for older people.”

Funds monetize Japan’s aging demographicRetirement homes and related services have emerged as a hot spot for private equity in Japan’s generally uninspiring consumer market

Private equity sees opportunities in Japanese retirement homes


HONy capItal secured tWO significant firsts with its purchase of a 20% stake in Tokyo-listed hotel chain operator and real estate business Tokai Kanko for JPY1.4 billion ($17.8 million). This is the Beijing-based private equity firm’s debut investment overseas and also the first time it has ventured into real estate. The transaction will be executed through Hony Capital Fund 2008, LLP.

Tokai Kanko, which has close ties to Hong Kong-listed real estate investment and development firm Far East Consortium International (FECI), will use the funds to pursue real estate acquisitions in Japan. The investment is part of an alliance through which Hony, FECI and Tokai Kanko will also create a separate fund worth JPY6.75 billion.

The Chinese firm and David Chiu, a senior executive at FECI, will between them inject JPY5.4 billion into a special purpose vehicle, each taking a 40% stake. Tokai Kanko has committed to provide the remaining JPY1.35 billion in return for a 20% holding. The vehicle will be managed by Galaxy Godo Kaisha.

Tokai Kanko and Galaxy Godo Kaisha are both interested in hotels and related assets. The link with Hony can be traced back to a longstanding business relationship between Hoong Cheong Thard, a senior manager at FECI, and John Zhao, Hony’s founder and CEO.

“Both [Hoong and Zhao] are interested in investing in Japanese hotel businesses because of growing demand from Chinese tourists,” says Sataro Shishido, COO of Tokai Kanko.

With this in mind, Tokai Kanko’s primary geographic target is not just Tokyo, but also Osaka, Kyoto, Kyusyu, Okinawa, and Hokkaido – all of which are popular among Chinese visitors. Shishido notes that business hotels with between 200 and 300 rooms are the most attractive properties.

“We need accommodation with the capacity to host tour groups from China, Malaysia, Indonesia and Taiwan, where the company has already built up a client base with local travel

agents via FECI,” he explains.The company’s first acquisition reflects this

investment philosophy. Tokai Kanko has agreed to purchase a 60% stake in Agora Hospitalities, which manages the 175-room Moriguchi Royal Pines Hotel in Osaka, not far from Kyoto.

According to analysts, a number of real estate assets in the hospitality industry have been

put up for sale – often at steep discounts – in response to falling consumer demand. “We have been offered a number of assets, and we think that we will need to launch another fund quite soon,” Shishido adds.

Tokai Kaiko was owned by Seison Group, an affiliate of Seibu Group, until 1997, when it was purchased by Asia Land,

a company controlled by Chiu. Chiu’s father is the majority owner of FEIC and other real estate companies. Tokai Kaiko currently runs two resort hotels in Japan, and one each in Australia and Malaysia. It also operates cemeteries.

IN august 2010, aKHIl gupta, chairman and managing director of Blackstone India, said the private equity firm “would not hesitate” to invest $1 billion in the country’s power sector if attractive deals presented themselves. Reports added that the timescale for these investments would be three to five years.

This week Blackstone is expected to close its third deal in the sector in 15 months, with total expenditure already reaching $500 million. According to reports, the firm has signed a definitive agreement to pay INR500 crore ($111 million) for a 25.2% stake in Visa Power, the power generation arm of Kolkata-based conglomerate Visa Group.

The deal, for which JM Financial is believed to be the sole advisor, is the culmination of discussions stretching back more than a year. Visa Power’s core asset is a 1,200 MW coal-fired plant

in Chhattisgarh, which is said to rely on a captive coal mine for much of its fuel, thereby minimizing costs. It also has 6,600 MW of capacity under development, including a 1,320 MW coal-based super critical plant in Orissa.

The power sector fits in well with Blackstone’s stated objective to target opportunities related to infrastructure development and domestic consumption in India. Last July, the private equity firm paid approximately $60 million for a 12.5% interest in Monnet Power, an independent power producer with a 1,050 MW plant backed by captive coal reserves in Orissa state as well as 2,000 MW in other thermal projects.

It followed up one month later with a $300 million investment in Moser Baer Projects Private (MBPP), which plans to commission 4,000 MW of thermal power, 500 MW of solar and 500 MW of hydro capacity by 2016. In January of this year, Macquarie SBI Infrastructure Fund committed

$129 million to the first phase of one of MBPP’s thermal energy projects.

Statements issued by Moser Baer, Blackstone and Macquarie all highlighted India’s energy shortages and the opportunities this offers to external investors. Power demand is growing at 6-7% a year and the country is already grappling with a 10% base load and a 13% peak load deficit.

In late June, the Indian government finalized the broad structure for an $11 billion infrastructure debt fund. The fund’s responsibilities would include plowing much needed capital into the power sector by supporting the construction of power-generation facilities as well as helping existing energy companies boost capacity. The government wants to attract long-term investors domestically and overseas.

According to Gautam Bhandari, head of infrastructure investment at Morgan Stanley India, $1 billion can fund 1,200 MW of power. But even if the entire fund was devoted to energy projects it wouldn’t solve “one-sixth of the problem.”

Deal of the [email protected] / [email protected]

Hony makes first foray into Japan

Blackstone closes in on third India power deal

Tokai Kanko’s latest buy, the Moriguchi Royal Pines Hotel

India faces a power deficit


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JacK ma Is every bIt tHe INterNet pioneer. In Alibaba.com, he created China’s leading business-to-business trading platform; Taobao swept aside eBay to become the number-one auction website; and the launch of Alipay, a third-party payment service, plugged a hole in the e-commerce market. Last year, Ma added a less savory line to his resume: he became the first Chinese CEO to break a variable interest entity (VIE) contract, the structure through which foreigners invest in certain kinds of Chinese companies.

Ma’s actions, which only became public in June, were intended to offset regulatory concerns about foreign involvement in China’s third-party payment industry. He did this by transferring ownership of Alipay from Alibaba Group to a domestic firm of which he is the majority shareholder, thereby removing the subsidiary’s exposure to the VIE that secures Yahoo and Softbank’s financial interest in the parent company. The foreign firms opposed the move at board level, saying it rode roughshod over their investment agreements.

This apparent violation of shareholder rights and fiduciary responsibility sets a worrying precedent for venture capital firms that have backed third-party payment providers – and also for those that invest through VIEs in general.

“GPs tell LPs that there is a potential total loss scenario, which creates a wave of panic,” says Rocky Lee, managing partner for Asia at Cadwalader. “This is what gets me on the phone at 2 a.m. talking to LPs and funds in California. These guys may have 50 other portfolio companies with VIEs.”

Market leaderAlipay is without question the dominant force in China’s third-party payment market, having been introduced in 2005 to support Taobao users. It accounted for just over 50% of the $156 billion in transactions processed by all service providers last year, according to iResearch. Tenpay, owned by internet platform Tencent, is second on 20%, while no other competitor has a double-digit

market share. By 2014, the market is expected to be worth $636 billion.

This rapid growth in transactions, which is taking place outside the formal banking sector, caught the attention of the People’s Bank of China (PBoC). Last year it announced that all participants would have to apply for licenses, and that those with foreign investors would be subject to separate review. The first round of licenses was issued in May, with 27 companies making the shortlist, including some that have in the past received foreign capital. Up to 30 more approvals are expected before the implementation deadline on September 1.

The PBoC has also indicated that foreign control over these companies will not be tolerated, either directly or indirectly through VIEs. “I believe the reason they are focusing on third-party payment is because it relates to the banking system,” says David Wang, a partner at Paul Hastings in Shanghai. “They are not ready for foreign investors to be controlling that aspect of the financial services sector in China.”

The approach is not altogether surprising. Given that PayPal falls under the remit of America’s banking regulators, it is understandable that China might want to extend its cap on

foreign ownership of financial institutions to third-party payment providers.

According to people familiar with the situation, companies are broadly following one of three strategies: working with their foreign investors to find an alternative solution to the VIE; terminating the VIE contract and offering to compensate their backers at a later date; or telling investors that the contract is null and void and therefore no money is owed.

Apparently negotiations between Alibaba, Yahoo and Softbank are ongoing. It has separately been reported that Lakala has bought back shares owned by Morningside Ventures

and other overseas investors. And sources tell AVCJ that local renminbi funds are buying into companies, trying to cherry pick those that are likely to receive licenses.

DFJ DragonFund China has invested over $5 million in YeePay, which claims to be the largest independent third-party payment provider, since 2004, accounting for roughly one-fifth of total funds raised by the company. Tony Luh, managing director at DFJ, says the situation has been discussed but there are as yet no plans to sever ties.

“The whole thing started with the Alibaba

Is China pushing VCs out of third-party payment?New regulations on foreign participation in third-party payment in China have called seemingly safe investment structures into question

ChinaPay (Guangzhou) 4%YeePay 4%ChinaPay (Shanghai) 4%

Other 2%IPS 4%

ChinaPnR 6%

Alipay 50%

99bill 6%Tenpay 20%

China's third-party payment industry by market share, 2010

Source: iResearch


[email protected]

situation and their structure is a lot more complicated than ours and they have well known stakeholders in Yahoo and Softbank,” Luh tells AVCJ. “To us, it is business as usual – it’s like you hear an air raid siren on once in a while and then everyone senses things are normal.”

Mode of entryDFJ’s investment in YeePay has always been channeled into the company’s offshore entity domiciled in the Cayman Islands. In ordinary circumstances, an entity such as this would operate in China via a wholly foreign-owned enterprise (WFOE), with profits transferred back to Cayman as dividend payments. However, direct foreign ownership is not permitted in China’s internet industry – where, until the PBoC’s intervention, third-party payment providers were deemed to operate – so a structure was created in parallel to the WFOE under VIE rules. The structure is owned by Chinese nationals, which means it is allowed to hold the relevant business licenses but does little else. The relationship between the WFOE and the parallel company is based on five legal agreements that are intended to secure the former’s economic interest in the latter.

Cadwalader’s Lee notes that VIEs are essentially a standard by which financial statements are constructed and there are as many imperfect structures as there are workable ones. Classic flaws include a failure to comply with Chinese laws designed to prevent illegal round-trip investing and a failure to comply with rules governing tax, foreign exchange and M&A – or just a failure to inform the Chinese government of what is going on.

The genesis of the structure can be traced back to the China-China-Foreign (CCF) model through which foreign telecom operators made their doomed efforts to enter China in the mid-1990s. China Unicom, in need of capital to build out its network, invited the foreign firms to

form joint ventures with third-party companies tied to its subsidiaries. The foreign telecom firms were given proxy control over the joint ventures, which were then contracted by China Unicom to provide services.

Beijing unilaterally cancelled the agreements in 1998, arguing that China’s WTO accession obligations required it to open up some

industries to foreign investment, but not all. Class One telecom assets – networks and carriers – were deemed off limits due to national security concerns. However, Class Two assets, such as the internet and related services, were subject to less rigorous oversight and a revised version of the CCF emerged. Two years later, web portal Sina listed on NASDAQ through a VIE structure.

“The government was very particular about who could invest and where they could invest,” Luh says. “That is why you have the Sina model – it really started the wave of foreign investment

in Chinese companies.” He adds that DFJ even uses VIE structures for transactions in areas where foreign ownership is not deemed sensitive.

Questions have been raised as to whether the VIE structure would stand up if tested in court. Difficulties have also presented themselves when the Chinese national who owns the license-holding firm departs from the official company without transferring his interest. This happened in 2001 when Wang Zhidong was fired from Sina and a similar scenario appears to have emerged this year at GigaMedia.

The implications of the revised approach to third-party payment companies are wider but

all is not lost. Foreign direct investment is not completely outlawed in China’s banking sector – although it prefers investors to be banks – so it is possible that the PBoC will accept venture capitalists as small minority investors (minus the VIE structure). However, the payment company would still need to an internet content provider (ICP) license to do business. The Ministry of

Industry and Information Technology last issued one of these to a foreign-invested entity over six years ago and hasn’t shown any indication that it will start doing so again.

The bigger pictureSuch issues are likely to be resolved in due course, but it remains unclear what scars they will leave on the VIE structure in general. Wang of Paul Hastings insists that the restrictions are specific to third-party payment, but Lee of Cadwalader is more circumspect. He notes that permission to

create a VIE is dependent on particular regulatory bodies and that third-party payment companies only ran into trouble when the PBoC decided that their activities encroached on the banking space. It is conceivable that ownership reviews could take place in other industries.

“For the internet, it’s pretty clear that VIEs are permitted – it’s only when you go into a new industry that there are potential problems,” Lee says. “Education is the next potential blow up. We can’t be sure what the Ministry of Education’s response will be to venture capital moving from vocational certificate education into secondary principal education. It might come out one day and say you can’t do it.”

Lee adds that his firm is already working on solutions to the VIE problem that are intended to operate independently of the regulators and lock in investors’ economic position. He envisages a new structure that co-exists with the VIE or acts as a backup to it.

Until such a model launches, venture capital firms are wedded to VIEs – and the tax liability protection and offshore structuring involved – and neither Luh nor Ian Goh, a partner at Matrix Partners, say their firms are scaling back exposure to the structure. “It’s always a possibility that it will run into trouble,” says Goh. “The VIE allows you to list and fundraise, but does it enable you to enforce shareholders’ rights? There have always been some issues but the Chinese government will resolve it one way or another.”

China's third-party payment industry by market size

Source: iResearch * Estimate

2008 2009 2011*2010 2012* 2013* 2014*

4078.4

266.9

156.8

384.9

501.3

636.3

US$

billi

on

“GPs tell LPs that there is a potential total loss scenario, which creates a wave of panic. This is what gets me on the phone at 2 a.m. talking to LPs and funds in California” – Rocky Lee


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Michael Queen, Chief Executive, 3i (AVCj India Forum 2010)

The conference was a great opportunity to network with senior professionals from the Indian Private Equity community who were very open in sharing their insights in this important market.

Documents

Page 12 Industry outsiders Deal of the Week · Deal of the Week analysis Industry outsiders What can female GPs do to shatter private equity’s glass ceiling? Page 7 Indian power