FUNDS Bureaucratic traffic · Startups’ third fund, local accelerator AppWorks’ second fund,...

Asia’s Private Equity News Source avcj.com February 03 2015 Volume 28 Number 05

FOCUS DEAL OF THE WEEK

Bureaucratic trafficAsian GPs are paying more attention to AIFMD, but confusion still reigns Page 7

Capital alternativesVenture debt finds willing clients in India 0

Happily ever after?Longreach buys bridal jewelry business Page 12

Hahn & Co in Fund II, co-invest double-header

Page 13

FUNDS

DEAL OF THE WEEK

Bert Koth of Denham Capital talks mining

Page 15

CDC champions India rural rail freight solution

Page 12

Huimin finds niche as small retail intermediary

Page 13

Strong prospects for China PE trade sales

Page 3

CICC, Clearwater, CVC, First Eastern, Gobi, Legend, Navis, Quadira, Sailing, Sequoia, Valiant

Page 4

EDITOR’S VIEWPOINT

NEWS

INDUSTRY Q&A

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LPs GPs

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UN

TRYHong Kong

13%

China76%

Over 344 participants from15 countries and 230 companies.

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Number 05 | Volume 28 | February 03 2015 | avcj.com 3

EDITOR’S [email protected]

EXAMINED PURELY IN DOLLAR TERMS, China private equity trade sales offer little insight.

In 2014, total proceeds came to $4.8 billion, the lowest in five years. But the 2013 figure of $7 billion was inflated by Baidu’s $1.85 billion acquisition of 91 Wireless (several VCs sold minority holdings). Similarly, in 2012, Goldman Sachs received $2.3 billion from Temasek Holdings for a 1% interest in Industrial and Commercial Bank of China.

More significantly, AVCJ Research has records of 69 trade sale exits in 2014 up from 54 and 36 in each of the previous two years. It is the largest-ever annual total, topping 59 in 2010.

The momentum appears to have carried into 2015, although in this particular instance the impact is very much in dollar terms. Two PE funds managed by China International Capital Corporation last week agreed to exit Jiangyin Tianjiang Pharmaceutical as part of China Traditional Chinese Medicine’s (China TCM) $1.34 billion acquisition. The funds, which own just over 30% of the firm, sould receive about $532 million.

The deal is also a strong example of one of driving forces behind this trade sale surge. China TCM was acquired by a Hong Kong subsidiary of state-owned China National Pharmaceutical Group Corp. in 2013. With the subsequent purchase of Tongjitang, China TCM kicked off an M&A spree that is expected to run for some time.

There is no single founder-controlling shareholder in Jiangyin Tianjiang; the chairman and founder of the company agreed to sell a less than 10% stake to China TCM, which is picking up an 81.5% interest from multiple shareholders.

However, it does point to pragmatism in the face of a changing opportunity set.

Industry consolidation is certainly an interesting theme, and it doesn’t have to be led by a state-owned enterprise. A host of locally-listed Chinese companies are on the lookout for acquisition opportunities through which they can stay on course with growth projections. Buying up rivals can be challenging for corporate China but if there is a minority PE investor keen to exit then it can play agitator or facilitator in order to get a deal done.

Another trend is the greater willingness among entrepreneurs to completely sell of a business – perhaps due to advancing age, an increasingly difficult commercial environment, or recognition that another group is better positioned to lead the next stage of growth. These situations are as much an opportunity for PE firms to secure buyouts as they are for minority backers to get out.

According to AVCJ Research, only two trade sales in which a private equity investor has exited a control position have topped $600 million: TPG Capital’s sale of UT Capital to Haitong Securities in 2013 and Affinity Equity Partners and Unitas Capital’s exit of Beijing Leader & Harvest Electric Technologies to Schneider Electric in 2011.

This select group will enlarge if China buyouts evolve in the way the industry hope

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15+ thought-provoking sessions covering regional and domestic most debated topics

300+ attendees who are policy makers, fund managers, investment professionals, corporate executives from across the region

6 roundtable sessions with top expertise and intimate networking opportunities

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LP-G

P R

ATIO

LPs GPs

1 : 2Attended by 110+ LP

from China and overseas

BY

CO

UN

TRYHong Kong

13%

China76%

Over 344 participants from15 countries and 230 companies.

BY

TITL

E

Principal/VP/Associates 33%Managing Director/ Partner/ CFO/COO 32%Director / GM / Chief Representative 20%Chairman / CEO / Managing Partner 15%

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China private equity exits by type

Source: AVCJ Research

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 IPO Open market sale Share buyback Trade sale

Exits

200

150

100

50

0

avcj.com | February 03 2015 | Volume 28 | Number 054

ASIA PACIFIC

Navis tops off fund with shariah-compliant vehicleNavis Capital Partners has reached a final close of $1.5 billion on its seventh fund with the addition of a shariah-compliant parallel vehicle. The bulk of the international LP commitments, totaling around $1.3 billion, came by February of last year..

L Capital Asia backs Saudi Arabia confectionerL Capital Asia – a PE firm sponsored by luxury goods conglomerate LVMH – has secured its first Middle East investment with the acquisition of a minority stake in Bateel, a luxury confectioner based in Saudi Arabia. The company has a chain of 43 confectionery boutiques across 14 countries. Nine of these outlets are in Asia, spanning India, Indonesia, Malaysia, and Pakistan.

AUSTRALASIA

PE buyout talks with Bradken fall throughPacific Equity Partners (PEP) and Bain Capital have pulled their A$872 million ($731 million) take-over bid for Australian mining industry supplier Bradken due to volatility in the commodities market. The PE firms concluded confirmatory diligence following Bradken’s decision to open its books, but market conditions had made it impossible for the consortium to obtain financing on acceptable terms.

GREATER CHINA

Sailing invests backs cross-border e-commerce siteSailing Capital has committed $100 million in Series B funding to Ymatou, a B2C e-commerce site supported by a global logistics system that connects foreign retailers to Chinese consumers. It works with over 1,000 businesses in North America, Europe and Australasia, enabling them to access the China market without maintaining inventory and establishing local operations.

Legend Capital leads round for Innovent BiologicsLegend Capital has led a Series C round of funding worth $100 million for Innovent

Biologics, a Chinese biopharmaceutical company. Temasek Holdings also came in as a new investor, while existing backers Fidelity Biosciences, Fidelity Growth Partners Asia, Lilly Asia Ventures and Frontline Bioventures also participated.

Taiwan’s NDF commits $84m to VC fundsTaiwan’s National Development Fund (NDF) will

invest up to $84 million into four venture capital funds as part of efforts to support local start-ups. Commitments will be made to angel investor 500 Startups’ third fund, local accelerator AppWorks’ second fund, Translink Capital Partners III, and a joint venture fund run by the Battelle Memorial Institute unit 360ip and Industrial Technology Investment Corp.

China Merchants backs United PhotovoltaicsChina Merchant Fund Management, an investment arm of China Merchants Bank, has subscribed to RMB420 million ($67 million) worth of convertible bonds issued by solar plant operator United Photovoltaics. The instruments have a three-year tenor, a coupon of 7.5% and a conversion price of HK$1.03 per share.

First Eastern’s Chu launches Nova Scotia fundVictor Chu, chairman of Hong Kong-based First Eastern Investment Group, is leading a group of private investors that will create a C$50 million ($40 million) venture capital fund in Nova Scotia, Canada. The fund is intended to help local small and medium-sized enterprises (SMEs) expand into Asia.

Qiming, IDG back China plastics trading platformQiming Venture Partners and IDG Capital Partners have led a $20 million Series A round for Zhaosuliao.com, a Chinese B2B plastics trading platform. Existing backers Matrix Partners China and angel investor Zhujie Li, an investment partner at ZhenFund, also participated.

Gobi, ABC lead $6m Series A for AutoBotGobi Partners and ABC Capital have led a $6 million Series A round for Chinese start-up AutoBot, which makes diagnostic tools for cars. The company’s two flagship products are AutoBot Pro and the AutoBot Mini - on-board diagnostic (OBD) devices that are plugged into a car’s OBD-II outlet or cigarette lighter and collect and analyze data on vehicle performance.

Sequoia leads Series B round for car-sharing appSequoia Capital has led a Series B round of funding for Tiantian Yongche, a Chinese peer-to-peer (P2P) car-sharing platform. This follows a $3 million Series A round from Innovation Works

CICC funds exit China TCM business via trade saleTwo PE funds managed by China International Capital Corporation (CICC) will exit Jiangyin Tianjiang Pharmaceutical as China Traditional Chinese Medicine (China TCM) buys a majority stake in the business for up to RMB8.34 billion ($1.34 billion). CICC Jiatai Equity Investment Fund holds a 19.71% stake in Jiangyin Tianjiang, having paid RMB613.2 million for the interest in September 2011. A further 12.63% is owned by

CICC Jiatan Equity Investment Partnership. The two funds will sell their stakes to China Traditional for up to RMB3.33 billion.

Another financial investor, Wuxi Guolian Zhuocheng Venture Capital, has a 1.14% interest. This will be exited alongside stakes owned by Shanghai Jiahua United, Guangdong Keda Clean Energy, and Dengping Tan, a director of Jiangyin Tianjiang. China TCM will pay up to RMB4.13 billion for a 40.52% holding. Finally, Jialin Zhou, chairman of Jiangyin Tianjiang, sell her 8.62% stake for up to RMB878.7 million.

Founded in 1992, Jiangyin Tianjiang is China’s largest producer of traditional Chinese medicine (TCM) granules. These are extracts of medicinal herbs created through the use of modern extraction and concentration technologies. Granule sales grew from RMB228 million in 2006 to RMB4.2 billion in 2013. The market is expected to be worth RMB18.8 billion by 2018. Jiangyin Tianjiang and its subsidiary, GD Yifang, are two of only six companies in China approved to manufacture concentrated TCM granules.

NEWS


last June. Operated by Beijing Tian Heyi Tech Company, Tiantian Yongche enables private car owners to connect with prospective passengers.

NORTH ASIA

Japan’s Integral to refinance bankrupt airlineJapan’s Integral Corp. has agreed to refinance ailing domestic airline Skymark which filed for bankruptcy protection last week. The Tokyo Stock Exchange-listed budget carrier blamed the weak yen and its legal dispute with aircraft manufacturer Airbus for its woes. Skymark has racked up debts of JPY71 billion ($603 million).

YJ Capital launches Fund II, secures first dealYJ Capital - the VC arm of Yahoo! Japan - has announced the launch of its second fund, which has made its first investment in Indonesia fashion flash sale site VIP Plaza. The new fund will have a total corpus of JPY20 billion ($169 million) with Yahoo! Japan providing the bulk of the capital - JPY19 billion - and the GP putting in the rest.

Gumi Ventures reaches a $16.9m close on Fund IIGumi Ventures – the corporate VC arm of the Japanese mobile gaming company of the same name – has reached a JPY2 billion ($16.9 million) final close on its second fund. The new fund launched in August.

SOUTH ASIA

Hillhouse leads Series B for auto portal CarDekhoHillhouse Capital has led a Series B round of funding worth $50 million for GirnarSoft, owner and operator of India-based automobile trading platform and information portal CarDekho. Hong Kong hedge fund Tybourne Capital and Sequoia Capital also participated in the financing, which values CarDekho at $300 million.

L Capital Asia exits PVR Leisure via share buybackL Capital Asia, a PE firm sponsored by luxury goods conglomerate LVMH, has exited its stake in PVR Leisure, a unit of India multiplex operator PVR, via a share buyback arrangement with the parent. The firm retains an interest in parent.

PVR Leisure focuses on in-mall entertainment, gaming, food and leisure.

Canada’s Fairfax Financial raises $1b for India unitCanada-based Fairfax Financial Holdings has raised $1 billion for its recently-formed India

investment unit through a combination of an IPO and a private placement. The unit will pursue long-term capital appreciation by investing in public and private equities and debt instruments in India and Indian businesses.

Valiant leads $26m Series D for India’s FirstCryValiant Capital Partners has led a $26 million Series D round for Brainbees Solutions, the Indian start-up behind babies and children-focused retailer FirstCry.com. Existing investors IDG Ventures India, Vertex Venture Management and SAIF Partners, also participated in the round.

SOUTHEAST ASIA

SGX, Clearbridge form SME capital-raising platformThe Singapore Exchange (SGX) has partnered with Clearbridge Accelerator to set up a capital-raising platform for small- and medium-sized enterprises (SMEs) in Asia. The two parties will set up a joint-venture company to develop the platform.

CVC makes another partial exit from MatahariCVC Capital Partners has reduced its stake in Indonesia’s Matahari Department Store from 14% to around 2% after making two separate sales. The PE firm reportedly raised IDR3.67 trillion ($294 million) by selling 238.6 million shares - or an 8% stake - at IDR15,400 apiece..

Facebook co-founder backs Singapore property siteEduardo Saverin, co-founder of Facebook, has led a S$2 million ($1.5 million) round of seed funding for 99.co, a Singapore property listings site. Sequoia Capital also participated alongside several entrepreneurs-turned-investors. The company previously received backing from Fenox Venture Capital, Golden Gate Ventures, East Ventures and 500 Startups.

Lakeshore invests $4.5m in Thailand steakhouse chainThailand-focused GP Lakeshore Capital Partners has invested $4.5 million in KT Restaurant, the Bangkok-based operator of mid-market steakhouse chain Santa Fe. Santa Fe has 66 branches, half of which are in Bangkok with the rest located in provincial cities around Thailand.

Quadria seals landmark Indonesia pharma dealSoutheast Asia-focused healthcare investor Quadria Capital, which is expected to close its latest fund in the next two months, has taken a minority stake in Indonesian drug manufacturer Soho Global Health.

This is thought to be the first private equity investment in Indonesia’s pharmaceuticals industry. The size of the transaction was not disclosed, but Quadria is looking to complete 6-7 deals from a $300 million fund, which suggests check sizes of $40-50 million.

Headquartered in Jakarta and controlled by the Tan family, Soho Global is one of Indonesia’s largest pharmaceutical players. It produces a

range of herbal and synthetic treatments – generics as well as licensed formulas – and in 2013 set up a joint venture with Germany’s Fresenius Kabi to manufacture liquid injectable products and branded generics. The company has exposure all the way along the value chain from manufacturing to distribution, with channels that cover 90% of Indonesia’s major cities.

“We are providing capital to grow the business and expertise to help them identify and bring in new products that will diversify their portfolio,” Hareesh Nair, vice president at Quadria, told AVCJ. Asked why it has proved difficult for foreign PE to make a breakthrough in Indonesia’s pharmaceutical industry, Nair noted that companies have a variety of sources of capital available to them and are therefore looking for partners that offer support in achieving particular goals.

NEWS

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Indonesia 201524 March, Grand Hyatt Jakarta

Volatility, Opportunities and Jokonomics: A new landscape for PEWe are delighted to bring your attention to the NEW speakers already confirmed for the 4th Annual AVCJ Indonesia Forum. Taking place on 24 March 2015 in Jakarta, this year’s agenda will adopt a lively and interactive format, addressing the significant potential as well as challenges PE is facing in this unique but volatile market. Join local and regional private equity leaders to debate whether Indonesia is still THE hot market in Southeast Asia and how deal activity can be increased over the next 12 months.

Jaka Prasetya Managing Director, Private Equity KKR SINGAPORE

Azam Khan Chief Investment Officer,

Infrastructure East Asia and Pacific IFC

Sandeep Naik Managing Director, India &

Southeast Asia GENERAL ATLANTIC

Jean-Christophe Marti Senior Partner NAVIS CAPITAL

Irene Koh Vice President JP MORGAN ASSET MANAGEMENT

Philip Jeyaretnam Managing Partner RODYK & DAVIDSON LLP

Jaganath Swamy Vice President HARBOURVEST PARTNERS (ASIA)

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Wen Tan Partner FLAG SQUADRON ASIA

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COVER [email protected]

“I’M NOT GOING TO BOTHER FUNDRAISING in France anymore. It’s a shame, but the regulatory situation means it is just too much trouble.” This view, expressed by a GP in the process of raising a China growth fund, is a common refrain among Asia-based private equity managers getting to grips with Europe’s changing regulatory environment.

France has emerged as the prime example of a jurisdiction that has erected a bureaucratic blockade around its investor community in the wake of the global financial crisis and then the EU’s Alternative Investment Fund Managers’ Directive (AIFMD) intended to protect citizens from any future fallout. Once a market of small but not insignificant interest to non-European GPs now it is largely off limits to them.

The problem is not necessarily AIFMD itself. Announced in 2011 and implemented two years later, the passport regime enables EU-based funds and managers (AIFs and AIFMs) to market their products freely within the region, albeit on condition of meeting more stringent regulatory requirements.

Alongside AIFMD, member states run private placement regimes used by non-EU managers. Not only must these GPs submit separate documentation for each jurisdiction in which they want to market, but extensive “gold-plating” has resulted in systems that vary hugely in terms of ease of access. France is a tricky one.

“The private placement regime in France is to my knowledge largely untested and few people have the appetite to navigate registering there,” says Gus Black, an investment funds partner with Dechert. “France is also a country in which we run into a strong investor preference for an onshore European vehicle. It is academic whether you could register an Asian GP with a Cayman fund if the investor actually wants a European fund.”

Uncertainty reignsOther jurisdictions are also home to difficult investors and challenging private placement regimes. If the UK, Luxembourg, Ireland and the Netherlands are described as generally accommodating – in the UK and Luxembourg a manager simply notifies the regulator of its intent to market a fund rather than having to go through a registration process – other member

states fall into two categories. Germany, France and Austria, for example, have systems that make private placement more difficult, while much of Southern and Eastern Europe remain completely unfathomable.

Across all the interviews conducted for this article, the phrase “huge gray area” cropped up with alarming frequency. Yet this is the reality confronting Asian managers. They must establish what they are legally allowed to do where, and then cover the relevant costs. For many smaller players it might be a bridge too far – and the potential opening up of the passport system to non-EU managers is not necessarily a panacea.

“In Asia it hasn’t really been that much of a focus,” says Alexander Traub, head of Asia at Augentius, a private equity fund administrator and depository. “If people are not avoiding Europe as a whole they are only just coming around to the fact that something has to be done and they are getting in line.”

The reporting deadline for managers that registered for marketing in the EU after July 22, 2014 fell at the end of last month. For EU-based AIFMs this is now a matter of habit, but the vast majority of their non-EU counterparts this was

a first experience of the system. There are some exceptions – for example, the Netherlands has said that does not yet expect external managers to start periodic reporting – but in most jurisdictions there was a rush to submit year-end 2014 reports.

The UK’s online reporting system set up by the Financial Conduct Authority (FCA) was beset by a much larger volume of traffic than it had

ever seen before and duly crashed. “I know just from dealing with some clients in the last week that they still haven’t received their login details enabling them to register, let alone file reports. They have missed the deadline but it’s not their fault,” says John Adams, a partner with Shearman & Sterling’s UK investment funds practice.

His view is that, with regulators under so much pressure to get the reporting to work, managers are unlikely to be investigated for all but the most wanton flouting of the rules. This does not, however, mean that GPs are getting a free ride: everything they do may ultimately be assessed in hindsight.

Retrospective riskAn ethically dubious position on AIFMD would be to ask how the regulators can tell if a non-EU manager is marketing without a license – the very nature of the infraction is that there is no registration. Two parties would be able to tell: a disgruntled GP that is following the rules could inform the regulators of a rival that is not; or, more worryingly, a disgruntled LP.

“If someone is found to be marketing a fund in certain jurisdictions without authorization

they could be looking at a jail sentence,” says Christopher Stuart Sinclair, a director with Deloitte’s advisory and consulting department in Luxembourg.

“What is also coming to the fore is the regulatory put option. If in the future things turn sour between a GP and LP, an LP could turn around and say, ‘You marketed to me improperly. I bought in good faith but you weren’t in

Shades of grayMany Asian managers are coming to terms with how the EU’s Alternative Investment Fund Managers’ Directive might impact their fundraising plans. Unfortunately the legislation remains difficult to fathom

AIFMD timeline2011 July 1: Directive published; July 21: Becomes legally binding

2013 March 22: Level 2 measures introduced; July 22: Implementation date, passports available to EU AIFMs

2014 July: End of transitional period for AIFMs operating before July 22

2015 July: ESMA reports on extension of passport to non-EU AIFs/AIFMs

2016 Passports may be made available to non-EU AIFs/AIFMs; substance requirements for non-EU AIFMs managing EU AIFs or marketing AIFs via passport

2017 July: Review of the directive by the European Commission

2018+ ESMA to review passport regime; possible end to national private placement regimes; substance requirements for all non-EU AIFMs

Source: KPMG

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Indonesia 201524 March, Grand Hyatt Jakarta

Volatility, Opportunities and Jokonomics: A new landscape for PEWe are delighted to bring your attention to the NEW speakers already confirmed for the 4th Annual AVCJ Indonesia Forum. Taking place on 24 March 2015 in Jakarta, this year’s agenda will adopt a lively and interactive format, addressing the significant potential as well as challenges PE is facing in this unique but volatile market. Join local and regional private equity leaders to debate whether Indonesia is still THE hot market in Southeast Asia and how deal activity can be increased over the next 12 months.

Jaka Prasetya Managing Director, Private Equity KKR SINGAPORE

Azam Khan Chief Investment Officer,

Infrastructure East Asia and Pacific IFC

Sandeep Naik Managing Director, India &

Southeast Asia GENERAL ATLANTIC

Jean-Christophe Marti Senior Partner NAVIS CAPITAL

Irene Koh Vice President JP MORGAN ASSET MANAGEMENT

Philip Jeyaretnam Managing Partner RODYK & DAVIDSON LLP

Jaganath Swamy Vice President HARBOURVEST PARTNERS (ASIA)

LIMITED

Wen Tan Partner FLAG SQUADRON ASIA

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

Co-Sponsors Legal Sponsor


compliance – I want my money back.’ That is the biggest consideration keeping people from walking too fine a line.”

The threat of retrospective action has influenced how certain managers view the various ways in which AIFMD might be outmaneuvered, honestly or otherwise. When the legislation was first announced, a number of Asia-based GPs indicated they would source commitments out of Europe through reverse inquiries from investors aware of their fundraising plans. Fast forward to the present and their enthusiasm for this approach has been dimmed by uncertainty over the potential regulatory response.

The message coming out of a number of European jurisdictions is that reverse solicitation is not a mechanism around which a marketing program can be structured. France’s Financial Markets Authority (AMF) has said reverse inquiries must relate to specific products and refer to them by name; a broad request for information on any future fund is not acceptable. The FCA in the UK also issued notice that widespread abuse of its accommodating stance on reverse solicitation would result in tighter guidance.

“Our understanding is that because the burden of proof is so onerous, only the largest and biggest brand name firms can to some degree rely on making a case that inbound calls were truly made by these investors,” says Vincent Ng, partner at placement agent Atlantic Pacific Capital. “If you are a lower mid-market fund, the chances of an LP calling you directly without any degree of shoving or hinting are small.”

One consistent piece of advice amongst all the uncertainty is that GPs should track their communications carefully, just in case they are asked to present evidence that backs up a contested claim of reverse solicitation.

“We’ve had plain vanilla reverse solicitations,” notes one Asia-based manager who is currently fundraising. “Someone heard about us – we don’t know how, they’ve never met any of us – and they literally called the front desk. They wanted to know more about the fund so we asked for an email confirming the phone conversation and logged it into our system. That is very rare. The bigger, savvier LPs just send us reverse solicitation letters. They know who is in the market.”

An added complication is what to do about existing investors. Some GPs are advised to scrutinize materials presented at annual general meetings for any mention of a successor fund.

But if a manager informs existing LPs that the current vehicle is 90% drawn down and those LPs logically conclude that another fund is in the pipeline, prompting inquiries, then who is soliciting whom? The consensus view among the advisors that spoke to AVCJ is this constitutes a GP fulfilling its fiduciary responsibilities to existing investors, not subtle pitch for a new fund. But it shows how managers have become wary.

One approach taken by some managers is informing LPs that after July 22, 2013 they will receive no further communication and must get in touch directly if they want further information.

Alternatively, a manager might avoid regulatory issues by marketing separate

accounts, which can be structured so they don’t count as funds or AIFs. However, the same issue of credibility crops up. The GP must genuinely be able to offer a separate account – and have prior experience running them – while the LP should be sufficiently experienced and well-capitalized to accept one.

“On the basis that everything is judged on hindsight, if at the end of the process all the GP has done is gather a load of commitments into a fund, it raises a question mark over whether they were trying to market separate accounts or market their fund via the back door,” says Dechert’s Black.

Marketing mechanicsInfused in this debate are the different lines jurisdictions have drawn in terms of how far a GP can go before pre-marketing becomes actual marketing and therefore requires registration or notification.

The Asian manager currently in the market, who has gone through notification in the UK and is waiting to see whether LP demand warrants similar action elsewhere, reels off a list of dos and don’ts for different markets.

At one extreme sits the UK, where a GP can engage in a variety of pre-marketing activities – sending emails, making presentations, issuing pitch books, circulating draft private placement memoranda – provided they don’t involve near final form constitutional documents. At the other: the Netherlands, where any information, written or oral, citing a specific fund is deemed to marketing.

Opinion is divided as to which jurisdiction is most stringent on marketing. Sweden is cited by several advisors as tough if not tougher than the Netherlands, although both jurisdictions are said to have relatively straightforward registration processes. Sweden processes applications in a few weeks, while the Netherlands follows the notification procedure, although attestation is required from a regulator.

By contrast, registration in Denmark and Germany is complicated by the need for a depository. Even though the system created by Germany’s Federal Financial Supervisory Authority (BaFin) is “depo-light” – unlike Denmark, the depository can be anywhere within the EU – it can still be a hindrance.

“It is not just the presence of an additional service provider that

managers otherwise wouldn’t have to think about or pay for, but the time and cost involved in going through the BaFin application where there is no guarantee of success,” says Shearman & Sterling’s Adams. “Some GPs are reluctant to follow that route unless they have a good sense that there is a huge opportunity to raise capital in Germany.”

A potential workaround is to target a German institution with a presence outside of Europe, such as a fund-of-funds that has an office in Hong Kong. Here, too, care is required. This approach is acceptable provided all marketing takes place in Hong Kong and the subscription documents are signed there. But the regulator is likely to look through any structure to the ultimate investor, so if a GP receives the completed subscription documents and finds they have been signed in Germany it could pose a problem.

“If it is clearly an EU organization and the


Marketing under EU member states’ national private placement regimes

Concept of marketing

Notification or authorization

Additional requirements

UK

Germany

France

Italy - -

Spain - -

Portugal - - -

Sweden ?

Denmark

Finland

Ireland ? ?

Luxembourg

Austria - -

Netherlands

Belgium

Note: Correct as of December 2014 Source: PwC

Straightforward Moderate Challenging Must also have local agent



decisions are being made in the EU and you try to get around it by pretending the decisions are not being made in the EU, the regulators are going to see through that very quickly,” says Oliver Morris, director in the advisory department at KPMG Channel Islands.

Similar issues of substance apply in situations where a manager decides to eschew the private placement uncertainty and set up an AIF and an AIFM under the passport regime. Several industry participants say they have so far seen little demand for such structures: managers don’t want to bear the additional cost when there are still acceptable private placement regimes through which they can enter key markets.

Going localHowever, there are a number of ways in which the passport regime can be accessed cost-effectively. For example, a host of service providers have emerged offering to be an Asian GP’s AIFM-for-hire. Much like the rent-a-management-company approach employed for UCITS, an AIFM in Ireland or Luxembourg is responsible for multiple sub-funds under an umbrella vehicle. The cost is lower than operating independently and setting up dedicated in house teams, but control is sacrificed at the same time.

An AIFM cannot be a letterbox entity taking instructions from the Asia-based manager of a

Cayman Islands-incorporated fund; the latter is a delegate of the former. What this means is the AIFM-for-hire retains responsibility for a number of the risk management functions and has complete oversight regarding portfolio management. It is also able to fire the Asia-based delegate if this course of action is in the best interests of shareholders.

“You are relinquishing some power, both legally and over the management of your portfolio. Some of these managers don’t like the idea that they can be fired by an AIFM they feel they are hiring, although legally it is the other way around,” says Shearman & Sterling’s Adams.

Opting for a full AIFM also exposes a manager to a host of requirements that are more demanding than those imposed under private placement regimes. Remuneration is one of the more contentious issues.

Initial fears that GPs would have to disclose individual remuneration have abated. The annual report submitted when marketing in the EU as an AIF or on a private placement basis must reveal the number of staff and the size of the overall remuneration pool. Indeed, in cases where the staff is so small that it might be possible to calculate individual remuneration, separate legislation can be invoked to maintain privacy.

AIFMD goes beyond the private placement regimes in dictating how staff are paid – for example, it outlaws guaranteed bonuses and stipulates the mode and timing of certain payments. An Asia-based delegate would be drawn into this system and it represents a huge cultural shift for many managers.

Nevertheless, a shift of some sort is all but inevitable. Later this year, the European Securities and Markets Authority (ESMA) will issue an opinion on whether the passport system that currently applies to EU-based managers should be extended to GPs from outside the region. There is uncertainty as to whether the framework outlined is politically tenable or practically workable.

“A lot of this comes down to the amount of pushback you see in wanting this passport in the first place and the willingness of member states to open up to external managers,” says Grant Lee, a director in PwC’s advisory division. “The

legislation is there, so to a certain extent hands are tied so it is more about the detail. But it could get to the point where the regulators make it so difficult that people don’t do it.”

For Asian managers to qualify for access to every EU jurisdiction they would have to be brought into the regulatory fold by agreeing to oversight from a European state of reference. The process for determining the state of reference is complex and it is unclear what additional demands Europe might try to impose on a manager’s local regulator to address areas not directly covered by AIFMD.

At the same time, some but not all jurisdictions are likely to begin to wind down their private placement regimes. GPs would be left with a choice between a passport system inside and outside of the EU or reverse solicitation.

“I don’t see a lot of people lining up to take advantage of the third-country passport because what that is essentially going to do is expose the third-country management company to European regulation,” says Dechert’s Black. “Most people who want the benefits of the passport are quite keen to ring-fence the regulatory impact in an EU entity and are in no rush to subject their main management company to that regulation.”

Favorable future?It points to is a situation in which AIFMD is an accepted, and to some extent contained, part of a non-EU manager’s strategy. In this way, AIFMD may eventually become part of the fabric of the industry, just as private equity has largely come to terms with the new reality presented by the US Foreign Account Tax Compliance Act (FATCA).

On one hand, compliance may become cheaper and easier for managers as familiarity with the process grows. On the other, LPs may get more comfortable and sophisticated at reverse solicitation.

There is also the prospect of AIFMD emerging as a regulatory gold standard. Much as investors in the hedge fund space often demand exposure to a certain strategy through UCITS rather than a Cayman fund, LPs could do the same with AIFMD. Suzanne McNeil, managing director of depository at Augentius, says she is already seeing this. Augentius was recently approached by a non-EU manager about performing depo-light functions because one of its major LPs made it a stipulation to invest in the fund.

The cost implications of this would not be welcomed by smaller managers that still face being squeezed out of the market because they don’t have the resources to participate under AIFMD or private placement.

“The bottom line is if European capital is important to you it is wise to look at cost-effective ways of having an onshore structure to meet those requirements and get rid of all those uncertainties,” says Deloitte’s Stuart Sinclair. “If it’s marginal, do you really need Europe?”

This begs the question of whether Europe needs them. Industry participants already refer to smaller managers focusing on investors in a particular jurisdiction in order to justify the higher regulatory overheads. It will result in less eclectic LP bases, and maybe some groups missing out.

“If you are a big beast continually raising money left then you can register a holding group that covers all your funds and the economies of scale work,” says Atlantic Pacific’s Ng. “But if you are a single-entity fund that goes to market every four years, would you want to do this? This regulation is penalizing the small guys. LPs only get exposure to the biggest guys – but are these the best funds?”

“If European capital is important to you it is wise to look at cost-effective ways of having an onshore structure to meet the requirements and get rid of the uncertainties. If it’s marginal, do you really need Europe?” – Christopher Stuart Sinclair


[email protected]

TEMASEK HOLDINGS HAS BECOME THE latest investor to enter an embryonic but potentially large new market within India venture capital after agreeing to buy SVB India Finance – a unit of NASDAQ-listed lender Silicon Valley Bank – for INR2.8 billion ($45 million). The Singapore investment fund will provide loans of up to INR150 million on six-months to three-year terms to some of India’s fastest growing companies.

SVB India has been in operation since 2008 and its investment portfolio is impressive. Clients include the likes of Snapdeal, iYogi, BlueStone, Capillary, FirstCry, Freecharge and Perfint. SVB India gets its pick of the most-promising start-ups because for the last seven years it has enjoyed a virtual monopoly over India’s desolate venture debt space. But things are changing.

As the country’s venture capital market has matured, demand for venture debt has

grown. More players are coming in to fill the demand-supply gap. SVB India has been joined by IntelleGrow, a unit of early stage investor IntelleCap, and Trifecta Capital Partners, a venture debt new debt provider set up by Rahul Khanna, formerly managing director at Canaan Partners. They are nurturing the green shoots of venture debt, but what is its full potential?

“There is definitely increasing interest among high-growth, early-stage start-ups in need of a different kind of financing instrument,” explains David Richards, co-founder of Unitus Seed Fund. “The problem is that there have been very few options for debt, so historically the capital has not been there.”

Debt demandsWhile venture debt may be new phenomenon in India, it is a well-established product among start-ups in developed economies.

The most obvious example is SVB India’s

parent, Silicon Valley Bank, which was one of the first movers in the space when it set up in the US in 1983. Silicon Valley Bank is now one of a number of commercial banks in the US offering venture debt along with the likes of Square 1 Bank and Bridge Bank. There are also a host of pure-plays such as Lighthouse Capital Partners, TriplePoint Capital, and Pinnacle Ventures, which provide financing solutions out of traditional venture capital-style fund structures.

Most venture debt providers broadly operate in a similar way, offering debt on top of a larger round of equity funding. For example, if a start-up raises a Series A round of $5 million, the venture debt provider would contribute an additional layer of $1-2 million.

The investment is normally made alongside venture capital funds with which the bank or fund has a previous relationship. This is done

on the assumption that the start-up will raises further rounds from the same VC investors, and it helps make the lender comfortable enough to provide debt with an average three-year amortization. In the case of Silicon Valley Bank debt is normally be collateralized by the company’s assets, including things like intellectual property.

The main reason this venture has not taken hold in India, or indeed in Asia as a whole, is down to the relative immaturity of the venture capital market. Most Indian entrepreneurs only really caught onto to the idea of equity funding in the last decade. At same time many promoters are unaware of what alternatives are available.

“In the past there has been a lack of knowledge about what venture debt is about,” explains Prashant Mehta, partner at early-stage investor Lightbox. “Many start-ups see equity as the best alternative for all activities, whether it is appropriate or not.”

The problem is that while equity is typically ideal for long-term costs – such as developing a technology platform or hiring talent – many start-ups still use this kind of capital to cover short-term expenses that would be served by debt. The reason for this is that many entrepreneurs have found traditional lines of credit closed off to them.

Unitus’ Richards points out that one of the main challenges of the small and medium-sized enterprise (SME) lending ecosystem has been the habit of India’s financial institutions to ignore riskier, high-growth start-ups in favor of mature SMEs that have been around for a while and are turning a profit.

Debt demandsWhen SVB India entered the market in 2008 it did so by setting itself up as a non-banking finance company (NBFC) and has so far made over 60 investments, adopting the investment model that had already been established in the US: It typically invests in start-ups that have raised their first institutional round and are already generating a turnover of around $100 million.

IntelleGrow, which was set up around four years later in 2012, also formed an NBFC but adopted a slightly different strategy by targeting earlier-stage businesses. Sanjib Jha, CEO of IntelliGrow, explains that his firm targets companies at the pre-Series A stage – when turnover is still below $10 million – and invests $500,000 to $1.5 million per company. The firm has made 56 investments over the last two years, primarily working with young, first-generation entrepreneurs in their late 20s to mid-40s.

“This age group is well educated, I think they understand finance very well and they fully understand the utility of capital,” Jha says. “Once you understand the dynamic of the uses of capital you understand that your balance sheet needs to be leveraged.”

Another recent entrant into the market is Capital Float, also an NBFC, which was set up in 2013 and last year received a $1 million round of funding from SAIF India. While the firm classifies itself under the more generic heading of SME lender, it nevertheless counts high-growth start-ups such as e-commerce platform Zovi.com among its clients.

Not all venture debt lenders have taken the

Innovation capital Led by SVB India, venture debt providers are beginning to take root in India. Can this nascent asset class replicated its success in developed markets and become a viable option for domestic start-ups?

India’s venture debt providers Name Type Established Capital base (US$m) Investment size (US$)

SBV India NBFC 2008 50 Up to 2.5m

IntelleGrow NBFC 2012 30 500,000-1.5m

Capital Float NBFC 2013 3 40,000-80,000

Trifecta Fund manager 2014 100* Up to 2.5m

Source: AVCJ Research Note: *fund target

[email protected]

NBFC route. Khanna’s Trifecta is looking to invest out of a fund structure and is in the process of raising INR3 billion ($50 million) for its maiden vehicle. Khanna points out that while NBFCs can provide more structured, higher yield, forms of debt than banks, their investments don’t necessarily fall into the category of traditional venture debt, i.e. providing debt alongside a

significant round of equity from a third party. “What we are doing with our first fund is

modeling a product based on some of the best practices we have seen deployed the world over,” says Khanna. “In lots of ways it is a three-way deal – the company, the equity provider, and us. For us to make our target returns [a 17% gross IRR] we need the appropriate level of equity support to help us manage the risk of backing a high-growth, asset light start-up.”

Like IntelleGrow, Trifecta is targeting businesses at an earlier stage than SVB. It will back start-ups that are in the market for their first

institutional round of equity funding, committing INR50-150 million per loan at a 16-18% interest rate.

Lightbox’s Mehta says that more widely availability debt capital could help solve a lot of issues facing Indian start-ups that require a lot of working capital in order to scale up fast and fulfill orders, but don’t necessarily want to suffer the

expense of giving up more equity. In the early stages in particular, India-based investors offering rupee-denominated debt might be a perfect solution.

However, there is now also demand for debt from international sources, with many start-ups looking to use a combination of local and offshore financing solutions. This is because India’s capital controls may make it difficult for a start-up that receives venture debt funding in rupee to deploy it outside of the country.

“It differs from firm to firm but if your company is thinking about operations outside

of India you may want to look at venture debt sources outside of India that allow you more flexibility to deploy capital in other markets,” says Mehta “What might happen is that you start off focusing on your home market for the first couple of years before you are ready for a global market. So if you need capital early on, domestic providers are a great option.”

It is tricky to predict the exact speed at which venture debt is likely to gain traction in India as there is little precedent for it in any other emerging market. However, the consensus view is that there is plenty of demand in the start-up community. The question is how long it will take to develop the ecosystem.

IntelleGrow’s Jha believes some indication can be drawn from the way microfinance has evolved. In 2004, the ecosystem in India was very small and people wondered whether it would even be $200 million market, but today it is worth around $10 billion.

“Early-stage lending and venture debt is now at the stage microfinance was at in 2004,” says Jha. “Temasek’s acquisition of SVB India comes at a time when the market is heating up, and more players like us are arriving. It is a learning curve, and it might take another three years, but it will be up to the incumbents to prove that there is a market.”

“There is definitely increasing interest among high-growth, early-stage start-ups in need of a different kind of financing instrument.” – David Richards

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IS THE SPIRIT OF ROMANCE EBBING AWAY in Japan? Naoki Sawano, president of bridal jewelry specialist Primo Japan, suggested as much a couple of years ago. He held a trend among young people “to think of the proposal and the engagement ring as two separate things” as partly responsible for a drop in the percentage of couples purchasing engagement rings.

As Sawano acknowledged, there are other factors at work – not least Japan’s falling birth rate and aging population. In late 2013, the number of people aged 65 and over crossed the 25% threshold for the first time. This share is expected to reach 40% by 2060.

Regional expansion is therefore a priority for Primo and this initiative will be supported by The Longreach Group, which has bought the business for a reported JPY20 billion ($170 million). Mainland China is a key target, with the GP hoping to replicate earlier successes in taking Japanese companies cross-border.

Founded in 1999, Primo produces semi-customized bridal jewelry, including engagement and wedding rings, for middle class consumers,

operating in the segment below Cartier, Bulgari and Tiffany. The company operates under three brands – I-Primo, Lazare Diamond and Selexia – and seeks to differentiate itself from mainstream jewelry retailers by offering a focused, high-quality service with an attractive price proposition.

In addition to 76 stores in its Japan, the company has 10 outlets in Taiwan and two in Hong Kong. Primo also has a presence in Tel Aviv through which it sources diamonds directly from the market as opposed to relying on the costlier broker channel.

International expansion began in 2007 when the company opened its first store in Taiwan. It was under the previous owner, Baring Private Equity Asia, that the Hong Kong market was penetrated as well. The PE firm bought Primo in early 2011 for an undisclosed sum from a group of investors led by Goldman Sachs and Risa Partners. Primo reported annual sales of JPY15.7

billion for the year ended September 2014, up from JPY13.7 billion in 2013 and JPY12.2 billion in 2010.

While growth and operational efficiencies are expected from Japan – which accounts for the vast majority of Primo’s sales – the combination

of high quality products and services combined with affordable price points is tipped as a potential hit in China.

“It is not a jewelry business, but a bridal jewelry service – a highly targeted segment in which it is easy to recognize the value proposition,” says a source familiar with the transaction.

“It is a good targeted play for China because it is about aspiring middle class people getting married, not about party officials giving gifts.”

Should the business achieve the scale it is targeting, three viable exit paths emerge: an IPO, a trade sale to a strategic buyer, or secondary buyout – which would put Primo into its fourth pair of private equity hands.

UTTAR PRADESH, THE MOST POPULOUS state in India, is served by just two rail freight container terminals. They are located in the northern industrial hotbed of Kanpur, with one operated by Pristine Logistics & InfraProjects and the other by Concor.

Bihar, located to the east of Uttar Pradesh is even more poorly served. Pristine’s new terminal in Patna, the state capital, has the potential to revitalize local communities by allowing farmers to get their produce to market more easily.

Last week, CDC Group, a UK-based development financial institution, endorsed the notion of economic empowerment through logistics by investing $25 million in Pristine. The company, which provides rail freight services in rural and under-served parts of the country, previously secured approximately $10 million from local PE investor UTI Capital in 2012.

“Efficient terminal infrastructure is necessary for businesses to be able to trade,” says Rohit Anand, an investment director on CDC’s direct equities team. “Given the large distances in India, and sometimes challenging road conditions, rail

is the logical mode of transport for containers and bulk goods moving from regions located deep inland.”

The state-owned Indian Railways opened up its freight transportation segment to private investors under public-private partnerships (PPP) a few years ago. It generated about $15 million in revenue from freight transport in 2014. Pristine’s operations are profitable and the company will use the new investment to develop eight greenfield terminals across northern, central and eastern India. These will include both bulk and container handling facilities.

“Indian Railways has made very positive noises about private investment in rail infrastructure and we hope this will translate into a smooth regulatory environment. Local governments are encouraging of such improvements as it helps create business and employment opportunities in the region, “adds Anand.

CDC’s investment will not only create

nearly 1,500 jobs directly but also a further 400 shorter-term construction jobs. In addition, the company plans to develop a food park in Bihar that will provide work for 1,800 more people. One of India’s largest fruit, vegetable and dairy producing states, Bihar is held back

by the absence of fast, reliable and temperature-controlled transportation services. The park will bring food processing, storage and modern transport services to rural communities.

In recent years, Maharashtra and the New Delhi National Capital Region have routinely accounted for approximately

half of the foreign direct investment flowing into India. The combined share for Orissa, Uttar Pradesh, Bihar and Madhya Pradesh – Pristine’s areas of focus – has been in the low single digits.

CDC expects Prinstine’s operation to grow significantly over the coming years. The group has already brought in a rail freight industry veteran to sit on the company’s board.

DEAL OF THE [email protected] / [email protected]

Longreach puts a ring on it

CDC banks on rail to share the wealth

Rail freight: Goods to market

Primo Japan: Ring masters


HUIMIN STARTED OUT IN IN 2012 AS AN online B2C platform in 2012, enabling Chinese consumers to order daily household items from small-scale supermarkets in their neighborhood. The supermarkets took care of the delivery and Huimin got a commission on each transaction. However, after two years the company was still burning cash and generating zero profit.

“They spent a lot on promotion,” says Shixiang He, an investment manager at Shenzhen-based Fortune Capital. “Also, when customers ordered products online, Huimin didn’t know whether the supermarkets had sufficient stocks. Even if supermarkets did have the right items, they weren’t necessarily willing to deliver when customers ordered just two bottles of water.”

The chairman, Yichun Zhang, responded by shifting to a B2B model, serving as a commercial logistics provider that connects supermarkets and manufacturers. Last week, Huimin raised $100 million in a Series A round led by Fortune Capital, which accounted for one third of the total capital committed. Other participants included GP Capital, CITIC Private Equity, Zhejiang

Zheshang Investment Management, and Xitai Sheng, co-founder of Hongtai Fund.

By helping small supermarkets to source goods from wholesalers, the company reduces the workload for shopkeepers, many of who are husband-and-wife teams. “They can’t bargain much with wholesalers as they’re only stocking small quantities, so the cost price is high. There are also risks in terms of buying counterfeit products from different agents,” He says.

Huimin buys in bulk so gets better prices. It also offers greater supply chain transparency, minimizing concerns about product safety. From the manufacturers and wholesalers’ perspective, it is easier to manage one customer relationship than hundreds. In addition, prices are more stable.

There are over 2 million community-level supermarkets and convenience stores in China, and Huimin now works with nearly 100,000 of them across more than 30 provinces and

municipalities. It adds approximately 1,000 outlets to its network every day and wants to reach 250,000 by the end of the year, with a focus in top-tier cities.

According to He, Huimin’s warehousing, distribution and service quality are superior to those of e-commerce giants like JD.com and Alibaba Group’s Taobao Marketplace and Tmall.

While JD.com builds out self-run logistics systems and warehouses, Huimin is able to rely on the supermarkets in its network to provide warehousing services. He notes that JD.com is still making a loss because it spent so much on logistics.

Huimin contrasts with Alibaba in that it does not rely on outsourced delivery services.

“Using third-party delivery firms can result in safety issues,” He says. “Customers using Huimin enjoy cheap delivery services provided by the supermarkets because they are so close by. This operating model is much more convenient.”

CHRISTMAS HOLIDAYS ARE A RARITY AT Hahn & Co. The Korean buyout firm’s acquisition of Posfine, a slag powder business owned by steelmaker Posco, closed on December 30. The 2013 seasonal period was dominated by negotiations over a majority stake in Hanjin’s bulk and liquefied natural gas shipping businesses. A year earlier it was another carrier Korea Line, although no deal went through.

For Scott Hahn, the PE firm’s CEO, who was previously CIO at Morgan Stanley Private Equity Asia, working Christmases have become par for the course. Sellers in Korea are often set year-end deadlines for completing a transaction and this leads to a rush of activity in December.

However, December 2014 was particularly busy or Hahn & Co. Before the documents were signed for Posfine, the firm closed its second fund at $1.2 billion and agreed a $3.6 billion buyout of Halla Visteon Climate Control Corporation (HVCC). In addition, a $700 million co-investment vehicle was raised to support the HVCC deal.

Extra capital was required due to the sheer size of the transaction. Hahn & Co. teamed up

with local manufacturer Hankook Tire to acquire the asset, but its individual contribution still came to around $2.6 billion – well beyond the capacity of the firm’s first fund, which closed at $750 million in August 2011.

Given that Fund II launched in mid-July and spent about five months in the market before closing at the hard cap, there was clearly demand from LPs to participate in Korea’s robust buyout story, so Hahn & Co. invited them to take some direct exposure. The National Pension Service is also understood to be involved.

“People are now trying to get increasingly custom-tailored fund products with different economics and fund life. There is going to be more creativity in terms of fund structure and design,” Hahn says of the decision to raise a co-investment vehicle alongside the main co-mingled fund.

According to AVCJ Research, private equity investment in South Korea reached a record

$10.8 billion in 2014, with buyouts accounting for $7.7 billion of the total. The country’s share of Asia-wide buyouts came to 26.7%, up from 17.2% in 2013. Two deals really moved the needle in 2014 – HVCC and The Carlyle Group’s $1.93 billion acquisition of Tyco International’s Korea unit.

However, Hahn believes that foreign PE firms are losing ground to local players such as MBK Partners, Vogo Investment, IMM Private Equity and Hahn & Co (all of which are registered with the Korean regulator). These firms contributed about 45% of the $18 billion in disclosed buyout deal flow since 2013. This is nearly

twice the share of the big regional and global funds, although MBK is a large regional firm.

“The market is significantly skewed towards the local private equity players because there is a lot of capital available in Korea, more experience among the local managers, and in many cases they are the preferred buyers for businesses,” says Hahn.

DEAL OF THE WEEK / [email protected] / [email protected]

Fortune backs Huimin’s B2C-B2B switch

Hahn gets $1.9b for two funds

Hiumin: Supermarket solution

Scott Hahn: Busy December

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Q: What sort of opportunities does Denham target and how does your strategy differ from traditional PE?

A: We try to de-risk the asset by focusing on intrinsic value-add. In the current metals and mining market there is a scarcity of developmental capital so we tend to take control of undercapitalized – and in some cases under-managed – assets and bring them into positive cash-flow. We improve the assets by exploring within the existing mine plan and expanding the life of the mine. The main difference is that we do not use financial engineering or leverage to create value. We spend a lot of time trying to identify the best operating team. The people come before the asset – if we can’t find the right people then we are happy to let go of a good asset.

Q: What are the trends driving

the current crisis in the mining industry?

A: If you look at the current funding crisis in the junior mining sector, the main cause is not slowing economic growth in China, or the debt crisis in the US or Europe; it is that junior mining companies trading on the public markets were over promoted and overvalued. You had too many people running around trying to sell a beautiful story about perpetual growth and the risks were never properly understood or analyzed.

Q: Has this changed the way you

invest?A: The whole money-making

paradigm in metals and mining that has changed. Five or six years ago capital might go into

advanced exploration, but now you can only create value by going into producing assets and at a late stage. So where you once had longer holding periods and higher risk, now you have shorter holding periods and lower risk. It is positive for the industry because a lot of these companies are not viable and the management teams are mediocre; they are just going to run out of cash and disappear from the market.

Q: You did two mining deals in

Australia in 2014. What were the driving factors?

A: Auctus Minerals and Pembroke Resources are the first two metal and mining platforms we have done in Australia. The reason we waited was because, until recently, Australia was

unrealistically expensive for running projects – valuations were too high and the execution costs for business plans were too high. We looked at hundreds of projects with only a handful making any sense. Only with the funding crisis have we been able to find attractive terms. Pembroke and Auctus are new companies founded with our capital and led by management teams with a track record of successfully building mining projects ahead of time and below budget.

Q: Do you expect to see more

deals in the wider Asia region?A: Pembroke, which is developing

metallurgical coal assets, already has a mandate for Indonesia and we will continue to look at opportunities in a number of countries, primarily in Southeast Asia. We do believe the Pacific Rim countries, particularly Indonesia and Papua New Guinea, are among the most geologically prospective in the world. If you take a long-term view, eventually we will seek to establish more mining platforms elsewhere in Asia.

Q: How has the fall in oil prices

impacted the mining and metals industry?

A: From a mining perspective I always regard oil prices as a dirty hedge. If oil prices go down then the operating costs of mining operations go down – energy costs usually comprise 20-25% of the overall operational cost of a mining asset. Also, if you look at long-term exchange rate correlations, usually when oil prices go down, the US dollar goes up and emerging market currencies go down. Given

that most of a mining asset’s operating costs are in emerging market currencies and revenue is often in US dollars, by and large falling oil prices will again be beneficial.

Q: How much longer will the status quo in the commodities market remain?

A: Commodities prices will continue to fall for the next two years and then bottom out. You will need to wait six years or so for a cyclical uplift in metals and mining. This shouldn’t come as surprise because we are at the end of the largest super cycle in history, and it was exacerbated by people talking up the market. The valuation of the average junior miner is 90% down from its peak while the average cash lifespan on the balance sheets of these companies is less than six months. If you participated in every single IPO of a junior mining company in the last six years, you would have lost around 50% of your money.

Q: What is your medium-term outlook for PE investors targeting mining assets?

A: I regard the current situation as one of the best, if not the best, entry points in a decade for the sector-focused investor who knows what they are doing, because strictly-speaking most people who invest in metals and mining don’t. The second positive note is that if most projects are not getting funded then demand might exceed supply sooner than most people expect, and that will lift prices up. It is not going to happen tomorrow, or next year, but it is paving the groundwork for the next up-cycle.

BERT KOTH | INDUSTRY Q&A [email protected]

Buried treasures For resources-focused GP Denham Capital, the commodities downturn has thrown up some interesting opportunities. Bert Koth, the firm’s Perth-based managing director, explains why his eye is now on Asia

“The people come before the asset – if we can’t find the right people then we are happy to let go of a good asset”

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4-6 March • The Westin Sydney


Australia & New Zealand 2015

Co-Sponsors

Supporting Organisations Media Partners

Enquiry

Registration: Carolyn Law T: +852 3411 4837 E: [email protected]: Darryl Mag T: +852 3411 4919 E: [email protected]

Senior industry professionals confirmed to speak include:

Clive Boyce Investment Manager FUNDS SA

Robert Credaro Head of Growth Assets FIRST STATE SUPER

Jessica Archibald Managing Director

TOP TIER CAPITAL PARTNERS

Steve Martinez Head of Asia-Pacific Snr. Partner, Private Equity APOLLO MANAGEMENT, L.P.

Natalie Meyenn Head of Private Equity MLC

Klaus Bjørn Rühne Partner ATP PEP

David Simons Director, Private Equity FUTURE FUND

Neil Stanford Investment Manager -

Private Equity HOSTPLUS

Michael Weaver Manager, Private Markets SUNSUPER PTY LTD

Marcus Simpson Head of Global Private Equity QIC

Ben Frewin Managing Director ARCHER CAPITAL

Benjamin C. Gray Managing Partner TPG CAPITAL

Tim Martin Partner CRESCENT CAPITAL

PARTNERS

Padmanabh (Paddy) Sinha Managing Partner,

Private Equity TATA CAPITAL

John Haddock Managing Director and Chief Executive Officer CHAMP PRIVATE EQUITY

Simon C. Moore Managing Director THE CARLYLE GROUP

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