Untangle the PIPEs - avcj.com · Asia’s Private Equity News Source avcj.com February 28 2017...

Asia’s Private Equity News Source avcj.com February 28 2017 Volume 30 Number 08

FOCUS DEAL OF THE WEEK

Untangle the PIPEsIndian GPs make the case for investing in the country’s public markets Page 7

PE pays its respectsGPs make inroads in Asia funeral services 0

Muscling to the topNavis-backed start-up in fitness merger Page 13

Back office tasks for Asia PE are a balancing act

Page 3

EDITOR’S VIEWPOINT

years

Both same font

Odyssey brings together Australian PE veterans

Page 12

Relationship building pays off for ChrysCapital

Page 13

FUNDS

Tsinghua University Education Foundation

Page 15

AirTree, Bain, Boyu, CDC, CyberAgent, Hillhouse, IDFC, IDG, IFC, INCJ, Kickstart, Kejora, KKR, Manipal, MBK, Permira, Sequoia, Temasek

Page 4

NEWS

LP INTERVIEW

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GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY

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Jiming HaVice Chairman and Chief Investment StrategistGOLDMAN SACHS PRIVATEWEALTH MANAGEMENT CHINA

Ou Wang Managing Director and Head of Private Equity Investment Department, CHINA INVESTMENT CORPORATION

Patrick ZhongChief Investment OfficerWANDA GROUP

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Edward J. GrefenstettePresident & Chief Investment OfficerTHE DIETRICH FOUNDATION

Julian ChengCo-head of ChinaWARBURG PINCUS

Jonathan ZhuManaging DirectorBAIN CAPITAL

Dave BrochetManaging DirectorCDPQ ASIA PACIFIC PTE LTD

David WeiChairman and Founding PartnerVISION KNIGHT CAPITAL

Jeffrey LiManaging PartnerTENCENT INVESTMENT

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Number 08 | Volume 30 | February 28 2017 | avcj.com 3

EDITOR’S [email protected]

FOR MOST FUND ADMINISTRATORS, A desired business evolution scenario for Asia – and principally China – is as follows: A GP raises two or three funds, relying solely on friends-and-family money at first and adding a sprinkling of institutional capital later on. Fund IV involves a step up in size, and hopefully in LP quality as well, and the back office requirements reach the point where there is no desire to continue performing these functions in house. So the GP outsources these services to an administrator.

Beyond areas such as custodian services, to outsource or not to outsource is traditionally viewed in the context of size, resources and habit. And outsourcing is generally on the rise in Asia, as investor bases become more international, investors seek larger amounts of information from managers, and greater regulation adds weight to the administrative burden.

The 2017 edition of fund administrator Augentius’ annual global survey of private equity fund managers appears to confirm this trend. Across compliance, fund administration, regulatory reporting, taxation and legal services, the percentage of Asian respondents expressing a willingness to outsource is not particularly out of step with the Americas and Europe, the Middle East and Africa (EMEA). Indeed, in all bar fund administration, Asian managers have more intent to outsource than their EMEA counterparts.

But how far are private equity firms in this region willing to go in order to deliver consistency, standardization and automation? Is there, for example, growing demand for middle

office and front office reporting – systems that slice and dice portfolio specific data to show how capital from a particular LP has been allocated across different deals, geographies and sectors? Anecdotal evidence suggests many GPs find these costs harder to justify.

Asked whether they were planning to modernize and develop their internal processing in 2017, 30% of Asian respondents answered in the affirmative, compared to 60% in the Americas and 55% in EMEA. Peculiarly, the 2016 figure for Asia was 50%, roughly in line with other markets. In another part of the survey, Asian GPs indicated they saw less of a challenge in LP communications than their Americas and EMEA counterparts. Investment opportunities, fundraising and market regulation are by some distance their biggest concerns.

LP respondents were also less worried about GP-LP communications than other issues, although their biggest administrative frustrations are lack of transparency around fees, late reporting and insufficient detail in reporting. The latter two have separately been described as areas in which some LPs – attitudes can vary considerably – are likely to give Asian GPs a break, prioritizing market access over seamless delivery of information. It remains to be seen how long this lasts.

Tim BurroughsManaging EditorAsian Venture Capital Journal

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Jiming HaVice Chairman and Chief Investment StrategistGOLDMAN SACHS PRIVATEWEALTH MANAGEMENT CHINA

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Patrick ZhongChief Investment OfficerWANDA GROUP

Enquiry

Registration enquiries: Anil Nathani T: +852 2158 9636 E: [email protected]

Sponsorship enquiries: Darryl Mag T: +852 2158 9639 E: [email protected]

Now in its 16th year, the AVCJ Private Equity and Venture Forum - China is the premier gathering of the China’s most influential private equity GPs and LPs, government regulators, senior corporate executives and other professionals. Join and connect with 360+ industry professionals for two days of thought-provoking debate, in-depth discussion on market trends, networking and more.

Co-Sponsors Asia Series Sponsor

Networking Lunch Sponsor

Exhibitors Wi-Fi Sponsor

VC Legal Sponsor Legal Sponsors

Networking Coffee Break Sponsor

HEADLINE SPEAKERS

CONFIRMED SPEAKERS INCLUDE:

Edward J. GrefenstettePresident & Chief Investment OfficerTHE DIETRICH FOUNDATION

Julian ChengCo-head of ChinaWARBURG PINCUS

Jonathan ZhuManaging DirectorBAIN CAPITAL

Dave BrochetManaging DirectorCDPQ ASIA PACIFIC PTE LTD

David WeiChairman and Founding PartnerVISION KNIGHT CAPITAL

Jeffrey LiManaging PartnerTENCENT INVESTMENT

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avcj.com | February 28 2017 | Volume 30 | Number 084

GLOBAL

Bilden withdraws from navy secretary nominationPhilip Bilden, the former Asia head of HarbourVest Partners, has withdrawn himself from consideration to be US navy secretary. Bilden said he would be unable to satisfy the ethics requirements “without undue disruption and materially adverse divestment of my family’s private financial interests.”

K2 Global raises $183m for US-Asia VC fundK2 Global has raised $183 million for its debut venture fund, which aims to promote cross-border development in Asian and US technology start-ups. The vehicle will focus on mobile, e-commerce, financial technology, augmented and virtual reality, artificial intelligence, autonomous vehicles and machine learning.

AUSTRALASIA

Bain makes partial exit from MYOBBain Capital Private Equity has made a partial exit from Australian accounting software developer MYOB, reducing its holding from 56.25% to approximately 39.1%. The GP sold 100 million shares. Based on the February 22 closing price of A$3.56, it would have generated proceeds of A$356 million ($274 million).

Hostplus commits $65m to ArtesianAustralian superannuation fund Hostplus has committed A$85 million ($65 million) to local seed investor Artesian. The VC firm now has more than A$150 million under management across fixed income funds focusing on corporate bonds, a range of venture funds, and an equity crowdfunding platform.

AirTree leads $19m investment in ProspaAirTree Ventures has led a A$25 million ($19.2 million) investment in Australian financial technology company Prospa. The investment is said to value Prospa at A$235 million. The capital will go towards a doubling of the 120-strong staff as well as supporting technology development and expand product distribution.

GREATER CHINA

GPs join $1.53b financing round for iQiyiChinese video-streaming platform iQiyi.com has raised $1.53 billion from investors including Hillhouse Capital, Boyu Capital, Run Liang Tai Fund, IDG Capital, Everbright-IDG Industrial Fund and Sequoia Capital. iQiyi’s owner Baidu invested $300 million.

Temasek, Hillhouse invest in MobikeSingapore’s Temasek Holdings has made a strategic investment in Mobike, a Chinese smart

bike rental services start-up, while existing backer Hillhouse Capital has also re-upped. The investment follows a $215 million Series D round led by Tencent Holdings and Warburg Pincus in early January, and a strategic investment from Taiwan-based manufacturing giant Foxconn Technology Group weeks later.

KKR invests in Gambol Pet GroupKKR has invested in Gambol Pet Group, a China-based pet food product company. The commitment came through KKR’s $1 billion China Growth Fund. Gambol is one of the largest pet food exporters in China, supplying products including dry food, wet food, real meat jerky treats and dental bone to overseas markets.

PE-backed SF Express lists in ShenzhenChina’s largest express delivery services provider SF Express, which is backed by several PE investors, has completed a backdoor listing in Shenzhen that values the business at RMB43.3 billion ($6.6 billion). The publicly-traded shell company, Maanshan Dintai Rare Earth & New Materials, has been renamed SF Holdings. The backdoor listing plan received regulatory approval in December.

Meituan-Dianping launches consumer fundMeituan-Dianping, a China-based online-to-offline (O2O) services platform created through the merger of two rival groups, has launched a RMB3 billion ($436 million) fund that will make early-stage consumer sector investments. Meituan-Dianping is an anchor LP in the fund, which is targeting RMB1.5 billion for its first close.

Bike-sharing start-up Bluegogo gets $58mChinese bike-sharing start-up Bluegogo has raised a RMB400 million ($58 million) round – at a valuation of RMB1 billion – led by Black Hole Capital. Zhineng Xingtong, a Shenzhen-based medical device developer, also participated. Bluegogo was launched in November by SpeedX, a smart road bike manufacturer.

IDG Capital backs CreditEase’s insurance unitCreditEase Insurance Agency, an insurance unit of China’s CreditEase Wealth Management, has raised RMB80 million ($12 million) from

Permira-owned Sushiro targets $728m IPOSushiro Global Holdings, a sushi restaurant chain majority-owned by Permira, is looking to raise up to JPY82.4 billion ($728 million) through an IPO in Tokyo. The company plans to sell up to 21.1 million shares at an indicative price of JPY3,900 apiece, for a valuation of JPY107 billion overall. Permira intends to offload 18.9 million shares in the offering, generating proceeds of JPY73.7 billion and taking its stake from 94.7% to 30.9%.

The GP bought Sushiro from Unison Capital in 2012 at a valuation of approximately EUR895 million ($946 million), including debt. At the time, Sushiro had 335 restaurants in Japan and had just entered Korea. Permira said in its 2012 annual report that the number of restaurants in Japan alone could at least double, with plans to open around 30 new outlets a year.

The company is the one of the market leaders in the revolving sushi restaurant space, offering food of consistently high quality at a lower price point compared to traditional sushi establishments. As of September 2016, the company had 442 restaurants in Japan and six in Korea. It expanded into the US last year.

NEWS


investors including IDG Capital through a private placement on the National Equities Exchange and Quotations (NEEQ). IDG has invested RMB15 million in the firm through two entities, while CreditEase New Financial Industry Investment Fund committed RMB65 million.

P2P car rental site Atzuche raises Series CAtzuche, a Shanghai-based peer-to-peer (P2P) car rental start-up, has completed a RMB400 million ($58 million) Series C round. Investors include China Pacific Insurance, China Equity Group, Hangzhou Financial Investment Group, China Securities, Matrix Partners China and Ivy Capital.

IDG, Sequoia form tourism fund with CYTS ToursIDG Capital and Sequoia Capital have formed an investment fund with Shanghai-listed travel agency China CYTS Tours Holdings to invest in consumer-related companies that help improve the traditional tourism industry. The three parties established a management company, CYTS Hong Qi Fund Management, to operate the vehicle.

NORTH ASIA

MBK to buy Daesung Industrial GasesMBK Partners has agreed to buy Daesung Industrial Gases (DIG) from a Goldman Sachs-led consortium that has majority-owned the South Korean industrial gas manufacturer since July 2014. Parent company Daesung Group said it would sell 40% of DIG – the balance is held by the consortium – for KRW354.9 billion ($314 million). The overall deal is said to be worth around KRW2 trillion, including debt.

Mercari buys VC-backed e-commerce playerJapanese e-commerce company Mercari has agreed to acquire domestic competitor Zawatt, setting up an exit for a number of venture capital backers. Investors in Zawatt include CyberAgent Ventures, Net Capital Partners, Mizuho Capital, SMBC Venture Capital, IMJ Investment Partners, MS Capital and Susquehanna Asia Investment.

INCJ, First Eastern part-exit Japan airlineInnovation Network Corporation of Japan (INCJ) and Hong Kong-based First Eastern Investment

Group have made a JPY30.4 billion ($271 million) partial exit from Japanese airline Peach Aviation. INCJ and First Eastern will reduce their collective stake from 61.3% to 33% . The buyer is Tokyo-based airline operator ANA Group.

SOUTH ASIA

CDC, Manipal launch $80m healthcare fundUK-based development finance institution (DFI) CDC Group has partnered with India’s Manipal Education & Medical Group for an $80

million fund targeting healthcare investments in emerging markets. The vehicle will target companies offering non-hospital services, primarily in South Asia and Africa.

IFC considers $100m solar investment The International Finance Corporation (IFC) has proposed a $100 million investment in Indian infrastructure-focused non-banking financial company (NBFC) L&T Infrastructure Finance (LTIF). The proceeds of LTIF’s non-convertible debentures would provide credit lines for local solar developers.

SOUTHEAST ASIA

Kickstart, BPI invest in Zalora PhilippinesKickstart Ventures and BPI Capital have joined their parent Ayala Group to buy a 49% stake in the Philippines business of online fashion retailer Zalora. Ayala will take a 43.3% stake and its property and mall development subsidiary Ayala Land will hold 1.9%, leaving about 3.8% for BPI and Kickstart. Rocket Internet, Zalora’s founder and chief backer, will hold the remaining shares.

Kejora reaches first close on second fundIndonesian VC firm Kejora Ventures has reached a first close of nearly $25 million on its second fund and plans to expand into Thailand with the support of one of its LPs, . The overall target for Kejora Star Capital II is $80 million.

IFC set for $60m medical investmentThe International Finance Corporation (IFC) has proposed a commitment of $60 million to IDS Medical Systems, a Hong Kong-based healthcare industry supplier for Southeast Asia. The investment would support a $130 million growth project for the company, including expansion of existing operations and entry into new markets such as Cambodia and Myanmar.

Shanda leads $5.6m round for NidaIndonesian hotel reservation services provider Nida Rooms has raised a $5.6 million Series A round of funding led by China’s Shanda Group. Additional unnamed Southeast Asian investors also participated in the round.

IDFC exits Essar Power for $87.1mIDFC Alternatives has fully exited its stake in Indian power plant operator Essar Power for INR5.8 billion ($87.1 million). IDFC CEO and Managing Partner M.K. Sinha told AVCJ that the deal, which closed earlier this month, involved several private investors. IDFC paid INR3.5 billion for its 1.5% stake in 2009, so the sale price indicates a 1.7x return on its investment.

The period between 2008 and 2011 saw a wave of PE commitments in Indian energy, with an average of 18 deals per year and $3.4 billion invested in all according to AVCJ Research. However, investments fell sharply the following

year after revelations of mismanagement and cancellation of planned coal allocations, leaving local energy suppliers starved for fuel.

“There were a multitude of issues, all beyond the control of investors, that impacted infrastructure investments of that vintage, and power was particularly badly impacted on account of the cancellation of coal blocks,” said Sinha, attributing IDFC’s relatively positive returns from Essar to the downside protections built into the original investment agreement.

Essar was the first investment from IDFC’s debut infrastructure fund, which closed in 2009 with total commitments of $927 million.

NEWS


COVER [email protected]

INDIAN ENGINEERING FIRM DYNAMATIC Technologies was relatively unknown in the country’s private equity community in 2010 – and that was just the way Samena Capital wanted it. The firm was on the lookout for local businesses that were overlooked by the wider investment community, and Dynamatic hit the sweet spot: it was listed, so most PE investors avoided it, but at the same time its liquidity was too low for public market investors to take much interest.

Samena feels Dynamatic has more than justified its initial $8 million investment. From INR944.80 at the time of the original deal, the company’s share price has more than tripled – most recently closing at INR2,890. It was even higher at the time the GP exited the stake held by its first find in October 2016, earning a return of more than 2x (the firm retains an 8.8% stake acquired through its second fund).

“We identified this company five or six years ago when it did $1 million of sales to AirBus for a component. Today it’s the hottest ‘made in India’ story. And we’ve seen that evolution happen over the last six years,” says Chetan Gupta, senior vice president at Samena. The firm sees Dynamatic as powerful evidence for why Indian PE investors should not overlook PIPE deals, demonstrating the kind of rewards available to managers who do their homework well.

The argument is well known among India-focused GPs and many find it persuasive. However, there are obstacles to pursuing PIPEs in India, among them a decline in opportunities and growing skepticism from LPs. Investors that want to look for treasure buried in India’s public markets must form a convincing strategy and be prepared to justify their approach to those who hold the purse strings.

The pipelinePIPE deals have historically accounted for a significant proportion of private equity transactions in India. AVCJ Research shows their share of overall PE investments was above 10% in each year since 2007 until 2014, while their share of the amount invested in dollar terms only dropped below 10% in 2016 – and so far this year the latter number has risen back to just below 40%.

By contrast, over the same period China has never seen PIPEs represent more than 10% of overall deal flow. The PIPE share of dollars invested in China has consistently been higher than in India – but this figure is inflated by deals such as Singapore state-backed investment vehicle Temasek Holdings’ multiple investments in Chinese state-owned banks of $1 billion or more.

While the strong presence of PIPEs in India’s PE market is undeniable, they have shown a steady decline in recent years, going from a peak of 89 deals in 2011 to just 22 deals last year, a drop of more than 75%. Their share of overall deals also dropped from 20% in 2011 to just 3.6% in 2016.

This development has generated little concern and some relief in the investment

community, with LPs in particular welcoming it as a sign of growing maturity among India-focused GPs.

LPs’ hesitance to back GPs that pursue PIPE deals stems from multiple sources. In the case of UK-based development finance institution (DFI) CDC Group, the companies that GPs are most likely to find in the public market are correspondingly least likely to meet the social development goals that are most important to the institution. “Investing in a listed company, which is hopefully already able to mobilize commercial capital from the market at much cheaper rates, is not a good destination for our capital,” says Alagappan Murugappan, managing

director of Asia funds at CDC.Murugappan takes a similarly skeptical view

of the financial. Unlike CDC’s social goals, this perspective is shared by many of the DFI’s fellow LPs, which in recent years had begun to wonder, increasingly vocally, why they should pay the customary overhead for GPs to make passive investments in public companies. This investor dissatisfaction, upon being noticed by PE managers, had the desired effect.

“GPs were being told by LPs that if they wanted to do a PIPE deal, they weren’t going to get the same amount in terms fees [2% management fee and 20% carried interest], because then the LPs would much rather go to a public fund manager than a private equity fund,” explains Vikram Hosangady, head of India private equity at KPMG. As a result, he says, “private

equity funds have become fairly averse to doing PIPE deals unless they have to.”

General Atlantic’s investment in PNB Housing Finance represents one recent case where circumstances seemed to dictate a PIPE transaction: the GP joined the mortgage lender’s IPO last year as an anchor investor and later bought an additional INR5.01 billion ($76.1 million) worth of shares after its debut. Waiting until after the IPO gave General Atlantic a way to gain exposure to an exciting company and segment without trying to outbid other private investors.

This is the type of PIPE investment that usually comes to mind among PE professionals, and is

Power to the publicPIPE deals remain a significant part of private equity in India, but a slowdown in recent years has prompted investors to evaluate strategies and the place for public market deals in private portfolios

Amount (US$m)

India PIPE deals

Source: AVCJ Research

100

80

60

40

20

0

6,000

4,000

2,000

0

Dea

ls

US$

mill

ion

No. of deals

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


the chief driver of criticism both from LPs and from other private equity firms that see this approach as lazy and dangerous: the former because it requires none of the real work or talent that should go into setting up a private investment; the latter because it tends to lead

to funds clustering into a few popular sectors without sufficient diversification and thus protection for their investors.

Loving the unlovedBy contrast, proper PIPE investing means going in the opposite direction: looking for companies that have been largely ignored by both public and private investors despite the increased visibility of being listed, and that can benefit from the guidance that an experienced PE investor can bring to bear.

India’s market offers some unique attractions in this regard, largely owing to the changing nature of its public markets and its evolving regulatory environment. Notably, a widely held perception among PE professionals is that many of the closely-held companies on India’s public bourses should not be listed at all, since their characteristics align more with those of private companies.

These include companies such as the earlier mentioned Dynamatic, as well as commercial vehicle and motorcycle manufacturer Eicher Motors, another former portfolio company of Samena. Gaurav Ahuja, managing director of ChrysCapital, explains that many older Indian companies went public too early in their lifecycles due to difficulties private companies face in securing financing for expansion. Since their listings, in some cases decades ago, these businesses have continued to attract little attention, resulting in valuations that hide their real worth.

“These are companies with little or no coverage, so there’s very little liquidity. So often times you will see opportunities in that

space,” says Ahuja. “They could be temporary dislocations, or companies that have had a temporary stumble that they will recover from over a medium to long term perspective.”

Identifying an investment opportunity can be easier with a public company than a private

one, since more of its financial information is readily accessible. But investors warn this is not an unadulterated benefit. The other side of publicly available information is that promoters of public companies are often less willing or able to provide access to internal information than private company owners are. Even having the needed financial information is no substitute for building a trusting relationship with the company’s management.

Executing the deal often requires similar skills to any other PE transaction. At typically low liquidity levels, finding a seller willing to part with a significant stake can be difficult, so GPs often must go to the company’s management, who usually hold 50% or more of the company anyway, to negotiate a fresh offer of shares.

In these cases PE investors say there is often little difference between their approach to private companies and these technically-public ones. Owners must be convinced that a GP can serve as a suitable partner for the company’s future plans and that the relationship can be mutually beneficial.

An added layer of complexity comes

from the inability to sign a contract for the investment and thus set up the kind of rights and protections that a PE manager might take for granted. Samena’s Gupta points to Dynamatic as an example of how a deal without such arrangements can still work out to the benefit of both parties, but adds that the GP must demonstrate its willingness and ability to help the target company and its trust in the management.

“We haven’t signed any kind of agreement with them, but they invited us to sit on the board. And the reason is because they see us as long-term partners, they see us opening other markets for them, they see the value add that we bring to them in terms of understanding and deep diving into their operations,” says Gupta. “All of these are reflective of the more traditional private equity approach to operational enhancement in the underlying company.”

The relatively thin line between private and public companies in the Indian market means that in some cases GPs are on familiar ground with investees whose mindset is largely more similar to private companies than public ones. Subbu Subramaniam, founder of MCap Fund Managers, recalls a deal in which the firm paid $5 million for a stake in a listed company that brought its overall valuation post-investment to $30 million.

“If that isn’t a private transaction I don’t know what it is,” says Subramaniam. “We got two board seats and 15% of the company. It’s theoretically

listed and continues to be listed, but you can’t get out of 15% in one go. That is classic private equity.”

Weaker flowThough these borderline-private companies are a rich resource for GPs, they are not a renewable one. Investors acknowledge that finding such opportunities has become more difficult in recent years, accounting to some degree for the slowdown in PIPE deals both overall and as a share of overall deal flow.

Prejudice by LPs against PIPE deals has also played a part in the decline, with GPs reluctant to pursue too many such transactions for fear


“There will be a few LPs who say, ‘We’re agnostic – as long as the manager is disciplined and the track record has demonstrated that they’re using the flexibility smartly we’d love to give them more’” – Gaurav Ahuja

Amount (US$m)

PIPEs as percent of overall PE deals

Source: AVCJ Research

25

20

15

10

5

0

40

35

30

25

20

15

10

5

% o

f dea

ls co

mpl

eted

% o

f tot

al ca

pita

l inv

este

d

No. of deals

2007 2008 2009 2010 2011 2012 2013 2014 2015 20172016


of alienating investors, many of whom hail from other jurisdictions and may therefore not be as familiar with the particular available in India’s public markets.

“There will be a few LPs who say, ‘We’re agnostic – as long as the manager is disciplined and the track record has demonstrated that they’re using the flexibility smartly we’d love to give them more,’” says ChrysCapital’s Ahuja. “But by and large the majority will say, ‘It’s unconventional and it’s hard for me to sell it internally, and so we wouldn’t want to do something like that.’”

It is important to note that many LPs do recognize the role that PIPEs play in the Indian market and are not wholly averse to exposure to this segment, albeit in a limited way. The challenge from an institutional investor’s perspective is to make sure a manager is using its money in the most responsible manner possible. CDC, for instance, specifies in its LP contracts that GPs may consider public market transactions if the companies form only a small minority of the GP’s portfolio and if certain standards are met by the PE investor.

“We want them to take significant stakes and be able to add value to those businesses. It might not be in the governance, because they might not get the right to be able to do that, but in

terms of introducing new clients or enhancing their financing structure, or areas where they can add value,” says Murugappan. “Only in those situations would we permit them to invest in PIPEs.”

LP concerns have been allayed to an extent by the recent decline in PIPEs – with public market transactions making up less of the overall deal flow and a smaller part of the pot

as well, the hope is that private equity firms are moving toward a more balanced approach. At the same time, GPs that pursue PIPE deals say they have seen a growing acceptance of India’s PIPE potential among their investors, particularly those who have seen consistent positive returns from the strategy.

Indeed, it may help for GPs to build a certain level of flexibility in their fund structure. Samena, for instance, has set up its second fund so that returns from public market exits can be recycled for investment in the vehicle’s other

portfolio companies rather than being returned to investors right away. The firm believes LPs approve of its PIPE investments because of the higher returns that this strategy can provide for them.

Despite this flexibility Samena has done few PIPE deals in India recently. Gupta acknowledges that the firm has had a harder time finding the proper opportunities, partly because PIPEs

form only part of its strategy so there is less risk of pursuing sub-standard public market investments for the sake of getting capital deployed. At the moment the GP is content to wait and see when the types of deals it wants will materialize.

“Tomorrow if things become much more attractive, we would be more than happy to deploy capital in them. It’s just that valuations in our mind are far ahead of where they should be, especially in some of these hot sectors,” he explains.

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“They see us as long-term partners, they see us opening other markets for them, they see the value-add that we bring to them.” – Chetan Gupta


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THE PRIVATE EQUITY INDUSTRY HAS BEEN prodding around the funeral services space in Asia for several years, but despite a number of convincing macro indicators, investor sentiment has failed to gain any noticeable momentum. Such malaise, however, tends to evaporate after a $1.1 billion deal.

CVC Capital Partners’ acquisition of Malaysia-based Nirvana Asia for that sum last year clarified the industry’s potential in dramatic style. Not only is Nirvana the largest funeral services company in Asia, it was the first Hong Kong-listed company of any kind to be taken private by a PE firm. As a result, expectations of growing investor appetite are beginning to bubble in the bereavement industry.

“We expect more investors and fund managers to come and look for M&A opportunities,” says Larry Kwan, business development manager for the Asia Funeral & Cemetery Expo and Conference, which will take place in Hong Kong this May. “They now see funerals and cemeteries as having a comparatively higher profit margin and want to start in the industry.”

GPs taking notice of this market for the first time may confront an unexpected set of business variables around the fact that monetizing last respects can be an uncomfortable, even taboo, topic in Asia’s traditionally minded circles. At the same time, it is increasingly coming to light that few consumer lifestyle segments can boast such a potent combination of cultural and demographic drivers.

The aging effectPrivate equity enthusiasm for death care services in Asia was signaled as early as 2010 when Yunnan Hongfu Venture Capital launched a fund with a view to investing about $30 million across 40 funeral parlors and graveyards. The plan included a promising contextual backdrop with provincial government pledging funeral industry support, but it was scrapped early due to lack of LP interest.

The notion that such a scheme might gain more traction in the wake of the Nirvana deal is not so far-fetched considering how the environment has changed for a key investment rationale. While issues around Japan’s aging population have been an investment industry

touchpoint for more than 20 years, China’s emergence as a graying market has been relatively recent.

It wasn’t until around 2010 that over-65s began to approach 10% of China’s total population, doubling a longstanding historic average. Since then, seniors have been periodically projected to represent 15-20% of the world’s most populous country by 2030.

The Carlyle Group and Farallon Capital Management reacted to this outlook with a $35 million commitment to Shanghai-based funeral service provider Fu Shou Yuan International’s

IPO in 2013. More substantive entries into the Chinese market, however, have proven elusive. Nirvana, notably, has enjoyed a relatively unfettered proliferation across Southeast Asia but remains restricted to a marginal Chinese footprint due to local regulatory and land cost issues.

Such roadblocks are particularly critical given that one of the best strategic gambits private equity brings to the table is growth through consolidation. Funeral service markets worldwide are characterized by small, independent and unprofessionally run businesses that can be cleaned up in the back-end and synergized through familiar buy-and-build plays.

“There are players who literally take money from customers and put it straight in the bank earning 1% or less interest per year,” says Jason Shin, a managing partner at VIG Partners. “They aren’t doing any fund management because they don’t see that as part of their core business. In many regards, it’s a well suited industry for private equity.”

VIG became the first PE firm to invest in Korea’s funeral services space last year with the acquisition of an 84% stake in Jo-Un Life for KRW65 billion ($58 million). It is targeting demand related to a local trend of dwindling family sizes and leveraging its experience in the life insurance industry via a pre-need subscription model. Jo-Un operates much the

same as an insurance company except if the loss of a family member occurs within the contract period, clients are required to pay the balance of the service costs in a lump sum.

Although generations of financial scandals due to bad bookkeeping by local operators have made acquisition targeting difficult for VIG, the scattered playing field suggests there is potential to accumulate a leading market share. This effect is exaggerated by a lack of chaebol participation in the industry, arguably for reasons related to avoiding associations with death. The two biggest funeral service companies in Korea

control 20-30% of the market combined, while Jo-Un and a host of independents compete for the rest with shares of 1-5% each.

Consolidation playThis scenario has already played out in other markets with varying results. Nirvana, for example, has exploited patchy competition in Southeast Asia to take 80% of Singapore’s pre-need market but only 1% of the overall market in Indonesia. An extreme example of the fragmentation effect can be seen in US-based Service Corporation International, which commands only 16% of its domestic market despite being the country’s largest operator with some 1,500 parlors and 470 cemeteries.

Australia-based Invocare – which has been supported by PE firm Propel Investments – is sometimes called the largest funeral services company in Asia Pacific and claims overall market shares of 33% in Australia, 30% in New Zealand but only 10% in Singapore. Interestingly, the company’s Singapore business consistently tracks sales margins more twice as large as those of the Australasian units.

The discrepancy in sales margins hints at how social differences between East and West can make funerals more of a big-ticket play in Asia – even at modest penetration rates. In addition to the price hikes caused by more prevalent land

Untapped eternity Increased urgency around demographic tailwinds in the funeral services space has coincided with a spate of investment activity in recent years. Private equity could be well positioned to play a leading role

“The biggest angle for investment is customizing the funeral for each family and making the experience as memorable as possible” – Daisuke Murakami

[email protected]

scarcity issues, the industry can leverage stronger cultural pressure to observe strict ancestral reverence norms and extravagant memorials.

In Korea, VIG benefits from local customs dictating three-day catered wakes where guests – sometimes numbering in the thousands – can run up a bill as high as $10,000. Likewise in Japan, ceremonies last at least two days and can include elaborate services such as praying monks.

“There’s a lot of opportunity to put soft value into this industry because the B2C [business-to-consumer] businesses are often managed in a very old-fashioned manner,” says Daisuke Murakami, a principal at Advantage Partners. “The biggest angle for investment is customizing the funeral for each family and making the experience as memorable as possible by coordinating goods, services and performances associated with the deceased person.”

Advantage was the first PE firm to invest in Japanese death care with a buyout of Epoch Japan that valued the company at around JPY2 billion ($18 million) in 2015. The plan is to add value to an operation that spans 46 existing funeral halls through premium services such as family-customized food options, the production of memorial video montages and the formal organization of speeches that might not have otherwise been coordinated.

This approach recognizes that despite social pressures to pay proper respects to loved ones and the inevitability of a “death boom” in aging societies, funeral services are not immune to the limitations of strained family budgets. Customers will consequently need extra encouragement in the form of unique services before agreeing to pay the high prices associated with modern ceremonies.

“We’re seeing clear opportunities being facilitated by advisory firms in this space,” Advantage’s Murakami adds. “We think we can grow Epoch through further M&A, so we will keep pursuing opportunities in this area.”

Macro vs microThe high costs associated with the funerals industry, however, can represent both a driver and an inhibitor of expansion initiatives, as Nirvana’s stalemate in China attests. In many markets, land cost issues have translated into extremely high cremation rates. Japan is the world’s highest at 99%, while Korea follows closely at around 80%.

In this context, much of the recent PE activity has been understandably reluctant to commit to the real estate side of the industry. The hesitancy may erode in the future, though, as hybrid plays come into focus combining relatively modest

land components and cash-generative value-add opportunity sets.

VIG has contemplated just such a scenario in Korea’s growing segment for urn depositories, or columbaria. These facilities typically sell urn niches in the range $5,000-20,000 for a 30-year lease. Prices can vary depending on the position of the niche within the columbarium, proximity to a city or the maintenance extras that an investor is able to provide.

The death care industry’s international profile as a disorganized patchwork of small, inefficient businesses is at the heart of this upside, but also a reminder that a local, community-sensitive tact is part of the service. The essence of PE’s advantage may therefore be an ability to balance micro-scale operational flexibility with a high-altitude vision that acknowledges the fleeting nature of a demographics-driven window of opportunity.

“We see this going from a fragmented mom-and-pop industry into a few very large organizations, and we intend on becoming one of the leaders after such industry consolidation,” says VIG’s Shin. “As long as the overall population is not declining and we have this increase in the affluent older customer base, the next 10-20 years could be a kind of golden period that we can benefit from. The question is, after 20 years, what do you do with the aged society?”

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WHEN GEORGE PENKLIS STEPPED BACK from Quadrant Private Equity in December 2014, he didn’t envisage returning to the industry with a new firm two years later. Penklis spent two decades at Quadrant, co-founding the business with Chris Hadley in 1994 under Westpac and taking it fully independent in 2005. Six funds were raised between 1996 and 2010, with corpuses increasing in size from A$50 million ($38 million) to A$750 million.

The firm is one of several in Australia whose success propelled it into a higher tier: Quadrant’s eighth fund closed last year at A$980 million and seeks to deploy A$70-150 million per investment, well beyond the lower middle market space where the GP made its name.

Penklis is now looking to fill the gap that these transitions have left, teaming up with Gareth Banks, Jonathan Kelly and Paul Readdy, all of whom were previously directors at CHAMP Ventures, a local GP that will not be raising a new fund. The new firm, Odyssey Private Equity, has secured commitments of A$275 million to invest in Australia and New Zealand. It will write equity checks of A$15-40 million for companies with enterprise valuations of up to A$100 million, taking minority or majority positions.

“Investors see the lower middle market as a very positive area for investment in Australia, there is strong deal flow,” says Penklis, who spent the latter part of his two-year sabbatical assisting fund-of-funds ROC Partners on various initiatives. “But it’s also where the gap is – those who perform go up and move out of the space while non-performers fall away.”

Dwindling numbersFifteen years ago there are said to have been 15-20 private equity firms with institutional backing in Australia and New Zealand’s lower middle market, many of them captive units of banks. That number has since fallen to half a dozen. Stephen White, managing partner at Stafford Private Equity, a domestic fund-of-funds, actively follows about six managers, which he says is “pretty typical” of the market.

According to AVCJ Research, between 2005 and 2010 there were 34 final closes for Australia and New Zealand-focused buyout and growth funds with corpuses of $25-249 million. For the six years following that, the total falls to nine.

“With the entry of the mega international buyout funds and larger local funds, there are very few funds with deep relationships among Australian family businesses so we are seeing more opportunities that fit within our mandate and are exclusive,” says Jeremy Samuel, founder and managing director of Anacacia Capital. The GP closed its debut fund at A$50 million in 2008, one of nine in the $25-249 million range from that vintage. When Anacacia raised A$150 million for Fund II in 2013, it was one of just four final closes that year in the entire growth and buyout fund market.

“If you look at the economy, nothing has changed,” he adds. “We are a very stable, international, small business economy with 25

million people, over one million small businesses, and 50,000 companies with 20-200 employees, which is Anacacia’s sweet spot. Management talent in Australia is strong so there is ample opportunity in this small-medium end of the market.”

The Australian Bureau of Statistics put the number of companies with fewer than 20 staff at just over two million in September 2016, while 782,000 of these are considered active employers. They account for 97% of all companies nationwide and – excluding financial services and the public sector – nearly 44.8% of total employment and 35.6% of economic output.

Companies at the top of this tier and in the one above it are classic targets for lower middle market private equity: founders and management teams that are at an inflexion point, whether they need a succession planning solution or capital and expertise scale up. While there is growing appreciation of the role that a financial investor can play in these processes, deal-sourcing remains contingent on deep networks and careful cultivation of opportunities.

However, it is an opportunity set to which Australian superannuation funds have less exposure than before. As these funds have seen their asset bases grow their minimum check size has increased, making it harder to back smaller GPs. “Last time we raised a fund, several LPs wanted A$50 million allocations, we told them we could give them A$30 million and they got board approval,” one manager notes. “Now they will want to write checks for A$80-100 million.”

This attitude is rooted in cost: Super fund trustee boards, wary of relatively high fees in private equity, prefer their alternatives teams to write A$100 million checks to five managers – with guarantees of co-investment – than A$20 million checks to 25. “For the super funds it all comes down to the MER [management expense ratio],” Stafford’s White adds. “I think they would like the returns but MER is such a commercial reality for them, and whether they like it or not, they need to manage to it.”

Fundraising challengeAs a result, the traditional source of capital for Australian managers has become a less meaningful allocator to the asset class, which is one of the reasons why the lower middle market space remains underpenetrated.

In the absence of super fund support, a new manager can turn to the likes of ROC, Stafford, Vantage Asset Management and Continuity Capital Partners for institutional support or tap these fund-of-funds’ counterparts in Hong Kong and Singapore. Family offices and high net worth individuals are another option, but there is a general unwillingness to back blind pool funds – so more managers work on a deal-by-deal basis.

Against this backdrop, Odyssey’s fundraise took an unusually quick two months, not including the Christmas period. But the situation itself is unusual: the combination of executives from two well-established Australian PE firms with relevant track records. The LP base is institutional, primarily domestic and – according to sources within the LP community – includes several investors in CHAMP Ventures funds.

“We have about 70 years of investment experience between us,” Penklis says of the four founders. “Investors are comfortable with the team and have known about our track records for a while.”

Into the white spaceThe arrival of Odyssey Private Equity – a collaborative effort by former executives from two of Australia’s best known GPs – once again draws attention to the hole in Australia’s lower middle market

“Investors see the lower middle market as a very positive area for investment in Australia” – George Penklis


IN THE WORLD OF PATIENT CAPITAL, A resilient track record counts for a lot. This may be especially true in India, where a number of macro narratives have caused fundraising momentum to wax and wane dramatically during the past decade. According to AVCJ Research, Indian PE fundraising peaked at $10.3 billion in 2006 before falling as low as $5.4 million in 2011 and then clawing back to $6.2 billion last year.

Nerviness among LPs during these undulations has been understandable given a choppy domestic exit market, but managers that have proved themselves capable of surviving periodic droughts are continuing to sell an encouraging long-term development vision. New Delhi-based ChrysCapital has recently flexed its muscle in this regard with an above-target close on its seventh India fund at $600 million.

“There were some LPs who had invested in India 7-10 years ago but, due to poor performance, have shied away for a long time,” says Gaurav Ahuja, managing director at ChrysCapital. “We’re happy to be able to bring some of these people back into the country.”

LPs in Fund VII include both new and existing investors, with insurance companies, university endowments, family offices and global fund-of-funds represented. Returning LPs include Singapore’s GIC and Harvard Management Company.

ChrysCapital attributed the response to an almost two-decade history that has produced $4.2 billion worth of exits that represents about 8% of the national total. This was realized across 55 transactions representing all of the capital from its first four funds and more than 100% of committed capital from its fifth.

The latest vehicle launched in September 2015 and reached a first close of around $350 million that December. Investments will focus on the business services, financial services, healthcare, consumer and manufacturing sectors, and will comprise minority growth and select control deals. There have been two investments so far, including

backing for non-banking financial company Hero FinCorp and participation alongside Reliance Capital in L&T Infotech’s IPO .

Longevity is also expected to play a role in ChrysCapital’s value-add proposals for these companies going forward. “There are a lot of scars on our back that a new entrepreneur can benefit

from without experiencing them firsthand,” Ahuja says. The firm is aiming to leverage 25-30 years of experience among its key partners, especially in the financial and healthcare sectors.

“We have realized over 18 years that we have been investing in India that ownership stakes and rights you have that

are detailed in the documentation are important, but only up to a point,” Ahuja continues. “The relationships, sector knowledge and operational experience in key sectors that we bring to the table helps build comfort and confidence, so entrepreneurs actually want to listen because we’re speaking their language.”

WHEN NAVIS CAPITAL PARTNERS bought gym operator Celebrity Fitness in 2007, Fitness First soon became the giant it wanted to topple. The private equity firm invested about $40 million in Celebrity Fitness and has helped the business grow from fewer than 20 gyms and a predominantly Indonesian footprint to 62 across Southeast Asia. Over the past 10 years it has supplanted Fitness First as market leader in Malaysia and widened the gap between the two operators in Indonesia.

“We thought we could outcompete them because they were part of a leveraged buyout,” says Nick Bloy, managing partner at Navis. “All of the cash being generated by Fitness First in Asia was being sucked up to pay down debt at the holding company level, so the local guys didn’t have money to spend on capex.”

BC Partners had bought the global Fitness First business in 2005 only to see it hit hard by the global financial crisis. The company duly succumbed and its creditors, led by Oaktree Capital Management, completed a debt-for-equity swap worth around GBP565 million in

2012. Navis and Oaktree first discussed a merger the following year – and nearly four years on, it has finally come to fruition.

Any deal was contingent on the Fitness First business being broken up into its constituent geographical parts, and Oaktree didn’t want to act immediately. However, after the Australia operation was sold last year, progress could be made in Southeast Asia. Fitness First has 90 clubs in Singapore, Malaysia, Indonesia, Thailand, the Philippines and Hong Kong, with 220,000 members and $219 million in annual revenue. Combining with Celebrity Fitness – which covers Singapore as well as Indonesia and Malaysia, and has 178,000 members and $76 million in revenue – will create a business more than five times the size of its nearest rival.

“This is an industry that rewards scale: landlords want you in their malls, not someone with a weak balance sheet; if someone wants to

introduce a new fitness concept, you are the go-to person because you have 400,000 members,” he adds. “So far we’ve tripled the value of our equity in Celebrity Fitness. I feel we can double it again, and fairly quickly because of the synergies.”

Ownership of the combined entity, known as Evolution Wellness, will be split 60-40 between Oaktree and Navis, but they will have joint control. An exit is likely in 2019 or 2020: by that point the company is expected to have EBITDA of close to $100 million, which would make it an attractive listing target.

Between now and then the plan is to pursue further growth in Southeast Asia, where gym membership penetration is just 4.2% compared to 14.8% in Australia.

“Sometimes you are in a business that is a very steady compounder but remains very immature,” Bloy says. “Thailand, the Philippines and Indonesia have big populations and we have barely tackled any of the secondary cities.”

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

ChrysCapital banks on reputation

GPs target healthy scale

India fundraising: Rocky road

Fitness investing: Pumping up

Aik Meng EngChief Executive OfficerTE ASIA HEALTHCARE PARTNERS

Rebekah Woo CFA, CAIASenior Director, Growth Markets AsiaCDPQ ASIA PACIFIC PTE LTD

Raymond RudiantoPresident DirectorBARING PRIVATE EQUITY ASIA

Florian HolmCo-CEO, IndonesiaLAZADA GROUP

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Serge LépineChief Executive OfficerTHE QATAR AND ABU DHABI INVESTMENT COMPANY(QADIC)

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THE COMBINED ASSETS OF THE TOP 10 Chinese university endowments amount to less than the $35.7 billion held by Harvard University, the largest of their US counterparts. The disparity exists because the two countries have different education systems. While Chinese universities are mostly government funded, private donations are vital to many US educational institutions. However, China’s endowment community has seen significant change over the last 20 years.

Tsinghua University Education Foundation (TUEF) was created by Tsinghua University in 1994 to handle RMB20 million ($3 million) in donations. It was the first non-profit university organization in China.

Between 2010 and 2015, TUEF’s assets grew from RMB1.49 billion to RMB5.17 billion, and it made distributions RMB3.53 billion to the university and to charities. This growth was primarily driven by an annual average of RMB1.1 billion in donations over the same period, 90% of which came from social organizations and individuals and the rest from alumni. The capital goes towards general improvements at the university, although some donors request that their money be spent on specific projects.

“Part of the remaining capital is used for making investments,” says Ying Huang, investment manager at TUEF Asset Management, the endowment’s investment platform. “But it took us several years to accumulate sufficient capital to make meaningful investments.”

TUEF started making external commitments in 2005. Like other institutional investors, the initial focus was on fixed income and public equities. Three years later, it made its debut private equity investment – becoming the first endowment in China to make the jump. As of 2015, it had deployed RMB2 billion across multiple asset classes, with a total market value of RMB4 billion. The private equity portfolio, including direct and fund investments, accounted for 20% of the total asset value.

Narrowing focusThat first PE commitment stayed close to home as TUEF established a joint venture with Tus-Holdings, a Tsinghua-backed science park developer that incubated Chinese start-ups. The JV invested in Tsinghua family funds, such as vehicles managed by TusPark Ventures, a VC

arm of the university. Coverage broadened to include third-party domestic GPs in response to government policies that encouraged this behavior, giving rise to a host of new renminbi-denominated funds.

TUEF had a bias towards large generalist funds managed by reputable GPs in the early days because the industry was still nascent – for example, it invested in Hony Capital’s second renminbi fund, which closed at RMB10 billion in 2010. But over the ensuing years, the endowment has gradually diversified its approach, backing smaller GPs with niche strategies that are expected to deliver higher returns.

A number of commitments have been made to industry-focused vehicles launched by generalist GPs, and also to funds operated by

specialists. CDH Investments counts TUEF as an LP in its mezzanine, real estate and acquisition financing project funds. A healthcare vehicle managed by CITIC Capital has also received an allocation, as have Cathay Private Equity’s Sino-US small and medium-sized enterprise (SME) fund and sports-focused Chinese GP Yao Capital.

On the VC side, TUEF invested in the first renminbi fund launched by Joy Capital, a recent spin-out from Legend Capital led by Erhai Liu. The GP typically targets at start-ups operating in auto industry and other consumer-related segments. “We are seeing Chinese GPs have become more professional in specific segments and we prefer to back those candidates,” says Huang. “If a GP comes to us and says it wants to do anything and everything, we would be concerned that they are too diverse.”

With a five-strong investment team to oversee all asset classes, TUEF relies heavily on its own network to source GPs. For example,

Yao Capital co-founder David Han is a Tsinghua graduate and he previously worked on potential collaborations with TUEF while with Chinese conglomerate Wanda Group. “We normally would not invest in new GPs if there is no established any relationship. It takes us several years to evaluate a GP before we invest,” Huang adds.

TUEF invests in both in renminbi and US dollar vehicles, committing approximately $10 million each time. For direct investments, it cannot account for more than 10% of the transaction size. The endowment previously invested several agriculture-related projects initiated by Tsinghua University. Renminbi funds tend to be of shorter duration than traditional US dollar vehicles, and TUEF used to be wary of tying up its capital for extended periods.

“When we invested in a seven-year PE fund, we became very nervous and worried about whether portfolio companies could go for IPOs or achieve strong exits,” says Huang. “Now, with more experience, we feel comfortable with the traditional US dollar fund lifespan of 10 years. It’s been a learning process for us.”

Overseas experiments For much the same reason, TUEF hasn’t rushed into international private equity. In 2007, it formed a tech-focused Sino-foreign joint venture, known as SBI & TH Venture Capital, alongside Japanese conglomerate SBI Holdings. The JV invested in early-stage companies based in China and overseas, but it is no longer making new commitments.

TUEF is now working with its existing GPs to gain exposure to overseas assets that have a China relevance. Through CDH’s project financing funds, it participated in WH Group’s $7.1 billion acquisition of US-based Smithfield Foods and supported the GP’s purchase of Nanfu Battery from Procter & Gamble. In each case, TUEF converted renminbi into US dollars in order to invest.

“Our fund volume is small compared to the likes of Chinese insurers. When it comes to overseas fund investments, insurers have to focus on large established GPs that can accommodate their check size and provide stable returns. We can’t write such big checks right now. We are more focused on alpha returns, and that’s why we prefer specialists,” says Huang.

First mover Tsinghua University Education Foundation is the first Chinese endowment fund to invest in private equity. It has developed a preference for managers with niche strategies

“We are seeing Chinese GPs have become more professional in specific segments and we prefer to back those candidates” – Ying Huang

Aik Meng EngChief Executive OfficerTE ASIA HEALTHCARE PARTNERS

Rebekah Woo CFA, CAIASenior Director, Growth Markets AsiaCDPQ ASIA PACIFIC PTE LTD

Raymond RudiantoPresident DirectorBARING PRIVATE EQUITY ASIA

Florian HolmCo-CEO, IndonesiaLAZADA GROUP

Abhijeet MuzumdarHead of Corporate Development & InvestmentsAMAZON

Markus BrachtVice PresidentDEG

Serge LépineChief Executive OfficerTHE QATAR AND ABU DHABI INVESTMENT COMPANY(QADIC)

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