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AFRICA, ChINA, eUROPe, The MIDDLe eAST by grapieroo13

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                    EYES ON WORLD MARKETS

                  A SPECIAL FOCUS ON

The NexT
                 Europe’s Hidden Gems
               The downturn creates bargains for savvy investors with access to cash.
    Waiting Game in the Middle East
  While the worldwide economic slowdown has not spared the Middle East, the private equity
  market there still continues to show strong signs of long-term growth.
       Into Africa
     With unbridled wealth in resources, Africa provides tempting targets for
     cash-flush buyers—and cross border interest from the East.
              China: Down But Not Out
         Private equity opportunities and the changing deal dynamics in China.

Winter 2009                                                                             t h e d e a l 81
                                            EYES ON WORLD MARKETS

                                            The NexT

                                  Eyes on Emerging Markets: Pockets of Life in a Global Slump
                              Grim as the markets seem now, investors continue to spot opportunities for growth
                                          in Emerging Europe, the Middle East, China and Africa.
                                                         Europe’s Hidden Gems
                                     The downturn creates bargains for savvy investors with access to cash.
                                                CEEing the Bright Side of the Downturn
                              A conversation with M&A lawyer Jason Mogg of the newly independent Kinstellar.
                                                        Doing Better Deals
                                         A new KPMG study reveals the five secrets of top dealmakers.
                                                           Europe Deal Roundup
                   Private equity fundraising and investment statistics from the Emerging Markets Private Equity Association.
                                                    Waiting Game in the Middle East
                      While the worldwide economic slowdown has not spared the Middle East, the private equity market
                                       there still continues to show strong signs of long-term growth.
                                    Isthitmar World: Opportunities Abound in Challenging Times
                                     A look into the Middle East’s premier investment firm specializing in
                                                  private equity and alternative investments.
                                                         Middle East Deal Roundup
                                          Zawya’s figures on IPOs, sukuk securities and Islamic funds.
                                                                 Into Africa
                                    With unbridled wealth in resources, Africa provides tempting targets for
                                         cash-flush buyers—and cross border interest from the East.
                                                 Empowerment in Africa: Let it BEE
                      Obligations and economic incentives under South Africa’s policy of black economic empowerment.
                                                        China: Down But Not Out
                                    Private equity opportunities and the changing deal dynamics in China.
                                                        China Deal Roundup
                        A private equity and M&A market overview with data from the Asian Venture Capital Journal.
82 t h e d e a l
                                                                                                                   SPONSORED REPORT

Eyes on Emerging
  Markets pockets of life in a global slump
By Laura Dodge                                    growth in emerging markets where valuations       domestic demand and investment to buoy

                                                  are down and domestic consumption is              the economy. Ironically, the government’s
               ot long ago the emerging
                                                  feeding growth. “Financial conditions are         requirement that Polish pension funds invest
               markets of China, Central and
                                                  clearly not good in the U.S. or Western           their assets at home will help.
               Eastern Europe, Africa and
                                                  Europe, but that doesn’t mean that the rest       Domestic demand and a budget surplus
               the Middle East were the stars
                                                  of the world is suffering equally,” notes James   should also help the Czech Republic buffer
of many investment portfolios, generating
                                                  Cordahi, senior vice president at the Middle      itself against the global credit storm. Daniel
average returns of 40% to 50% in 2007. As
                                                  East private equity firm Abraaj Capital, which    Lynch, a partner at the Eastern European
the U.S. credit crisis unravels, however, no
                                                  manages $7.5 billion in assets.                   private equity group 3TS, notes that, “we
corner of the globe has been left unaffected.
The Shanghai Composite Index shed 70%             EmErging EuropE                                   wouldn’t consider [the Czech Republic]
of its value in the first three quarters of       Consider some of the markets in Central and       immune [to the credit crunch], but domestic
2008, after climbing almost 97% in 2007.          Eastern Europe (CEE). The Ukraine took out        demand is strong and the banks are in good
Share prices in South Africa and Kenya have       a $16.5 billion loan from the International       shape.”
experienced precipitous drops; and the Czech      Monetary Fund (IMF) for its ailing                Lynch said that the sectors in the region best
Republic, Poland and Bulgaria—some of             banking sector in October 2008. Hungary           able to weather the financial downturn are
Europe’s formerly fastest growing markets—        is also counting on loans from the IMF, the       ones geared to the domestic market, such as
have all revised economic growth forecasts        European Union and the World Bank to              retail and healthcare. Tech plays will also be
downward. Even the cash-rich Middle East          help it prop up its economy. In another sign      attractive. “Online anything is really starting
is feeling the pain: in Dubai, for example,       of the times, private equity firm The Carlyle     to pick up in Eastern Europe. Internet
share and property prices have taken a dive       Group announced in November that it was           penetration is up, and bandwidth is being
as foreign and local investors, spooked by        closing its 15 month-old Central and Eastern      built,” he said.
high government and corporate debt in the         European offices.
emirate, pull money out.                                                                            For private equity players in the region,
                                                  Meanwhile Poland, the Czech Republic and          the trouble will not be finding attractive
The domino effect has surprised many              Romania continue to see some deal flow due        investment opportunities—especially as
financial market players who thought that         to relatively resilient domestic demand.          valuations decline to three or four times
emerging markets would remain relatively          I’m reasonably bullish about Poland,” said        Ebitda, versus five-to-six times a couple years
immune from the effects of the debt crisis in     Eastwell. “It’s reasonably insulated from         ago—but on accessing leverage to make new
the U.S. and Western Europe. “Until a few         what’s going on, and Polish banks don’t have      investments and exiting existing ones. While
months ago, I would have said famously that       the same toxic asset problems as banks in         overall deal volume is likely to slow, trade sales
most emerging markets hadn’t felt the blow        Western Europe.”                                  and private placements will likely pick up.
of the credit crisis. But contagion has spread.
The magnitude of this is such that it’s gripped   The Organisation for Economic Co-operation        middlE East
everywhere,” said Nick Eastwell, Linklaters       and Development (OECD) recently cut its           It’s a different story in the Middle East, where
managing partner for the Emerging Europe,         gross domestic product growth forecast for        cash-rich governments and even private
Middle East and North Africa region.              Poland from 5.9% to 5.4% this year, and from      equity players are likely to inject funds where
                                                  5% to 3% next. Reduced demand in Western          they’re needed to soften the blow of lower
Grim as the markets seem at the moment,           Europe for Polish exports will account for        oil prices and drops in share prices. “The
investors continue to spot opportunities for      much of the decline. But many analysts expect     Middle East is probably the least effected [by

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                                                                                                                                    t h e d e a l 83
the financial crisis],” said Linklaters’ Eastwell,   China                                              According to Dealogic, China-related IPOs
adding that “[countries such as Saudi Arabia]        In China, stalling global demand has               are down 45% this year, and companies that
still have those energy reserves and the cash        forced many of China’s export-oriented             had been expecting to make an IPO this
to spend.”                                           manufacturers to close shop, leaving               year are now on the market for trade sales or
                                                     thousands unemployed. The withdrawal of            private placements.
Strong cash reserves help to explain why the
region is faring relatively well under current       institutional investors from equity markets        “We’re not seeing big deals. People are waiting
global financial conditions. Saudi Arabia,           has also battered share prices.                    on the sidelines,” said Robert Ashworth,
for example, is channeling its abundant              The government’s response has been to              head corporate practice in Asia at Freshfields
cash reserves towards infrastructure and IT          try to invigorate domestic demand via a            Bruckhaus Deringer. “But there will be deals.”
projects. And its government, as well as those       $586 billion stimulus plan geared towards          afriCa
of Saudi Arabia, Qatar and the United Arab           infrastructure spending and lower interest         As an emerging market, Africa does not quite
Emirates, have taken steps to shore up the           rates to free up capital. Some analysts expect     match China’s allure, but by some numbers,
banking sector.                                      the government to take additional measures         Africa has never been so attractive. According
Even Dubai, whose economy has suffered               to boost consumer confidence, such as further      to the Emerging Markets Private Equity
perhaps the most in the region due to the            interest rate cuts or tax reductions.              Association, capital raised for Africa doubled
collapse of its highly leveraged real estate         Meanwhile, China’s slowdown does not seem          to $1.26 billion in the first half of 2008.
sector, should benefit from the UAE’s oil            to have deterred private equity fundraisers.       Economic growth rates of between 6% and
revenues.                                            (“Slowdown” might be misleading given              8% in resource rich countries such as Nigeria
                                                     that the World Bank still expects 7.5%             and the Democratic Republic of Congo have
“Dubai does not have oil. That’s the bad
                                                     economic growth in 2009, versus 9% this            helped to drive the flood of private equity
news,” explained Eastwell. “The good news
                                                     year.) Beijing-based ChinaVenture, a research      investment. Improved regulatory and political
is—and people tend to forget this—that
                                                     and consulting group, calculates that private      climates in nations such as Ghana and
Dubai is not independent. Dubai is part of
                                                     equity and venture capital raised roughly $12      Tanzania have also helped to attract investors,
the United Arab Emirates, and Abu Dhabi,
                                                     billion to invest in China in 2008, which is       according to John Mawuli Ababio, who heads
the UAE capital, has all the oil. Even with
                                                     already higher than the $11 billion raised for     the African Venture Capital Association
oil prices at $50 or $60 a barrel, Abu Dhabi
                                                     all of 2007.                                       (AVCA).
has plenty of cash [to spend on Dubai].”
Eastwell suggests that domestic M&A is likely        Of course, not all that capital has been put       Analysts suggest that capital inflows are
to pick up in the UAE as Abu Dhabi invests           to use. Charles Comey, managing partner at         likely to decline as investors place their bets
in Dubai’s industrial resources sector.              Morrison and Foerster’s Shanghai office, said:     elsewhere, however. In a report released in
                                                     “We’re seeing a significant shift already taking   October, KPMG suggests that forward price-
Demographics should also help the region
                                                     place in the private equity markets. We’ve had     earnings ratios, which help to predict future
to weather the credit crisis. “The Middle
                                                     a number of cases recently where people were       deal activity, have declined by as much as
East and North Africa have huge, young and
                                                     looking at later stage investments in China—       13.9% in Africa and the Middle East (versus
growing populations,” said Abraaj Capital’s
                                                     deals in the $70 to $100 million range—and         8.7% in North America, and 10.7% in Asia
Cordahi. He adds that with governments
                                                     have decided not to proceed given the              Pacific).
in the region implementing policies aimed
at boosting the private sector, “it’s clearly a      lack of visibility on when an IPO would            In South Africa, the hub for private equity in
growth story.”                                       be possible. On the other hand, we see             sub-Saharan Africa, deal activity has already
                                                     strategic as opposed to purely financial           slowed. “We’ve seen more cancelled deals than
Cordahi expects sectors catering to the              investments continuing to be active.”              deals go forward,” said Dave Thayser, Director
region’s growing population, such as
                                                     On the other hand, according to Shaun Rein,        for Transaction and Advisory Services at Ernst
healthcare and private education, to fare well
                                                     founder and managing director of China             and Young’s Johannesburg office.
in the coming year.
                                                     Market Research, “early-stage venture capital      One example is South Africa’s platinum
Energy-related industries also continue to           players are doing well at the moment. They         producer Impala Platinum’s bid to buy
attract interest despite lagging commodity           don’t leverage as much [as private equity], and    Mvelaphanda Resources and Northam
prices. Franklin Templeton, Manulife, and            they typically have a five to seven, or even       Platinum Ltd. for a total of $2.5 billion,
UBS with Merchantbridge, have all launched           10-year plan,” he said. “And since valuations      which at the time of writing had stalled.
Middle East and North Africa (MENA)                  are going down, they can pick up better
funds in the past year targeting infrastructure,     investments.”                                      But activity in South Africa’s telecom and
banking and energy-related industries such                                                              infrastructure sectors remain relatively lively.
as mining and oil refining. “In a year or two,       Consumer plays seem particularly attractive        Vodafone recently increased its stake in South
the global economy will continue to pick up          given the continued expansion of China’s           African mobile phone operator Vodacom.
again and oil prices will start to rise,” said       market. One of the biggest deals of the year       Also, one of the biggest deals of the year
Cordahi. “The outlook is still pretty bright.”       was Coca-Cola’s purchase of Huiyuan Juice          was private equity group Actis’ acquisition
                                                     Group for $2.4 billion in September, and           of Alstom South Africa, an electrical
In North Africa, energy-related industries           private equity firms Actis and Warburg Pincus      engineering, manufacturing, distribution and
continue to attract investors despite dragging       recently purchased the hotel chain, 7 Days         contracting business, for $700 million.
oil prices. However, Eastwell notes, deal            Inn, for $65 million.
activity is likely to take a “longer term                                                               Says Thayser, “there’s still a bit of life.” The
perspective.”                                        For investors seeking to exit their                same can be said for many emerging markets
                                                     investments, the market is more challenging.       these days.

84 t h e d e a l
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                                                                                                       d e a l 85
   The Downturn Creates Bargains for
          Savvy Investors with Access to Cash
                                                                                                                   By Rob Garretson

             s recently as a year ago, dealmakers in Europe were           the pipeline which savvy investors will pick up for a song,” Mogg
             insisting that the emerging markets in Central and Eastern    said, pointing to financial institutions in CEE as a possible source of
             Europe (CEE) had little or no exposure to the financial       bargains, though admitting that it may be “more of a hunch than
             crisis emanating from in the U.S. With less leverage and      anything else.”
little or no subprime mortgage exposure to speak of, CEE markets           And strategic investors may have the CEE markets to themselves, as
were still booming and offered relatively safe emerging-market returns     portfolio investors steer clear until the current economic haze clears
for investors. In August 2007, global PE giant The Carlyle Group           up, suggests Matthew Peterson, a portfolio manager at Newgate
announced the creation of a new CEE team based in Warsaw and               Capital Management LLC, in Greenwich, Conn. “What investors,
three months later expanded the team, led by managing director             including institutional investors, desire now more than ever, is
Ryszard Wojtkowski. “We see long-term opportunity in Central and           liquidity,” he notes. “The world is full of assets that are arguably
Eastern Europe,” said Carlyle co-founder and managing director             cheap.” Yet even if assets in CEE are identifiably better valued than
Daniel A. D’Aniello.                                                       assets elsewhere, they may not be attractive enough for portfolio
What a difference a year makes. Last month Carlyle confirmed it is         investors to spend their now scare liquidity.
closing its 10-person Warsaw office and going back to monitoring the       “Is there confidence in a realization event within an acceptable time
region out of its two London-based funds. “Carlyle has ended plans         frame,” Peterson asks. “I think the answer is likely to be ‘no’ for many
to form these specialized investment operations because in the current     portfolio investors.”
investment climate the opportunities did not warrant maintaining
fully dedicated teams and funds,” a spokesman told Reuters.                In addition to highly distressed assets, there are industries and sectors
                                                                           in CEE that will not suffer as much from the economic downturn
Clearly, the global credit crisis and the resulting economic slowdown      and remain solid investment opportunities, notes Goldscheider. “One
rippling from the U.S. and across Europe are hitting emerging markets      is food in all shapes and forms. The other one is pharmaceuticals.
hard. “Obviously Romania, Bulgaria and Ukraine, and to some extent         Everything that people just need will get away quite unscathed.”
Hungary, have suffered more, and the crisis has arrived already,”
notes Peter Goldscheider, co-founder of the Vienna-based European          Goldscheider, who founded EPIC in 1989 with his partner, Gustav
Privatisation & Investment Corp. (EPIC), cautioning that this is a         Wurmböck, has earned a reputation as the investment banker to
sweeping statement that shouldn’t be taken as investment advice.           Emerging Europe. He sees rock bottom prices for assets in many
                                                                           sectors and countries across CEE. “For people who want to invest
While in some countries, notably the Czech Republic and Poland,            opportunistically at cheap prices and get real value, then [the region]
“reality has yet to sink in,” he says, most countries in the region will   would make a lot of sense,” he said.
eventually feel the pain. Those dependent on the industries that will
suffer most, such as automotive, and sectors whipsawed by volatile         Finding hidden gems will depend on investment horizons,
energy prices, like transportation and freight, will be affected more      Goldscheirder notes. “If you look for mid-term gems then I think
than those countries that don’t rely on “those bleeding sectors,” he       asset-driven deals like cement, or other assets in the ground” offer
adds.                                                                      opportunities. Another widely distressed asset class is real estate and
                                                                           the real estate companies, “where book values and market values have
Yet even in these tough economic times with credit markets almost          an incredible spread these days.”
frozen across the globe, the region is still rife with opportunities for
dealmakers, particularly those with access to cash. The deteriorating      Telecom is another sector that should continue to do well, as costs
economic environment over the past year is not deterring M&A               for service continue to decline. “But there will be big shifts in
decision makers from retaining a positive outlook on activity over the     business models,” Goldscheider predicts. “I personally think that
year ahead, according to a recent study by Deloitte, which found that      advertisement-based, cheap mobile phone providers will have a big
both businesses and private equity investors intend to expand activity     boom.” EPIC has invested on one such company, Austria’s Out There
in 2009. “Supported by strong economic growth and ambitious                Media (OTM), which focuses on advertisement-sponsored PDAs and
management, it is also companies from emerging nations that are            mobile phones as a business model.
increasingly looking across borders for assets,” said Garret Byrne,        Such sectors that help cash-strapped consumers save money should
M&A transaction services leader for Deloitte Central Europe.               hold up during the economic downturn to a larger extent, he notes. “I
“There are, for those who have cash or access to it, lots of               think McDonalds will have a great year. You get a lot of food cheaply.”
opportunities now,” agrees Jason Mogg, a managing partner at the           Among sectors to void: “Advertising will suffer a lot, and so will the
Prague office of law firm Kinstellar, specializing in corporate M&A        entertainment industry and all the media,” Goldscheider said.
and finance. “Those who are able to stitch together the leverage, or
who don’t need it, will do astoundingly well from this, if they are        “Highly leveraged deals are not happening right now,” adds Mogg.
buying assets now.”                                                        “There is liquidity out there, but the psychology behind that liquidity
                                                                           is not at all good. When the psychology—or the mood—changes,
As is true in any downturn, declining valuations create buying             there will be a rush for deals.”
opportunities. “There are likely some excellent distressed assets in
86 t h e d e a l
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CEEing the Bright Side of the Downturn
A conversation with M&A lawyer Jason Mogg of       prediction that I’ll regret, but there you have it).   they alone could
the newly independent Kinsteller.                  I think that aside from Ukraine, and arguably          squelch the growth. I
In a move that some observers saw as a shift       Hungary, which have public finance issues,             personally would bet
in the legal center of gravity in Europe,          the Emerging Europe region as a whole is               on Turkey to come
170-year-old U.K. law firm Linklaters LLC          in relatively good shape. The perceptions of           through well. But
last month turned over control of its four         problems, which the foreign press bandies              it and Europe need
Eastern European offices—in the Czech              about, seem not quite accurate. That alone             to get closer on the
Republic, Slovakia, Romania and Hungary—           presents excellent opportunities. There are            political level. The
to local management. The new spinoff firm          likely some excellent distressed assets in the         more that happens,
is called Kinstellar (incidentally an anagram      pipeline, which savvy investors will pick up for       the      better   off
of “Linklaters”). Jason Mogg, Linklaters           a song.                                                Turkey—and Europe—will be.
managing partner for Central and Eastern           Q: With the current turmoil in global credit           Q: Are there vulnerable markets that are too
Europe, and now a Kinstellar managing              markets, is there enough leverage available            risky and that investors should steer clear of?
partner in its Prague office, has 18 years of      to make deals happen?                                  Jason Mogg: The risks were there for investors
practice experience in North America and                                                                  putting new money in six months ago or
Europe, including corporate/M&A and                Jason Mogg: That is the big question. Highly
                                                   leveraged deals are not happening right now.           three months ago. Now much of that risk has
project finance experience in CEE since 1993.                                                             turned into real trouble. New money invested
Rob Garretson spoke with him about the             There is liquidity out there, but the psychology
                                                   behind that liquidity is not at all good. When         now looks less risky. Investors who put money
investment opportunities in the region as the                                                             in real estate during the last year—which was
global financial and economic crisis spreads.      the psychology—or the mood—changes, there
                                                   will be a rush for deals.                              booming incredibly in recent years—may have
Q: In this current economic climate, what                                                                 gotten in at the wrong time. Ukraine may be
countries and specific sectors present the         Q: Who, if anyone, is providing the debt for           more difficult than other places, until they
best opportunities for M&A and private             such deals in the current market?                      get some clarity at the political level and there
equity investing in Emerging Europe                Jason Mogg: The CEE banks (mostly                      is confidence in political stability generally.
today?                                             subsidiaries of often more troubled foreign            Russia does not look quite as exciting now
Jason Mogg: There are, for those who have          banks) have not completely stopped lending,            that oil prices are $100 off their July peak, as
cash or access to it, lots of opportunities now.   although they are doing it much more                   the Russian economy is built almost entirely
The banking and other financial institutions       selectively and based on lower leverage models.        on oil. The steel sector looks set for a rough
sector—relatively healthy compared, for            Private equity funds are looking at low leverage       patch, as does the auto sector.
example, to the situation in the U.S., U.K.        models.                                                Q: What do you see as necessary indicators
or even Western Europe—may be quite                Q: Are there particular countries or sectors           for recovery in Emerging Europe?
interesting for those seeking to build during      that are relatively immune from the current            Jason Mogg: Change in the psychology. The
the recession. The IT/software sector for          slowdown (or even poised to prosper from               mania for doom and gloom emanating, with
the slightly longer term, and of course            it?) Are some more insulated from the                  very good reason, from the U.S., is poisoning
infrastructure and energy are also interesting.    contagion than others?                                 some markets for no good reason, other than
Also general manufacturing, where the                                                                     the rather self-centered assumption that it
                                                   Jason Mogg: The contagion is at core driven
companies are well managed.                                                                               must be true everywhere. Emerging Europe
                                                   by lenders now being allergic to lending after
The Czech Republic and Slovakia remain, in         a glut of easy and inexpensive debt which was          has some fundamentals right that the U.S. and
fact, in relatively good shape and have yet to     then repackaged and sold on and on and on by           the Western European economy does not: very
be hit by the general perception from abroad       the banks and financial institutions. This means       limited subprime debt; a culture of savings
that the economic climate in CEE is poor. The      that even good assets and good businesses              and prudence; a culture of generally realistic
same is true of Poland. But the perceptions        are now having much more difficulty raising            expectations; low cost labor, which (unlike in
of the region from abroad, which seem quite        the necessary financing to invest and grow.            some Asian economies) is also highly educated
casually held, are probably an overshoot of the    Given that ultimately most of the capital in           and of high quality; a rapidly growing middle
reality as well as the future prospects of these   CEE is still foreign capital, and these markets        class; excellent geographic location close to
markets. Romania will suffer in the short term     are dependent on export, it is difficult to see        both Asian and Western European markets;
but continue to grow at a stronger pace going      anybody being immune or insulated.                     and a manufacturing base.
forward. I also think that Serbia/Ex-Yugoslavia                                                           Q: Any particular keys to investing across
                                                   On the other hand, the power and
and Turkey—especially Turkey—are very                                                                     this relatively disparate region?
                                                   infrastructure sectors are relatively immune
interesting places to invest over the next year.
                                                   and may prosper. Serbia has not yet really             Jason Mogg: The basics are, as everywhere,
Q: Is there anything you would identify as         benefitted from the growth as elsewhere in             more important than ever. The number one
a hidden gem?                                      CEE and has an improved political landscape,           rule is: find the right business partners. Take
Jason Mogg: Surprise! The financial institutions   which might see it through this period rather          a medium-to-longer term view. Go for quality.
in CEE. (I admit this is perhaps more of a         well. But perceptions abroad (whether up to            Do thorough due diligence. Don’t assume.
hunch than anything else, and may prove to be a    date, or accurate, or not) still are a drag, and

                                                                                                                                          t h e d e a l 87
doing Better
                                                      them to develop more precise valuations and        is the only way to create synergies. Further,
                                                      post-deal targets. In addition, their method       they believe any significant change to any
                                                      helps them obtain the critical “buy-in” they       function will have an effect on other related

                                                      need from the business leaders who will be         functions throughout the organization.
                                                      instrumental during implementation.                As one Champion said, “If you change
                                                      2. post-dEal monitoring                            something, no matter how isolated it may
                                                      According to the study, 41% of Champions           seem, there is likely to be a ‘ripple effect’
A new KPMG study reveals the five                     use corporate development team members             throughout the organization.” Champions
                                                                                                         understand that the “ripple effect” must be
secrets of top dealmakers.                            in a formal “post-close” role. At other
                                                                                                         carefully managed to ensure that integration
                                                      organizations, this number falls to less
By Chris Gottlieb                                     than 27%. About 60% of Champions give              teams work in sync with each other; they

                                                      their corporate development teams a major          also understand the real complexity of the
            he current global environment
                                                      responsibility in getting the business ready for   initiatives about to be undertaken.
            is extremely challenging for
            dealmakers, including those in            Day 1. This is twice the level of involvement      Less successful organizations approach
            Europe. Financing has become              the other companies reported. As one               differently. They treat integration planning
a major concern and even after a company              Champion said, “We always keep our M&A             as purely functional and do not take the
funds a transaction it must still justify the         team involved in a post-close monitoring           necessary steps to have the right program
deal and achieve value. In addition, a slowing        role. They can stay completely objective and       management office (PMO) in place. Often,
economy may force acquirers to attempt to             provide a valuable point of reference during       in these cases, their PMO contains someone
increase the pace at which they normally seek         formal status checks. They are critical in         either less experienced at managing cross-
to capture revenue and cost synergies.                helping our operating teams translate their        functional integration programs or not
                                                      progress into financial terms and thinking         influential enough within the company to
Despite these difficulties, certain serial
                                                      through resource allocation decisions.”            ensure collaboration.
acquirers have been able to succeed
systematically deal after deal. To gain a             The ability to monitor results is important        5. staBilizing thE BusinEss
better understanding of deal success, KPMG            for the Champions. The study said more than        Another major difference is that M&A
recently surveyed more than 160 large                 half of corporate development Champions            Champions emphasize the quick “stabilizing”
companies across the U.S. and Europe. The             “always” conduct formal postmortem reviews         of the merged entity. Ninety percent of all
study found a certain group of acquirers              on individual transactions, compared with          Champions consider “stabilizing the business”
achieved their synergies at least 75% of the          only 38% of the other organizations.               one of their top three integration priorities.
time. These companies were designated                 3. intEgration tEam                                According to Champions, stabilizing the
the M&A Champions. An analysis of the                 Another key differentiator is the emphasis         business depends on effectively “managing the
Champions revealed that they approached               Champions place on dedicating full-time            change process.”
deals differently from their less successful peers.   resources to integration. According to the         Champions mitigate the risks of change in
KPMG’s study found that the M&A                       study, at more than 30% of Champion                two ways. First, understanding that some
Champions consistently incorporated five              organizations, integration team members are        amount of disruption is inevitable, they
attributes that helped them meet their                expected to play a full-time integration role.     incorporate the potential losses into their
acquisition goals:                                    This compares with less than 20% at other          financial models. Second, they have a clear
                                                      organizations. At Champion companies,              plan in place to minimize disruptions over
1. duE diligEnCE
                                                      more than half of all integration team             the first 100 days, based largely on three key
One of the most significant differences
                                                      members were “relieved” of their regular           guidelines: they make critical “direction-
between M&A Champions and their
                                                      business responsibilities, three times the rate    setting” decisions at the earliest possible
counterparts is how they conduct due
                                                      at the less-successful companies. Corporate        moment; they set shorter interim targets
diligence. Champions explore a wider range
                                                      development Champions are also more                and celebrate early wins; and they establish
of business risks, place more importance on
                                                      than twice as likely as their less successful      a program for communicating effectively
quantifying future business scenarios and use
                                                      peers to have more than 50% of the full-           to different stakeholder groups. As a result,
a greater number and variety of sources. The
                                                      time integration team members stay on and          Champions seem able to obtain sufficient
study revealed this type of comprehensive
                                                      become part of the new management team             control over their newly acquired operations
due diligence is so important that the most
                                                      for the integrated business. That management       33% faster than non-Champion teams.
successful acquirers average 50 external
                                                      continuation adds to a seamless knowledge          With market pressure likely to intensify
interviews with customers, suppliers, end
                                                      base and gives the integration team a              over the near-to-medium term, acquirers
users, business partners and industry analysts.
                                                      tremendous incentive for success.                  are bound to face a much tougher deal
Twenty percent of the Champions perform
“as many interviews as possible.”                     However, some Champion companies make              environment and will feel even more
                                                      the integration manager and other key              pressure to succeed. KPMG’s study, however,
Also, Champions use their business units
                                                      support functions full-time roles within their     demonstrates that by adopting a set of specific
during the due diligence phase. For example,
                                                      company, expecting the manager and his             attributes, a corporate development team can
almost 90% of the Champions require a
                                                      team to move from one deal to the next.            greatly increase its chances of success.
business unit manager to contribute to the
synergy model. At the Champion companies,             4. using thE pmo to managE “intEr-                 Chris Gottlieb is the Partner-in-Charge of
these individuals are also involved in                dEpEndEnCiEs” BEtwEEn tEams                        KPMG’s U.S. Business Due Diligence Practice.
developing detailed integration budgets.              Champions recognize that imposing major
Champions believe this approach enables               changes on an organization’s operating model

88 t h e d e a l
                                                                                                                                                                                                                    SPONSORED REPORT

                                                                                                                  80                              Average Returns for CEE Private Equity Funds
                                                                                                                                                  (As of December 2007)
                                                                                                                  70                                               10 Year
                                                                                                                                                                       5 Year
                                                                                                                                                                       3 Year
    D E A L                                          R O U N D U P                                                                                                     1 Year


    The Central and Eastern European private equity
    market has seen tremendous growth in both
    fundraising and investment in the last five years. Two                                                        30
    rounds of European Union Accession proved pivotal
    in promoting this trend by encouraging economic                                                               20

    development and the enhanced sophistication of
    local financial markets. Private equity fundraising                                                           10

    in the region reached a peak in 2007, with $12.8
    billion raised, including two funds that alone raised                                                                                        Dec-03       Jun-04        Dec-04        Jun-05            Dec-05             Jun-06            Dec-06           Jun-07      Dec-07
    $9 billion between them, versus only $1.5 billion                                                                           Source: Cambridge Associates LLC Proprietary Index: pooled end-to-end returns, net of fees, expenses and earned interest.

    raised in 2005. Investment in the region has also
    increased, rising from $602 million in 2005 to $4.4                                                                     EMPEA Survey of LP Interest
    billion in 2007.                                                                                                        Current vs. Projected Investment Strategy,
    As of December 1, 2008, EMPEA counts $2.4                                                                               Central and Eastern Europe (CEE)
    billion in funds raised, and $2.5 billion invested in                                                                   and the Commonwealth of Independent States (CIS)
    the region—a net decrease from 2007 levels, even                                                                                              100%
    accounting for the outlier funds raised in 2007.
                                                                                                                       % Respondents Investing

                                                                                                                                                   80%                                                              75%
    Although the use of leverage in PE transactions
    had increased in recent years in the region, fund                                                                                              60%                                             57%

    manager investment strategies are expected to                                                                                                  40%
    change with reduced access to debt for large deals.
    LPs assigned CEE a risk premium of 5% relative to                                                                                              20%

    North American private equity in the EMPEA 2008                                                                                                 0%
    LP Survey—the lowest perceived risk of all emerging                                                                                                        2007 Survey                              2008 Survey

    regions. Given the macroeconomic challenges faced                                                                                                              Projected
                                                                                                                                                                   Strategy (3-5 years)
    by economies in the region, changing LP perceptions
                                                                                                                                                                   Current Strategy
    about risks and opportunities within CEE could
    impact fundraising levels in 2009.

        Private Equity Fundraising & Investment 2001-YTD 2008

15000                                                                         15000                                                                                                   2000

            CEE/CIS                                                                          CEE                                                                                                     CIS/RUSSIA
                                                                                                                                                                                                                    Private Equity Investment
12000                  Private Equity Investment                              12000                  Private Equity Investment
                                                                                                                                                                                      1500                          Private Equity Fund Raising
                       Private Equity Fund Raising                                                   Private Equity Fund Raising

 9000                                                                          9000


 6000                                                                          6000

                                                                                                                                                      3,050                                                                                                 402
 3000                                      2,711                               3000
                                  1,777                                                                        1,577                   1,457                                                                              175
         575     530      676                                                         200              231
                                                                                      240     430      563
                          406      986      842      2,603   4,426    3,437                                     746                         602       2,201    4,426     2,360                     77         100         113         200         240       222      N/A       976
    0    317     377
                                                                                  0           250
         2001   2002    2003      2004     2005      2006    2007 YTD 2008            2001    2002    2003     2004                      2005         2006     2007 YTD 2008                     2001        2002        2003        2004        2005       2006     2007    YTD 2008

        Note: 2008 figures account for activity between 12/31/2007 and 12/1/2008. All figures in $millions.
        Source: Emerging Markets Private Equity Association (EMPEA). To learn more about EMPEA or to join, visit

                                                                                                                                                                                                                                                        t h e d e a l 89
     Waiting Game
            in the Middle East
   While the worldwide economic slowdown has not spared
   the Middle East, the private equity market there still
   continues to show strong signs of long-term growth.
                                                                                                                             By Edward H. Baker

            he environment for private equity and mergers and                  on mergers and acquisitions. “But they’re being more cautions about
            acquisitions activity in the Middle East wasn’t looking            what they’re spending the money on.” The huge Middle Eastern
            bad in the first half of 2008. No billion-dollar deals were        sovereign wealth funds, for instance, valued at as much as $1.5 trillion
            completed, and the total number of announced deals fell to         before the September meltdown, are estimated to have lost as much as
12 from 33 in the first half of 2007, yet investors were happy to reap         a third of their value recently.
the benefits of a number of promising exits, including Abraaj Capital’s        At the same time, assets values have declined, but that hasn’t
sale of Egyptian Fertilizers for $2.5 billion, and the IPO of Depa, an         necessarily made owners more willing to sell. “Declining valuations,”
interior decoration firm, which raised $432 million. Meanwhile, oil            said Arcapita’s Squires, “have resulted in potential sellers postponing
prices, heading toward $150 a barrel, continued to fill the region’s           or delaying a decision on transactions, as valuation expectations re-
coffers.                                                                       calibrate.” That process will take some time, unfortunately, and until
Like economic conditions in the rest of the world, however, things             then, sellers are waiting to see what the market will look like in the
changed significantly in the Middle East over the summer and into the          days to come.
fall, as the credit crisis and the ensuing recession overwhelmed even          Said Linklaters’ Garland, “They need to be confident that they are
that region’s fast-growing economies. Stock exchange indices are down          properly capitalized and can operate successfully in what is going to be
by more than 50% in the region, and growth rates have tumbled as               a difficult economic climate.”
well: for instance, Dubai, which had been experiencing GDP growth
of almost 18% since 2000, is expected to grow at just 6% in 2009.              For the immediate future, however, the outlook remains bright. “The
                                                                               picture I would paint is one of relative optimism,” Garland said.
Clearly, the downturn will have a very real effect on the prospects            “The Middle East is likely to emerge out of the economic downturn
for M&A and private equity in the region. The number of deals has              more quickly than other regions simply because most of the region
already slowed significantly, and exits have slowed even more. Yet the         is still cash-rich, thanks to trade surpluses, and obviously it still has
sense among investors and advisers familiar with the Middle East is            lots of oil. And it will emerge with all of the attendant benefits—with
that it will suffer less overall from the downturn, and come out of it         more liquidity in the market and a greater appetite for investment
more quickly than other parts of the world. That in turn suggests a            opportunities.” The region’s capital markets are maturing and
generally optimistic outlook for private equity in the region in the           deepening, its economies are looking to diversify as quickly as possible
longer term.                                                                   to get away from their longtime dependence on oil, and the deal
For the time being, private equity activity in the Mideast will remain         community of entrepreneurs, advisers and investors continues to grow
slow. The region remains cash-rich, of course, despite the recent rapid        and strengthen.
decline in the price of oil. Indeed, the price of oil hasn’t really affected   Given the positive environment, a number of sectors look particularly
the market anyway, says Jonathan Squires, director of corporate                attractive to Squires. “Healthcare in particular remains fairly
investments for MENA and India at Arcapita Bank, a private equity              fragmented, and is in need of significant investment,” he said.
firm headquartered in Bahrain. “The level of M&A activity in the               “Infrastructure too, and particularly energy and utilities, will need
region is seeing some slowdown more due to the financial crisis than           considerable private investment alongside public funds. I also like
the declining oil price.” Private equity in the Middle East, he notes, is      consumer retail and oil and gas-related services and manufacturing.
mostly growth capital, with limited use of leverage to finance deals. Of       Finally, there is some opportunity in the logistics space, and the
the banks that do lend to finance these transactions, most of them are         development of Dubai’s port infrastructure could boost the prospects
local units of international banks, and they have indeed been affected         for port and related logistics services in that sector.”
by the liquidity crisis.
                                                                               The rules of private equity investing in the Middle East, especially
More important has been the impact of the slowdown in investment               for the growing number of global players entering the market, won’t
capital to support transactions as investors in the Gulf, hit by losses        change for a while yet. A real understanding of local players and local
to their global portfolios, turn to preservation of cash. “There are still     laws, and an appreciation for the value of relationship, are vital for
investors who have money to spend on deals,” said Nick Garland, a              long-term success in the very promising Middle East.
partner in the Dubai office of law firm Linklaters, who concentrates

90 t h e d e a l
                   SPONSORED REPORT

91 t h e d e a l          t h e d e a l 91
in Challenging

              espite the events of the last few months, the Middle East    from consumer to industrial and financial services. The firm has
              continues to remain the focus of the world financial         also received prestigious awards from leading industry publications,
              community. The current financial turmoil and resultant       including Banker Middle East and Euromoney.
              slowing of economic growth worldwide has led to              Istithmar World Aviation invests in fast-growing sectors of the aviation
substantial need for investment capital, opening a huge window of          and aerospace industry, including airlines, manufacturing, engineering
opportunity for regional private equity groups that have a global          and financing. Istithmar World Ventures is a venture capital platform
outlook, strong funding resources and expert insight into emerging         that benefits promising start-ups and greenfield ventures by providing
opportunities in markets around the world.                                 them with the necessary financial and managerial resources.
Istithmar World, which was created in 2003 as the investment arm           Despite being among the youngest investment firms operating globally
of Dubai World, is the region’s premier investment firm specializing       from the region, Istithmar World is today firmly established as one of
in private equity and alternative investment opportunities globally.       the premier investment companies operating globally from the region
In the five years since its inception, Istithmar World has built a broad   and across a wide range of sectors.
portfolio of successful investments in markets ranging from North
America and Europe to Asia and the Middle East, and across a variety       Having already opened its first international office outside the UAE
of sectors, including consumer, industrial, financial services and real    in Shanghai last year, Istithmar World recently opened its New York
estate. Headquartered in Dubai with offices in Shanghai and New            office earlier this year. These offices allow Istithmar World to focus
York, Istithmar World invests through its three separately-managed         on identifying and pursuing exceptional investment opportunities
divisions: Istithmar World Capital, Istithmar World Aviation and           in line with the overriding strategy and to manage existing portfolio
Istithmar World Ventures.                                                  companies better in those regions.
Istithmar World Capital is a private equity and alternative investment     The future looks even brighter with the increasing value of Istithmar
house. In the four years since its inception, it has invested in over      World’s assets under management, the strength of its proprietary deal
35 companies with total capital deployed in excess of $3.5 billion.        flow, and the active management of its existing portfolio. With plans
Istithmar World Capital has also successfully established itself as a      in full swing to expand its network in emerging markets Istithmar
major investment company with a broad portfolio of successful firms        World is set to achieve its vision of being the premier truly global
in markets ranging from North America and Europe to the Middle             investment house based in the Middle East.
East and the Far East, as well as across a variety of sectors ranging

92 t h e d e a l
                                                                                                                                            SPONSORED REPORT

 D E A L              R O U N D U P
Middle East markets resisted the dramatic global                          IPO
downturn in the IPO market by raising $3.61 billion in
                                                                               Number of Issues                                                 Total Amount ($mil)
the third quarter of 2008 from 12 initial public offerings                80                                                            15000    14,440
                                                                                     71                                                                       13,147
against $4.72 billion from 13 IPOs in the second quarter                  70
                                                                                                                                        12000                            11,989        11,672
of 2008.                                                                  50

Year to date, capital raised is down 8.9% in the Middle
                                                                          30                                                             6000
East and North Africa (MENA) and 2.6% in the Gulf                         20
                                                                                           MENA                   GCC                                      MENA                    GCC
Cooperation Council (GCC), proving the region fared                       10
                                                                           0                                                               0
much better than the global market.                                                 2007      YTD 2008    2007      YTD 2008                        2007     YTD 2008      2007       YTD 2008

Sukuk Issuance
                                                                               Average Size of Offerings ($mil)                                 Average Oversubscription
The past three years have seen a rapid surge in the                      500                                            467               25
                                                                                                                                                                                       23.09 x
issuance of sukuk securities (Sharia-compliant financial                 400                                                              20
instruments that have economic similarities to bonds).                                                                                           15.14 x     14.89 x
                                                                         300                                                              15
However, total global issuance stood at about $14.7                                 203
                                                                         200                                                              10
billion until December 2008, which is down from                                                                                                                           6.15 x
the $32.9 billion issued in 2007. This lower level of                    100
                                                                                           MENA                   GCC                      5
                                                                                                                                                           MENA                   GCC
issuance was largely due to the global liquidity freeze                    0                                                               0
                                                                                2007          YTD 2008    2007      YTD 2008                        2007     YTD 2008      2007        YTD 2008
and a controversy over which types of sukuk are                                 Source: Zawya IPO Monitor

compliant with Islamic law.
Islamic Funds                                                            Sukuk Issuance ($mil)
Despite massive upheavals in the regional stock markets,                 35000

asset managers launched 52 regional funds in the first                   30000
                                                                                           Global                                                     GCC
nine months of 2008 and will likely exceed the 58 funds                  25000

launched in the whole of last year. These do not include                                                                                                                11,421
global funds launched by regional investment houses.                                                     18,636
                                                                         15000                                                14,694                                                        8,115
Twenty of the funds launched this year were focused in
the MENA region, another six purely in the Gulf, 12 in                   10000
                                                                                                 7,577                                     5000

Saudi Arabia and five in Egypt, suggesting that asset                     5000                                                                       1,944
managers continue to cast their nets wide to capture the
                                                                                0                                                               0
best performing companies across the region or in larger                              2004       2005     2006      2007      2008 td                2004      2005     2006        2007    2008 td
                                                                                      Source: Zawya Sukuk Monitor

            MENA Launched Funds
            Fund                                Fund Manager                               Asset Type                        Geographical Focus                 Islamic
            Iraq Investment Partners I          Northern Gulf Partners                     Hedge Fund                        Iraq
            Tharwa Islamic Money Market Fund    Tharwa Investment Company                  Money Market                      Kuwait                             •
            Al-Ahli Saudi Mid-Cap Equity Fund   NCB Capitalz                               Equity                            KSA                                •
            Global GCC Real Estate Fund         Global Investment House                    Property                          GCC                                •
            SHK Alpha MENA Fund                 Algebra Capital                            Equity                            MENA
            Blom Petra Balanced Fund            Blom Invest                                Balanced                          Jordan
            International Mix Fund              Bank of Beirut                             Fixed Income                      Lebanon
            Rana Liquidity Fund SAR             Rana Investment                            Money Market                      KSA
            Al Agyal Fund                       Beltone Asset Management                   Equity                            Egypt
            Sukuk Fund                          Algebra Capital                            Fixed Income(Sukuk)               MENA                               •
            MENA Fund                           ING Investment Group                       Equity                            MENA
            AL-Awaed Investment Fund            Kuwait Investment Co                       Equity                            MENA
            Excalibur MENA Fund                 Unicorn Investment Bank                    Equity                            MENA
            Mashreq Arab Tigers Fund            Mashreqbank                                Equity                            MENA
            Aldurrah liquidity fund SAR         Altawfeek Financial Group                  Trade Finance                     KSA                                •
            Aldurrah liquidity fund USD         Altawfeek Financial Group                  Trade Finance                     KSA                                •
            Moon A/T Capital GCC Fund           A/T Capital Management Limited             Equity                            GCC

Source: Zawya Funds Monitor. For more data and information, visit
                                                                                                                                                                         t h e d e a l 93
            frica may be the world’s last major   According to Regis Nyamakanga of South             and resources: typically roads to the mines
            emerging market with unbridled        Africa’s Business Day, Bain Capital acquired       it developed for the sole purpose of resource
            wealth in resources. Despite some     Edcon for $283 million and the Industrial          extraction, notes UC Irvine Business
            high-profile conflicts, peace has     and Commercial Bank of China invested              Professor Peter Navarro, author of The
been breaking out. Up to 2007, M&A had            $3.6 billion in Standard Bank in 2006. Oil-        Coming China Wars.
been growing by as much as 400% until             rich Nigeria, with a 150 million populous,         “The $9 billion memo of understanding with
the global crash unwound many promising           grows and diversifies at around 9%, said de        DR Congo is basically a mineral swap,” said
deals—putting the peace dividend in               Pontet, generating 10% of the continent’s          de Pontet. China then sells back finished
question.                                         M&A deals.                                         goods that hollow out local manufacturing
South Africa, which dominates the                 Still, “deal flow has come down drastically        like the atrophying garment factories in
continent’s M&A deals, has “definitely felt       in 2008,” said Thayser, and is being felt          Swaziland and South Africa.
the impact of the world economic tsunami,”        in South Africa, paradoxically through             Yet China also appears willing to rebuild
said Howard Pelkowitz of Ararat Corporate         the Black Economic Empowerment Act,                infrastructure in countries with few resources,
Advisory Services in Johannesburg. “How           which accelerated the transfer of mining,          like Malawi and Kenya, which suggests
long this will continue is anybody’s guess.”      construction and manufacturing assets              a political interest. China is developing
Even iron smelters, feeding a once voracious      to black ownership. “Most of these deals           hydropower projects: for $8 billion in Nigeria,
Chinese market are slowing, said Ernst &          generally have been funded ... on debt,” said      a proposed $80 billion in the DR Congo and
Young South Africa’s David Thayser, with          Ararat’s Pelkowitz. The combination of high        $580 million in Kenya.
major “companies such as BHP Billiton             asset prices and increases in interest rates has
                                                  strained these deals. “This could well result in   In DR Congo and Angola, China is
… closing down smelters due to lack of                                                               appearing to do the impossible: rebuild
demand.”                                          many of those transactions either being un-
                                                  wound or being re-priced and restructured,”        railroads, develop oil pipelines where few
“Fundamentally sound companies ... are now        he said.                                           dared to venture, and laying out roads in
available for the asking,” notes Pelkowitz.                                                          once impenetrable jungles. Nevertheless,
                                                  Some diversification occurs in countries with      locals get “annoyed when they see hundreds
Other deals abound. The New Partnership for       few resources, like Lesotho, which grew its        and hundreds of Chinese engineers,” said de
Africa’s Development (NEPAD), according           textile base thanks to the African Growth and      Pontet, “they think few good jobs will be left

Into Africa
                                                                                                     for them.”
                                                                                                     South Africa, thanks to its political
                                                                                                     transformation from the majority rule
                                                                                                     under Nelson Mandela, is the most
                                                                             By Alan Brody           stable democracy. E&Y’s Thayser notes,
                                                                                                     “the regulations governing M&A and
to South African investment analyst Bert          Opportunity Act (AGOA) of 2000, a tariff           Competition Law in South Africa are of
Chanetsa, has 120 priority development            reduction program between Africa and the           world standard.”
projects of which $4 billion is open to private   U.S. that, according de Pontet, has mostly         At the same time, South Africa remains a
financing.                                        helped commodities.                                gateway to the continent due to its advanced
Phillipe de Pontet, an analyst with the Eurasia   Examples like BMW wheel manufacturing              infrastructure; it is hosting the 2010 World
Group, a global political risk research and       in South Africa have inspired investors. Call      Cup, which is driving the construction of
consulting firm, notes that “junior” mining       center and IT outsourcing has emerged in           stadiums, hotels and airports.
developers—North American-based First             English-language countries like Ghana, Kenya       Yet the financial world, some say, is jittery
Quantum, Anvil, Camec and Toronto’s               and South Africa. French-speaking Senegal          due to rolling blackouts and the almost
Katanga Mining—are in the now peaceful            and Cote d’Ivoire offer similar services to        certain election of Jacob Zuma, a populist,
Democratic Republic of Congo seeking              France. Kenya offers safari tourism and            who lacks predecessor Thabo Mbeki’s
funding for cobalt and copper development.        exports cut flowers, while Uganda boosts its       sophistication.
“There is also an explosion in small-to-          coffee processing.
                                                                                                     Will Africa remain a backwater with the
medium telcos that look like great takeovers,”    Stock markets have even emerged in                 world economies in a tailspin? The Obama
said de Pontet. With minimal infrastructure,      countries like Nigeria, Zambia, Togo and           administration is heralding a renewed
wireless has grown dramatically—even with         Kenya, although they remain lightly traded         attention to Africa, and the U.S. has a new
domination by MTN, Zaid and Vodacom,              and dwarfed by The Johannesburg Stock              Africa Command headed by the military’s
the opportunities for wireless services seems     Exchange.                                          only black four-star general, William E.
boundless.                                                                                           Ward. The Chinese competition could also
                                                  China swEEps in
mining thE dEEp riChEs                            Even as Africa slowly breaks from its legacy       grab the United States’ attention. Most
Major oil finds in Angola and in the tiny         of 20th century colonialism, civil wars            importantly, this time, infrastructure,
island of Sao Tome have attracted significant     and pervasive poverty, it remains a relative       growing peace, far-reaching education and an
development—much of it from China.                backwater for the U.S. However, China’s            industrial base are in place as they never were
                                                  interest in Africa remains unflagging.             before.
Thanks to an emerging middle class,
data processing, banking and some small           Since 2000, China has offered Africa               The mood remains hopeful Africa will
manufacturing companies are growing.              infrastructure deals in return for influence       someday shine through.

94 t h e d e a l

       t h e d e a l 95
in South Africa
By Gabrielle Heaney
                                                    lEt it BEE
         ince February 2007, businesses in         BEE sCorECard                                      equity capital), they will typically be looking
         South Africa have had practical           A scorecard mechanism is used to measure           for an investment with a BEE aspect.
         guidelines for implementing the           the achievement of BEE. Scores are based           Considerations for the foreign investor
         strategies envisaged in the 2003          on the codes and relevant industry charters        include:
Broad-Based Black Economic Empowerment             of good practice developed by the DTI and          Due diligence. It is increasingly common
Act (the BEE Act).                                 a number of industry bodies which outline          for investors to review the BEE rating of
The BEE Act was intended to redress the            target levels of BEE for each element. Scores      potential acquisition targets prior to the deal,
economic disadvantage experienced by               are awarded based on how close a business          to assess how this might affect any potential
millions of black South Africans (that is          gets to the target for each element, and the       financing, restructuring or procurement
African, colored or Indian persons who are         overall BEE rating of a business is worked out     relationships post-acquisition.
South African citizens by birth or descent         from the scores.
                                                                                                      Incorporating equity ownership. One of the
or who were naturalized before 1993)               “The scorecard represents targets rather than      aims of BEE is to extend equity ownership of
due to past apartheid laws. It provides the        quotas,” said Ashleigh Hale, a partner at          companies.
statutory framework for the redistribution         Bowman Gilfillan. “The codes are there to
of ownership, control and management of            inspire compliance in a spirit of good faith       New investors, and private equity buyers in
businesses in South Africa.                        and are flexible enough to accommodate a           particular, are in an ideal position to negotiate
                                                   variety of ways of achieving the overall goal.”    new shareholder structures. Typically a 15-20%
CodEs of praCtiCE                                                                                     shareholding for black South Africans has been
Under the BEE Act, the South African               For example, achieving a high score for skills     achieved in most cases where private equity has
Department of Trade and Industry (DTI)             development might involve putting a system         driven the deal.
was permitted to issue codes of practice (the      in place to assist employees to achieve a
codes) to encourage and measure “Broad-            professional qualification through structured      However, in many cases it will not be possible
Based Black Economic Empowerment”                  education in the workplace or providing            for a foreign company to yield a percentage of
(BEE) within all: government bodies, public        access to institutional instruction at school or   their ownership in a target company. In these
and private organizations that interact with       in universities.                                   circumstances, rather than fulfilling the BEE
the state, and enterprises that require licenses                                                      equity ownership element directly, companies
                                                   thE EConomiC inCEntivE                             can instead, if they meet the requirements in
or government concessions or who acquire
                                                   Businesses engage government-accredited            the codes, make a financial contribution to
assets from the state.
                                                   agencies to assess their official BEE              a government-approved “Equity Equivalents
Earlier “narrow-based” efforts to achieve          rating. In the private sector, there is no         Programme” (EPP). EEPs provide assistance
BEE had focused on black ownership and             legal requirement to achieve BEE targets.          to black South Africans in a number of
management of businesses. The codes focus          However, a low BEE rating can prejudice the        different ways, with the goal of achieving
on seven elements that provide the basis of        chance of a company securing business in           BEE.
the new broad-based approach (see box).            comparison to companies with better BEE
                                                   ratings.                                           Funding BEE stakes. Special purpose
                                                                                                      vehicles are commonly set up and financed
                                                   This is because all state-owned entities and       by the vendors of a business to provide
    ElEmEnts of Broad-BasEd                        government departments are legally obliged         the capital for black South Africans to
    BlaCK EmpowErmEnt                              to look at BEE compliance in evaluating            invest in equity ownership in that business.
                                                   tenders or granting licenses, permits and          Increasingly hybrid equity (that is, deferred
    The seven elements that provide the            concessions. In practice, this means that any      dividend shares or redeemable preference
    basis of the broad-based approach are:         business that relies on government business is     shares) has gained popularity. Other funding
                                                   obliged to meet BEE targets.                       options range from simple donations to
    · Employment equity
                                                   Part of the BEE score relates to the activities    charitable trust arrangements.
    · Skills development                           of suppliers, and this means that the              Gabrielle Heaney is an analyst with Practical
    · Procurement                                  requirements flow through the chain of             Law Co., the U.K.’s pre-eminent provider of
                                                   trading partners. “The better your score is the    legal know-how, transactional analysis and
    · Ownership                                    more likely people are to deal with you,” said     market intelligence for business lawyers. For an
                                                   Kevin Cron, a director at Deneys Reitz Inc.
    · Management                                                                                      overview of private equity in South Africa, and
                                                   “This creates significant economic pressure to     for more on the practical legal issues of doing
    · Enterprise development                       meet BEE targets.”                                 business there, visit
    · Socio-economic development                   issuEs for forEign invEstors
                                                   In practice, when South African businesses
                                                   seek foreign investment (such as private
96 t h e d e a l
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                                                                                                                                              t h e d e a l 97
Down But Not Out
By Laura Dodge                                                              generally on the table. Most investments are growth capital or mid-tier

                  hat a difference a year makes. This time last year, it    investments.”
                  seemed the Chinese equity markets knew no limits.         Control deals have been tough for private equity players to obtain
                  The Shanghai Composite Index rose 97% for the             in China because Chinese entrepreneurs have historically been
                  year, and Chinese asset management funds saw              reluctant to give up control. “Entrepreneurs want to maintain some
returns of over 60%. These days, however, share prices are plummeting       decision making, and they may not trust private equity,” said Shaun
as investors retrench and export-oriented factories are shuttering their    Rein, founder and managing director of China Market Research.
doors. China’s President Hu Jintao has warned that the country’s            With market conditions as feeble as they are at the moment, some
economy will likely suffer the reverberating effects of the global          companies may seek whatever investment they can get.
financial downturn in 2009.                                                 “We see two sides for investors. While public share prices have
The reality on the ground is not as dire as the fall in the stock market    obviously come down, valuation expectations for companies that
suggests, however. According to Emerging Markets Private Equity             are still private remain misaligned,” according to Charles Comey,
Association, China dedicated funds raised $11.2 billion in the first        Morrison and Foerster, Shanghai managing partner and co-head of his
half of 2008 (versus a total of almost $11 billion for all of 2007) and     firm’s China private equity group. At the same time, many Chinese
new funds keep coming: for example, Chinese private equity firm             companies that need additional capital and had counted on raising it
FountainVest recently closed its first fund with $950 million to invest     through an IPO, but are now finding market conditions poor, may
in midsize Chinese companies.                                               offer sweeter terms for investors or strategic buyers.
“If you look at the first half, it’s already been a very active year from   “Some companies were depending gravely on an IPO this year,” said
the investing and fundraising standpoint,” according to Philipp Gysler,     Lincoln Pan, Hong Kong-based vice president of the private equity
the head of Asia at Partners Group, an alternative asset manager but he     firm Advantage Partners. “They expected new capital injections and
adds, “deal dynamics have changed.”                                         took on high levels of debt to finance expansion in anticipation of that
By many accounts, there are really two sides to deal activity in China.     expansion, and they’re now stretched to make their debt payments.”
On the one hand, private equity and venture capital may continue            What’s more, according to Allan Liu, managing partner of the private
to blossom since many funds are new to the market and hungry for            equity group ARC Capital Partners, the economic downturn could be
opportunities. On the other, exits, financing structures and follow-on      an opportunity for private equity investors with cash to gain control as
financing have been impacted by tightened global credit.                    Chinese companies refocus on core businesses. “We see more potential
First the good news: while private equity players in the U.S. and           deal flow for control deals,” he said. “Many companies have become
Western Europe reel from tightened credit markets, private equity           diversified, and as they now need to focus on the core business, there
players in China generally do not rely on a high amount of leverage         are carve out and spin off opportunities.”
to make deals. As Rob Ashworth, who heads the Asia corporate                The trick, as with any investment, is spotting a good deal. Growth
practice at Freshfields Bruckhaus Deringer, explains, “Leverage was         prospects in some industries, such as export-oriented manufacturing,
never a key part of the market [in China] since control deals are not       look flat. “Manufacturing is dead here, but I don’t think it’s all due to
                                                                                                                                        con. page 100
98 t h e d e a l

       t h e d e a l 99
the financial crisis,” suggests Rein of China Market Research. “The       Catalogue for Foreign Investment Industries that China’s Ministry of
government has been pushing for a slowdown. They’ve stopped giving        Commerce issued late last year calls for increased foreign investment
licenses to highly-polluting industries, for example. The crisis has      in clean technologies and renewable energy, such as solar and wind
accelerated the speed of slowdown in manufacturing, but it is not the     power.
sole cause.”                                                              According to Freshfields’ Rob Ashworth, “there’s a lot of talk about
At the same time, the global crisis has helped to accelerate government   wind power investments. People are taking a long-term bet on it.”
efforts to boost domestic consumption, which bodes well for the           The problem with clean tech, according to Morrison and Foerster’s
consumer sector. “Energy, renewables, the consumer sector—anything        Charles Comey, is that many companies in the sector require high
to do with brands—may be protected from a recession in China,”            capital expenditures up front, and with private equity increasingly
Freshfield’s Ashworth said.                                               concerned about rate of returns, they may be hesitant to invest. “The
The consumer sector accounts for about 35% of China’s gross               question is whether you can get companies off the ground through
domestic product, which is far less than the 70% share it takes in the    a combination of government subsidies and other benefits, and how
U.S. market. It’s a figure that the government is trying to raise.        investors can put funding together,” he said.
“I think the government clearly realizes that the economy cannot          The flip side to the China growth story is that the deal flow is slowing,
depend on export-led growth over the long-term,” said Liu of ARC.         and some investors are worried about exit strategies. “There’s been a
“The economic downturn may actually be good for China, since              lot of putting on the brakes,” Ashworth said. “The stage where two
it’s pushing the government to focus on domestic consumption.”            parties sign the terms of the deal used to be fast—a couple weeks. Now
ARC Capital Holdings, an AIM listed fund managed by a subsidiary          we’re seeing the whole process blown out, with the parties spending
of Pacific Alliance Equity Partners, has stakes in several domestic-      time going back and forth on the terms. People are treading very
oriented companies, including Hainan Airlines and the baby stroller       carefully.”
maker, Goodbaby, an export-oriented firm that Pacific Alliance is         Capital raised through initial public offerings declined by 45% in the
reconfiguring for domestic distribution.                                  first half of the year, according to Dealogic, and market uncertainty
Despite rising unemployment and a slowdown in manufacturing,              continues to force many companies to put off listing plans or seek
several indicators suggest that consumer appetite may be robust           alternative financing. “The last so-called PE deal we did was a project
enough to withstand slower economic growth. Retail sales in October       loan for a new semiconductor company which was secured by offshore
2008, for instance, grew 22%, and China Market Research found             collateral and closed in late September,” Comey said.
in a recent survey that 70% of consumers intend to maintain their         Investing in convertible shares, or completing a PIPE—a private
spending habits in 2009.                                                  investment in public equity—may become more attractive as share
Meanwhile, the Chinese government’s stimulus package, which               valuations tumble, but even these deals are down. According to the
is geared towards infrastructure projects, aims indirectly to boost       research group Zero2IPO, PIPE investment fell to just $18 million in
consumer spending. “The package will unlock infrastructure                the third quarter of 2008 from $548 million the previous quarter; and
projects suspended last year when the government was worried              bridge loan investment also dropped precipitously to $50 million from
about overheating,” Liu said. “Infrastructure building will speed up      $567 million over the same period.
urbanization, which will boost domestic demand.”                          The problem for non-control PIPE deals, as Partners Group’s Gysler
A push towards increasing income and demand in rural areas should         explains, is that markets these days are so volatile that “your equity
also help, said Liu. The government aims to double rural incomes          can be impaired overnight.” As for trade sales, ARC’s Liu suggests that
by 2020. In the meantime, it is offering tax breaks to retailers in       though these types of deals are likely to increase, they may get stuck if
rural markets, and subsidies to rural consumers. “If rural demand is      the majority owner doesn’t want to sell.
boosted,” he said, “it could absorb the excess manufacturing capacity     Some investors are simply choosing to wait out the storm by focusing
originally geared for export.”                                            on the companies in their portfolios. According to Ashworth,
Confidence in the strength of Chinese consumer appetites is fueling       “restructuring existing investments is the flavor of the month.” Rather
deal activity. One of the biggest deals of the year was Coca-Cola’s       than searching for new deals, private equity companies are helping
purchase of Huiyuan Juice for $2.4 billion in late 2008. (The purchase    their investments seek second round financing or to manage their
is subject to approval by the Ministry of Commerce.) Private equity       balance sheet.
firms Actis and Warburg Pincus jointly purchased a 51% stake in           Some funds, suggests Gylser, may simply run out of money. “In the
the hotel chain 7 Days Inn for $65 million. The Carlyle Group, in         next year or two, companies may find themselves without any takers
addition, has placed a bet on consumer appetite for private education     for a follow-on investment because current investors won’t have the
via a $50 million investment in the Hao Yue Education Group, a            breadth to support them,” he said. “There will be more need for
Beijing-based private school with plans to expand. Similarly, Actis       syndication.”
recently invested $103 million in Ambow Education, which offers
online education and training.                                            Perhaps China’s burgeoning homegrown private equity funds will
                                                                          play an increasing role in the market. A handful of onshore renminbi-
Aside from consumption, much of the buzz in China these days              denominated funds have cropped up in the past year, and lawyers such
surrounds environmentally-friendly technologies, or so-called clean       as Comey and Ashworth say they’re seeing increasing interest in these
tech. Said Rein, “every fund I run into is talking about clean tech.”     funds—although regulatory issues need to be clarified.
One of the biggest deals this year was International Finance Corp.’s
$136 million investment in ENN Solar Energy, which makes thin             Private equity may continue to thrive in China, but domestic and
solar film.                                                               international forces look certain to change its shape in the year to
The Chinese government is encouraging investment in clean tech as
part of an effort to minimize the environmental damage occurring
as a side effect of the country’s rapid economic development. The

100 t h e d e a l
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                  SEC T OR EXP ERT I S E

        Not Applicable                                            $49,455,000                                            Not Disclosed

              (United States)                                             (China)                                                 (United States)

     has arranged two                                                                                                  has been acquired by
                                                         Common Stock PIPE
 revolving lines of credit in
            China                                                     NASDAQ                                                       (Singapore)

           Industrial Technology                                 Industrial Technology                                             Healthcare
          October 2008                                              June 2008                                              January 2008
          FINANCIAL ADVISOR                                  LEAD PLACEMENT AGENT                                           SELLSIDE ADVISOR

                                   Not Disclosed                                               $188,198,608

                                         (United States)                                               (China)

                                       has acquired                                   Initial Public Offering
                          Its Chinese Manufacturing
                                  Operations                                                       NASDAQ
                                       Business Services                                        Financial Services
                                 November 2007                                               October 2007
                                    FINANCIAL ADVISOR                                             CO-MANAGER
                        William Blair & Company acted as advisor to the entity listed first in each of the listed transactions.


 The Shanghai Representative Office is a liaison for the firm’s Investment Banking business.

                                                                                                                                                 t h e d e a l 101
                                                                           Financial services, along with telecommunications, transportation and
                                                                           distribution, were the focus of private equity and M&A players in the
                                                                           first half of 2008. The latest data from Asian Venture Capital Journal
                                                                           below shows that the first half of 2008 was an active year for investing
  D E A L                   R O U N D U P                                  and fundraising, but since financing structures have been impacted by
                                                                           tightened credit, IPOs have suffered.

        Private Equity Market Overview

15000                                                                                       25000
         New Funds Raised                                                                             Capital Under Management
                                                   $12,149                                                                                   $20,550 $19,880     $23,425
12000                                                                   $11,472             20000

 9000                                                                                                                              $14,680
 6000                                  $5,452                                               10000                        $8,660
                                                                                                      $6,900   $7,330

 3000                        $2,320                                                          5000
    0                                                                                           0
         2003      2004      2005       2006        2007*    1H2007     1H2008                        2003      2004      2005      2006      2007*    1H2007    1H2008

15000                                                                                        6000
                                                                                                       Trade Sale/M&A Exits                  $5,299
         Investments Made
                                                  $12,286                                    5000
12000     Number of Deals
          Disclosed Deals              $10,403      550                                                                  $4,125
                            $9,572                  414                                      4000
 9000                                    438
                              231        356                            $7,929
                              183                                                            3000
                                                                         245                                                       $2,544
 6000                                                        $5,772      190                                                                           $2,072
                                                              268                            2000                                                                 $1,759
 3000             $2,421
        $1,775                                                                               1000               $632
          89       166
                   126                                                                                $334
    0                                                                                           0
         2003      2004      2005      2006        2007*     1H2007     1H2008                        2003      2004      2005      2006      2007*    1H2007     1H2008

                                                                                                     M&A Market Overview

                                                                                                      M&A Volume
60000                                              $57,501                                             Number of Deals
                                                                                            80000                                             2,055
          PE/Venture-backed IPOs                                                                       Disclosed Deals                        1,534
                                                                                            60000                                  $56,352
40000                                   $38,849                                                                                                                     987
                                                                                                                         $45,246    1,422                           693
30000                                                                                                          $38,577              1,071              $39,630
                                                                                                                676        601                           934
20000                                                         $17,000                                $24,726                                             716
                             $10,349                                      $9,361            20000     464
10000              $6,565                                                                             376
    0                                                                                           0
         2003        2004      2005      2006        2007*    1H2007      1H2008                      2003      2004      2005      2006      2007*    1H2007     1H2008

 Note: All figures in $ millions. *Restated
 Source: Asian Venture Capital Journal. For more data and information, visit

 102 t h e d e a l

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