SPONSORE R REPOR
SPONSORED D EPORT T
EYES ON WORLD MARKETS
A SPECIAL FOCUS ON
AFRICA, ChINA, eUROPe, The MIDDLe eAST
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.
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
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.
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
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
EUROPE’S HIDDEN GEMS
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
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
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
DE A L S
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
80 Average Returns for CEE Private Equity Funds
(As of December 2007)
70 10 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
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
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
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
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 www.empea.net
t h e d e a l 89
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
91 t h e d e a l t h e d e a l 91
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
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
against $4.72 billion from 13 IPOs in the second quarter 70
12000 11,989 11,672
of 2008. 50
Year to date, capital raised is down 8.9% in the Middle
East and North Africa (MENA) and 2.6% in the Gulf 20
MENA GCC MENA GCC
Cooperation Council (GCC), proving the region fared 10
much better than the global market. 2007 YTD 2008 2007 YTD 2008 2007 YTD 2008 2007 YTD 2008
Average Size of Offerings ($mil) Average Oversubscription
The past three years have seen a rapid surge in the 500 467 25
issuance of sukuk securities (Sharia-compliant financial 400 20
instruments that have economic similarities to bonds). 15.14 x 14.89 x
However, total global issuance stood at about $14.7 203
billion until December 2008, which is down from 6.15 x
the $32.9 billion issued in 2007. This lower level of 100
MENA GCC 5
issuance was largely due to the global liquidity freeze 0 0
2007 YTD 2008 2007 YTD 2008 2007 YTD 2008 2007 YTD 2008
and a controversy over which types of sukuk are Source: Zawya IPO Monitor
compliant with Islamic law.
Islamic Funds Sukuk Issuance ($mil)
Despite massive upheavals in the regional stock markets, 35000
asset managers launched 52 regional funds in the first 30000
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
Saudi Arabia and five in Egypt, suggesting that asset 5000 1,944
managers continue to cast their nets wide to capture the
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 www.zawya.com
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
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 www.practicallaw.com.
· 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
G LOBAL REACH
MIDDLE -MA R K ET FOC US
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
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.
CHICAGO BOSTON LONDON NEW YORK SAN FRANCISCO SHANGHAI TOKYO ZURICH
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
New Funds Raised Capital Under Management
$12,149 $20,550 $19,880 $23,425
12000 $11,472 20000
6000 $5,452 10000 $8,660
3000 $2,320 5000
2003 2004 2005 2006 2007* 1H2007 1H2008 2003 2004 2005 2006 2007* 1H2007 1H2008
Trade Sale/M&A Exits $5,299
12000 Number of Deals
Disclosed Deals $10,403 550 $4,125
$9,572 414 4000
231 356 $7,929
6000 $5,772 190 $2,072
268 2000 $1,759
$1,775 1000 $632
2003 2004 2005 2006 2007* 1H2007 1H2008 2003 2004 2005 2006 2007* 1H2007 1H2008
M&A Market Overview
60000 $57,501 Number of Deals
PE/Venture-backed IPOs Disclosed Deals 1,534
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
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 www.avcj.com
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