As mezzanine debt continues to feature prominently in US and European buyout transactions, a number of specialist finance houses are hoping to fly the flag for the product in the world's emerging markets. Asia has become the focus for a number firms, but a question mark remains as to whether the region will embrace what largely remains an untapped source of funding.
“At present, it is more a case of establishing the concept,” says Christophe Evain, head of Intermediate Capital Group's (ICG) Hong Kong office. ICG, long established in the European market, launched its Asia-Pacific operations just over 18 months ago and to date has been involved in just one transaction, the $93m acquisition of a 50 per cent stake in CGV, South Korea's largest cinema group, by CVC Asia Pacific and 3i last October. ICG provided a $28m mezzanine piece to help fund the acquisition.
The CGV deal was completed off ICG's balance sheet, although the firm is currently in the process of raising a fund dedicated solely to the Asian market. “We're hoping to raise a fund of around $150m from LPs in Europe, Asia and the US,” says Evain.
“Asia has a more recognisable, long-embedded credit culture than other emerging markets,” according to London-based ICG director Tom Attwood, speaking at the time of the fund's launch.
“There are big economies with big companies which have divisions that can be sold. There is now a more broadly based M&A community, and a number of private equity houses that we know well such as Carlyle, CVC Capital Partners and Prudential are already there. There is a great opportunity in this market, which reminds me of the state of the UK market in the early 1990s.” Having helped blaze a trail for the product in the UK back then, ICG clearly has confidence that it can do the same in the Far East today.
The state of the Asian buyout market varies from one country to the next, which makes for a diverse range of opportunities.
“There is mixed growth in the market. Japan is very attractive at the moment, as is South Korea, where buyouts are being initiated as conglomerates come under greater pressure to sell,“ explains Evain. “Hong Kong is also presenting expansion capital opportunities as companies look to expand onto the mainland.”
Robert Graffam, head of mezzanine finance at Darby Overseas Investments, concurs. “It's hard to generalise about the Asian market. China looked promising pre-SARS, and there are also opportunities in India. But a combination of economic weakness and a shortage of capital reduces the level of opportunities in the region.”
Darby is also a recent entrant to the Asian market, following its acquisition of Prumerica Asia Infrastructure Investors (PAII) from an affiliate of Prudential Financial in March 2002. The $246m Asian Infrastructure Mezzanine Capital Fund specialises in infrastructure investments in the region, primarily in telecommunications and energy.
Since taking over the PAII fund, the firm has made one investment, a $37m deal for Korean broadband provider, with another, similar-sized deal, in the pipeline. The firm has also produced two exits from mezzanine investments, both in China, which generated IRRs “in the high teens”.
Graffam, however, is under no illusions about the current environment. “It is a difficult market without any doubt. There is not nearly the same level of opportunity as we see in Latin America [which is Darby's other key emerging market].”
Despite the difficulties, Graffam says the firm is likely to launch a successor to the PAII fund. “We will most likely look to raise a new fund in 2004, although we won't focus on infrastructure deals.” The team of seven professionals, headed by Joseph Ferrigno in Hong Kong, will in the meantime look to manage the fund's existing portfolio, and to invest its remaining $50m of capital.
Looking beyond Darby and ICG, a number of other financiers provide mezzanine-type structures, although there are no real specialists. According to one mezzanine professional in Europe, Asia is not top of the list of new markets to be discovered. “Launching in a new region is resource intensive. It is especially difficult to raise a fund unless you are in a position where you can invest off the balance sheet to gain momentum.”
The scarcity of mezzanine providers in Asia could ultimately work to the advantage of those operators willing to take a chance on the region. Early mover advantage should then result in strong returns for investors. “We don't want an overly competitive market where firms undercut each other on price,” explains Evain. The ideal market would appear to be one where there are enough players to make the right amount of noise to promote an emerging financing tool in an emerging buyout market.
The California Public Employees' Retirement System (CalPERS) is to invest $200m in a WL Ross fund targeting Japanese turnarounds. CalPERS will also receive a 20 per cent stake in the fund's management.
The fund, which will target small, distressed Japanese companies, hopes to raise a total of $1bn. The fund will begin making investments in May. New York-based WL Ross manages about $1.6bn of investments in Japan, including three private equity funds and stakes in Japanese companies.
Carlyle approaches Japan fund target
US-based The Carlyle Group has reportedly raised around three quarters of a planned $400m-plus (Y50bn) fund targeting the growing Japanese buyout market, which was originally due to close in late 2001.
Carlyle set up its Japan offices in 2000, establishing a buyout and venture unit. The buyout group is led by Kensuke Shizunaga, former general partner of Schroder Ventures, and Haruyasu Asakura, formerly with Apax Globis Partners. The venture team is led by Kazuo Higashi. These groups will focus on four key sectors: telecommunications and media, technology, manufacturing and consumer goods.
At the time, the firm said it would also raise a $250m venture capital fund aimed at Japan. Carlyle has so far made one investment in Japan. Last year it agreed to buy Daiei Inc's armouredsecurity business for about Y7.9bn in cash and assumed debt.
Reports suggest that the Carlyle Japan Partners Fund has attracted investors including the Development Bank of Japan, which has committed Y4bn. Sony Life Insurance, a unit of the world's biggest video game maker, has also made a commitment to the fund.
CHAMP completes Austar deal
Australian private equity investment firm Castle Harlan Australian Mezzanine Partners (ChAMP) has completed the acquisition of a majority interest in Austar United Communications, in line with a plan first announced last December. CHAMP said it will initiate an offer to acquire all remaining publicly held Austar shares in early May.
CHAMP paid US$34.5m to the bondholder creditors of United Australia Pacific last December. In return, CHAMP has assumed UAP's majority interest in United Austar, a Colorado company that beneficially owns 80.7 per cent of Austar.
In accordance with requirements of the Australian Securities and Investment Commission (ASIC), CHAMP will tender a followon offer to acquire Austar's remaining publicly held shares in early May, when offering documents are mailed to shareholders. CHAMP is offering 16 cents per Austar share, which is slightly higher than the effective price paid for UAP's Austar shares of 15.5 cents per share.
Austar is the only provider of satellite pay TV in nonurban eastern Australia and the second largest provider in all of Australia, with more than 400,000 subscribers. In 2002, Austar reported revenues of approximately A$320m and EBITDA of A$23m.
ADB backs ASEAN China fund
The Asian Development Bank has approved a $15m equity participation in a new private equity fund that aims to provide capital for small and medium enterprises located in the member countries of the Association of South East Asian Nations (ASEAN), and China.
The ASEAN China Investment Fund is planning to raise equity capital commitments totaling $125m through private placement of limited partner interests with investors.
Besides ADB, the fund's initial core limited partners include the State Secretariat of Economic Affairs of Switzerland, which will also invest up to $15m, and the United Overseas Bank Group of Singapore, which will invest a maximum of $10m.
Investee companies will be screened and monitored with respect to corporate governance, productivity and efficiency, environmental standards, labour, health and safety standards, as well as overall legal compliance. It is the first ADB-assisted investment fund and one of the first private equity funds in Asia to incorporate such a program as an integral part of its design.
k1 Ventures leads $115m gas deal
Singapore-listed investment firm k1 Ventures has acquired Citizens Communications' Gas, the main gas company in Hawaii, in a S$205m ($115m) buyout. Approximately 61 per cent of the purchase will be financed by debt.
In a statement to the Singapore Exchange, k1 said the acquisition would give it “both a stable and profitable regulated utility as well as a fully competitive, high-margin non-regulated business.”
k1 Ventures, originally Keppel Corp.'s subsidiary Keppel Marine, was formed in June 2000 with joint-venture partners DBS Bank and SingTel to invest in and support Asia's high-growth tech companies requiring early stage funding.
The group started out with an initial funding of S$500m (US$271m) and a services portfolio that included strategic, operational and financial advice.
$58m for United Platform Technologies
Beijing-based United Platform Technologies (UPT), a provider of communications equipment and related products to wireless carriers in China, has raised an additional $8m in Series A financing, enabling it to close the round on $58 million.
The round, originally announced at the beginning of March, was led by an $18m investment from Walden International, which incubated and cofounded the company in November. Other investors included DCM-Doll Capital Management with $10 million, Intel Capital, New Enterprise Associates, Jerusalem Venture Partners, and Presidio Venture Partners.
Walden chairman Lip-Bu Tan and DCM managing general partner David Chao, representing the two largest shareholders, will sit on UPT's three-member board with chief executive officer and co-founder Chareleson Zheng. UPT also acquired W2 Networks, a China-based wireless equipment manufacturer.
Cerberus to increase Aozora stake
US private equity group Cerberus is close to an agreement with Softbank to acquire the Japanese group's remaining stake in Aozora Bank in a deal worth Y100bn ($830m).
The firm, which already holds just over 12 per cent of Aozora, has decided to exercise an option to acquire the additional 50.1 per cent stake in the bank. Sumitomo Mitsui Financial Group is also thought to be keen to make an offer for Softbank's stake, although it has seen its share price fall sharply.
Cerberus is expected to sell part of its holdings and reduce its stake to less than 50 per cent, although the firm issued a statement to stress that it saw Aozora Bank as a long-term investment. Aozora is the successor to the failed Nippon Credit Bank, which was taken over by the government in 1998. It was renamed Aozora Bank following its sale to a consortium led by Softbank, Orix and Tokio Marine & Fire Insurance in 2000.
Jafco leads $10m wireless round
Jafco Investment, Japan's largest venture capital investor, has joined forces with Motorola to co-lead a $10m second round of financing for Dilithium Networks, a US-based provider of wireless multimedia solutions. The new capital will be utilised to expand global sales and support efforts, as well as to support ongoing research and development efforts. To date Jafco Asia has invested over US$700m in 255 companies in 13 countries in the Asia Pacific, and has achieved 155 exits.
Sabre buys India's Centurion Bank
A new investment fund launched by Rana Talwar, the former chief executive of Standard Chartered Bank, has completed its first deal with the acquisition of Centurion Bank, the ailing Indian bank.
The board of Centurion Bank has approved Sabre Capital's proposal to restructure and recapitalise the bank in a recapitalisation deal worth around $70m, although the proposal is subject to approvals by the High Court and the Reserve Bank of India, which is expected in four months.
The bank has non-performing assets of about $150m, around 35 per cent of assets. Sabre plans to use Centurion's 72-branch network in south India as a platform for growth built around a revamped line-up of retail products.
Sabre Capital is a private equity fund established by a team of bankers to invest in and help manage financial services businesses in emerging markets. It is looking at similar opportunities in East Europe, Middle East and Indonesia.
The other stakeholders in Sabre Capital are Rajiv Maliwal, former head of Standard Chartered's private equity operations in Singapore, and Nigel Kenny, the bank's former finance director.
US group backs Southern Pacific
Texas-based private equity fund Sandefer Capital Partners has arranged a financing package for struggling shale oil producer Southern Pacific Patroleum which will see it invest up to A$51m in the Australian company.
The fund, which specialises in energy-related projects, has agreed to invest A$34m in SPP – through secured bonds convertible to SPP shares. These funds will allow SPP to continue to upgrade its stage one shale-to-oil plant and improve its environmental performance.
Sandefer has also conditionally agreed to provide two further investments of A$8.5m each within the next two years. In total, Sandefer, investing through SCP Koala Partners, will be entitled to a 42 per cent stake in the business.
The transaction, which is subject to approval by the Australian Stock Exchange and by SPP shareholders, will also see Sandefer appoint one director to the company's board.