In what is being widely viewed as a surprise U-turn, the Australian government has pledged to remove capital gains tax (CGT) on the disposal of assets by nonresident investors.
The move, which was unveiled as part of the government's recent Federal Budget announcement, had long been resisted in the face of lobbying by the Australian Venture Capital Association (AVCA), which had argued that unfavourable tax laws put the Australian private equity market at a disadvantage compared with those, for example, in the US and the UK.
The government has indicated its intention to introduce the legislation before 30 June 2006. When it does, overseas investors are expected to target Australia in greater numbers, with US-based funds in particular expected to lead the charge. Until now, overseas investors have had to try and circumvent CGT rules through the use of elaborate tax structures, which nonetheless placed a number of restrictions on their activities.
A statement issued by the AVCA welcomed the proposed changes, but noted that some issues require further clarification. For example, the change refers only to exemption from capital gains and not revenue gains. This is a potential problem because whether private equity gains should be characterised as revenue or capital has long been a bone of contention. In addition, it is currently unclear whether relief will be extended to capital gains realised by an Australian fund that are distributed to non-resident investors.
The Australian government has estimated that the introduction of CGT relief will cost it A$50 million (€30 million; $38 million) a year in tax revenues for the next two years. Mark Goldsmith, a partner at Sydney-based law firm Gilbert + Tobin, describes this as “a relatively small amount, considering the rigidity of the approach adopted by the government in the past and the angst it has caused many industries including the Australian private equity sector.”
The pain of Australia's capital gains rules may be easing but will not, it seems, be easily forgotten.
TAX CLAMPDOWN IN KOREA
According to a report in Joins.com, Korea's National Tax Service is seeking to levy taxes of 70 billion won ($70 million) on Lone Star Funds and between 20 billion won to 40 billion won ($40-70 million) on Carlyle Group.
The tax agency, which recently launched an investigation into foreign private equity funds active in the country, says it expects to set tax levies on the two US-based firms within a month.
Distressed investor Lone Star's 280 billion won profits from its sale of the Star Tower in Seoul came under the microscope, as did the 700 billion won profits made by Carlyle Group when it sold shares in KorAm Bank to Citigroup last year.
Korea's tough tax stance is one manifestation of what appears to be increasing antipathy towards private equity firms in the country. The Institute for Monetary and Economic Research, a Bank of Korea thinktank, recently advised the Korean government to sell its stakes in South Korean banks only to other lenders rather than private equity funds.
BANKS REAP 14X RETURN ON PING AN
Investment banks Goldman Sachs and Morgan Stanley have reaped a 14-fold return on their investment in Chinese life assurance firm Ping An, following the sale of a 9.9 stake in the company to HSBC for $1.1 billion.
The two banks acquired a combined 12.7 percent interest in the business for about $70 million in 1994, and then reduced their stake to around ten percent last year when selling shares in the wake of Ping An's $1.8 billion IPO on the Hong Kong Stock Exchange.
HSBC now has a 19.9 percent stake in Ping An, having previously paid $600 million for a ten percent stake in 2002.
SLOW PROGRESSA recent report in the Financial Times highlighted a poor response from foreign investors to China's non-performing loan sell-off amid claims that domestic state-owned rivals were being treated preferentially. The table below shows there has been $6bn of sales since Dec 2001 – almost half of which are still pending.
|Summary of China NPL sales to foreign investors: Dec 2001 – Nov 2004|
|Seller||Investor/Arranger||Transaction type||Deal size ($m)||Completion date/status|
|BOC (Caymen)||Citigroup||Open Auction||1,800||December-07|
|China Construction||Morgan Stanley||Open Auction||310||May-08|
|Bank||Deutsche Bank||Open Auction||203||May-08|
|China Orient||Chenery Associates*||Negotiated – Harbin||210||December-06|
|Chenery Associates||Negotiated – Yanjiang||217||December-05|
|Great Wall||Citigroup||Negotiated||242||Signed – Pending Approval|
|Huarong||Goldman Sachs||Open Auction – Haurong I||240||December-06|
|Morgan Stanley**||Open Auction – Haurong I||1,304||December-06|
|Morgan Stanley / GE Comm'l Fin||Closed Auction – Wuhan||215||Signed – Pending Approval|
|Morgan Stanley||Open Auction – Haurong II||125||Signed – Pending Approval|
|Citigroup||Open Auction – Haurong II||131||November-08|
|Lehman Brothers||Open Auction – Haurong II||240||Signed – Pending Approval|
|JP Morgan||Open Auction – Haurong II||220||Signed – Pending Approval|
|UBS AG||Open Auction – Haurong II||185||Signed – Pending Approval|
|Goldman Sachs||Open Auction – Haurong II|
|6,016||Signed – Pending Approval|
|Zhongjin Fengde and International Finance Corporation.|
NEWBRIDGE IN DEBUT SINGAPORE DEAL
US private equity firm Newbridge Capital, a joint venture between Texas Pacific Group and Blum Capital Partners, has completed its first deal in Singapore with the purchase of a 26 percent stake in hospital operator Parkway Holdings for around $187 million.
SGX-listed Parkway owns a network of private hospitals in Singapore, Malaysia, India and Brunei. It is 7.5 percent-owned by Cobalt Limited, a fund advised by private equity firm Symphony Capital.
KKR SETS SIGHTS ON ASIA
New York buyout firm Kohlberg Kravis Roberts (KKR) is reportedly interested in buying a 17.6 percent stake in South Korea's Samsung Life Insurance Co for around $800 million. The deal would be KKR's first in Asia.
Five creditors including Korea Development Bank and Daehan Investment & Securities currently hold Samsung Life as collateral for its defunct former affiliate Samsung Motor. The creditors negotiated to sell their stake to Warburg Pincus and Newbridge Capital earlier this year, but the talks reportedly broke down on sale terms.
PEQUOT FORMS REAL ESTATE JOINT VENTURE
Pequot Capital Management, the US hedge fund, has formed a joint venture with Singapore-based real estate investor Pangaea Capital to target real estate, non-performing loan and private equity-style restructuring opportunities in Asia.
Pequot, which has more than $6 billion under management, has recently moved away from equity markets amid concern at the herd mentality of stock market investors. In the US, it has switched increasingly to distressed debt and venture capital.
The Pequot/Pangaea Asia Opportunities Fund, which is seeking $300 million from outside investors, is headed by Robert Zulkowski, former Asia Pacific region CEO of Los Angeles-based real estate investment specialist Colony Capital.
QUANTUM GOES IT ALONE
Quantum Advisors, the ([A-z]+)-based private equity firm, has announced its intention to raise a first independent fund with a goal of $100 million to $200 million.
Quantum, which has been in existence for 20 years, previously invested through a joint venture with Hong Kong's Jardine Fleming bank.
The firm's CEO and founder Ajit Dayal said the fund would target growth capital investments of between $1 million and $5 million in Indian companies looking to expand.