Changing course

Sigit Prasetya had a good start to his new job. Hired to run CVC Asia Pacific’s Southeast Asia office in 2007, he sort of pioneered the use of leverage in that region.

Not only did the transactions he led require some groundbreaking work on deal structuring, but they unfolded in the immediate wake of the Lehman-sparked crisis, when most of the global investment community was paralysed.

Prasetya led the 2008 take-private of Malaysia’s Magnum Corp, a licensed gaming operator. Valued at $1.54 billion, it was one of the largest LBOs in Asia in 2008 and remains the largest ever foreign private equity investment made to date in Malaysia.

Next was the $892 million acquisition of Matahari Department Stores, Indonesia’s first LBO, which was negotiated with the Indonesian family-owned Lippo Group in 2009 and wrapped up the following year.

“We have a long-term dialogue with the Lippo Group. It was a special situation because Matahari was a subsidiary of a diversified listed company. Doing the Matahari deal makes a lot of sense. It crystallised value for the parent company. It was not a divestment; even though we have a controlling stake, it’s a partnership. We had ideas about how best to add value, so the first step was to convince them to do something together with us.”

Matahari was also complex on the financing side: Prasetya had to determine how to develop, for the first time, a deal structure that used Indonesian rupiahs rather than US dollars. CVC stuck with regional banks for debt financing, using Standard Chartered and Malaysia’s CIMB.

While some say there is no such thing as a proprietary deal, Prasetya says that Magnum and Matahari were both proprietary deals in the sense that no auction was involved.

“The Magnum deal never had an auction,” he says. “With Matahari, the deal was not an auction. The deal probably leaked one to two weeks before the announcement and people started scrambling to get into action, but there was never a formal auction.”

CVC’s track record in Asia-Pacific, he adds, is 75 percent propriety deals. The most recent example was the $460 million acquisition of Hong Kong Broadband Network (HKBN), the telecommunication business unit of the Hong Kong-listed City Telecom, which was led by managing partner Roy Kuan, CVC’s head of Greater China.

“You have to focus on developing proprietary transactions in Asia,” Prasetya says. “I would argue that’s the way to do deals because if you only rely on an auction, it can be a very difficult way to make a living.”

But not everyone agrees that the deals were exclusive. “CVC’s competitors must have seen the same deals but were not able to close them,” an industry source told PE Asia. “The deals CVC targets are typically sizeable and therefore would almost necessarily be marketed widely.”

However, the source added that Prasetya, a native Indonesian, seems to be one of the rare private equity professionals who can manoeuvre and close deals in Southeast Asia, which is dominated by family-owned conglomerates.

Prasetya’s background may be a factor. For seven years, he headed the investment banking businesses at Morgan Stanley Asia in Indonesia. Investment bankers know how to get the deal done, but they are often detached from the hands-on operational work that is crucial to growing the acquired company. Consulting experience can complement deal skills as it tends to involve shaping and guiding a company’s operations. On the consulting side, his past experience was at Booz Allen Hamilton and Citibank.

But the other and maybe key ingredient – not found on the CV – has been the ability to reach a comfort level with the large family groups that control many Southeast Asian economies. In Indonesia, Prasetya has successfully negotiated two deals with the Riadys, the powerful Indonesian family who owns the $22 billion Lippo Group.

After Matahari, a second deal with Lippo came in 2011 when Prasetya led the negotiations for PT Link, Indonesia’s second largest cable TV business. CVC invested $275 million for a 49 percent stake, the maximum ownership allowable for a foreign firm in the media sector.

Yet deals with families have issues. An outsider holding the lesser stake in a family business may have higher investment risk. No firm wants a portfolio that places bets on several companies owned by one family. And because family conglomerates can be fiercely competitive, deals with one may exclude deals with others. It’s a challenge for all private equity firms to navigate this landscape. 

TROUBLE DOWN UNDER

Prasetya brushes aside the suggestion he is a deal king or ace negotiator and points out that Brian Hong, senior managing director, led two of the Southeast Asia deals. In fact, Prasetya has a quiet temperament and tends to avoid the spotlight. But CVC is certainly among the heavyweights investing in Asia. Since entering the region in 1999, the UK-based firm has raised increasingly larger pan-Asia funds. Fund I raised $750 million in 2000; five years later it closed Fund II on $2 billion. And in 2011, it closed Fund III on $4.1 billion – one of the largest pan-regional funds raised for Asia at the time.

Through those funds, the firm brought its buyout and control orientation into Asia. The discipline in maintaining a consistent investment strategy with the funds the firm has managed in Europe would seem to appeal to LPs,

particularly given some of the European funds’ positive performance. But what became clear was that CVC was a buyout firm in a region where there are few buyouts, and looking for a single type of deal keeps a firm out of a lot of conversations. LBOs in Asia are largely limited to Japan, Australia and Korea.

“In Europe we’re primarily a buyout firm, but in Asia we realise buyouts are less prevalent,” Prasetya says. “If we have to invest in a minority stake that’s fine with us as long as we can add value and we have significant influence in the business. That includes agreeing on a business plan up front with controlling shareholders and with management. We want to be active investors. In Asia, finding opportunities where you can add more value than capital is important.”

Recent minority deals include the purchase of a 15 percent stake in Philippines bank RCBC last year and an undisclosed minority stake in China-based Venturepharma Group in April.

But it wasn’t only the lack of buyouts that increased the firm’s appetite for smaller stakes. CVC’s second fund proved to be problematic.

“CVC’s first fund was a knockout in terms of performance (for its vintage) among the top funds globally,” according to an industry source. That permitted CVC to raise $2 billion for a second Asia fund which was focused on buyouts or control LBOs predominantly in Japan, Australia and Korea.

The larger second fund also coincided with the pre-crisis boom years, when deals were done at peak prices with lots of leverage, particularly in Australia. CVC was not alone. Several firms overpaid during this period. For example, Unitas Capital and Canada’s Ontario Teachers’ Pension Plan acquired NZ Yellow Pages in a $1.54 billion leveraged buyout, a price that represented 13.6 times the company’s earnings for 2006.

CVC’s second fund hasn’t performed well, two industry sources who requested anonymity told PE Asia, largely due to difficulties with portfolio companies in Australia and Japan. As of 31 March, Fund II’s internal rate of return was negative 3.61 percent, according to documents from the California State Teachers’ Retirement System.

Among the deals that soured was CVC’s 2006 purchase (together with Nomura) of Japan’s Skylark for $3 billion. Three years later, CVC reportedly handed over its remaining stake in the company to private equity firm Chuo Mitsui Capital in return for being absolved from having to repay loans taken out to finance the purchase of its stake.

In Australia, the firm had difficulties with investments in Stella Group and PBL Media. But the bigger burden has been the firm’s debt-ridden portfolio company Nine Entertainment, which has – so far – crippled Fund II. CVC has been fending off creditors that include Apollo Global Management and Oaktree Capital and has not yet been able to refinance A$2.6 billion of Nine’s debt, which comes due in February 2013.

Investments in these large Asia buyout deals often involved capital from CVC’s European funds, meaning all the firm’s clients were exposed to Fund II’s underperformance.

CVC could potentially lose more than $2 billion on Nine, one of the largest losses in private equity history, according to media reports, some of which claimed that the firm was pulling out of Australia entirely.

However, CVC Capital Partners, which typically doesn’t talk to the press, last year issued a statement denying it’s on the brink of massive losses, adding that Nine was not in breach of its financial covenants or in default under any of its banking agreements and that it “has proactively commenced discussions with its lenders regarding refinancing options”.

Prasetya would not comment on CVC’s Australia activity.

A source close to CVC said that in Australia, junior level employees have left because CVC will not do new deals while it sorts out current investments. But the managing partner and managing director are still there, the firm is not pulling out of Australia and when the portfolio is stabilised, CVC will continue to invest in the country.

As the firm wrestles with these investments, the troubled second Asia fund is on track to underperform among its peers, more than one industry source told PE Asia.

But CVC’s latest fund, with more emphasis on Southeast Asia and Greater China as well as minority stake deals, is looking much stronger, according to one LP.

Changing course seems to have been the right move.