New Enterprise Associates enjoys success with SMIC IPO

Amid volatility and espionage charges, New Enterprise Associates' (NEA) investment in Shanghai-based semiconductor manufacturer SMIC has been realised in a landmark public offering worth $1.8bn.

When NEA invested in Shanghai-based Semiconductor Manufacturing International Corporation (SMIC) last summer, the Baltimore-based venture capital firm was hoping to ride an anticipated upswing in global semiconductor demand.

It's been a bumpy ride up, but it looks as though NEA's $90 million (€73 million) China bet has paid off, at least for now. In March, SMIC, the world's fifth-largest contract chip maker, floated 5.15 billion shares, raising HK$14 billion (US$1.8 billion; €1.5 billion) and making it the third largest initial public offering in the world so far this year.

The IPO sold 25 percent of the company to the public, valuing NEA's 3.5 percent stake at roughly $252 million. Other big investors in the company include the city of Shanghai, Beijing University and Motorola.

SMIC's debut, however, saw the stock fall a surprising eight percent in Hong Kong and 11 percent in New York as investors reacted to ‘inaccurate statements’ made by SMIC's finance chief about having enough capital to meet planned expenditures through 2005, according to news reports.

Some investors were also wary of the company's valuation – the offering made the company more expensive than the world's top two Taiwan-based semiconductor makers, Taiwan Semiconductor Manufacturing and United Microelectronics (UMC), based on a price/earnings ratio. SMIC's book value is about the same as UMC, but half Taiwan Semiconductor's.

Add to this recent allegations made by archrival Taiwan Semiconductor that SMIC stole trade secrets, and it becomes clear that the company's gains will be hard-fought.

Despite its shaky start, many investors are still confident of SMIC's crucial role in the global semiconductor market. After all, the company grew to its current size in only four years. The secret of this success was timing, according to NEA general partner Dick Kramlich. When Texas Instruments veteran Richard Chang, SMIC's chief executive officer, decided to start up his own offshore fabrication facility in 2000, he took advantage of the worldwide down-swing in semiconductor demand to set up the first 12-inch fab foundry in China.

“Most of the cost in a semiconductor fab facility comes from the depreciation of manufacturing equipment,” says Kramlich. “[Chang] was value-conscious, buying equipment for 8- and 12-inch fab facilities during the semiconductor downturn, putting in an embedded cost at a competitive level.”

SMIC develops transistors at the .35- and .18-micron levels. The smaller the transistor, the more powerful the chip. Kramlich says SMIC is developing even finer line services down to the .13- and .09-micron level, which will help it maintain an edge on its competitors.

The company is growing as fast as the boomtown in which it is based. According to Kramlich, SMIC had approximately $800 million in revenue in 2003, compared with $365 million the previous year. SMIC expects to reach revenue of at least $1 billion for 2004.

And although 98 percent of 2003 sales were in the US, Europe and Japan, SMIC is also banking on prospects in the domestic market in the near future. Though the majority of chip supply to the country comes from abroad, Kramlich says direct sales to Chinese customers will grow significantly.

Australian private equity firm Catalyst Investment Managers is preparing to exit profitably from its investment in clothing company Just House, which is planning a share listing to raise A$540 million ($400 million; €330 million). Catalyst, owned by the UK's Prudential, invested an initial A$130 million in the company and currently owns 87 percent. The firm is also planning to take public Pacific Brands, a fashion house it bought in 2001 in partnership with CVC Asia Pacific.

In 2003, roughly $17.9 billion (€14.24 billion) was invested across Asia, compared with $10.45 billion in 2002, an increase of 91 percent, according to the Asia Venture Capital Journal. Japan was the leading market for investors with approximately $7.3 billion. South Korea placed second with $3.3 billion invested. Other top destinations for private equity capital last year were Australia ($2.8 billion), China ($1.28 billion), India ($774 million) and Indonesia ($653 million).

The Pennsylvania private equity consultant has launched an office in Singapore and named Alain Vandenborre to lead the effort. Vandenborre, 43, becomes a director and will spearhead the firm's business development activities in South East Asia. From 1990 to 1997, Vandenborre was head of international development at Suez Group, with responsibility for banking and direct investments in Asia. Then from 1998 to 2000 he was executive director and chief financial officer with Vivendi Universal in the Asia Pacific region. He is currently executive director of the Singapore Venture Capital Association and cochairman of the Asia Pacific Venture Capital Alliance.

Officials in Seoul are stepping up efforts to attract business growth in the country. Starting in July, the government will offer 50 percent to 100 percent tax cuts to start-up businesses that hire five or more employees. At the same time, the Korea Securities Research Institute (KSRI) has recently called for regulatory support for the establishment of Korean private equity funds to compete with the foreign groups currently prowling the country. A KSRI executive was recently quoted as saying: “The domestic corporate restructuring market has been overrun by foreign [private equity funds] such as Carlyle, Newbridge Capital and Lone Star. On the other hand, domestic restructuring efforts … have been limited due to cumbersome regulations.”

The global private equity firm has transferred two partners to India from its Singapore office. Rajesh Khanna and Pulak Prasad will now work from Mumbai, according to reports. Warburg Pincus is currently one of the biggest investors in India. Among Warburg Pincus' Indian investments are Venture Infotek, a provider of credit card processing; Moser Baer, a maker of optical storage discs; and World Network Services, an accounting outsourcing company. Warburg Pincus' Asia operations have seen some shuffling of late. Two months ago, the firm's Beijing co-head Wayne Wen-Tsui Tsou left to join Carlyle in Hong Kong.

VC firm Globespan Capital Partners announced the close of Globespan Capital Partners IV on $285 million (€230.6 million). The Boston- and Palo Alto-based firm started fundraising in January 2003 following its spinout from publicly traded Japanese venture capital firm JAFCO Ventures. The closing of the fund will bring the information technology investment specialist to more than $700 million under management.