Asia Private Equity Leaders’ Outlook 2010

Asia Private Equity Leaders’
Outlook
Industry Outlook for 2010 and beyond

January 2010
Global Intelligence Alliance©2010. All rights reserved.

Contact: Nicolas Pechet , Vice President, China, and Head of Private Equity practice, Nicolas.Pechet@globalintelligence.com
Vishwanath Desai, Senior Consultant, Vishwanath.Desai@globalintelligence.com
Web: www.globalintelligence.com
Tel: Hong Kong (852) 2107 4299 Singapore (65) 6423 1681 New York (1) 212 946 2628 London (44) 207 203 8382

All Rights Reserved ©2010 www.globalintelligence.com

Table of contents

This document contains excerpts from GIA’s “Asia Private Equity
Leaders’ Outlook” White Paper. For the entire free white paper, please
visit www.globalintelligence.com to get the full contents on:

Outlook for Private Equity in Asia In this slide show

Key Private Equity Strategies and Opportunities In this slide show

Snapshot of APAC Private Equity Investment Flows Available in complete version

Methodology:
This industry briefing is based on a month long study involving over 20 in-depth interviews with business leaders within Asia’s Private
Equity industry, including senior executives from Apax Partners, Baring Private Equity Asia, CLSA, GE Capital, Morgan Stanley, as well
as ongoing market monitoring and analysis of PE industry trends since 2008.
The report is provided as is, free of charge and without any warranty or guarantee. Global Intelligence Alliance accepts no responsibility
for errors or omissions, or for any loss or consequential loss arising as a result of decisions taken based on its contents.
©2010 Global Intelligence Alliance. All rights reserved. This report is copyrighted, however individual pages or portions thereof may
be copied referencing “Global Intelligence Alliance” as the source.

GIA Industry White Paper 1 / 2010: Asia Private Equity Leaders’ Outlook www.globalintelligence.com 2

Abbreviations and acronyms

APAC Asia Pacific
AUM Assets under management
BFS Banking and finance
bn Billion
CAGR Compound annual growth rate
FDI Foreign direct investment
GPs General Partners
IPO Initial public offering
KPI Key performance indicator
LPs Limited Partners
mn Million
PE Private equity
Q-o-Q Quarter-on-quarter
R&D Research & Development
ROI Return on investment
TMT Telecom, Media and Technology
UNCTAD United Nations Conference on Trade and Development.
Y-o-Y Year on Year


Outlook for Private Equity in Asia

www.globalintelligence.com


Outlook for PE sector in Asia is generally very positive,
though much uncertainty remains in short to medium term
“The Private Equity industry in Asia will undoubtedly continue to grow. The fundamentals of the region are right
and this presents great opportunities for Private Equity investors.”
- - Managing Director, GE Equity

Private equity leaders in Asia remain generally very positive about growth of their industry in the region given strong
economic fundamentals, particularly in several of the region’s top markets (i.e. China and India). However their outlook
on growth levels in the coming years varies substantially in light of economic uncertainty. Their expectations can be
captured along three key scenarios - strong growth, moderate growth, moderate growth and saturation.

Outlook for investment activities in Asia
Scenario 1:
Strong growth
Asian private equity aggregate fund
pool (2004-1H 2009, millions of USD) 262,317
254,037
Scenario 2:
Moderate
207,381 growth
Scenario 3:
166,139 Moderate growth
and saturation
134,981
110,590

1H ‘09
2004 2005 2006 2007 2008 2009 2012 2015
Source: Global Intelligence Alliance, Research & Analysis, Center for Asia Private Equity Research



Outlook for growth of PE sector in Asia
Scenario 1: Strong growth
•  Asia continues to recover from the economic downturn relatively faster than the US and Europe. Companies in
Asia continue to require capital to support expansion. Relatively low valuations caused by downturn attract PE
funds to close more deals in near term.
•  Economic growth of 7 % to 10% in India and China remains on track in coming years, while demand for capital
in these countries remains high in order to meet requirements for growth.
•  Strong economic growth absorbs PE investment and sustains further growth of PE industry.
•  High net worth individuals, sovereign funds and institutional asset managers continue to show strong interest in
exposure to PE in Asia, making prospects for raising PE capital in Asia very bright.

Scenario 2: Moderate growth
•  Asia continues to attract capital for PE funds, however, the inflow of PE capital gradually outpaces economic
growth and productive use for such capital, causing competition amongst private equity firms to intensify further.
PE investment returns drop as the market matures.
•  Some capital is ultimately redirected to more attractive asset classes in which risk adjusted returns are higher.

Scenario 3: Moderate growth and saturation
•  Overinvestment in many core sectors such as chemical and manufacturing, and excessive competition amongst
PE investors in the few remaining attractive sectors lead to weak PE investment returns.
•  Insufficient fund managers with skills to navigate PE funds through challenging cycles further limits growth. Only
the best PE firms with top talent continue to thrive and attract capital.
•  A substantial reduction in capital allocated to PE funds occurs, eventually bringing the industry back to a more
sustainable and balanced size.

“Lack of experienced and seasoned professionals and team who can manage capital and risk effectively through the various economic
cycles could be a key barrier for growth of private equity industry in Asia.”
-- Managing Director, Baring Private Equity Partners


Key Private Equity Strategies and
Opportunities


Key Private Equity Strategies and Opportunities

Key value creation areas by PE investors to portfolio
companies in Asia
1 Bringing international exposure to portfolio company management

•  Access to senior management professionals and advisors with specific expertise.
•  Cross border collaboration with other portfolio companies.
•  Support for expansion in overseas markets through network and other portfolio companies.

2 Assistance in business development and growth planning
•  Steering organic growth via focused 100 day plans as well as long term business planning.
•  Rapid growth through M&A and partnerships in international markets.

3 Understanding and advice on capital structure
•  Assistance in capital need identification, capital allocation and management.

4 Assistance for IPO readiness

•  Setting up corporate governance and financial reporting systems as a precursor to IPO.
•  Promoting management reporting and transparency.

5 Operational best practices and optimization
•  Performance measurement and planning.
•  Sharing practices such as Six Sigma, inventory optimization and lean manufacturing.

“As the industry matures, simple Pre-IPO deals will become less attractive. To maintain high returns, PE firms will have to
undertake deals where success depends more on improvement of the underlying business. Handling this operational risk
requires a different skill set.”
-- Former Investment Manager, Apax Partners


Key Private Equity Strategies and Opportunities

Opportunities created by global financial downturn
“I haven’t seen many deals at bargain valuations here in Asia. Companies that have focus on domestic markets
have done well. ”
-- Managing Director, Morgan Stanley Private Equity

Executives share that Private Equity firms in Asia were less impacted by the economic crisis as compared to many large
US or European funds. However, many US/European funds investing in Asia have been constrained in terms of ability to
exit deals, and have seen loss of some value during the recent cycle.

•  Quality of deals improved
During last 4 quarters, companies in all major sectors more or less saw the effect of economic slowdown. The deal flow
surged till 2nd quarter of 2009. As a result PE firms received high quality leads and improved deal quality.
•  Acquisitions multiples have gone low. Thus there now are good companies available at cheaper prices. PE firms
could assist portfolio companies better through strategic acquisitions/partnerships.

•  Competition moderated and principles of PE business underscored
•  Competition from “me too” deal makers and hedge funds got moderated during recent time.
•  PE fund managers and firms could convince investors about their capabilities to manage the portfolio successfully
through the downturn.

•  Importance of portfolio management increased
•  Due to unattractive exit options, PE firms preferred to stay longer in the existing deals to improve the performance of
portfolio companies.
•  Short term working capital management, customer focus, effective capital allocation and utilization by portfolio
companies.
•  Smaller positions (investments of small size) are now getting better attention as PE funds focus more on portfolio
management.

Research
Idea Portfolio
Screening / Due Exit
generation Management
Diligence

Shifting industry sector focus and deal sources
Key sectors for PE investment in Asia

Consumer & Financial Technology / Manufacturing /
Healthcare
Retail Services Media Industrial

Infrastructure Renewable Business
Agriculture Education
/Real Estate Energy Services

Current actively invested sectors
Future attractive sectors for investment Sector focused strategies

Key countries for PE investment in Asia
Deal sources % range
Individual referrals 5 – 20

Geography focused funds
Self researched & identified 10 – 50
S. Korea
China Japan Approached by companies 5 – 30

Hong Kong Investment banks/brokers 30 – 60
India
Others* 10 – 40
Vietnam
* includes small boutique I-Banks, accounting firms,
Singapore
consulting firms, industry associations, etc.

•  Deals sourced through individual referrals and
Australia networks tend to have a higher success rate for a
range of reasons (e.g. less competitive deal terms,
Source: GIA Research & Analysis higher trust factor, etc.).

Research
Idea Portfolio
Diligence

Growth capital screening process similar to US and EU, but more effort
required to forecast market growth and regulatory dynamics in Asia
•  Country’s macro-economic growth, legal frameworks/ investor
protection, geographical fit with fund mandate
•  Fundamentals of target industry/market, including industry size,
Market structure and growth potential

Screening
•  Competitive landscape and intensity, new entrants and barriers
to entry
Deal funnel •  Regulatory environment, government control / intervention

•  Strategic fit with firm’s investment mandate and clear strategy for
value creation during holding period
•  360 degree assessment of target company, including due
diligence on such factors as:

Due diligence
•  Business plan, business model, scalability, track record,
Company financials, etc.
•  Comparative advantages (e.g. IP, technology, brand, license,
etc.)
•  Management quality and compatibility
•  Top and bottom line growth potential
•  Legal, technology, operational, other risks
•  Capital requirements for expansion

Deal structuring
•  Etc.

•  Investment size
•  Entry price / valuation
Deal structure •  Holding period
•  Control
•  Other investor / shareholder rights and conditions
•  Exit options
Source: Global Intelligence Alliance Research & Analysis


Research
Idea Portfolio
Diligence

Key post investment priorities typically used by APAC PE
investors to lay foundations for long-term value creation
1 Working capital management to meet short term objectives
•  Re-negotiation of supplier contracts and centralizing procurement.
•  Supply chain improvement, reducing inventory, and optimization of working capital.
•  Cash-flow management and optimization.

2 Strengthening management of the company
•  Identification and prioritization of key issues for Board and management to address.
•  Incentive alignment of various stakeholders.

3 Financial and control system implementation
•  Assessment and improvement of financial reporting systems.
•  Implementation of policies to promote transparency.
•  Balance sheet management to manage risk while meeting long term needs.

4 Efficient capital allocation and capital usage
•  Identification of capital needs and alignment with growth objectives.
•  Prioritization of capital allocation and control on expenditure.

5 Implementation of operational level strategies
•  Identification of operational issues and implementation of improvement programs.
•  Implementation of operational improvement can be much more difficult in emerging Asian markets given gaps
in knowledge, and thus requires more hands on involvement from PE firm.


Research
Idea Portfolio
Diligence

Key value creation levers most commonly used by PE
executives interviewed
Very high impact High impact Moderate impact
Profit and loss Balance sheet
Sales optimization
Sales effectiveness Geographic/product Marketing Strategies External growth
Marketing Strategies
expansion
 New market entry  Customer need  Growth opportunities
 Distribution network  New markets focus assessment identification and target
• Customer need
 Increasing core
 Customer portfolio  New product and service  Screening acquisitions of
assessment
competencies
 Pricing optimization offering high potential targets
• Newew products & services
 N product and service  Post Merger Integration
offering efficiency
 R&D

CoGS optimization
Purchasing Inventory management Manufacturing Asset restructuring
 Total cost of ownership  Inventory optimization  Make-or-Buy  Sale of new core assets
(TCO) reduction  Efficient warehousing  Manufacturing footprint  Company restructuring
 Make-or-Buy optimization  Plant optimization
 Low-cost-country sourcing  Benchmarking
 Production efficiency

SG&A optimization
Sales focus optimization Supply chain G&A rationalization Working capital /
 Sales force efficiency and  Supplier network strategy  Overhead / support optimization
organization  Lead time reduction function efficiency  Supplier payment terms
 Compensation scheme  Shared services  Account receivable
 Off- and near shoring  Cash management
 IT performance


Research
Idea Portfolio
Diligence

Exit strategies heavily reliant on IPOs
IPO remains the preferred exit strategy for most funds across various APAC markets, though strategic/
trade sales and overseas backdoor listings are prevalent for smaller markets in South East Asia.

Number of exits in 2008 Exit strategies by key geographies
N = 176 exits •  IPOs will continue to be the key exit strategy,
particularly given the increasingly large
demand for IPOs in China and India, and
5% - Others, including falling capital controls allowing capital to flow
dividends and write-downs into those markets more freely.
•  China – Exit route is mainly via IPO, though
backdoor listing in overseas markets are
commonly used given long lead times to
31% complete IPOs domestically.
Strategic/ •  India – a mix of both IPO and trade sales
Trade sales with majority of deals exiting via IPO.
64% - IPO
•  South East Asia – exits tend to be more via
strategic/trade sales given limited domestic
IPO markets.
•  Korea – exits tend to be primarily via through
strategic/ trade sales, through domestic IPO
markets are increasingly robust.
•  Australia & Japan – a mix of strategic/trade
sales and IPOs.

Source: Global Intelligence Alliance Research & Analysis, Center for Asia Private Equity Research


Thank You for Your Attention

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GIA Industry White Paper 1 / 2010: Asia Private Equity Leaders’ Outlook www.globalintelligence.com

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We bring value to private equity investment decisions
  Independent 3rd party opinion on opportunity.   Interviews with local industry players along the value-
Fact based
  In-country industry expert network at critical stage chain (suppliers, competitors, distributors, retailers,
of transaction and development. decisions customers, regulatory and industry experts.
  We understand the PE investor mindset,   Cross-referencing and validation of critical data /
investment lifecycle and mode of cooperation. assumptions.

Value
  Conclusions based on end-to-end
  Leverage local industry experience. No Creation research, from suppliers to customers .
‘learning curve’ at your expense. Rapid Integrated   Global coverage, and local expertise in
  Answers in days, not weeks. diagnosis due diligence 16 countries in APAC.

    
Idea generation Screening Research/ Portfolio Exit
due diligence management

Sector topography Investment 360° target evaluation Identify, monitor and
and opportunity Identify and evaluate
identification quantify new threats &
studies and screening potential exit partners
Evaluation of investment developments
theses and assumptions
Development of Monitor industry exits/
Forecasting and impact
company screening
models Assess viability of target analysis of sectoral M&A activity
growth strategy and trends
ability to compete

Benchmark products/ System dynamics and
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market success
GIA’s suite of services to
Access network of industry insiders / domain
support investment decisions expertise to address hard to solve issues


Over the last decade, the private equity industry has
experienced dramatic growth in scale and ambition

Recent difficulties in fund raising coupled with defaults by portfolio companies mean challenging times for investors.

Intense rivalry between PE houses, and a scarcity of proprietary investment opportunities are leading to an increasing
focus on generating attractive proprietary deal flow, making superior investment decisions and on adding value to
portfolio companies.

Recognizing this we have developed a proprietary network of industry and technical consultants throughout the world as
the cornerstone of our approach to addressing our client’s commercial due diligence needs.

We can help you to address these challenges and more.
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Asia Private Equity Leaders’ Outlook 2010

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