Australia loomed large in IPOs and trade sale exits in 2004, with the Australian clothing group Pacific Brands' US$957m IPO ranking third in the world for exits by private equity (PE) groups via IPOs. Another notable deal was the US$500m sale of Epic Energy's pipeline assets. Australian lawyers are au fait with PE developments here, so how are our neighbours faring?
New Zealand
Freehills and Mallesons in Australia and Pillsbury Winthrop in the US were the key legal advisers on Pacific Brand's IPO. In New Zealand, Chapman Tripp also saw some of the IPO action. Chapman Tripp partner, John Strowger, acted for the underwriters of Pacific Brands. He is realistic about the size of the New Zealand market (small) but enthusiastic about past and potential activity (up).
"These are not massive sums of money in comparison to the telephone numbers that funds are raising in Sydney," says Strowger, "but they are nevertheless a long way up from zero". Some 15 partners are active in private equity work at Chapman Tripp, a firm whose clients include Haraki Fund (a Goldman Sachs JBWere Fund), which has NZ$75m to spend following a successful capital raising at the start of the year. Another regular client is Vodacawa, an ABN Amro sponsored fund managed by Direct Capital, which was one of the founders of PE in NZ. Strowger recently advised Vodacawa on a NZ$55m raising.
The New Zealand government typically partners up with private business to encourage an entrepreneurial culture in a small but feisty economy, and it's no different with PE. The government established the NZ Venture Investment Fund Ltd (VIF), through which private investors can get a helping hand. VIF is mandated to assist the growth of the New Zealand venture capital industry, specifically through investing NZ$100m in selected private venture capital funds. VIF co-invests alongside private investors on a 1:2 ratio.
The NZ government has earmarked NZ$16m to co-invest alongside private investors in start-ups, with an emphasis on technology. Chapman Tripp has biotechnology clients taking advantage of the government initiative, including TMT Ventures Limited; a technology, media and communications fund managed by Direct Capital.
Chapman Tripp recently acted on TMT's NZ$8m investment in Argent Networks Limited, a leading developer of customer care and billing solutions to the fixed, mobile, broadband and next generation telecoms market. The firm also advised No 8 Ventures Management Limited and TMT on their NZ$3.4 investment in Esphion Limited, a leading developer of proactive solutions for mission critical IP networks and is expanding rapidly in Asia-Pacific. TMT and No 8 Ventures are both managers of the New Zealand government's VIF.
TMT is sitting on around NZ$80-100m of commitments. "For every NZ$2 the industry puts in, the government will put in NZ$1," says Strowger. "So it's a natural partner for something like TMT." The investment in Argent and Esphion brings the number of investments by VIF managers since 2003 to 15, and it is the fourth in which VIF managers have co-invested.
Unlike in Hong Kong, where private equity houses have encountered difficulties with exiting their investments via the stock market, New Zealand provides a favourable environment for private equity exits. Some Hong Kong funds travel down south for that reason. "I do a lot of work for PE funds out of Hong Kong in this part of the world. They end up with a cultural affinity with and an appetite for investment in Australasia. We have legal systems that are relatively certain and stable and political systems and an economic environment that is reasonably stable. That's a pretty significant advantage," says Strowger.
As for Hong Kong's tax advantage, again the competitive New Zealand government has taken care of that, putting in place more business-friendly tax policies than in neighbouring Australia. "Relative to Australia, it's a less regulated environment," says Strowger. "That doesn't mean it's the 'Wild West'. But we don't have stamp duty and the tax complications that Australian businesses inevitably have to grapple with.
"We have a level of cooperation in business practice that ensures that deals get done over here. I don't think we're as competitive as the environment in Australia - which is a good thing. There seems to be a focus in this part of the world on getting deals done - we're English in style rather than American, ie with a more pragmatic approach. We're not irresponsibly unregulated but it's a relatively light-handed regulation and that's a comparative advantage.
"The market isn't as crowded in NZ. In Australia, with the plethora of players, you inevitably have competition. But there are still deals done here where there isn't a level of bitter competition.
"PE activity is generally up in 2004 on 2003 volumes. That's consistent with a healthier stock exchange - there's been quite a market for IPOs in NZ this year. And although the numbers I could quote are feeble compared with Australia, there has been a considerable uplift in IPO activity [and M&A] in NZ this year and that has consequences - in terms of confidence - for everything else. You now have a couple of well-funded domestic guys out there looking to do deals."
Where in the PE cycle are we in New Zealand? "I suppose you could say the trigger's cocked - in terms of being funded," answers Strowger. "We're probably at a phase where people are looking for deals. Multiples are going up - funds are paying very significant multiples."
Another leading New Zealand firm in Strowger's opinion is Bell Gully, which has rainmaker James Gibson on board. Strowger and Gibson have cooperated previously. "I encourage potential clients that I can't act for to go to James," says Strowger. On venture capital, Simpson Grierson is also a major player.
Korea and Japan
Two of the most talked about PE transactions occurred in Korea. Standard Chartered Bank competed against HSBC Holdings in acquiring Korea First Bank from Newbridge Capital. HBSC Holdings offered US$3bn for Newbridge's stake in the bank.
Meanwhile, Hanaro Telecom won the bid to become the new shareholder of Korea Thrunet, which filed for bankruptcy in March 2003. Hanaro enlists both American International Group and Newbridge Capital as it principal shareholders. It offered more than KRW450bn (US$3.3bn) in taking over Thrunet.
Another great example of a Korean buyout transaction saw private equity firms Newbridge Capital, AIG Investment Corporation and TVG Ltd best the Korean chaebol LG to acquire a controlling stake in Korea's top broadband provider, Hanaro Telecom. The deal is valued at $1.1bn.
Japan continued its impressive run with almost US$3bn of funds raised for domestic investments, against US$1.36bn for the whole of 2003. In many respects Japan dominated the headlines in 2004. Rejuvenation of the Japanese economy, together with renewed foreign investment and lending by Japanese entities and the increased openness of the markets, has encouraged many businesses to expand their operations.
This strong run of investments has come alongside an epoch of exits, especially in Japan, where "the most profitable private equity deal of all time" - the US$2.16bn Shinsei Bank IPO - resulted in stellar returns for private equity firm Ripplewood and partners. The New Yorkbased firm bought the bank when it was still the Long Term Credit Bank of Japan in 1999 for US$1.15bn. Ripplewood also pulled off 2004's biggest trade sale - the US$3bn sale of Japan Telecom to SOFTBANK Corp. The Carlyle Group was close behind with the US$2.7bn sale of its KorAm Bank holdings to Citigroup. The listing of Shinsei Bank was a defining event for the industry. It was an outstanding investment performance by any measure.
It instilled a level of confidence in fund management firms that aspire to replicate such a success. Within a month of Shinsei Bank's debut, when the resurrection of Long Term Credit Bank (Shinsei Bank's previous name before taken over by the current management) mesmerised all investors, Citigroup and Nikko Cordial, one of Japan's largest securities firms, announced their intention to raise a ¥110bn (US$1.06bn) Nikko Citigroup Japan Fund. It was the first US$1bn buyout fund launched for Japan since Ripplewood Holdings' RHJ Industrial Partners back in 1999.
Other headline deals include Citi Venture Capital/CVC Asia Pacific's US$803m purchase of the non-memory assets of Korea's Hynix Semiconductor; and in Japan, Carlyle Group's US$1.9bn acquisition of Japan's DDI Pocket Inc.
China
As the market of choice for many foreign investment firms, the total amount of investments in China jumped to almost US$1.2bn, or five times the amount for the same period last year, which was marred by the SARS panic.
However, domestic China funds were able to raise only US$380m. The results suggest that while local funds continue to make progress, foreign interest in local opportunities is at an all-time high. Complaints of Chinese investments not finding profitable returns were also put to rest as the Middle Kingdom produced five of the Top Ten venture-backed IPOs in 2004. These included the US$1.84bn Ping An Insurance IPO in Hong Kong, the US$1.8bn dual listing of Semiconductor Manufacturing International Corp (SMIC), and several others.
US firm Paul, Weiss continued to benefit from the growing number of private equity investments in China. One of the firm's strengths is its practice in the media and technology industry. On the second round funding of Focus Media (China) Holdings Ltd Paul, Weiss counsel, Marcia Ellis, said in Asian Venture Capital Journal (AVCJ): "Both advertising and media are really interesting areas for investment right now ... From the advertising perspective, it's interesting because one of the drivers in television program production now in China is that it's starting to have product manufacturers invest in the production of the company in order to get placement." She added: "I think this is one interesting area that private equity funds have to consider now because it's an area that's growing so strongly that they have to think about having some of it in their portfolio."
Linking China and New Zealand, a Paul, Weiss PE deal in 2004 was for Plantation Timber Products Holdings Limited (PTPH), a portfolio company of JP Morgan Partners Asia, the Asian private equity arm of JP Morgan Chase and Search Investment Group. PTPH sold to Carter Holt Harvey of New Zealand its entire equity interest in the business of PTPH, which manufactures and distributes medium density fibreboard in China. The purchase price was US$134m. Paul, Weiss partner, Jack Lange, along with Marcia Ellis, authored an article titled "Illiquid Market Deters Investors". In it they point out several contributing actors that are hampering exits from private equity investments, including the unsuitability of the Chinese domestic capital markets for private equity exits and the lack of domestic institutional investors and private investment funds that provide liquidity. They observe that: "The main problem with foreign private equity investment in China is that it remains too dependent on foreigners." While noting that they believe the situation will change in time, they indicate that current investors will continue to utilise foreign listings and trade sales to foreign strategic buyers as exit routes.
Elsewhere, results were mixed in Southeast Asia, with Thailand and Malaysia showing remarkable improvements. Thai-focused firms invested almost US$200m, compared to US$23m in the first half of 2003, while Malaysian investments jumped to US$459m from the US$30m for the whole of 2003. Singapore and Indonesia showed drops in investment, with the former down to US$42m and the latter at US$43m for the first half of 2004.
Commenting on the results, AVCJ's publisher Dan Schwartz said: "Is this a bubble or the real thing? Asian private equity has always been and will continue to serve up a volatile brew. But with markets like India and China generating real wealth through global value add, and countries like Korea and Japan continuing to restructure, the time seems right to initiate an Asian investment strategy." He added: "Furthermore, the new trends of buyouts and outsourcing are more sustainable than the ephemeral bubble-era value hikes, setting great expectations for high and consistent growth."