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For more information on KPMGs Private Equity


Group in Asia Pacific, contact:

Contents

1
2
8
10

Key insights
The Asian context Churning investments
Regulatory influences on exit considerations China, Japan and Korea
Exit strategies Mitigating value leakage

11

Managing the exit process Perceived success factors

14

Agenda for action

16

How KPMGs Private Equity Group can help

Asia Pacific PE Group Leadership

Malaysia

David Nott

Hock Eng Lim

+61 (2) 9335 8265

+60 (3) 2095 3388

david.nott@kpmg.com.au

hockenglim@kpmg.com.my

Robert Stoneley

New Zealand

+852 3121 9850

Ian Thursfield

robert.stoneley@kpmg.com.hk

+64 (9) 367 5858

Australia

ithursfield@kpmg.com.nz

Jonathan Dunlop

Philippines

+61 (2) 9335 7633

Fernando Castro

jonathan.dunlop@kpmg.com.au

+63 (2) 894 1779

China and Hong Kong SAR

fcastro@kpmg.com.ph

Gavin Geminder

Singapore

+852 3121 9808

Diana Koh

gavin.geminder@kpmg.com.hk

+65 6213 2519

India

dianakoh@kpmg.com.sg

Abizer Diwanji

Taiwan

+91 (22) 2498 0473

Jay Cheng

adiwanji@in.kpmg.com

+866 (2) 2715 9716

Indonesia

jaycheng@kpmg.com.tw

David East

Thailand

+62 (21) 574 0877

Tanate Kasemsarn

deast@siddharta.co.id

+66 (2) 677 2750

Japan

tanate@kpmg.com.th

Tom Whitson

Vietnam

+81 (3) 5218 6789

Warrick Cleine

tomwhitson@jp.kpmg.com

+84 (8) 821 9266

Korea
Edward Kim
+82 (2) 2112 0770
edwardkim@kr.kpmg.com

warrickcleine@kpmg.com.vn

High time to exit: Strategies to help maximise value

Key insights

In order to better understand the disposals processes employed by private equity


funds and identify how they seek to maximise the returns for disposals, KPMG has
been actively surveying private equity houses, both in Asian and Western markets.
Our surveys found that areas where the approach to disposals can certainly be
improved include:
the importance of the vendor identifying issues in the business prior to prospective
purchasers doing so
the need to commit sufficient and appropriate resource to the process
the need to try to ensure the value in the business is not eroded by rumour and
uncertainty
setting a detailed and realistic timetable for the disposal process
It is a common misconception that buyers face most of the challenges in a transaction.
In fact, divesting a business is as complicated and resource-intensive for the seller as
the acquisition is for the buyer. There is room for improving the disposals process. This
will become more important in Asia Pacific as more funds become available and
buyers become more sophisticated.

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

The Asian context


churning investments
Private equity houses in the Asia Pacific region have been churning their investments.
The value of exits in the nine months to September 2005 is over four times that of the
whole of 2002 and shows no sign of abating.
The prospect of greater returns as well as a global increase in the allocation of funds to
private equity as an alternative asset class brought a large amount of such funds to
Asia Pacific during the late 1990s and early 2000s. This year the trend has been
magnified by the closing of three large, Asia focused funds:
CVC Asia Pacifics CVC Capital Partners Asia Pacific II, the largest Asia Pacific
focused fund closed in May with US$1.975 billion; 1
JP Morgan Partners Asia Opportunities Fund II closed in September with
US$1.574 billion; 2 and
Warburg Pincus Warburg Pincus Private Equity IX, LP, closed in August at
US$8 billion. This fund had Asia as one of its target markets.3
One factor which may be encouraging this increased inflow of money to Asia-specific
private equity funds is the profits made on recent exits which have delivered stellar
returns to their investors. China Mengniu Dairy,4 Petra Foods,5 Ping An Insurance
Company,6 just to name a few, all produced record returns for their investors. The
anticipated divestments of Mando Corp and Korea Exchange Bank in Korea 7 as well as
Mphasis in India 8 are equally promising.
Overall, this reflects an uptrend for divestitures in Asia Pacific. The number of private
equity backed trade sales and IPOs increased by 33 percent between 2002 and 2004,
from 186 to 247.9 2005 looks to be less active in terms of numbers, with 160 exits
over nine months.10 The value of exits via trade sales is set to break the 2004 record
while the value of IPO exits falling off significantly from the 2004 peak.11

________________________________
1

Press release by CVC Capital Partners, 4 May 2005

Press release by JP Morgan Chase, 7 September 2005

Press release by Warburg Pincus 15 August 2005

China Milk, Asia Private Equity Review, 1 July 2005

Sweet Return for CLSA Private Equity, Asia Private Equity Review, 1 June 2005

Goldman Sachs and Morgan Stanley units sell Ping An Insurance Holdings, Asia Private Equity Review, 1 June 2005

In Anticipation, Asia Private Equity Review, 1 September 2005

Time to Exit, Asia Private Equity Review, 1 August 2005

AVCJ Database, September 2005

10 Ibid
11 Ibid

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

Three years ago, private equity-backed IPOs were nearly double trade sales; for the
first nine months of 2005 the balance between trade sales and IPO exits is much
closer.12 This substantial increase in the number of exits via the trade sales route
reflects a general strong flow of funds to equity investment in this region from
strategic buyers, giving private equity houses a favourable market in which to realise
gains.

Number of private equity-backed exits in Asia Pacific


includes Australia, New Zealand and Japan

154

160
140

140
122
120
103
100

93

88

80

72
64

60
40
20

Number of trade sales


Number of private equity-backed

2002

2003

2004

2005

IPOs

15 Sept
________________________________
Source: AVCJ Database, September 2005

Value of private equity-backed exits in Asia Pacific


includes Australia, New Zealand and Japan

16,000
13,631

14,000

13,976
12,918

US$ million

12,000
1,000
8,000
6,357
6,000
4,000
2,000

5,205
3,148
1,735

2,299
Trade sales transaction amount
Private equity-backed IPO fund

2002

2003

2004

2005

raised

15 Sept
________________________________
Source: AVCJ Database, September 2005

________________________________
12 AVCJ Database, September 2005

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

The value of exits from trade sales and from IPOs in 2004 was over US$27 billion
compared to nearly US$5 billion in 2002.13 For the first nine months of 2005 trade sales
are nearly the same as the whole of 2004 while the value of exits via IPO has declined
substantially with the slew of listings in Hong Kong in excess of US$1 billion not being
replicated (Tables 1 and 2).

Table 1: Top 5 private equity-backed IPOs 2004


Issuer Name

Stock Exchange

Listing
Date

Total Funds
Raised
(US$m)

Shinsei Bank, Ltd.

Tokyo Stock
Exchange 1

Feb 04

2,164.37

ABN AMRO Capital Investment - Tokyo Office


Ripplewood Japan Inc.
RIT Capital Partners Plc.

Ping An Insurance
(Group) Company
of China, Ltd.

Stock Exchange
of Hong Kong
- Mainboard

Jun 04

1,840.86

Goldman Sachs (Asia) Ltd.


Morgan Stanley Private Equity Asia Ltd.

Semiconductor
Manufacturing
International Corp.
(SMIC)

Stock Exchange
of Hong Kong
- Mainboard

Mar 04

1,779.31

Fortune Venture Management Pte. Ltd.


Goldman Sachs (Asia) Ltd.
Goldman Sachs Capital Partners, Inc.
H&Q Beijing
New Enterprise Associates
Oak Investment Partners
Shanghai Fortune Venture Ltd.
Temasek Holdings (HK) Ltd.
Vertex China Investment
Vertex Management (III) Pte Ltd.
Walden International Hong Kong Ltd.
Walden International China Ltd.

China Netcom
Group Corporation
(Hong Kong) Ltd.

Stock Exchange
of Hong Kong
- Mainboard

Nov 04

1,138.90

Goldman Sachs (Asia) Ltd.


Shanghai Alliance Investment Ltd. (SAIL)

Elpida Memory Inc.

Tokyo Stock
Exchange 1

Nov 04

1,056.56

Development Bank of Japan (DBJ)


Intel Capital Japan

________________________________
Source: AVCJ Database, September 2005

________________________________
13 AVCJ Database, September 2005

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

Financial Investors

High time to exit: Strategies to help maximise value

Table 2: Top 5 private equity-backed IPOs 2005 (Jan-Sept)


Issuer Name

Stock Exchange

Listing
Date

Total Funds
Raised
(US$m)

Financial Investors

ACCA Networks
Co. Ltd.

JASDAQ
- Japan

Mar 05

2,458.54

AMS Life Science

JASDAQ
- Japan

Mar 05

330.48

Shizuoka Capital Co. Ltd.

kabu.com Securities
Co., Ltd.

Tokyo Stock
Exchange 1

Mar 05

172.85

ITOCHU Finance Corp.


ITOCHU Technology Ventures, Inc.

Focus Media (China)


Holding Co., Ltd.

NASDAQ
USA

Jul 05

171.7

Feb 05

141.88

Olam International Ltd. Singapore


Exchange
- Mainboard

GE Equity Japan
Ignite Japan KK
NIF Ventures Co., Ltd.
Nissay Capital Co. Ltd.
ORIX Capital Corporation
SMBC Capital Co., Ltd.
Temasek Holdings (HK) Ltd.
The Diamond Capital Co. Ltd.
Tokio Marine Capital Co., Ltd.
UFJ Capital Co., Ltd.

3i Asia Pacific
CDH China Holding Management Co., Ltd.
China Merchants & Fortune Assets
Management Ltd.
Draper Fisher Jurvetson ePlanet International
Advisors
Goldman Sachs (Asia) Ltd.
Milestone Capital Management Ltd.
SOFTBANK China Venture Capital
United Capital Investment Group (China) Ltd.
Venture TDF Shanghai Co. Ltd.
WI Harper Group
AIF Funds Management Ltd.
International Finance Corporation (IFC)
Temasek Holdings Pte. Ltd.

________________________________
Source: AVCJ Database, September 2005

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

In 2005, the value of trade sales has far outstripped that of IPOs, being over double,
reflecting the preferred exit route this year for certain large investments (Tables 3
and 4).
Table 3: Top private equity-backed trade sales 2004
Target/
Investee
Name

Japan Telecom
Co., Ltd.

Amount
(US$m)

Date

3,069.75

May 04

Deal Target/
Stake Investee
%
Country

Sellers

Acquirers

100

Goldman Sachs (Asia)


Ltd. (Hong Kong)

Soft Bank Corp


(Japan)

Japan

Goldman Sachs Capital


Partners, Inc.
(United States)
Newbridge Capital
Japan (Japan)
PPM Ventures Japan
(Japan)
Telecom Venture Group
Ltd. (Hong Kong)
KorAm Bank

2,710.63

Feb 04

100

South
Korea

Carlyle Asia - Korea


(South Korea)

Citigroup Inc.
(United States)

CDP Asia Investments


Inc. (Hong Kong)
JP Morgan Corsair, Inc.
(United States)
PAMA Group Inc.
(South Korea)
Standard Chartered PLC
(United Kingdom)
Epic Energy
Dampier-to-Bunbury
pipeline

1,315.58

Aug 04

100

Australia

AMP Capital Investors


Ltd. (Australia)
DB Capital Partners
(Australia)

Alcoa Inc. (United States)


Alinta Ltd. (Australia)
Macquarie Bank Ltd.
(Australia)

Dominion Resources Inc


(United States)
Hastings Funds
Management Pty Ltd.
(Australia)
Singapore
Telecommunications
Ltd. (SingTel)
Epic Energy 'Rest'
gas pipeline assets

1,240.47

Jan 04

5.5

Singapore Temasek Holdings


Pte. Ltd. (Singapore)

Undisclosed Investor(s)
(Singapore)

504.68

Apr 04

100

Australia

Utilities Trust II
(Australia)

AMP Capital Investors


Ltd. (Australia)
CNG Energy
(United States)
DB Capital Partners
(Australia)
El Paso Energy
International
(United States)

________________________________
Source: AVCJ Database, September 2005

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

Table 4: Top private equity-backed trade sales 2005 (Jan-Sep)


Target/
Investee
Name

Korea First Bank

Amount
(US$m)

Date

3,257.20

Jan 05

Deal Target/
Stake Investee
%
Country

Sellers

100

Korea Deposit Insurance Standard Chartered


Corp. (South Korea)
PLC (United Kingdom)

South
Korea

Acquirers

Newbridge Capital
LLC (South Korea)
Ministry of Finance and
Economy (South Korea)
Affinity Health Ltd.

1,103.14

Apr 05

100

Australia

Affinity Healthmanagement (Australia)

Ramsay Health Care


Ltd. (Australia)

CVC Asia Pacific


(Australia) Ltd.
(Australia)
GIC Special Investments
Pte Ltd. (Singapore)
Ironbridge Capital Pty.
Ltd. (Australia)
Ping An Insurance
(Group) Company
of China, Ltd.

1,040.04

BPL
Communications
Ltd.

1,011.03

May 05

9.91

China
(PRC)

Goldman Sachs (Asia)


Ltd. (Hong Kong)

HSBC Insurance
Holdings (Hong Kong)

Morgan Stanley Private


Equity Asia Limited
(Hong Kong)
Jul 05

100

India

Actis Capital LLP. (India)


AIG Global Investment

Essar Group (India)

Corporation (Mauritius)
Ltd. (India)
AIMAC Group (Singapore)
BPL Communications Ltd.
(India)
TVG Capital Partners Ltd.
(Hong Kong)

Taiwan Broadband
Communications Co.

632.44

Apr 05

100

Taiwan

Carlyle Asia (Hong Kong) Taiwan Fixed Network


Telecom (Taiwan)

________________________________
Source: AVCJ Database, September 2005

It should be noted that the total value of transactions in 2005 looks to be less than
that of 2004 (US$18,123 million over the first nine months of 2005 against
US$27,607 million in 2004). Taken together with the plateau in the number of trade
sales and the decrease in the number of IPO backed exits, these numbers suggest a
possible slowdown or plateau in exits for private equity as the sector reacts to some of
the government intervention around the region (see pages 8 and 9). This is likely to
result in an investment overhang given the amount of funds invested in the region.
Certainly in the short term, economic uncertainty driven largely by raising oil prices and
the twin spectres of terrorism and bird flu will temper the appetites of equity markets
and strategic buyers.

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

Regulatory influences on exit considerations

China
In terms of private equity investment and
exit strategies, China has been a bit of a
paradox. Private equity investment has
gained more attention among local

Internal taxation as a new FIE, the

originally to address internal issues the

higher Chinese tax rates or taxation of

Chinese central government wanted to

offshore investment returns;

rectify, but ended up having far greater

Dissipation of assets many

businesses, but successful exits are

managers or controllers of Chinese

largely subject to the availability of

State-owned Enterprises (SOEs) would

offshore vehicles.

acquire equity or assets through an

Chinese entities or individuals usually set


up an offshore special purpose vehicle
(SPV), usually with a mirroring structure
to the domestic company. They then
transfer their equity in the domestic
company to the SPV through a share

The rationale of the Circulars was

offshore SPV is no longer subject to

offshore SPV at a price substantially


lower than the market. The offshore
SPV could then sell the shares at a
significantly higher price, clearly a loss
to the Chinese state; and

reach. As one could guess, this onerous


application process only complicated
private equity investments, where the
freedom of exits is vital. The net effect
was a decrease in private equity-backed
investments. According to Zero2IPO (a
Beijing-based venture capital research
firm), venture investment was down by
8.1 percent in 2005, compared to the first
half of 2004.

Weak domestic stock market

swap, thus changing the legal structure of

allowing offshore SPVs did little to

the company to a Foreign Invested

encourage listing on domestic

Enterprise (FIE) and converting the

markets, when an overseas listing

controlling equity interests to the SPV.

could easily yield a much higher return

Then the offshore SPV can conveniently

on investment.

Given the stringent internal measures


that exist on foreign currency transfers
out of mainland China, and the lack of
robust and liquid stock markets,
managing successful exits in China is
highly dependent on the availability of

seek investment through private equity

It was these aforementioned areas that

investors or through an eventual listing.

offshore structuring. To maximise the

were generally believed to lead to some

potential for solid returns, while

This structure, although great for foreign

stringent regulations imposed by the

mitigating downside risks, we advise

private equity investors and foreign

State Administration of Foreign Exchange

private equity investors to seek quality

listings, led to some internal difficulties

(SAFE) to limit the flight of capital and

professional service firms that are familiar

for China. As a result, in 2004, the

assets.2 The regulations, generally

with the changing Chinese legal and

Chinese Academy of International Trade

referred to as SAFE Circulars 11 and 29,

regulatory environment.

and Economic Cooperation issued an

and their replacement 75, restricted the

extensive report 1 isolating some of the

ability of Chinese companies to

internal challenges related to offshore

restructure using offshore vehicles by

SPVs. Some of which included:

imposing strenuous application


processes. To many investors delight,
the revised draft Circular 75 is less
restrictive than the former two, but their
net effect is still uncertain.3

________________________________
1

Research on Issues of Transnational Capital Flight between the PRC and Offshore Financial Centres; August 2004

New rules from the State Administration of Foreign Exchange: the impact on offshore restructurings and cross-border transactions into China; Lovells 2005

In short, the circulars state that PRC residents-including non-Chinese citizens-must gain prior approval from SAFE and often the Ministry of Foreign Commerce (MOFCOM) before they can set up and hold shares in
offshore companies; a process which is retroactive as well.

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

Japan
Five years ago, private equity funds had
many attractive investment opportunities
in Japan but exits were difficult to
imagine. The IPO market was dead and
possible industrial buyers were mainly
focused on cleaning up their own balance
sheets.

certain Japanese equity investments. The

Newbridges 1999 investment in Korea

Japanese tax authorities are now able to

Exchange Bank for approximately

apply related party treatment to partners

US$500 million and sale to Standard

under certain foreign partnership

Chartered Bank for close to US$1.6

arrangements to determine whether the

billion.

partners should be subject to Japanese


tax on a disposal of shares in a Japanese
company held by the partnership. While
there is some relief available under

This success has been met with


increased scrutiny from Korean regulators
and the tax office, and has fueled
negative public sentiment towards

Since then, Ripplewoods sale of Japan

various tax treaties, the relief process can

Telecom to Softbank, and the Shinsei

place arduous disclosure requirements on

Bank and Tokyo Star Bank IPOs are high

certain types of investors. Another key

profile exits that show how the Japanese

recent practical development is that the

market is maturing. There is more fund

Japanese tax authorities are starting to

to fund activity. Other creative exits

take a more aggressive stance in

include the formation of Real Estate

assessing whether a foreign funds

Investment Trusts for real estate assets

Japanese operations can be considered

that have been acquired through NPL and

as a permanent establishment in Japan

other transactions. Ripplewoods

for Japanese tax purposes. Where such a

European listing of its Japanese portfolio

permanent establishment is found to

How will changes in the regulatory

of companies as part of RJH International

exist, this can lead to the imposition of, or

environment and increased scrutiny

is an especially creative way to monetise

an increase in, Japanese taxation on the

impact future private equity exits? Private

a group of investee companies which

funds income.

equity exit activity has been limited in the

foreign private equity capital. Korean


regulators and the National Tax Service
recently took a hard line against several
foreign funds in Korea, including Lone
Star, Carlyle and Goldman Sachs,
following investigations into capital gains
tax on the sale of local investments and
what Korean regulators perceive as
inappropriate business practices.

third quarter of 2005, so it may be too

may not be individually ready for disposal.

early to say. However, the Governments

Although Japanese industrial sellers

Korea

previously preferred quiet sales of non-

Private equity activity in Korea grew

core businesses on an exclusive basis,

to private equity funds, and the litmus

rapidly after the financial crisis in 1997,

we are now seeing more auctions as

test may come with Lone Stars

with foreign private equity funds

sellers realise that they can get a better

rumoured sale of Korea Exchange Bank.

brokering distressed asset deals with

price and a quicker sale through a well

limited competition from sophisticated

executed auction process.

local players.

Public outcry over the perception that

Several of these investments have

foreign private equity funds are spiriting

approaching a sale, and specifically the

proven to be very successful. Two such

enormous profits out of Japan nearly tax

impact of any changes to tax regulations

success stories are Lone Stars 2001

free was a factor in the 2005 tax

that may have occurred during the

purchase of Star Tower for approximately

programme to widen the scope of those

investment period.

US$600 million and subsequent sale to

who will pay Japanese tax on exits from

GIC for nearly US$950 million, and

stance may present significant challenges

Given the increased scrutiny on private


equity funds, careful consideration needs
to be given to tax implications when

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

10

High time to exit: Strategies to help maximise value

Exit Strategies
mitigating value leakage
Divestment of an investment is clearly part of the private equity fund strategy. It is a
core part of their mandate. Is there anything we can learn from their divestment
processes that can be used to derive industry best practice processes which can be
applied more generally?
KPMG conducted two surveys of M&A decision makers, one covering European and
American and the other Asian private equity houses to identify approaches, practices
and problems associated with and encountered during the disposals process.14 The
surveys also included corporations strategic buyers in order to see if there were
any observable differences in the processes they employed compared to private
equity funds.
The surveys found that areas where the approach to disposals can certainly be
improved include:
the importance of the vendor identifying issues in the business prior to prospective
purchasers doing so
the need to commit sufficient and appropriate resource to the process
the need to try to ensure the value in the business is not eroded by rumour and
uncertainty
setting a detailed and realistic timetable for the disposal process
More than anything else, value erosion is closely associated with delays in the process
and decision-makers acknowledged that delays were one of the most common
problems they faced when implementing a disposal.
However, value erosion does not end with agreement of the final price. Posttransaction problems are common. These include managing the post-disposal
transition, unforeseen warranty and indemnity claims, tax consequences and higher
than expected deal costs.
Based on the results of these surveys, over a third of respondents suffered value
leakage by a reduction in bid price during the disposal process. In fact, 35 percent of
our respondents completed their most recent disposal at a price significantly below
(20 percent on average) their own valuation and expected selling price.
Interestingly, our Asia Pacific research found that private equity houses devote more
resources to obtaining a clear understanding of the business, accurate performance
forecasts, and a realistic valuation, and they put more effort to developing a
presentation of the divested businesss future opportunities than corporations. Overall
private equity houses experienced less value leakage than their corporate
counterparts, probably reflecting their competency in buying and selling portfolio
companies.

________________________________
14 Increasing value from disposals A case for professionalizing the sell side, KPMG International, 2004; Extracting more value from disposals
A survey of current practice in the Asia Pacific region, KPMG Transaction Services (Australia) Pty Limited, 2004

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

11

Managing the exit process


perceived success factors
With a view to understanding what respondents had done right, these surveys also
looked at the tactical goals which they focused on to maximise the value of the exits.
The most important tactical goals identified by respondents to the survey were finding
the right purchaser, minimising value erosion and maintaining control over the process.
It is interesting to note that private equity houses seem to place less emphasis on
managing tax consequences than corporates. It is likely that the low priority assigned
by private equity houses reflects the fact that potential tax issues would have been
considered as part of deal structuring at the time of the acquisition to try to ensure
there is a clean exit.
As serial deal makers, private equity houses clearly see the value in finding the right
purchaser the right purchaser will see more value enhancement in doing a deal than
other potential purchasers and that should assist in the achievement of other tactical goals.
In the Asia Pacific research we found private equity houses were concerned about
reducing warranties and indemnities than their corporate counterparts. The fact that
private equity houses usually distribute the proceeds of a disposal explains their
concerns over post-sale risk and liabilities.

Tactical goals
92%

Finding the best purchaser

74%
88%

Reducing value leakage

73%
82%

Maintaining control of the process

77%

Minimising warranties
and indemnities

74%
60%
40%

Managing tax consequences


Minimising the time frame
of the transaction

67%
32%
38%
Private equity houses

________________________________

Corporates

Source: Increasing value from disposals, KPMG International, 2004

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

12

High time to exit: Strategies to help maximise value

With a view to controlling the divestment process, respondents were asked to identify
critical elements in the disposals process.

Critical elements in the disposals process


78%
78%

Evaluating disposal options

74%

Reducing value leakage

54%

Collation of financial, commerical,


legal and other information

70%
74%
56%

Completion statements and


price adjustments

72%
55%

Vendor due diligence

44%
53%

Production of information
memorandum

60%
Private equity houses
Corporates

________________________________
Source: Increasing value from disposals, KPMG International, 2004

Both corporates and private equity houses agreed on the importance of clearly
evaluating the disposal options. Among corporates, restructuring is the most favoured
alternative to a disposal. Among the private equity house respondents, 52 percent
identified refinancing as the main alternative if a straight exit was not a viable option,
as this released cash to the investors. In addition, refinancing is being used as a
method of releasing equity at a relatively early state, allowing for risk mitigation. It
certainly changes the profile of cash flows being returned to limited partners and may
result in more fund extensions if holding periods increase.15

Alternative options to disposal corporates


Restructuring/re-organisation

46%

Continue to run the business

21%

Closure/Equidation

15%

Joint venture
Refinancing

14%
10%

________________________________
Source: Increasing value from disposals, KPMG International, 2004

________________________________
15 Insight into realising value 2004, KPMG LLP (UK)

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

13

Besides refinancing, there are other alternative realisation strategies available to


private equity houses. These include:
Secondary buyouts
Dividend returns
Development of new exit routes such as Canadian Income Trusts for US private
equity houses
While these are currently not popular due to the IPO and trade sale activity in the Asia
Pacific, the possibility of a slowdown in exits based on the volume and value of
transactions in 2005 could force some private equity houses to consider them more
seriously.
There is however, less clarity on other aspects of the process. Corporates identified
pre-sale review and due diligence as more important than private equity houses did. In
our opinion this reflects in part the fact that private equity houses are preparing to exit
from the time of the initial investment and are more likely to have an understanding of,
and deal with, many of the likely disposal issues well in advance of the sale or
auction process. Private equity houses are considerably more concerned with
avoiding surprises in their disposal process compared to corporations. Private equity
houses were clearly more focused than corporations on the completion accounts and
price adjustments: as serial deal makers they realise that this is a common area of
value erosion as poor contract drafting, unforeseen working capital adjustments and
due diligence/warranty adjustments can cause price adjustments from the preferred
bid price which are unexpected.

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

14

High time to exit: Strategies to help maximise value

Agenda for action

Corporate organisations and private equity funds which focus on certain key areas and
have well defined processes can increase the value from disposals and in so doing
reduce, if not avoid, value leakage during the process. KPMGs Private Equity practice
believes the key areas of focus in a high quality disposal process include:

Strategic assessment
Validate the selling opportunity and likely market for the target before commencing
the process.
Conduct a pre-sale review and carry out sufficient due diligence on the business.
Assess alternative options to the disposal process and the pros and cons for each
of these.

Preparation and planning


Establish a realistic timetable and set clear objectives by which success can be
measured.
Assess bidders requirements up front and, allowing for commercial sensitivities,
provide as much information as possible to allow bidders to put a value on any
upside in the business plan or potential synergies.
Produce a credible and dispassionate valuation which can be substantiated with
detailed information.
Consider human resources aspects including how to keep employees motivated/
incentivised throughout the process.
Give early consideration to the drafting of shared service arrangements including
the establishment of transitional management arrangements to protect the vendors
interests.

Value preservation
Keep tight control of the process and the timetable.
Package bad news up front in order that bidders value it in the same way.
Monitor the value and timing of a disposal at board level it is not a process that
can be delegated.

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

High time to exit: Strategies to help maximise value

15

Completion
Be aware of what can go wrong after the deal is signed and incorporate this into the
drafting of the sale and purchase agreement.
Perform sufficient due diligence on warranties and indemnities to be provided.

Post transaction
Conduct a formal review of the process to determine whether objectives have been
met and capture key learning points for future disposals.

Follow-up research is under way to identify how perceptions have changed since the
initial reports were issued and to what degree private equity houses have focused on
the key areas in a high quality disposal process identified above.
With the possibility of a shortfall in liquidity as evidenced by the volume and value of
transactions in 2005, increasing value for exits will certainly come into the forefront of
decision makers.

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

16

High time to exit: Strategies to help maximise value

How KPMGs Private Equity


Group can help
KPMGs Private Equity Group is well-positioned to assist private equity groups in
managing the key areas of the disposals process. We are a group of experienced
private equity professionals from across the network of KPMG member firms, focused
on the needs of the private equity community and its investors.
We offer a coordinated approach to the industry, helping both middle market and large
leveraged buy-out private equity houses with their strategic, deal and portfolio
management issues. We believe in adopting a broader investment life-cycle
approach to creating value for investments.
Assisting private equity groups with disposals how KPMG can help:
Advise on tax issues especially in multi-jurisdictional businesses
Perform pre-exit business valuations
Assist in building credible plans to support a re-financing case
Assess whether a company is groomed effectively for disposal
Plan realisation strategies at the pre-investment deal stage
Carry out independent reports on projections underpinning re-financing cases
Perform vendor searches and due diligence
Provide sales strategies and partial exits advice
Provide personal tax advice
Provide debt advisory
Run the auction process

2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.

For more information on KPMGs Private Equity


Group in Asia Pacific, contact:

Contents

1
2
8
10

Key insights
The Asian context Churning investments
Regulatory influences on exit considerations China, Japan and Korea
Exit strategies Mitigating value leakage

11

Managing the exit process Perceived success factors

14

Agenda for action

16

How KPMGs Private Equity Group can help

Asia Pacific PE Group Leadership

Malaysia

David Nott

Hock Eng Lim

+61 (2) 9335 8265

+60 (3) 2095 3388

david.nott@kpmg.com.au

hockenglim@kpmg.com.my

Robert Stoneley

New Zealand

+852 3121 9850

Ian Thursfield

robert.stoneley@kpmg.com.hk

+64 (9) 367 5858

Australia

ithursfield@kpmg.com.nz

Jonathan Dunlop

Philippines

+61 (2) 9335 7633

Fernando Castro

jonathan.dunlop@kpmg.com.au

+63 (2) 894 1779

China and Hong Kong SAR

fcastro@kpmg.com.ph

Gavin Geminder

Singapore

+852 3121 9808

Diana Koh

gavin.geminder@kpmg.com.hk

+65 6213 2519

India

dianakoh@kpmg.com.sg

Abizer Diwanji

Taiwan

+91 (22) 2498 0473

Jay Cheng

adiwanji@in.kpmg.com

+866 (2) 2715 9716

Indonesia

jaycheng@kpmg.com.tw

David East

Thailand

+62 (21) 574 0877

Tanate Kasemsarn

deast@siddharta.co.id

+66 (2) 677 2750

Japan

tanate@kpmg.com.th

Tom Whitson

Vietnam

+81 (3) 5218 6789

Warrick Cleine

tomwhitson@jp.kpmg.com

+84 (8) 821 9266

Korea
Edward Kim
+82 (2) 2112 0770
edwardkim@kr.kpmg.com

warrickcleine@kpmg.com.vn

kpmhWdom

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