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BEMI EJ =JT I=JJAM RD=ONKAQAM KM QE?A QAMN=.
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
14
16
Malaysia
David Nott
david.nott@kpmg.com.au
hockenglim@kpmg.com.my
Robert Stoneley
New Zealand
Ian Thursfield
robert.stoneley@kpmg.com.hk
Australia
ithursfield@kpmg.com.nz
Jonathan Dunlop
Philippines
Fernando Castro
jonathan.dunlop@kpmg.com.au
fcastro@kpmg.com.ph
Gavin Geminder
Singapore
Diana Koh
gavin.geminder@kpmg.com.hk
India
dianakoh@kpmg.com.sg
Abizer Diwanji
Taiwan
Jay Cheng
adiwanji@in.kpmg.com
Indonesia
jaycheng@kpmg.com.tw
David East
Thailand
Tanate Kasemsarn
deast@siddharta.co.id
Japan
tanate@kpmg.com.th
Tom Whitson
Vietnam
Warrick Cleine
tomwhitson@jp.kpmg.com
Korea
Edward Kim
+82 (2) 2112 0770
edwardkim@kr.kpmg.com
warrickcleine@kpmg.com.vn
Key insights
2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
________________________________
1
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
10 Ibid
11 Ibid
2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
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.
154
160
140
140
122
120
103
100
93
88
80
72
64
60
40
20
2002
2003
2004
2005
IPOs
15 Sept
________________________________
Source: AVCJ Database, September 2005
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.
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$1 billion not being
replicated (Tables 1 and 2).
Stock Exchange
Listing
Date
Total Funds
Raised
(US$m)
Tokyo Stock
Exchange 1
Feb 04
2,164.37
Ping An Insurance
(Group) Company
of China, Ltd.
Stock Exchange
of Hong Kong
- Mainboard
Jun 04
1,840.86
Semiconductor
Manufacturing
International Corp.
(SMIC)
Stock Exchange
of Hong Kong
- Mainboard
Mar 04
1,779.31
China Netcom
Group Corporation
(Hong Kong) Ltd.
Stock Exchange
of Hong Kong
- Mainboard
Nov 04
1,138.90
Tokyo Stock
Exchange 1
Nov 04
1,056.56
________________________________
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
Stock Exchange
Listing
Date
Total Funds
Raised
(US$m)
Financial Investors
ACCA Networks
Co. Ltd.
JASDAQ
- Japan
Mar 05
2,458.54
JASDAQ
- Japan
Mar 05
330.48
kabu.com Securities
Co., Ltd.
Tokyo Stock
Exchange 1
Mar 05
172.85
NASDAQ
USA
Jul 05
171.7
Feb 05
141.88
GE Equity Japan
Ignite Japan KK
NIF Ventures Co., Ltd.
Nissay Capital Co. Ltd.
ORIX Capital Corporation
SMBC Capital Co., Ltd.
Temasek Holdings (HK) Ltd.
The Diamond Capital Co. Ltd.
Tokio Marine Capital Co., Ltd.
UFJ Capital Co., Ltd.
3i Asia Pacific
CDH China Holding Management Co., Ltd.
China Merchants & Fortune Assets
Management Ltd.
Draper Fisher Jurvetson ePlanet International
Advisors
Goldman Sachs (Asia) Ltd.
Milestone Capital Management Ltd.
SOFTBANK China Venture Capital
United Capital Investment Group (China) Ltd.
Venture TDF Shanghai Co. Ltd.
WI Harper Group
AIF Funds Management Ltd.
International Finance Corporation (IFC)
Temasek Holdings Pte. Ltd.
________________________________
Source: AVCJ Database, September 2005
2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
In 2005, the value of trade sales has far outstripped that of IPOs, being over double,
reflecting the preferred exit route this year for certain large investments (Tables 3
and 4).
Table 3: Top private equity-backed trade sales 2004
Target/
Investee
Name
Japan Telecom
Co., Ltd.
Amount
(US$m)
Date
3,069.75
May 04
Deal Target/
Stake Investee
%
Country
Sellers
Acquirers
100
Japan
2,710.63
Feb 04
100
South
Korea
Citigroup Inc.
(United States)
1,315.58
Aug 04
100
Australia
1,240.47
Jan 04
5.5
Undisclosed Investor(s)
(Singapore)
504.68
Apr 04
100
Australia
Utilities Trust II
(Australia)
________________________________
Source: AVCJ Database, September 2005
2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
Amount
(US$m)
Date
3,257.20
Jan 05
Deal Target/
Stake Investee
%
Country
Sellers
100
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
1,040.04
BPL
Communications
Ltd.
1,011.03
May 05
9.91
China
(PRC)
HSBC Insurance
Holdings (Hong Kong)
100
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
________________________________
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.
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
offshore vehicles.
on investment.
regulatory environment.
________________________________
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.
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.
billion.
funds income.
Korea
local players.
investment period.
2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
10
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.
11
Tactical goals
92%
74%
88%
73%
82%
77%
Minimising warranties
and indemnities
74%
60%
40%
67%
32%
38%
Private equity houses
________________________________
Corporates
2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
12
With a view to controlling the divestment process, respondents were asked to identify
critical elements in the disposals process.
74%
54%
70%
74%
56%
72%
55%
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
46%
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.
13
2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
14
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.
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.
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
2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
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
14
16
Malaysia
David Nott
david.nott@kpmg.com.au
hockenglim@kpmg.com.my
Robert Stoneley
New Zealand
Ian Thursfield
robert.stoneley@kpmg.com.hk
Australia
ithursfield@kpmg.com.nz
Jonathan Dunlop
Philippines
Fernando Castro
jonathan.dunlop@kpmg.com.au
fcastro@kpmg.com.ph
Gavin Geminder
Singapore
Diana Koh
gavin.geminder@kpmg.com.hk
India
dianakoh@kpmg.com.sg
Abizer Diwanji
Taiwan
Jay Cheng
adiwanji@in.kpmg.com
Indonesia
jaycheng@kpmg.com.tw
David East
Thailand
Tanate Kasemsarn
deast@siddharta.co.id
Japan
tanate@kpmg.com.th
Tom Whitson
Vietnam
Warrick Cleine
tomwhitson@jp.kpmg.com
Korea
Edward Kim
+82 (2) 2112 0770
edwardkim@kr.kpmg.com
warrickcleine@kpmg.com.vn
kpmhWdom
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LMKBANNEKJ=H =@QE?A =BOAM = ODKMKPCD AS=IEJ=OEKJ KB ODA L=MOE?PH=M NEOP=OEKJ. 7:84 6JOAMJ=OEKJ=H EN = ;RENN
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