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Asia’s Private Equity News Source avcj.com August 19 2014 Volume 27 Number 30
ANALYSISFOCUS
Brownfield boom Australia tries to get super funds into new infrastructure as well as old Page 7
Building on tensionPE sees upside to China’s real estate pain Page 10
The drive to thrive?India seeks to boost investor sentiment Page 12
China infrastructure GPs see opportunity away from the mainstream
Page 14
Private equity identifies energy niches in Asia
Page 3
Ardian, Carlyle, CDH, Centurion, CVC, EPF, Fosun, GIC, IDG, Khazanah, KKR, MBK, Next Capital, Tiger Global, TPG, Samara
Page 4
EDITOR’S VIEWPOINT
NEWS
FOCUS
PRE-CONFERENCE ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM REAL ASSETS 2014
Blackstone’s Angelo Acconcia on Southeast Asia oil and gas
Page 15
INDUSTRY Q&A
Unlocking liquidity for private equity investors
www.collercapital.com London, New York, Hong Kong
Anything is possible if you work with the right partner
Number 30 | Volume 27 | August 19 2014 | avcj.com 3
EDITOR’S [email protected]
THE CONTINUED GROWTH OF THE ASIAN economies means increased demand for energy. Major Asian countries and corporations are rising to the challenge and paying top dollar for almost every oil and gas interest they can lay their hands on – not to mention extraction and production technologies. With relatively smaller war chests and shorter investment horizons, private equity may not be as competitive in such transactions.
According to AVCJ Research, there have been 82 private equity-related transactions in Asia’s energy space in the last three years, totaling $8.6 billion. This compares with $168 billion across 490 deals by other investors. It is a huge gap but also a deceptive one.
PE and VC investors can claim some credit for the North American shale gas revolution. They supported the development of technologies that have contributed to identification and extraction of energy assets previously beyond reach. In a similar way, PE investors have carved out an angle in the exploration and production (E&P) space, supporting start-ups that work alongside the national oil companies and multinationals.
It is a trend that started in North America but has since spread to Southeast Asia. In Pearl Energy (backed by 3i Group, sold to Mubadala), KrisEnergy (backed by First Reserve, went public) and Tamarind Energy (very recently backed by The Blackstone Group), we have examples of Asia energy veterans – geoscientists, engineers and operations specialists – who left major oil companies for private equity-funded start-ups.
Finding these groups is not easy, but their business model is reasonably straightforward: go
where the energy giants are not. Opportunities range from identifying unconventional resources such as coal-bed methane to focusing on stranded conventional deposits that are difficult to access or have been abandoned because oil majors conclude that the output no longer justifies the expense of being there. They leverage their local knowledge – plus the nimbleness of a start-up – to get the job done.
Speaking with industry professionals, the consensus view is that private equity money will continue to find its way not only into Asian E&P players but into the energy sector as a whole.
This is in part driven by global PE firms expanding their energy coverage into Asia – Blackstone is a seasoned operator in the sector but Tamarind is its first E&P deal in the region – and in part by signs that early entrants have profited from the experience. Another opportunity may come from divestments by multinational groups that, for whatever reason, are looking to exit certain Asian assets.
And if a private equity firm isn’t comfortable with direct exposure to energy projects, there are numerous ways to ride proxy on increased activity in Southeast Asia oil and gas, whether it is providing tug boats that ferry workers to and from oil rigs or high-tech imaging services to geology teams.
Allen LeePublishing DirectorAsian Venture Capital Journal
Oil angleManaging Editor
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Oil demand projections
Source: International Energy Agency
2011 2020 2035 OECD Bunkers Non-OECD ex China China - domestic China - imports
Mill
ion
barr
els p
er d
ay
100
80
60
40
20
0
avcj.com | August 19 2014 | Volume 27 | Number 304
ASIA PACIFIC
CBRE GMM closes Asia real estate fundThe investment arm of global real estate advisor CBRE has announced a final close on the Asia Alpha Plus III (AAP III) Fund of $236 million. AAPIII is the third in a series of closed-end funds targeting private equity real estate in the Asia Pacific region.
MVision CEO to move from London to Hong KongMounir Guen, founder and CEO of placement agent MVision is relocating from London to Hong Kong in order to lead the firm’s expansion in Asia. MVision will continue to be centrally managed from its London headquarters.
OMM funds partner joins DechertDean Collins, formerly partner and head of the Asia fund formation practice at O’Melveny & Myers (OMM), has joined Dechert as managing partner of the firm’s newly-opened Singapore office.
AUSTRALASIA
TA makes partial exit via Speedcast IPOSatellite telecom provider SpeedCast raised A$150 million ($139 million) via on IPO no the Australian bourse, facilitating a partial exit for TA Associates. The company sold 76.5 million shares - 26.3 million new shares and 50.2 million existing shares - at A$1.96 apiece.
Next Capital exits NZ bus operator to Maori fundsNext Capital has agreed to sell New Zealand bus operator Go Bus to Maori investment funds Ngai Tahu Holdings Corporation (NTHC) and Tainui Group Holdings (TGH). NTHC will take a two thirds interest in the company with TGH holding the remainder. The purchase price is reportedly NZ$170 million ($143 million).
Agri information service gets Series C roundAgworld, an Australia-based information exchange platform for farmers, has raised A$6
million ($5.6 million) in a Series C round of funding led by Reed Elsevier Ventures. Existing investor Yuuwa Capital also participated. Agworld’s services are used by more than 12,000 farmers in five countries, tracking performance over 35 million acres of cropland.
GREATER CHINA
Fosun, Ardian withdraw Club Med bidChinese conglomerate Fosun International
and Ardian Private Equity have withdrawn their takeover bid for French-based vacation resorts operator Club Méditerranée (Club Med). The move comes after French regulators gave the go-ahead to a rival offer made by Investindustrial, a private equity fund managed by Italian businessman Andrea Bonomi.
KKR-backed Rundong drops on HK debutRundong Auto Group,a Chinese car dealership backed by KKR, saw its shares drop as much as 16% on its Hong Kong trading debt on Tuesday, following a $124 million IPO. The retail portion of the IPO is understood to have received a lukewarm response from investors while the institutional tranche was only moderately oversubscribed.
Fosun PE units invest $110m in fishery firmFosun Group has acquired a 14.23% stake in CNFC Overseas Fishery for RMB681 million ($110 million), becoming the company’s second-largest shareholder. Four Fosun PE subsidiaries - Fosun Weishi, Fosun Capital, Fosun Venture Capital and Fosun Industrial Investment Fund - have acquired 105 million shares in CNFC at RMB6.46 apiece
China parenting site raises $24m from IDG, BanyanBanyan Capital and IDG Capital Partners have invested RMB 150 million ($24 million) in BeiBei, a Chinese online discount retail platform for maternity and baby products. The investment was made into Wuxiu E-Commerce, the owner and operator of BeiBei. It received $10 million in Series A funding from IDG in 2011.
Fosun VC, CDH invest $16m in China travel siteFosun Venture Capital Investment and return backer CDH Venture have invested in a RMB100 million ($16 million) Series B round of funding for Lailaihui, a Chinese online travel operator. The platform focuses on flash sales - offering goods at a discount for limited periods of time - of overseas travel packages to Chinese customers.
DG, Morningside back social networking appIDG Capital Partners and Morningside Technologies have invested $20 million in a Series B round of funding for Maimai, a Chinese social networking app for professionals. The
Carlyle, Tiger Global back China’s GanjiThe Carlyle Group and Tiger Global Management have invested $200 million in a further round of funding for Ganji.com, a Chinese mobile classifieds site. Carlyle, which will hold a minority stake in Ganji, provided equity from Carlyle Asia Partners IV, its latest pan-regional fund. The vehicle is still in the market, targeting $3.5 billion.
Established in 2005, Ganji provides classified ads across different service categories, including job recruitment, housing and local services, to over 350 cities in China. It connects small and
medium-sized enterprises, real estate agents and merchants with online customers.
“Ganji.com is led by a seasoned management team and has established a strong market position in China’s online marketplace with a proven business model,” said Eric Zhang, managing director at Carlyle. He added the platform is well-positioned to benefit from the evolution of industry digitalization, high demand for online classifieds, and increasing internet and mobile internet user base in China.
Ganji has previously raised $188 million across five rounds of financing since 2009. Backers are said to include BlueRun Ventures, Nokia Growth Partners, Capital Today, Sequoia Capital, CITIC Private Equity, Ontario Teachers’ Pension Plan and Macquarie Group.
NEWS
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avcj.com | August 19 2014 | Volume 27 | Number 306
round values the company at $100 million.
Centurion PE leads $6.5m round for GoGoVanCenturion Private Equity has led a $6.5 million Series A round investment in Hong Kong-based GoGoVan, a mobile app for on-demand delivery services. Launched in 2013, the app connects delivery drivers with customers and makes its money through the discounts on bulk acquisitions of fuel that is sold to drivers.
NORTH ASIA
MBK agrees $243m sale of Techpack SolutionsMBK Partners has agreed to sell bottle manufacturer Techpack Solutions to Dongwon Systems Corp, the industrial materials division of domestic conglomerate Dongwon Group, for KRW250 billion ($245 million). MBK acquired the business for $282.5 million - including $122.6 million in equity - in December 2008 through a carve-out from Doosan Corporation.
CVC set for exit from Korea’s WiniaMandoCVC Capital Partners is in exclusive discussions to sell WiniaMando, a South Korean manufacturer of kimchi refrigerators, to Hyundai Green Food, a subsidiary of leading domestic retailer Hyundai Department Store. The deal is worth around KRW150 billion ($146 million).
Walden Riverwood leads Series A for AtonarpWalden Riverwood Ventures has led an $8 million Series A round of funding for Atonarp, a Japanese developer of chemical sensors. Set up in 2009, Tokyo-headquartered Atonarp uses a combination of engineering and data analysis to provide ultra-trace chemical analysis solutions. Its technology is used across several sectors, including oil and gas and healthcare.
Japan’s Rakuten acquires VC-backed SliceJapanese e-commerce giant Rakuten has acquired Slice, a US-based e-commerce mobile app backed by Lightspeed Venture Partners and DCM, among others. Set up in 2010, Slice helps users to check online spending by allowing them to track packages, store online purchase information and get price drop alerts.
SOUTH ASIA
Sabre leads $8m round for dermatology specialistSabre Partners as led an $8 million Series B round of funding for Vyome Biosciences, an Indian bio-pharmaceutical company that specializes in dermatology. Existing investors Kalaari Capital and Aarin Capital also participated.
Samara acquires 45% stake in Iron MountainSamara Capital has acquired a 45% stake in the
Indian arm of US data storage firm Iron Mountain for an undisclosed amount. The company moved into India in 2006 when it set up a joint operation with Mody Access Info and Indexinfo Services, taking a 50.1% stake in the venture. Mody then changed its name to Iron Mountain India.
SOUTHEAST ASIA
GIC backs Brazilian education providerSingapore sovereign wealth fund GIC Private has acquired an 18.5% stake in Brazilian education company Abril Educação. Financial details of the deal were not disclosed but the stake is estimated to be worth around $265 million, based on the firm’s latest share price.
Indonesia’s Telkom to invest $200m in start-upsTelkom, the biggest information and communication operator in Indonesia, plans to invest $200 million in technology start-ups. It will support business models that can contribute to the long-term growth of the company.
Goodpack shareholders back KKR buyoutShareholders of Singapore-listed Goodpack, the world largest maker of intermediate bulk containers, have approved a S$1.4 billion ($1.1 billion) take-private offer made by KKR. KKR will pay S$2.50 per share for all outstanding shares in the company through a scheme of arrangement.
Khazanah to privatize Malaysia AirlinesMalaysia Airlines, the beleaguered national carrier that has tragically lost two planes in the space of four months, will be privatized and restructured by its largest shareholder, Khazanah Nasional. Khazanah owns 69% of MAS and will pay MYR1.38 billion ($432 million) for the rest.
EPF buys stake in Malaysian expresswayMalaysia’s Employees Provident Fund (EPF) will pay MYR68.7 million ($21.5 million) for a 31.85% indirect stake in the Cerah Sama, concession holder of the Cheras-Kajang Highway. EPF will acquire a 100% interest in Pinggiran Ventures from a Taliwork Corp. subsidiary. This entity owns 49% of joint venture Pinggiran Infrastructure, which holds a 65% stake in Cerah Sama.
TPG buys control of Sri Lankan bankTPG Capital has agreed to invest approximately $117 million in Union Bank of Colombo (UBC) in what will be Sri Lanka’s largest-ever private equity buyout as well as one of the biggest foreign direct investments in the country in recent years. TPG will buy a combination of primary and secondary shares representing up to 70% of UBC’s issued share capital, plus warrants that would increase its stake to 75% if exercised within six years. The transaction will strengthen the bank’s tier-one capital, enabling it to meet
regulatory targets that come into effect in 2016.“Together with Union Bank, we are well
placed to seize opportunities in the local market and develop a strong retail bank franchise. We see great growth potential for Union Bank and aim to see it emerge as one of the top five commercial banks in the country,” Puneet Bhatia, partner and India country head at TPG. Tim Dattels, managing partner and co-head of Asia at TPG, said the PE firm has been encouraged by Sri Lanka’s growth momentum and policies to enhance the banking sector.
Established in 1995, UBC has a network of 60 branches and focuses on lending to small and medium-sized enterprises. It went public in 2011.
NEWS
Number 30 | Volume 27 | August 19 2014 | avcj.com 7
COVER [email protected]
THE PORT OF NEWCASTLE IS A KEY PART of Australia’s coal supply chain. Last year 150.5 million tons of the mineral arrived from the mines of the Hunter Valley for onward shipment to international buyers, many of them in Asia. The port has been in operation for more than 200 years and handles over 40 commodities and 4,600 ship movements every year.
In April, the New South Wales government announced a 98-year lease of Port of Newcastle to Hastings Funds Management – which has strong ties to Australian superannuation funds – and China Merchants Group, following a five-month process involving five separate bidders.
The bulk of the A$1.75 billion ($1.6 billion) in proceeds will be recycled into new local infrastructure projects. Before the sale process even began, A$340 million had been earmarked for the redevelopment of Newcastle’s central business district. The rest will bankroll projects such as WestConnex, a A$10 billion highway intended to ease pressure on Sydney’s existing roads and open up the suburbs.
It is a pragmatic move and one that has worked for New South Wales before. Last year, 99-year leases for Port Botany and Port Kembla were sold for A$5.07 billion, of which Restart NSW received around A$4.3 billion. The buyer consortium included IFM Investors, Abu Dhabi Investment Authority (ADIA) and local pension funds AustralianSuper, Construction & Building Industry Super, HOSTPLUS and HESTA.
“In a climate of falling revenues and our triple-A credit rating under constant threat, the only way we can fix the State’s infrastructure backlog is by recycling mature assets on our balance sheet to create the flexibility we need to invest in new ones,” New South Wales Treasurer Mike Baird observed, when launching the Port of Newcastle sale.
This recycling strategy is catching on among state administrations that need to service debts and pay for new infrastructure. With willing buyers in the form of local super funds and foreign investors, as well as a federal government willing to cover 15% – or up to A$5 billion – of the cost of new projects funded in this way, momentum will gather. But at the same time, it is just one of a package of reforms needed to fix a wider public infrastructure financing issue.
“It is a good first step in terms of state governments repairing their balance sheets and in New South Wales it is also part of a bigger game plan to get newer infrastructure required for the productive economy,” says Paul Foster, head of infrastructure for Australia and New Zealand at AMP Capital. “However, it is still a reflection of the fact that natural long-term owners of these assets – superannuation funds and pension funds, Australian and global – are reluctant to take greenfield patronage risk at the early development stage.”
Old habitsAustralia’s superannuation funds are seasoned infrastructure investors, having participated in deals since the early 1990s, usually acting
through external fund managers. Airports and related infrastructure have been a particularly happy hunting ground. Between 2001 and 2004, facilities in Perth, Melbourne, Launceston, Brisbane, Townsville, Mount Isla and the Gold Coast all changed hands.
AustralianSuper had 10% of its assets in infrastructure in 2013, while QSuper and First State Super had allocations through their main defined benefit funds of 7.9% and 7.6%, respectively. These allocations – in percentage terms – well exceed those of the leading US pension funds. The California Public Employees’ Retirement System (CalPERS) currently has 2% of
holdings in infrastructure and timberland.The challenge for Australia’s superannuation
funds has been identifying supply to meet their obvious demand. “If you had asked at any given point in time over the last 15 years, whether there was institutional money to invest in infrastructure, the answer would have been a resounding yes,” says Mark McLean, head of Asia Pacific at Morgan Stanley Infrastructure. “The issue is more that there hasn’t been a lot of new supply of opportunities coming to market, but that is changing.”
McLean estimates that anywhere between A$50 billion and A$100 billion of infrastructure assets will be privatized over the next 2-3 years. Not all of these will fall into the hands of pension funds – Australian or otherwise – but the long-
term nature of the assets, delivering low but consistent yields, in some cases protected by regulators, means they are a good strategic fit.
According to AVCJ Research, $27.8 billion in private capital has entered Australia’s infrastructure, transportation and distribution and utilities sectors since 2010.
More than one third of this went into three privatizations: Port Botany & Kembla, Queensland Motorways (acquired by Queensland Investment Corporation in 2010, and sold on to Transurban Group this year, with participation from AustralianSuper), and Sydney Desalination Plant (Hastings Funds Management and Ontario
Ideal ownersAustralian pension funds are keen to invest in a raft of infrastructure privatizations, with some of the proceeds earmarked for new projects. But more can be done to get long-term capital into greenfield infrastructure
PE investment in Australian infrastructure
Source: AVCJ Research
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011
Infrastructure Transportation/distribution Utilities
US$
mill
ion
15,000
12,000
9,000
6,000
3,000
0
avcj.com | August 19 2014 | Volume 27 | Number 308
Teachers’ Pension Plan picked up a 50-year lease in 2012).
These transactions will be dwarfed by New South Wales’ electricity distribution and transmission businesses, which are thought to be worth about A$30 billion and will be put up for sale in 2015-2016. Queensland’s electricity infrastructure assets are even larger and expected to come onto the market around the same time. Also slated for privatization are ports in Melbourne, Gladstone and Townsville, as well as pipeline business SunWater.
Such is the size of these deals that the buyers are likely to be consortiums of investors, with at least one member either a strategic player or a fund manager with previous exposure to similar assets. AustralianSuper going into Queensland Motorways alongside Transurban is evidence of the former; Port Botany and Port Kembla, with IFM prominent, are evidence of the latter. Another trend is that the larger superannuation players are increasingly seeking to go direct.
“We are now looking to evolve our relationship with our existing managers to allow us to participate directly in investments, rather than simply supporting their pooled funds – our co-investment alongside IFM Investors in the NSW Ports transaction was our first step in this direction,” says Andrew Major, general manager – investments, at HESTA. “We are also looking at establishing a small number of new relationships, ideally outside of a pooled fund structure, that will allow us to get access to a broader range of opportunities in the global infrastructure markets.”
Superannuation funds are making such moves in the interests of returns and influence: management fees are lower, as an active participant they learn more about the nature of the asset and how the GP is developing it, and good governance and transparency is helpful in a look-through portfolio. The other consideration is scale. Many of these funds are growing rapidly and writing larger checks; targeted direct investments, made alongside a manager or independently, are helpful.
Obstacle courseThe recycling of capital from these privatizations into new projects is intended to help fill Australia’s infrastructure gap. These new projects – typically structured as public-private partnerships (PPPs) or build-own-operate-transfer arrangements, both of which revert to government ownership after a set period – become the privatizations of the next generation. However, this virtuous circle needs to be supplemented by other efforts to get superannuation funds into greenfield projects.
An EY report on infrastructure financing,
commissioned by the Financial Services Council in 2011, identified a string of obstacles. These included a lack of a clear pipeline and government commitment, insufficient specialist expertise available to superannuation funds, sovereign and political risk, regulatory pressures, a lack of suitably structured projects, complex bidding processes, and greenfield project risk. The last three are worth exploring in more depth.
First, for lack of suitably structured projects read the ever-expanding check sizes of the largest super funds. “Equity check sizes tend to be quite small and the demand for infrastructure investment is very large,” says Morgan Stanley’s
McLean. “With large infrastructure investments, the equity checks paid are in the billions of dollars whereas the average PPP the equity check will be less than A$200 million. It takes a lot of PPPs to move the needle when you have so much money looking to get invested in infrastructure.”
Second, the length of time between entering a bid for a project and seeing a return on the investment can be off-putting. The bidding process alone takes 18-24 months and there is no guarantee of success. If successful, there is another 3-5 year construction window after which the project starts to generate cash. A brownfield privatization, by contrast, begins with a dressed-up investment mandate package from a sell-side advisor and ends 3-4 months later.
The resource-intensive nature of a greenfield process is just not suited to a superannuation fund that might have no more than three people assigned to direct infrastructure projects.
“Time, cost and uncertainty of participation – particularly in a world where super funds are looking to internalize and have finite resources – is not a great use of resources. Hence the preference to get involved in projects where they can apply themselves intensely, try and acquire
an asset, and then deploy their capital and start making returns,” says AMP’s Foster.
Finally and perhaps most significantly, project risk. Last September, Sydney’s Cross City Tunnel entered voluntary administration after failing to refinance its debt, offering a timely reminder of what happens when PPP goes wrong. The asset launched in 2005, supported by A$680 million in debt and equity financing, but slipped into insolvency a year later due to low traffic volumes. New owners came in but couldn’t make a go of it.
Several tunnel and toll road PPPs from the early to mid-2000s were undone by optimistic forecasting. As such, if a superannuation fund is going to invest in a greenfield project it expects a higher return for the risk being taken on – capital could be sunk into construction only for the tolls from the operating asset to fall short of the level required to turn a profit. This explains the willingness to back a proven performer like Port of Newcastle, with the certainty of demand that comes from being a staging post in the Hunter Valley coal supply chain.
It would be wrong to say there is no pension fund money in greenfield infrastructure. In the current environment, Partners Group favors the small and mid-cap space where enterprise values are below A$1 billion, as well as new builds in areas such as urban rail services, renewable energy and social infrastructure. It works with long-term institutional investors on these deals.
In addition, the likes of Morrison & Co, Palisade Partners and AMP Capital run dedicated PPP funds that build new projects or buy into existing ones, while a handful of superannuation funds have participated in PPP directly. For example, two years ago HOSTPLUS team up with Lend Lease won the mandate to develop Sydney’s new waterfront convention, exhibition and entertainment precinct.
“Everyone talks about filling the infrastructure gap in terms of funding the build-out of new assets and it’s a good byline, but we haven’t seen too many examples of direct participation in greenfield PPPs by Australian super funds in recent years,” says Benjamin Haan, Partners Group’s Australia-based head of Asia infrastructure.“ However, the super funds are consolidating and building up direct teams of their own so I expect it to happen more in the future.”
The process could be facilitated by making it easier for the superannuation funds to participate. One option is for state governments to underwrite a portion of the demand risk in order to get investors on board and then exit via a refinancing a few years down the line, once the asset is up and running.
This was one of a number of issues highlighted in a report published earlier this year by the Productivity Commission that called
COVER [email protected]
“The natural long-term owners of these assets - superannuation funds and pension funds, both Australian and global - are reluctant to take greenfield patronage risk at the early development stage” – Paul Foster
COVER [email protected]
for a comprehensive overhaul of processes for assessing and developing public infrastructure projects. It challenged the argument that private capital would increase capital available for infrastructure, noting that government guarantees and tax concessions come at a cost. “Private financing is not a ‘magic pudding’ – ultimately users and/or taxpayers must foot the bill,” the report said.
“This is basically their way of saying that the trustees of super funds and the investors of those funds have a fiduciary duty to their unit holders,” says Sean Gregory, managing partner in the deals division at PwC Australia. “They are going to invest in things they think meet fiduciary criteria and if PPPs don’t meet those criteria then they aren’t going to get investment.”
Another missing piece in the jigsaw is infrastructure debt, although interest in these assets is on the rise globally in both the senior loan and the mezzanine space. Partners Group is invested in one local PPP where super funds provided funding on teh senior debt side, but Haan describes it as a rare example. Once the base rate started falling in 2012, absolute returns have become too low to generate additional appetite for this type of lending.
Another frequently-cited factor is the hold the Big Four Australian banks have over the domestic
debt market and the limited range of options available. Developers have typically struggled to secure long-tenure loans that extend beyond seven years because of the risks tied to projects where there is uncertainty over end-user demand. In the US and Europe, tenure can be 20 years or more.
“The infrastructure investment spend over the last 4-5 years and what looks to be coming for the next 10 years suggests that an infrastructure bond market will be much more needed than previously,” adds PwC’s Gregory. “A lot of infrastructure construction over the last 5-10 years has been private infrastructure for resources. It is really only in the last two years that the debate over public infrastructure, which needs a bond market, has really exploded again.”
The giant handIn this sense, while there are shortcomings in infrastructure financing, the common view among industry participants is that they can and will be addressed. Confronted by an impending wave of privatizations, superannuation funds are focusing on how they can efficiently and effectively participate in these processes, whether it is through a blind pool fund, as a co-investor or as an independent. Once the wave breaks, attention will turn elsewhere.
Recycling capital from brownfield privatizations into greenfield projects is one way of channeling superannuation fund capital into new builds. Indeed, of the various solutions assessed in the EY report, this was enthusiastically received. What it does not do is move the debate forward in terms of creating a financial modeling and reliable demand forecasting for greenfield projects that would make them acceptable to a larger pool of long-term investors.
Nevertheless, these investors remain natural owners of and lenders to domestic infrastructure. And if brownfield assets continue to get bid up then the impetus for reform could come from the super funds themselves as they reassess the risk-return dynamic. After all, the New South Wales ports transactions all traded at heady multiples of 25x forward earnings.
“Logically, from an economic perspective, you would have to think greenfield projects would become more appealing over time as the competitive nature of the brownfield sales processes stays as it is or potentially increases,” says Rebecca Maslen-Stannage, a partner at Herbert Smith Freehills. “It might end up making sense for super funds themselves to push for a way to work with governments to mitigate those risks and get into greenfield projects in a way that is acceptable to them.”
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avcj.com | August 19 2014 | Volume 27 | Number 3010
CHINA’S PROPERTY SLUMP CONTINUES. The National Bureau of Statistics announced earlier this week that home prices fell in July for a third straight month. The number of cities that saw price drops – 70, up from 64 the previous month – is the most since the bureau started publishing statistics in 2005.
Residential property developers, particularly the smaller players, are being battered by slowing pre-sales, squeezed margins and vanishing working capital. Yet it remains to be seen whether the central government will help them out by winding back policies intended to restrain price growth have been in place for four years.
This uncertainty strangling the property market is placing a tighter grip on the broader economy, prompting fears of a painful crash rather than the standard cyclical downturn. But what does it mean for offshore real estate fund investors?
“Real estate fund managers are very cautious on selecting property segments in which to invest,” says Regina Yang, head of research in real estate consultancy Knight Frank. “Ten years ago, most funds would invest in residential. However, over the past two years barely any residential transactions have been conducted since the government announced a slew of regulations to curb the sector.”
Policy initiative To be fair, there have been some changes in recent months. In June, 30 local governments began easing restrictions on individuals purchasing second or subsequent homes. But this small-scale stimulus has so far made little impact on the market as a whole. Residential building sales volume and new construction starts are expected to fall 20-30% this year. It is bad news, although perhaps not for everyone.
“While the market has generally slowed down, I think it is important to recognize that China isn’t one market. It’s a collection of a hundreds of markets, not only by geography and but also by property segment. For example, the residential market will differ from the office market in one city, and when you compare that to another city, it is again different,” says Brian Chinappi, global head of principal finance in real estate at Standard Chartered Bank.
Many investors regard the slowdown as a
sign of the Chinese real estate market gradually coming to maturity.
For the more sophisticated developers and investors, times of hardship can bring fringe benefits as less disciplined participants fall out of the market. China’s property sector remains highly fragmented, with over 85,000 developers, so the consolidation story has many chapters still to run. Larger real estate players are more comfortable with private equity financing because it is long-term capital that enables them to strengthen their market position.
“In the past many developers could sell products with little regard to what was really the
best product for the market, and in many cases they were bailed out by significant price increases. To be successful today developers and investors must understand their specific market, and provide the correct products at reasonable prices,” says Tom Delatou, CEO of Century Bridge Capital.
Century Bridge’s $170 million China Real Estate Fund, which closed two years ago and is now nearly fully deployed, focuses exclusively on middle-income, residential real estate in second- and third-tier cities. Since 2005, average household income has grown faster than average housing prices in lower-tier cities and the firm expects affordability in these geographies to continue to improve.
Middle class residential development does not offer the highest potential yields in the market, but Century Bridge believes it has the most attractive risk-adjusted returns. “We bring to market a product that the Chinese people want and can afford, and it is line with the type
of development the government is encouraging,” Delatou adds.
Unless China stops its urbanization process – which is hard to envisage – residential housing markets will still have significant room to grow over the next decade, ANZ said in a recent report.
Earlier this month, the State Council said it would promote urbanization by easing restrictions on the issue of urban residency permits, thereby allowing more of the rural population to register as urban citizens. CBRE Capital Advisors expects the policy will spur stronger demand for real estate assets over the longer time in lower-tier cites.
However, investments are only successful where they are underpinned by robust of end-user demand, which is typically driven by rising populations and employment. Some fourth-tier cities, and even some of the weaker third-tier hubs, do not boast these characteristics and so over-supply remains.
Spoiled for choiceWhile there are PE investors in residential real estate that have become more cautious – hanging back for the the right opportunity to materialize – others have addressed their concentration risk by targeting mixed-used commercial and residential complexes.
Last month, Standard Chartered Private Equity (SCPE) led a $124 million round of financing for a mixed-used project in China. It will be developed by Longfor Properties, covers more than 312,000 square meters of gloss floor areas in Chongqing’s central business district. SCPE paid $69.4 million for a 28% interest in the joint venture.
“Our investment with Longfor is a great example of our overall strategy in China,” Chinappi says.
The firm’s strategy is two-pronged: first, seek out top-tier developers that have long-standing relationships with Standard Chartered Bank; and second, only invest in high-quality projects. In addition, since the project is of significant size, SCPE was able to bring in co-investors, mostly from among the bank’s clients.
Another option is to avoid residential real estate altogether on the basis that it is driven by hard-to-predict government policy rather than the fundamentals of supply and demand. CBRE Investors Global Multi Manager, which will deploy
Threat or opportunity?Weaker economic growth and a struggling property market have made real estate fund managers more wary about their China residential exposure. But some still sense opportunity
“To be successful today, developers and investors must understand their specific market, and provide the correct products at reasonable prices” – Tom Delatou
one third of its recently closed $236 million Asia Alpha Plus III Fund in China, is targeting de-centralized offices in tier-one cities as well as logistics developments.
“The issue of residential is that obviously you don’t earn any income until it’s sold and completed. So returns are impacted significantly by timing and the need for pre-sales as a form of leverage,” says Adrian Baker, head of Asia at CBRE Investors. “Logistics is different. Once you develop the facilities they are income generating, provided you have mitigated the leasing risk. Even if you have to hold for longer than anticipated, at least you are earning income, whereas a longer hold for residential will dilute the IRR very quickly.”
Moreover, the current situation presents a window of opportunity for investors to negotiate lower prices and yield-enhancing investment terms on projects in upper-tier cities. This could deliver higher-quality assets at less competitive prices.
Conscious of the risk that comes with equity exposure to projects, CBRE is very selective in deal sourcing. China Resources, which last year formed a joint venture with leading property player China Vanke to develop a prime integrated residential development project in Shanghai’s Hongqiao district, is also selective
– but focuses more on projects than big-name developers.
“Rather than purely looking at brand names, we spend a significant amount of time evaluating the quality of the actual projects. As a result, even some medium-sized developers, who have strong local relationships and experience in specific provinces, can be a good choice for us, given their ability to secure attractive sites at prime locations,” says Charade Poon, investment director of China Resources Capital.
Structured solutionsFinally, for those uncomfortable with equity risk, investing through structured debt positions is an increasingly attractive proposition.
Over the past few years, Chinese developers have tapped the shadow banking market in ever greater numbers as the three traditional funding sources – bank loans, bond issuance and proceeds from pre-sales of new properties – have struggled to varying degrees. In a recent policy move, the government is trying to clamp down on the trust companies that are the source of many of these loans.
Real estate funds have become a significant source of capital. “At the moment, international private equity and banks are lending to Hong Kong developers’ listed and unlisted structured
offshore vehicles investing in China – with listed Hong Kong-based vehicles able to provide stronger credit guarantees,” says Nick Crokett, executive director at CBRE Capital Advisors.
The slowing market also provides offshore groups the opportunity to build relationships by providing capital to high-quality developers. They had previously struggled to do this because local developers could easily source cheap capital onshore. Needing to diversify their funding sources, these developers are opening up.
China has become the largest portion of Forum Partners’ Asia portfolio through the provision of structured debt solutions to sponsors who are developing, acquiring or already own specific properties. By contrast, the rest of the portfolio is dominated by standard equity investments. The firm has $150 million of dry powder left its third Asia-focused fund, which has a corpus of $373 million. China is likely to account for $200 million.
“The risk-return profile is different from in every market. In China, we can take less risk but still receive a good return by investing in a debt position. In Japan, we’re taking more risks when buying direct assets. However, the return might not be as compelling compared to China.” says Gregory Wells, managing director and head of Asia at Forum Partners.
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avcj.com | August 19 2014 | Volume 27 | Number 3012
CANADA PENSION PLAN INVESTMENT Board’s (CPPIB) announcement in June that it would pump INR20 billion ($322 million) into L&T Infrastructure Development Projects, the owner the largest toll-road concession portfolio in India, represented the biggest infrastructure bet the country had seen in a long time. The deal – the pension fund’s first in Indian infrastructure – is the largest since J.P. Morgan bought a 20% stake in SKIL Infrastructure for around $400 million in 2011.
It is also welcome news when considered in the context of India’s vast infrastructure needs. A recent report published by Deloitte estimates that a sum equivalent to around 10% of GDP must be sunk into the asset class over the course of the 12th Five-Year Plan (covering 2012-17) in order to achieve a 9% real GDP growth rate. This is amounts to INR65.7 trillion (about $1 trillion) at current prices.
In recent years GPs have shied away from infrastructure due to factors such as delays in project approvals, access to fuel for power plants and ongoing regulatory uncertainty. Meanwhile, many investors are still looking to get a return on deals that pre-date the global financial crisis. This makes one wonder whether CPPIB’s investment indicates a rebound in sentiment towards Indian infrastructure or the exception to the rule? Some might say it is the latter.
“I think there is going to be a wait and see approach in Indian infrastructure,” says Vijay Pattabhiraman, managing director and chief investment officer for J.P. Morgan Asset Management’s Asia infrastructure investments. “Too many people made investments in 2006 to 2008 and currently they are all looking for exits.”
The same Deloitte report maintains that of the INR65.7 trillion required, half will need to come in form on debt and equity with the government providing the rest. In the absence of a mature bond market, and with many banks reluctant to lend, the equity tranche clearly has a crucial role to play in infrastructure development. In principle, the opportunity is there; the stumbling points are finding the right spots and then finding investors comfort enough to commit.
“There is lots of stuff to buy; a lot of people are looking to sell assets,” says one infrastructure-focused GP, who asked not to be named. “What is
tricky is finding buyers who are prepared to put a whole lot of money in.”
AVCJ Research data show that $326 million was committed to six deals last year, the lowest total since the 2009 when $138 was invested across nine deals. It is just fraction of the $1.5 billion invested over 17 deals in 2010 – a peak in terms of the amount invested, but a couple of deals moved the needle considerably, namely the $435 million investment in power generation
infrastructure group Asian Genco by a Morgan Stanley-led consortium.
Infrastructure investors were arguably at their most prolific during the global boom of 2006 and 2007, which saw 20 and 17 deals, respectively, raise $673 million and $1.06 billion.
Cold feetIt is largely the investments dating back to this era that have caused the backlog of exits, leaving many groups with cold feet. A number of players paid over the odds when acquiring assets through auction processes and ran into trouble when their projects faced delays and eventually started to lose money. Some will struggle to secure an exit, and certainly not at multiples close to their entry valuations.
As a result, some investors have started to shift their strategy away from the country. 3i Infrastructure, for example, started to wind down local operations last year, citing macroeconomic, market and regulatory conditions in particular. Its portfolio includes a $245 million investment in Adani Power, which was to develop a portfolio
of power plants and a $102 million investment in highway developer Soma Enterprise. Both suffered losses due to project delays.
To underscore the scale of the problem, the government’s Economic Survey released in July revealed that of 239 infrastructure projects costing more than INR10 billion, 110 were delayed. Meanwhile, the total cost overrun of these 239 projects is estimated to be at around INR1.5 trillion, or 21.3% of the total cost.
“It has been a poor few years, mostly from a policy perspective,” says Deepto Roy, a partner with law firm Khaitan & Co. “What we have seen since the new government came into place is a lot more emphasis being put on policy improvements in infrastructure.”
Private equity has suffered due to policy uncertainty over issues such as changes in model concession agreements and pre-qualification criteria for bidding, notably in the in road sector; compensatory tariffs; restructuring of state utilities, for example in the power sector; and tariff reforms in the port sector.
Meanwhile, those who have been investing recently are focusing on operating projects so as to avoid risk relating to project approvals and delays. CDC Group, the UK government’s development finance arm, is one such institution. As recently as November, CDC pledged $200 million to IDFC Alternatives’ India Infrastructure Fund 2 (IIF2), its largest-ever LP commitment to an Indian investment fund. The vehicle tis targeting $1 billion and will provide long-term, equity investment for
Building confidencePrivate equity is expected to play a significant role in India’s infrastructure development, but regulatory constraints and disappointing returns are a turn-off for investors. Reform is required
No. of deals
Indian private equity infrastructure investment
Source: AVCJ Research
2,000
1,500
1,000
500
0
20
15
10
0
US$
mill
ion
Dea
ls
Amount (US$m)
2008 20102009 2011 2012 20142013
both construction and operating infrastructure projects across the country. CDC subsequently invested $25 million in Green Infra, an independent renewable power producer backed by IDFC Alternatives
“The most immediate opportunity we saw was in brownfield and operating assets,” says Alagappan Murugappan, managing director for CDC’s Asia Funds. “Even IDFC has made it clear that, initially at least, they want to focus on operating assets before they go into the greenfield.”
Policy solutionsIn order to attract more private equity investment in greenfield projects – essential if it is to achieve its infrastructure aims – the government must implement reforms. Accordingly, infrastructure became a focus of Finance Minister Arun Jaitley’s Union Budget presented earlier this year. Not only did the minister make large allocations to infrastructure, but he also set out a better policy framework for the execution of projects in order to attract investors.
One the first proposals was to set up a so-called eBiz platform to give transparency and accountability to the process of getting statutory clearance for activities including land acquisition, environment and forest clearances – a major
hurdle for project implementation. The budget also addressed the need to revisit the public-private partnership (PPP) model by proposing to set up a 3P India, an institution intended to support PPPs – with a corpus of INR5 billion.
Another key decision was to announce infrastructure investment trusts. Much like real estate investment trusts (REITs), these vehicles offer an alternative liquidity channel to investors by allowing completed projects to be spun out into listed trusts that generate consistent yields
through rental or other income streams. However, issues over infrastructure come
down to macroeconomics too. India’s economic performance was disappointing in 2013, characterized by sluggish GDP growth and rapid inflation, and this added to investors’ concerns. Recent improvements indicate the Indian economy will continue on an upward trajectory but progress is likely to be slow.
“For most investors nothing much has changed in the last year except for us having a new captain at the helm in Modi,” says J.P. Morgan’s Pattabhiraman, who compares Modi’s premiership as being in charge of a large battleship. “It will take him at least two year to steer the ship in the direction he wants it to turn.”
In the meantime, an improvement in investor confidence – especially where greenfield infrastructure is concerned – depends on policies being clearer and more concrete. Only then will investments by the likes of CPPIB and CDC seem more of a rule than an exception.
“The devil is in the details of implementation. The government needs to ensure that at a local level it can streamline approval processes and ensure reform takes place,” says CDC’s Murugappan.“If they can resolve this, and there is evidence of it, then a lot more money will flow into India infrastructure.”
“The devil is in the details of implementation. The government needs to ensure that at a local level it can streamline approval processes and ensure reform takes place” – Vijay Murugappan
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avcj.com | August 19 2014 | Volume 27 | Number 3014
“ANY DEREGULATION ANNOUNCEMENT on foreign capital is a good thing. However, this announcement does not necessarily benefit private equity firms who are focused on higher yield infrastructure and energy investments.”
This is the response given by Greg Karpinsky, co-head of energy, resources and infrastructure in Standard Chartered Bank’s principal finance division, to the revelation made earlier this year that China would open up 80 infrastructure projects – spanning transport, IT systems, energy, coal and petrochemicals – to private capital. The sentiment is shared by numerous PE participants.
While there have been successful PE investments in Chinese infrastructure, they are not easily won. Many assets are state-controlled and even where there are openings foreign private equity faces fierce domestic competition.
According to AVCJ Research, PE investment across infrastructure, transportation and
distribution, and utilities stands at nearly $3.5 billion so far this year, following a bumper 2013 in which $6.3 billion was deployed.
The totals include a number of sizeable transactions that would never fall into the hands of foreign players, notably Guolian Industrial Investment Fund Management’s $3.9 billion commitment to PetroChina Tubes Union, a pipeline spin-out engineered by PetroChina.
Nevertheless, the State Council’s infrastructure project announcement is not alone in hinting at reform. For example, a pilot program has been
launched that is supposed to see six state-owned enterprises introduce private investors and improve corporate governance as part of efforts to boost economic efficiency.
These initiatives have been linked to local government debt pressures, but there is also a growth agenda on the infrastructure side.
“Basically, the government made a lot of announcements to encourage more private capital and this is not a new thing,” explains Stephen Ip, head of government and infrastructure at KPMG. “We want to have new ways or another way to have private capital in the development of infrastructure.”
Whatever motivation there may be to open up SOEs – GaveKal Dragonomics estimates the average return on state-owned assets is around 4.6%, compared to 9.1% for private companies – it is countered by a reluctance to cede control. Indeed, there are many proposals for improving
efficiency that don’t involve privatization. “One of the barriers to entry in the energy
and infrastructure sector is that there are many well capitalized state-owned companies that have access to cheap capital and good quality projects,” says Karpinsky.
The answer for private equity investors is to seek opportunities within the system or on its fringes. Success depends on a GP having a value proposition that sets it apart from the competition. A number of firms found traction in energy-related infrastructure, with Christophe
Bongars, CEO of SustainAsia, noting that the dynamic in China is not dissimilar to other markets. “You simple can’t work alone; you have to work with them. This is because the energy market is highly regulated. It’s a regulated environment, whether it is in China or in Hong Kong. It’s the same everywhere,” he says.
Not so smallEven if private equity has to pick around the edges of the sector, away from the state-dominated mainstream, these pickings could still be rich. The Asian Development Bank estimates that the region requires investment of $8 trillion between 2010 and 2020 to address infrastructure shortages, and half of that is needed in China.
One example of a successful niche strategy is perhaps Zhaoheng Hydropower, which has received $300 million in private equity backing from Morgan Stanley Infrastructure Partners, Fountainvest Partners and Olympus Capital. The company focuses on small and medium-sized hydropower assets and is pushing towards 1 gigawatt of installed capacity. This is dwarfed by China’s 1,250 GW in total electricity capacity, but it isn’t necessarily grounds for concern.
“How much power generation capacity is owned by the private sector? Practically none,” a source familiar with the investment observes. “Zhaoheng is one tenth of 1% of the market, but that is still pretty big in China.”
Standard Chartered has a similar approach. It currently sees a lot of opportunities in specialized areas such as liquefied natural gas transportation infrastructure and waste and water treatment plants. Both are closely aligned with China’s development objectives yet offer scope for a foreign private equity investor able to offer technology and expertise from abroad.
And in the background, the debate about private participation in Chinese infrastructure can continue. It is worth noting that the State Council didn’t specifically refer to private equity in its announcement and there any number of foreign or domestic players that could benefit from reforms, should they be introduced. Private equity will simply follow the opportunities as they arise.
“Overtime you will have more private players. Those private players, as they grow, will provide more opportunities,” adds KPMG’s Ip.
Fringe benefitsPlans to open up Chinese infrastructure projects to the private participation are encouraging but not life-changing for PE investors who are already accustomed to operating in and around the state apparatus
PE investment in China utilities, transportation and infrastructure
Source: AVCJ Research
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014YTD
Infrastructure Transportation/distribution Utilities
US$
mill
ion
8,000
6,000
4,000
2,000
0
Number 30 | Volume 27 | August 19 2014 | avcj.com 15
Q: What led to the investment in Tamarind?
A: We have been looking for a way to invest in Southeast Asia, specifically but not exclusively Indonesia, Malaysia and Vietnam, which are interesting hydrocarbon basins as well as countries with geopolitical stability. There was an opportunity to partner with a best-in-class team in those geographies and pursue a slightly different strategy to what I think PE or independents have pursued before. That is to focus on appraisal and development rather than an exploration. An appraisal and development model focuses on optimizing the amount of hydrocarbons you get out of the ground and/or lowering cost. Often this happens in partnership with other companies, so really this strategy is one of forming long-term partnerships with national oil companies and independents to help them develop oil and gas assets and drive production growth.
Q: The Tamarind team came out of Talisman. What makes them and best-in-class?
A: The ideal team has a long track record of success and experience with a specific technical area, and covers all of the critical areas to deliver on the thesis. We had been looking for this type of team for several years but hadn’t found one that met all of the criteria. It just so happened that the Tamarind team had thought of pursuing this strategy independently – having executed on it successfully previously – and reached out to us. We had met with various exploration-focused teams and
passed on a number of them. We didn’t see the right combination of team members, focus area, and the exploration-based thesis seemed a little bit challenging. In Southeast Asia the national oil companies have all the information and when they look to farm out or sell down prospects there is a bit of reverse selection. Competition for assets has also increased.
Q: Why have there been relatively fewer oil and gas start-ups in Asia than North America?
A: First, not a lot of private equity firms have a global platform, experience in offshore oil and gas resources, and significant capital reserves. Second, there has been a lot to do in other areas of the globe, including North America. Third, our strategy focuses on identifying, recruiting and helping to support best-in-class teams to build long-term businesses. Those teams exist in Southeast Asia but they reside in the national oil companies or large independents and they don’t often come loose. In North America the strategy and success of entrepreneurial teams being backed by private equity is more common knowledge, which in turn helps entrepreneurs who want to pursue that strategy understand the opportunity and increases labor mobility.
Q: To what extent can comparisons be drawn between Tamarind and Africa-focused Kosmos, which also involved backing an experienced team in a market far from North America?
A: With Kosmos the thesis was backing a best-in-class team
that had success in the region at Titan. They focused on frontier basins with a specific technical thesis and there wasn’t much competition at the time. Tamarind is also a best-in-class team but in a region that has seen a significant amount of success on exploration, appraisal and development. There is a good degree of competition from the independents and the national oil companies. So whereas Kosmos was an exploration-based strategy
and the thesis was one of acting alone, Tamarind is an appraisal and development-based strategy where they don’t intend to act alone; they want to be a partner of choice for the national oil companies and the independents to help them do things they wouldn’t otherwise be able to do.
Q: What will Tamarind help them do?
A: We see significant potential forming long-term partnerships with companies that may not have specific technical expertise, bandwidth or resources for any one project and helping them to develop their assets and drive production growth. These may be assets that are challenging to develop, may need significant investment in infrastructure to get hydrocarbons to market, or require a specific development plan. For example, the below-ground aspects of the reservoir – high temperature and high pressure – might create a more onerous drilling environment. Finally, there could be some big fields that have come to what others believe to be the natural end of their lives and there is an opportunity to squeeze more from the grape.
Q: How is the capital going to be deployed?
A: That $800 million is equity from Blackstone Energy Partners and Blackstone Capital Partners VI. We have an ability to make investments of up to $1.5 billion in equity so if we find an attractive project there is room to increase the size of the investment. There is also the potential to use other sources of capital such as debt.
ANGELO ACCONCIA | INDUSTRY Q&A [email protected]
Old hands, new ventureThe Blackstone Group has entered Southeast Asia’s oil and gas space with an $800 million commitment to Tamarind Energy. Angelo Acconcia, managing director at Blackstone Energy Partners, explains the rationale
“This strategy is one of forming long-term partnerships with national oil companies and independents to help them develop oil and gas assets and drive production growth”
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