Out of the darkness

Asia’s Private Equity News Source
avcj.com July 30 2013 Volume 26 Number 29
Editor’s Viewpoint
How PE can - and cannot leverage China’s financial
sector shortcomings
Page 3
News
Affinity, Arisaig Partners,
Bright Stone, CIC,
Creador, DCM, East
Ventures, GIC, Khazanah,
Legend Capital,
Multiples, Nissay Capital,
SAIF, Standard Chartered
Page 5
Focus
Investors eye openings
as China’s banks inch
towards market economy
Out of the darkness
PE seeks opportunities as Australia’s commodities cycle turns south
Deal of the Week
Page 7
Page 12
Deal of the week
VCs support India group
buying club that eases
SME sourcing processes
Page 13
Portfolio
Pop culture buyout Green field gambit
Affinity secures Korea’s ‘iTunes equivalent’
Page 13
CLSA builds Indonesia agri-tech platform
Page 14
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eDitor’s VieWPoint
tim.burroughs@incisivemedia.com
PE and China’s
financial sector flaws
thE liQuidity sQuEEZE EnginEErEd by
China’s central bank in June, which temporarily
made it more expensive for commercial banks
to lend money to one another, was generally
regarded as an effort to remind said banks about
the importance of solid asset management.
Too much short-term money, the central bank
decided, was being used to support longer-term
investments. It tapped into broader concerns
about the use of “shadow banking” – notably
off-balance-sheet products offered by the likes of
trust companies – to meet financial needs, and
perhaps cover up a litany of financial weaknesses.
The move also prompted questions about
China’s financial sector as a whole. What did it
mean for impending interest rate reforms and,
by extension, the desire to allow banks greater
freedom while retaining control over the supply
of credit? And what of the lack of depth in
China’s financial sector, characterized by its still
immature bond markets? And of the way local
governments accumulated enormous liabilities
by using non-traditional funding sources?
In recent weeks, some of these questions
have been answered – and there are implications
for PE that go beyond macroeconomics.
First, the lower limit on interest rates that
banks can charge borrowers has been removed.
Most lending is done above the benchmark rate
so the immediate impact will be limited; but as
a precursor to a removal of the upper limit on
deposit rates, it is significant.
If banks are able to compete with one
another, as well as other forms of financing, for
deposits by offering higher rates, the benefits
would be twofold. On one hand, customers
wouldn’t be inclined to flood into other products
with as much vigor because, unlike recent times,
bank rates would exceed the inflation rate so
depositors wouldn’t be lose out in real terms
by putting in the bank. On the other, banks
would be less likely to offer less regulated wealth
management products to retain customers.
These reforms do not, however, pose an
immediate threat to the niche financial services
opportunities or direct lending activities that are
drawing interest from private equity. The viability
of these opportunities hinges on that fact that
Number 29 | Volume 26 | July 30 2013 | avcj.com
smaller companies struggle to get bank financing
in China and so look elsewhere. It would take a
more fundamental change in policy, and lender
attitudes, to rectify the situation and it isn’t
happening any time soon.
Second, China’s National Audit Office has
been ordered by the State Council to conduct an
audit of government debt. Concerns about local
authorities’ liabilities are nothing new; they date
back to the post-global financial crisis period
when when the central government announced
stimulus measures but left it to the provinces
to finance them. They relied on standalone
investment vehicles once they bank and bond
channels were exhausted.
In 2011, an audit of local governments
specifically arrived at a debt figure of RMB10.7
trillion ($1.75 trillion), or about 25% of GDP, which
many analysts claimed was an underestimate.
Earlier this year, the IMF said overall Chinese
government debt was likely closer to 50% of GDP.
The general assumption is that, when Beijing
sees a number it doesn’t like, local governments
will face restrictions on fundraising, leading
to less capital investment and downward
pressure on GDP growth. There will be fallout
for infrastructure projects that authorities can
no longer afford and for companies in the heavy
industry and property supply chain that find
themselves in a capital vacuum.
The question is whether distressed investors
can take advantage. If opportunities do
materialize, they are likely to be fringe benefits.
The labyrinthine nature of China’s financial
system – and the state’s role within it – means
there are usually numerous ways of raising
capital before allowing foreign PE players to
secure equity stakes in struggling ventures
or enforce non-performing loans on defunct
ones. Identifying the good stuff will require
scouring far-flung geographies or sifting through
overlooked portfolios of assets.
Managing Editor
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neWs
ASIA PACIFIC
Arisaig invests in India
McDonald’s franchisee
Investment Partners, Atlas Venture Fund, NeoMed
Management, VI Partners and Sunstone Capital.
Affinity reaches $2.5b
second close on Fund IV
Arisaig Partners has bought a 3.47% stake in
Mumbai-listed Westlife Development for INR1.8
billion ($30 million). Westlife controls McDonald’s
restaurants in west and south India through its
direct subsidiary, Hardcastle Restaurants. It is one
of two master franchisees of the fast-food chain
in India.
Arisaig will subscribe to 5.4 million new shares
in a preferential allotment at INR333.05 apiece, a
premium of 3.3% above the last trading price. The
deal values the company at INR50 billion.
Asia Pacific Capital invests
$25m in Ciris Energy
Affinity Equity Partners has reached a second
close of $2.5 billion on its fourth Asia buyout
fund, after fundraising for about nine months.The
fund, which reached a first close of $1.5 billion
in March, has a hard cap of $3.5 billion. Investors
include Washington State Investment Board,
Montana State Investment Board, Maine Public
Employees’ Retirement System and New Mexico
State Investment Council.
Hong Kong-based Asia Pacific Capital (APC)
has invested $15 million in Ciris Energy, a US
company that converts coal to natural gas,
concluding a $25 million Series C round of
investment. Ciris specializes in injecting nutrients
into buried coal seams to stimulate naturallyoccurring microbes which convert low rank coal
into natural gas. The latest investment will be
used to help commercialize this process.
AUSTRALIA
Zennon, New World invest
$25m in games developer
Revolution Growth invests
$40m in Bigcommerce
Zennon Capital Partners and New World Strategic
Investment (NWSI) have invested $25 million
in NASDAQ-listed China Mobile Games and
Entertainment Group (CMGE) buy buying 2.5
million American Depository Shares (ADS) at
$10 apiece. Zennon will also receive warrants to
purchase up to 100,000 ADS that are valid for two
years. Mobile game developer CMGE claims to
have the largest market share in China in terms of
revenues from 2010 to 2012.
VC firm Revolution Growth has invested $40
million in Australian start-up Bigcommerce,
which sells e-commerce software for website
design, store management, marketing and
electronic payments to online retailers. It charges
between $25 and $300 a month for its systems
and has around 40,000 customers, mostly in
Australia and the US. The company reported
revenue of around $10 million last year.
GREATER CHINA
IDG exits Wuzhen Tourism
stake
IDG Capital Partners has exited travel agency
Tongxiang Wuzhen Tourism Development to the
investee’s parent company, China CYTS Tours
Holding, for $67.5 million. The PE firm bought
about a 16% stake for $6.47 million in 2009,
implying a 10.4x return on its investment. CYTS
Tours bought the stakes from IDG’s Hao Tian
Capital I and Hao Tian Capital II.
Bright Stone targets $4.8b
for tourism fund
China Bright Stone Investment has partnered
with the Guizhou provincial government to
launch the country’s first tourism-focused fund,
targeting up to RMB30 billion ($4.8 billion).
The vehicle, Wuling Mountains Travel Industry
Investment Fund, is seeking commitments
from state-owned banks, the National Council
for Social Security Fund, insurers and listed
companies.. It has been launched in response
to central government’s guidelines to stimulate
Number 29 | Volume 26 | July 30 2013 | avcj.com
Hardcastle’s net profit for the year ended
March 2012 was INR425.1 million, up 126% from
the previous year. Revenue for the period rose
44% to INR5.44 billion. Westlife plans to double
its store count over the next couple of years. The
company had 148 restaurants as of December
2012.
The stake was bought with capital from the
$3.2 billion Arisaig Asia Consumer Fund. As of
June 30, more than one third of its capital was
invested in fast moving consumer goods and
retail businesses in India. These include Marico,
Nestle India, Godrej Consumer and Jubiliant
Foodworks, which operates Domino’s Pizza.
The quick service restaurant business in India is
estimated to be worth more than INR20 billion,
growing at an annual rate of around 40%.
economic growth in Guizhou. with a view to
improving its travel industry structure, promoting
cultural innovation and developing agricultural
businesses.
Legend Capital invests in
heart valve implant maker
Legend Capital has participated in a $62.5 million
Series C round of funding for Munich-based
JenaValve Technology, a manufacturer of valve
systems used to treat heart conditions.. Other
investors in the round include Omega Funds
and return backers Gimv, Edmond de Rothschild
Baifendian secures $10m
Series B round
Chinese recommendation engine Baifendian,
which tracks user tastes and predicts how they
might rate items, has received $10 million in
Series B funds from Zhejiang Shinkansen Media
Investment. Existing investor IDG Capital Partners
also participated. Baifendian partners with more
than 600 e-commerce sites and information
portals, including QQ, Vancl, China Mobile and
Vipshop.
CIC returns to profit on
back of equities boost
China Investment Corp. (CIC) has returned to
profit in 2012 reporting an annual return of 10.6%
on its overseas investments thanks to a rally in
global equities. It saw a cumulative annualized
return of 5.02% for 2012, up from 3.8% the
previous year. Public equities made up 32% of its
portfolio, up from 25% in 2011.
DCM targets $250m for
China VC fund
DCM is seeking $250 million for Venture China
Fund VII. The target is less than the $400 million
raised for DCM’s previous vehicle, which invests
5
News
in China, the US and Japan. DCM is based in
Silicon Valley, Beijing and Tokyo with more than
$2 billion under management.
SAIF invests in COFCO-run
food retail site
SAIF Partners has invested in Womai.com, a
food and grocery B2C online platform set up by
Chinese food conglomerate COFCO. Financial
terms were not disclosed but the investment is
said to be more than $10 million. Womai has a
strong supply chain system which is supported
by COFCO.
NORTH ASIA
Nissay Capital backs online
ad platform Dennoo
Creador set for $105m first
close on Fund II
Southeast Asia and India-focused GP Creador is
expected to reach a first close of $105 million on
its second fund by mid to late August. The full
target is $250 million.
Creador launched the fund in May, barely
four months after closing its debut vehicle. Fund
I accumulated $130 million and investment
started almost immediately after the first close
of $80 million in December 2011, which meant
that it was around two thirds deployed by May of
this year.
Part of the reason for Creador’s compressed
time frame is that the difficult fundraising
environment meant the GP was unable to meet
its original target for Fund I of $300-350 million.
The firm feels it is able to invest $80 million per
Nissay Capital has invested $1.1 million in
Japanese online ad platform Dennoo, bringing
the start-up’s total amount of venture capital
funding to $3.1 million. Dennoo claims to be the
world’s first “viewable time-based” advertising
platform. It analyses the exact number of seconds
a web-based ad is viewed, allowing publishers
to count impressions only when ads are actually
displayed and to charge for ads based on display
time.
DCM, Infinity invest in
accounting software firm
DCM and Infinity Capital Partners have invested
$2.7 million in Japanese online accounting
software company, Freee, as part of a Series A
round of funding. It has so far attracted more
than 6,500 Japanese small- and mediumsized enterprise customers for its free-access
automated accounting platform and started to
convert some of them into paid-up customers.
Femto invests $1m in
restaurant app startup
Japanese venture capital firm Femto has
committed JPY100 million ($1 million) of seed
funding to Toreta, an app developer targeting
the food service industry. The start-up is still in
the process of developing its first smart phone
app.The investment was made via Femto Growth
Capital, a JPY1.6 billion vehicle managed by
Shinsei Corporate Investment.
East Ventures backs flea
market app
East Ventures has invested JPY50 million
6
called Watsonia Developers, for residential
projects in India. The combined investment is
worth over INR20 billion ($335 million).
CLSA backs Luminous Water
Technologies
CLSA Capital Partners (CLSACP) has invested
INR 550 million ($9.2 million) in Luminous Water
Technologies (LWT) from its ARIA Investment
Partners IV fund. Gurgaon-based LWT produces
water purifier and water filter systems for home,
residential and commercial use.
Multiples buys ICICI
Venture stake in hospital
Multiples Alternate Asset Management has
bought a 64% stake in Bangalore-based Vikram
Hospital from ICICI Venture Funds Management,
and also infused direct capital for debt
repayment. The total investment is reported to
be around INR1.8 billion ($30.3 million).
Standard Chartered boosts
stake in Fortis
year, but working with a smaller-than-expected
pool of capital, it has been burning through the
dry powder reasonably quickly. A first partial exit
came in April as the firm sold nearly half of it 10%
stake in Malaysian restaurant chain and instant
coffee brand OldTown White Coffee for around
$15 million, generating a 2x money multiple.
Vasudevan set up Creador in 2011 after leaving
Indian GP ChrysCapital Partners.
($500,000) in Mercari, a Japanese flea market
app launched by former Zynga Japan General
Manager Shintaro Yamada’s start-up Kouzoh. The
app was released earlier this month and Kouzoh
claims around 50,000 users have so far put up
10,000 items for sale.
Standard Chartered Private Equity (SCPE) will
invest a $13.5 million in hospital chain Fortis
Healthcare through a preferential allotment of
8.85 million shares, taking its holding to around
2.7%. This works out to INR90 per share, lower
than the INR92 per share the firm paid in May this
year, when it invested INR370 million.
SOUTHEAST ASIA
Khazanah buys Turkish
insurance, Abraaj exits
Malaysian sovereign wealth fund Khazanah
Nasional has agreed to pay $252 million for a 90%
stake in Turkish health insurer Acibadem Sigorta.
The Abraaj Group will sell its 50% stake in the
business, while founder Mehmet Ali Aydinlar will
sell 40% of his half of the business. Acıbadem
Sigorta has the second largest market share in
the Turkish insurance industry.
SOUTH ASIA
Singapore’s GIC announces
name change
StanChart, Mahindra
Lifespace form RE JV
Singapore sovereign wealth fund Government
of Singapore Investment Corporation Private
Limited has changed its legal name to GIC
Private Limited. “The name change formalizes
the widely-used brand name of ‘GIC’ in the global
investment community and markets that GIC
operates in,” the group said.
SCM Real Estate (SCM), an investment arm of
Standard Chartered bank and Indian real estate
and infrastructure developer Mahindra Lifespace
Developers (MLD) have formed a joint venture,
avcj.com | July 30 2013 | Volume 26 | Number 29
Cover Story
andrew.woodman@incisivemedia.com
Swings and roundabouts
The end of the commodities super-cycle in Australia has impacted both mining companies and the
businesses that serves them. Private equity can benefit, but only if it digs deep
Number 29 | Volume 26 | July 30 2013 | avcj.com
rental – that have long been a popular proxy for
mining growth among GPs.
According to AVCJ Research, PE investment
in Australia’s mining and metals sector peaked in
2007 – along with base metal prices – with $1.1
billion deployed across 24 deals. That amount
was amount was nearly doubled last year with
$2.1 billion invested, but there were just 10 deals.
A large portion of the total came from China
Development Bank’s purchase of a 40% stake
in Extract Resources for $917 million as well
as China Investment Corp. (CIC) and Chengdu
Tianqi Industry’s $853 million acquisition of
Talison Lithium – the two of the largest PE
buyouts of Australian mining assets to date.
Headline deals
The headlines deals, however, are divestments
by publicly-traded mining majors that have
been forced to review their portfolios, resulting
in a smorgasbord of high-quality mining assets
coming onto market, the likes of which have not
been seen for a decade.
The likes of BHP Billiton, Rio Tinto and Anglo
American have all gone through a transition of
leadership followed by announcements that they
would sell non-core mining asset or, in the case
of Anglo American, are at least considering it.
BHP is seeking a buyer for its Gregory-Crinum
coal mining operation in Queensland as well
as for its aluminum and nickel divisions. Rio
Tinto has agreed to sell its majority stake in the
Northparkes copper mine in New South Wales
for $820 million to China Molybdenum and is
looking to offload its Clermont and Blair Athol
coal projects in Queensland. More will follow.
What sets this opportunity apart is that these
assets have garnered attention not just from
strategic investors but from generalist PE firms
too. Prior to being sold to China Molybdenum,
Northparkes was said to have drawn bids from
both The Carlyle Group and KKR.
KRR has made no secret of its interest in
acquiring Australian mining assets and already
counts former Rio Tinto CEO Leigh Clifford
among its senior advisors. While there is yet to
Reserve Bank of Australia commodity price index
200
150
US$
Australia’s mining industry is on
the brink of its biggest-ever hangover. For the
last decade – even through the global financial
crisis – commodity prices have continued to
push upwards. This was driven not only by
the resource demands arising from China’s
infrastructure spending binge, but also a global
easing in monetary policy that sought to
stimulate business in the wake of the crisis.
According to the Reserve Bank of Australia
commodities index, prices of non-agricultural
commodities – which include base metals such
as iron ore, copper and gold as well as bulk
commodities such as coal – reached an all-time
high in 2011 of $111.9 while base metals peaked
at $152 in 2007.
This so-called commodities super-cycle
set mining companies into a frenzy of activity.
Australia witnessed its biggest mining boom
since the gold rush of the 1850s and 1860s; a
boom which saw an estimated $650 billion of
investment flood into the country.
“In Australia the cost base of the industry got
wildly out of control,” explains Andrew Parker, a
partner with PricewaterhouseCoopers (PwC) in
Sydney. “Most miners were just digging it out of
the ground as fast they could to ship it off to the
markets, and so understandably cost was never a
consideration in that sort of environment.”
Now the party has come to an end.
Commodity prices have fallen dramatically since
their respective peaks over the last decade:
copper prices are down 35%; iron ore prices have
fallen 40% and gold prices have tumbled 36%.
The mining industry is beginning to suffer the
consequences of its earlier excesses and – as
commodity prices have return to pre-2006 levels
– cost considerations have returned to the fore.
As the dust settles, the question is where does
private equity fit into this new normal. Has the fall
in commodity prices opened up new doors for
investment and if so, where?
Broadly speaking, the impact of the
commodities cycle has been across three areas:
large mining firms that are scaling back their
ambitions and divesting non-core mining asset;
junior mining companies, many of which have
yet to enter production, in dire need of capital to
stay in operation; and mining services companies
– everything ranging from logistics to equipment
100
50
0
-03 ul-03 n-04 ul-04 n-05 ul-05 n-06 ul-06 n-07 ul-07 n-08 ul-08 n-09 ul-09 n-10 ul-10 n-11 ul-11 n-12 ul-12 n-13 n-13
J
Ja J
Ja J
Ja J
Ja J
Ja J
Ja J
Ja J
Ja J
Ja J
Ja Ju
Jan
Non-agricultural
Base metals
Bulk commodities
Source: Reserve Bank of Australia
“The big miners are looking closely at their
more marginal investments and attempting
to get out of them,” says Paul Espie, founder of
Pacific Road Capital Management, which focuses
on investment in mining and infrastructure.
“Capital is scarcer now and investors expect
cash distributions in an industry where there is a
tendency to hold on to cash and reinvest it.”
be substantial deal flow, a number of industry
participants expect big-name GPs to become
active in mining.
“If you asked me 12 months ago, I would
have probably said that in the main it was
only specialist PE funds interested in mining
assets, but we are seeing increasing generalist
activity and it is very serious inquiry,” says PwC’s
7
Cover Story
andrew.woodman@incisivemedia.com
Parker. “They are putting serious resources into
processes and working hard to make sure they
have the right skills and expertise in place.”
However, deals available to private equity in
this space are likely to be limited for a number
of reasons. Firstly, the mining majors are not in
financial distress, so they are under less pressure
to sell assets at the kind of fire sale prices many
PE investors might be looking for.
Secondly, private equity firms face stiff
competition from strategic investors that, more
a large mining company sells something it is
often because it doesn’t think the asset is good
enough. The majors aren’t cash constrained so
they wouldn’t sell high-quality assets. “
Koth argues that junior mining assets
offer a far better for proposition PE investors.
Most of these companies are engaged in the
exploration phase where the risks are much
higher and the need for capital expenditure is
greater – accordingly, many were badly hit when
commodities prices took a plunge.
Top 10 PE investments in Australian natural resources
Date
Amount
(US$m) Deal type
Investee
Segment
PE investor(s)
Investor
country
Mar-12
917.4 Buyout
Extract Resources
Metals mining China Development Bank
Capital
China
Dec-12
853.4 Buyout
Talison Lithium
Metals mining China Investment Corp;
Chengdu Tianqi Industry
China
May-07
270.0 Buyout
Coogee Resources
Oil & gas
extraction
Australia
Oct-09
258.7 Buyout
Dalrymple Bay Coal
Terminal
Metals mining Brookfield Asset
Management
Canada
Jan-12
225.0 Investment
Lynas Corporation
Metals mining Mount Kellett Capital
United States
Apr-07
208.1 Buyout
Valley Longwall
International Group
Oil & gas
extraction
Catalyst Investment
Managers
Australia
May-08
188.3 Buyout
Gorey and Cole
Drillers
Non-metals
Minerals
Ironbridge Capital
Australia
Gresham Private Equity
Babcock & Brown
Jul-07
174.6 Buyout
Barminco
Coal mining
Jun-07
172.2 Receivership
Sons of Gwalia
Metals mining Resource Capital Funds
United States
Jul-06
134.2 Buyout
Loy Yang (power
station and coal
mine assets)
Coal mining
Australia
MTAA Super; Transfield
Services; Westscheme;
Statewide Superannuation
Australia
Source: AVCJ Research
often than not, are willing to a price that are
beyond the comfort zone of most pure financial
players. A strategic justifies this premium by
virtue of the synergies it can offer with its existing
assets, and these often appeal just as much to
the sellers. PE cannot bring this to the table.
Sources familiar with the transaction say this was
a factor in the Northparkes deal.
Overseas strategic investors, in particular,
have been keen to snap up Australian assets.
According to Thomson Reuters, inbound M&A
in the mining sector stood at $9.4 billion across
149 deals last year – 32 of these involved Chinese
acquirers, which accounted for just under 20% of
total transaction value.
However, even after valuations and
competition are taken into account, some still
question the relative attractiveness of the assets
on offer when there may be better opportunities
further down the food chain.
“While it might be tempting for large PE firms
to buy divestments from mining majors there
is one thing you should never forget,” says Bert
Koth, a director with Denham Capital. “When
8
Private equity investors – typically specialists
– have a long-standing appetite for junior miners.
Extract Resources and Talison Lithium both fall
into this category, while Hong Kong-based Sprint
Capital made its first foray into Australia last year,
investing A$36 million ($36.4 million) for a 25%
stake in junior mining company Stanmore Coal.
“The middle market – the development
capital side – is where things have been tougher
but that is where the opportunity is because
banks aren’t lending there,” says Nick Powell, a
senior partner with Hong Kong-based resources
PE firm GEMS. “The capital markets aren’t
financing these projects so private equity is one
of the few sources of capital remaining.”
Boston-headquartered Denham has been
closely following this opportunity, having
opened its Perth opened last November. Koth
makes the point that early overconfidence from
investors in the junior mining space had led to
many junior mining companies being put on
the public markets irrespective of the underlying
asset and whether the management is high
quality or low quality. There can only be a limited
number of winners and so many companies have
been over-promoted and ultimately failed to live
up to investors’ expectations.
As a result, junior miners no longer have the
capital to progress their work programs and are
instead spending what money they have left
on maintaining the salaries and office space to
keep operations going – this has had the effect
of aggravating shareholders even more, leading
to the further falls in valuation. All these elements
have contrived to create an environment in
which junior miners’ need for capital has reached
the point of desperation.
“It is not a joke when I say we had to put a
password on the elevator at our Perth office to
prevent guys from junior mining companies that
are running out of cash coming up to our floor,”
says Denham’s Koth, adding that competition for
these assets ranges from small to non-existent. “If
you know who to speak to it is matter of pick and
choose and name your price – I have never seen
anything like it in the last decade.”
However, while the opportunities may appear
abundant it still begs the question: Should
direct investments in mining asset be left to
specialist PE shops or is it there an opportunity
for generalists? The consensus seems to be that
generalists should tread carefully if at all.
“It is a difficult space for PE as you have
volatile output and on top of that you have single
mine risk which can be very challenging,” says
Justin Reizes, head of KKR Australia. “If you have
a broader portfolio it makes things easier but
it’s still not so straight forward. A lot of people
are trying to get their heads around it to see if it
makes sense.”
An appealing proxy
For many generalist PE firms, investment
in mining services still represents the most
attractive option. While some have been
impacted by cost-cutting across the industry,
others say that the commodities downturn has
brought the benefits into sharper focus.
Pacific Equity Partners (PEP), for example,
backed two companies offering services to
Australia’s mining industry: on-site support
services company Spotless, which was taken
private last year for $723 million; and remote
power provider Energy Developments, which
PEP picked up for around $130 million in 2010.
The mining industry accounts for 20% and 50%
of each business, respectively.
“The nature of the mining boom has
sometimes been a little misunderstood – there
is a sense in the popular press that it is all over
but that’s not really true,” says David Grayce,
managing director at PEP. “The commodity
pricing signals stimulated a classic investment
response – mining majors got to work building
avcj.com | July 30 2013 | Volume 26 | Number 29
coVer story
andrew.woodman@incisivemedia.com
the next stage of the industry, whether it was
opening up new areas like liquefied natural
gas (LNG), establishing new mines, or debottlenecking infrastructure.”
He argues that production volumes have
consequently begun to pick up on the back of all
the investment and so businesses with exposure
to this have been reasonably well placed relative
to the cycle. For example, Energy Developments
supplies power to major miners on a long-term
contracted basis. As miners expand volumes
they typically become more energy intensive,
demanding more power capacity.
KRR’s Reizes observes a similar trend on
the services side, but adds there is also an
opportunity in helping miners that have been
forced to cut back.
BIS Industries was established in 2006 after
KKR paid A$1.83 billion ($1.6 billion) for Brambles
Industrial Services and Cleanaway Australia – its
first acquisition in the country and the largest
ever domestic management buyout at that
time. The company has been growing its market
share in the logistics space by offering a lower
cost alternative as mining companies seek to
restructure their balance sheets, hire contractors
and refocus on their core business.
“BIS is creating opportunities that were not
there in the growth cycle by being proactive
“It is not a joke when
I say we had to put
a password on the
elevator at our Perth
office to prevent guys
from junior mining
companies coming up
– Bert Koth
to our floor”
in helping customers to reduce costs and
capital spend,” say Reizes. “The company is even
providing solutions for existing customers by
taking more on-site work but reducing costs for
the customer overall.”
However, it has not all been plain sailing for
the company. KKR put BIS on the block in June
last year after negotiations failed to refinance
the loans used in the original purchase. It has
since obtained a $900 million financing package
from Bank of America Merrill Lynch and, with
Australia’s capital markets looking healthier than
before, an IPO is said to be in the pipeline.
Other PE portfolio companies have
experienced declining profits and job cuts. These
include equipment hire outfit Coates Hire, which
is owned by The Carlyle Group and Seven Group
Holdings. The investors obtained A$1.85 billion
in refinancing last year and announced in June
that they had decided against pursuing an exit –
Carlyle’s investment dates back to 2007 – after an
assessment of trade sale options failed to deliver
any acceptable offers.
This underscores the fact that, although
Australia’s mining industry provides no shortage
of opportunities, finding the right spots in the
value chain remains a challenge. PwC’s Parker
is convinced that private equity can play an
important role; there is demand for capital
discipline, cost management and cash flow
management skills that are readily applicable
from other industries. And specialists can of
course offer expertise that goes well beyond that.
It remains to be seen whether generalist
interest proliferates or remains limited to
the larger players. “The jury is still out,” say
KKR’s Reizes. “There is no doubt that people
are focused on it, but I am not sure if many
generalists are going to get comfortable enough
to stretch into owning mining businesses,
particularly when strategics out there also want
to own them.”
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avcj.com
26th AnnuAl
12-14 November 2013
Four Seasons Hotel, Hong Kong
Senior LP speakers already confirmed include:
Guan Seng Khoo
VP, Risk Management
AlbeRtA InVeStMent
MAnAgeMent CoRPoRAtIon
Volkert Doeksen
Chairman &
Chief executive officer
AlPInVeSt PARtneRS
Pak-Seng Lai
Managing director &
Head of Asia
AudA
Wee Teck Tay
director
bAnK oF SIngAPoRe
Jay Park
Managing director
blACKRoCK PRIVAte
eQuIty PARtneRS
Suyi Kim
Managing director, Head of Private
equity Asia, CAnAdA PenSIon
PlAn InVeStMent boARd
Thomas Kubr
executive Chairman
CAPItAl dynAMICS
Jeremy Coller
executive Chairman & CIo
ColleR CAPItAl
Thomas Klein
Vice President
deg
David Nieuwendijk
Senior Investment officer
Private equity
FMo
Steve Byrom
Head of Private equity
FutuRe Fund
Juan Delgado-Moreira
Managing director and Head
of International
HAMIlton lAne
Fritz Becker
Ceo & Managing director
HARAld QuAndt HoldIng
gMbH
D. Brooks Zug
Senior Managing director
& Founder
HARbouRVeSt PARtneRS, llC
David Wilton
CIo and Manager, global
Private equity, InteRnAtIonAl
FInAnCe CoRPoRAtIon
Jim Pittman
Vice President, Private equity
PSP InVeStMentS
Alison Nankivell
director, Funds Asia
teACHeRS’ PRIVAte CAPItAl
Risto Autio
director, Private equity
VARMA MutuAl PenSIon
InSuRAnCe CoMPAny
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by 2 August
and save
us$500
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Focus
winnie.liu@incisivemedia.com
Share the wealth
China’s first step in interest rate liberalization might herald a series of reforms that make financial services
more market-oriented. But where does shadow banking fit into it?
For Rong360, a Chinese online search
engine for loan products, the central bank’s
decision to abolish the lower limit on interest
rates was cause for cheer. If the government
allows greater freedom in setting lending rates,
there will be greater competition among banks,
and perhaps more web traffic for Rong360 as
prospective borrowers consider their options.
“We see huge potential in China’s financial
services sector and there’s no strong player
leveraging internet in this space,” says James Mi,
managing director at Lightspeed China Partners,
which led a $7 million Series A round of funding
for Rong360 last year.
Last week, the company secured $30 million
in Series B funding. Sequoia Capital is said to
have led the round, with Lightspeed and fellow
existing investors KPCB and Zero2IPO Ventures
also participating.
Nine in 10 loans in China are granted above
the 6% benchmark rate, so the immediate impact
of removing the lower limit is marginal. But as a
gesture of the government’s desire for a marketoriented economy – with more of a role for
small- and medium-sized enterprises (SMEs) – it
is powerful. Rong360 wants to ride the trend.
A removal of the upper limit on deposit rates,
which remain capped at 110% of the benchmark
rate, is the next industry participants are waiting
for. “If the regulator isn’t touching the banks’
deposit rate then it is not doing something
meaningful,” says Michael McCormack, executive
director at Z-Ben Advisors.
In this way, liberalizing deposit rates would
reduce investor appetite for higher interest rate
products available through China’s “shadow
banking system,” which in certain areas lies
beyond the reach of traditional regulation,
making its impact on the sector hard to fathom.
Under the radar
Shadow banking allows borrowers to obtain
credit from alternative sources to traditional
banking institutions and circumvent banks’
formal underwriting standards. It took off in 2009,
when Chinese government initiated a credit
boom intended to see the country through the
fallout from the global financial crisis. The big
winners were state-owned enterprises but many
smaller players missed out.
“Despite the massive increase in liquidity,
12
demand for credit from small- and medium-sized
enterprises (SMEs) was not being met,” say Per
Stenvall, managing director at M&A advisory
firm Stenvall Skoeld & Company. “The shadow
banking system is still meeting this demand by
providing loans to private companies shunned
by banks, and in doing so it is playing an
important role in rebalancing China’s economy.”
Moody’s estimates the balance of outstanding
shadow banking products is around RMB21
trillion ($3.4 trillion), equivalent to 43% of the
total system loans or 55% of GDP in 2012. Of this,
nearly half is undiscounted bankers’ acceptances
(off-balance sheet items) and entrusted loans
(between corporates with banks acting as
agents). The rest comprises loans extended by
“The shadow banking
system is still providing
loans to private firms
shunned by banks, and
in doing so it is playing
an important role in
rebalancing China’s
– Per Stenvall
economy”
trust companies, guarantee companies and
finance companies, as well as financial leasing,
microcredit, informal lending and pawn shops.
Limited shadow banking activity is necessary
in an emerging economy like China, but the riskreturn profiles can cause discomfort: SME credit
checks are difficult so lenders may never really
know borrowers; and if these loans are somehow
bundled into diversified wealth management
products that are sold to retail investors via
banks, the risk becomes all the greater.
The government therefore wants to regulate
shadow banking lest it becomes a systemic risk.
Although shadow banking can be profitable,
PE exposure to the industry is limited, given the
amount of consolidation and regulation required,
but Jon Parker, a principal for transaction
services at KPMG, believes the things might be
going in the right direction. “Likely investments
may be microfinance enterprises and wealth
management companies that can demonstrate
a good track record and are able to grow to a
reasonable size,” he adds.
Broader horizons
There have been other government policies
targeting small businesses, and for several years
now commercial banks have been encouraged
to boost lending to SMEs. But the development
of Alibaba Finance, which earlier this month
won regulatory approval to expand its business,
suggests an acceptance of non-traditional
providers. Backed up by transaction history
from Alibaba Group’s e-commerce platforms,
Alibaba Finance might be better placed than a
commercial bank to assess an SME borrower.
In this context, microfinance companies are
expected to playing an increasingly important
role in financing small businesses. There
were more than 7,000 registered microcredit
companies with total outstanding loans
exceeding RMB700 billion as of June. Lending
rates are capped at four times the benchmark
rate, so returns of 20% or more are achievable.
However, PE firms remain cautious about
the industry. Managing high volumes of loans is
challenging while the legal and credit systems
don’t provide sufficient protection to lenders.
“Most potential borrowers are individuals or
small companies with few assets,” says Johannes
Schoeter, founding partner at China New
Enterprise Investment (CNEI). “You can’t force
them to pay or declare bankruptcy and there isn’t
much collateral to go after. The borrower may
just disappear or simply say – sorry I don’t have
the money to pay you back.”
CNEI’s preference is financial leasing
companies. Last December, it led a Series B round
of funding for Juxin Internal Leasing, which
specializes in lending to SMEs in the education
and healthcare sectors.
Loan guarantee services are another niche
play to draw interest. Shenzhen Huarong
Investment & Guarantee, a portfolio company
of Shenzhen Capital Group, has expanded its
operations to provide short-term loans for
small business owners. “Revenues for the loan
guarantee business are high if the financial risks
are well controlled,” says Jin Yan, an investment
director with the VC firm.
avcj.com | July 30 2013 | Volume 26 | Number 29
deal of the week
tim.burroughs@incisivemedia.com / mirzaan.jamwal@incisivemedia.com
Affinity agrees chaebol restructuring carve-out
it to focus on growing its entertainment
Apple’s iTunes Store has a library of
business globally. Sources familiar with the
more than 26 million songs, a presence in 119
transaction put it another way: this is part of a
countries and revenues of $12.9 billion in 2012.
government-mandated restructuring of Korea’s
Its US market share is around 63%.
conglomerates, or chaebols.
In South Korea, iTunes’ market share is close
“There has been talk for a long time about
to 1%. The company has yet to gain momentum
chaebol restructuring and now
in the face of competition from
it’s real because the government
local players that charge less than
has introduced regulations that
Apple’s $0.99 per song. MelOn,
force them to divest,” one source
which is owned by digital music
tells AVCJ. “There has been a huge
platform Loen Entertainment is
political backlash against the
the runaway market leader with
chaebols – they have squeezed
approximately 60%; it charges
out the small to mid-sized guys
$0.60 per download.
over the years – and more deals
Last week SK Telecom, South
MelOn: The iTunes of Korea
like this will come.”
Korea’s largest mobile operator,
Loen was founded in 1978 as Seoul Records
agreed to sell a majority stake in Loen to Affinity
and listed on KOSDAQ in 2000. SK Telecom
Equity Partners for KRW265.9 billion ($239
bought a 60% stake in the business in 2006 for
million). The PE firm will buy 13.3 million shares –
KRW29.2 billion, and it was given responsibility
or a 52.6% stake – at KRW20,000 apiece from SK
for MeIOn. Revenue has seen compound annual
Planet, a subsidiary of SK Telecom. SK Planet will
growth (CAGR) of 22% in the last three years,
retain a 15% interest in the business. It is the first
reaching $180 million in 2012, while income has
deal from Affinity’s fourth Asia buyout fund.
expanded 74% to $24 million.
SK Planet said the divestment would allow
Most of Loen’s seven million paying
subscribers are on the downloads side of the
business, which comprises an iTunes-style store
and a subscription-based music streaming
service described as “Spotify without ads,” which
accounts for nearly three-quarters of revenues.
Other interests cover music rights ownership
and artist management and production. Talent
on the books includes pop stars IU and Ga-In. The
latter is best known overseas for her appearance
on Gentleman, the follow-up to Gangnam Style.
While Loen’s principal attractions are its scale
and dominant market position, the business
model employed by digital music platforms in
Korea has come under pressure.
Subscription package charges are rising as a
result of government measures to ensure higher
margins for musicians and content owners.
MelOn’s unlimited streaming service, for example,
has now doubled in price to KRW6,000 per
month. The move came after copyright holders
complained that payment rates must move
closer to international standards for the domestic
music industry to be sustainable.
VCs back India SME group-buying service
Despite there being around 47
million small- and medium-sized enterprises
(SMEs) in India, the segment has not yet
participated in the country’s e-commerce boom.
While 51% of online SMEs use the internet to
advertise, a mere 27% use it for trade, according
to a report by Google and the Federation of
Indian Chambers of Commerce and Industry.
“Normally there is an assumption that SMEs
will not adopt technology,” says Vani Kola,
managing director at Kalaari Capital. “But that is
not the case in our experience – if you can offer
the value for adopting the platform.”
When Kola met the team behind group
buying website Power2SME in 2012, the
company already had a database of active users
doing transactions worth INR500,000 per month.
Power2SME is a free platform that
aggregates demand for raw materials from
SMEs, negotiates the best prices directly with
suppliers and handles payments to them. It cuts
out distributors and wholesalers by then selling
the materials directly to SMEs and delivering
the goods to them. Its profit is the difference
Number 29 | Volume 26 | July 30 2013 | avcj.com
to jump up,” he says. “For example, in steel we
between the buying and selling prices.
started with a 1% margin and now we are doing
The company handles everything from
3,000 tonnes of steel in a quarter so our margins
chemicals and additives to metals and polymers,
have gone up over 7%. This is despite giving
dealing with suppliers such as Indian Oil and
savings of 5-6% to the SME.”
Arcelor-Mittal. By bringing SMEs together as a
Power2SME operates out of Delhi and the
single bulk purchaser, it is easier to negotiate
surrounding National Capital
with these giants.
Region but plans to start offering
Kalaari and Inventus Capital
services in Maharashtra, Gujarat,
invested $2 million in Power2SME
West Bengal and Tamil Nadu. It
in a Series A round in October
will also enter new sectors and
2012; Accel Partners joined
expand sourcing channels to
them in the $6 million Series B
include direct imports. Another
round last week. Since October,
plus of the B2B model is that
monthly transaction value has
SMEs are used to paying for
risen to INR50 million. The firm
Power2SME: Wholesale value
transportation so no part of the
has generated INR370 million in
revenues to date, has 13,000 registered users, and transaction has to be subsidized, unlike B2C
e-commerce websites that offer free delivery.
expects to break-even in the first quarter of 2014.
Power2SME is also in talks with four NBFCs
According to R. Narayan, Power2SME’s
about appraising potential customers and
founder and CEO, the margins are much smaller
providing credit for payments. “We’re trying
than for a service-oriented business, but what
to solve the need for capital and for cheaper
changes is the scalability. “When we start a
procurement prices – those are the two biggest
certain vertical it will be at 1-2%, but as we grow
pain points for SMEs,” Narayan adds.
the buying power improves and margins start
13
Portfolio
tim.burroughs@incisivemedia.com
The technology of tea
Sari Wangi is Indonesia’s largest private tea player. CLSA Capital Partners invested not so much for exposure
to the crop as what the company offers as a platform for distributing agricultural technology
The tea plantations of western Java
are at their most productive between July and
October, Indonesia’s dry season, but volatile
weather conditions in the months preceding
can cause havoc with the crop. A deluge of
rain might wash off all the fertilizer and thereby
reduce yields.
The solution is drip irrigation: a network of
pumps, pipes, valves and emitters that controls
the flow of water and other nutrients to the tea
plants. Application in small doses means fertilizer
is pushed down to the roots where there is
less run-off. While the origins of modern drip
irrigation can be traced back to the 1960s, it only
really took off in US agriculture in US in the last 10
years. Indonesia is even further behind, but rising
land prices are generating interest.
“Historically land has been so cheap that
people didn’t want to invest in technology – if
you needed more yield you could buy another
hectare of land for $200. On Java it’s now $6,0007,000 per hectare so it makes sense to pay $1,000
to 3,000 for equipment that has the same effect,”
ays Peter Kennedy, head of CLSA Capital Partners’
Clean Resources Asia Growth Fund. “We see a lot
of new land plantings who want to put a drip
down because the payback is 2-3 years on the
investment and mitigates weather risk.”
Drip irrigation is one of several technologybased solutions that can deliver higher crop
yields. Others range from sub-surface sensors
that monitor water and nutrition schedules to
bio-pesticides and fertilizers. CLSA is banking on
demand in Indonesia for all of them as farmers
increasingly find themselves under pressure
at both ends of the cycle: the economics are
changing in terms of inputs while multinational
customers want cleaner products.
The PE firm brought relationships with
leading technology providers, including Netafim,
which controls one third of the global microirrigation market, India-based bio-fertilizer
specialist Camson and US agri-products producer
Marrone Bio Innovations. Camson is a current
CLSA portfolio company; Kennedy backed
Marrone during an earlier phase of his career at
sustainable resources investor Fulcrum Fund.
A suitable partner
The missing piece was a local partner that would
serve as a testing base and a distributor for these
14
products. In July 2011, CLSA invested $15 million
in Sari Wangi Group, Indonesia’s largest private
tea company. The alliance was premised on
CLSA helping the company set up an agriculture
technology subsidiary, Nutrigasi Indonesia.
“When we first went to meet them about
three years ago the planes from Singapore were
60% full; now you can’t get a flight to Indonesia
on a Friday or a Monday,” Kennedy says, alluding
to the country’s emergence as a PE hotspot.
“When we first went
to meet them about
three years ago the
planes from Singapore
were 60% full; now
you can’t get a flight to
Indonesia on a Friday
or a Monday” – Peter Kennedy
However, the timing was not so much
prescient in terms of attractive valuations as Sari
Wangi being presented with a potential solution
just when it needed one. The company was
already looking at product diversification and
started experimenting with greenhouses and
drip irrigation in 2009; the next step was taking
these yield-boosting technologies and rolling
them out on a larger scale.
“It is a national issue for Indonesia and not
just about tea. For rubber, sugar, coffee, cacao,
cassava – the Dutch colonial era commodities
– productivity is in decline because the soil in
Java and Sumatra has been used for 150 years,”
explains Rocky Menayang, Sari Wangi’s CFO. “In
the beginning it was R&D. The edge CLSA gave us
was confidence that we are doing the right thing
and then access to international networks.”
Sari Wangi was already international in its core
tea business. The company started out 50 years
ago as a tea trader, founded by Johan Alexander
Supit – Menayang’s father-in-law – who had
returned home from London where he worked
for, among others, Joseph Tetley & Company,
which introduced teabags to the UK in the 1950s.
Supit sourced tea from local farmers
and shipped blended products to Western
multinationals, taking advantage of the
government’s nationalization initiative that
effectively shut foreign firms out of the export
market. He was also responsible for Indonesia’s
first teabag, sold under the Sariwangi brand,
which was bought by Unilever in 1989.
“Back then the domestic consumer demand
wasn’t big enough and it required someone
bigger to move the teabag market,” says
Menayang. “When he sold tea in bags customers
thought it was a new packaging concept and so
they just tore them open.”
Sari Wangi’s agreement with Unilever
included a clause that prevented it reentering
the retail segment for 12 years. Once this expired,
the company returned with new brands, drawn
by annual growth of 12% in the teabag segment,
which now accounts for more than one third
of the 70,000 tons of tea Indonesians consume
each year. In addition to growing the trading
business – two years ago, L. Link Schuurmann, a
150-year-old Dutch trading house, was acquired
to strengthen operations in Europe – Sari Wangi
moved upstream into plantations.
The company now produces 7,000 tons of
tea annually from its own fields and trades about
55,000 tons. It is responsible for more than one
quarter of the 35,000 tons Unilever sources from
Southeast Asia, predominantly for the Sariwangi
brand. Revenue is approximately $100 million
per year and Unilever contributes about 20% of
that. Government-owned plantation companies
may produce more raw tea but Sari Wangi is
more than twice the size of the next-largest
independent vertically integrated player.
“They are pretty ahead of the curve,” says
Kennedy. “When we met them they were already
rainforest-certified, one of few companies in
Indonesia to achieve this. They had sustainability
programs to comply with Unilever requirements.”
Rainforest certification is essentially a product
cleanliness standard, ensuring that farmers
don’t harvest their crops less than 45 days after
applying pesticide and that there is no residue
on the leaves. It also sets benchmarks for factory
hygiene and the treatment of employees.
Now, though, Europe is setting standards that
go above and beyond rainforest certification.
Menayang estimates there are 300 parameters
avcj.com | July 30 2013 | Volume 26 | Number 29
Portfolio
tim.burroughs@incisivemedia.com
progress has been made on tissue culture to
develop better seeds, as well as crop population
densities that ensure these technologies have
optimal impact.
Nutrigasi is now the exclusive distributor for
Netafim in Indonesia. One of its first customers
was the country’s largest state-owned sugar
producer, which agreed to trial the technology
on a 100-hectare plot. After 10 months of
cultivation, average yield per hectare had jumped
from 60 tons to 105 tons, without making any
on pesticide use, up from just five parameters 2-3
years ago. Vietnam is already paying the price, its
tea banned from Europe due to non-compliance.
Dual purpose
CLSA’s involvement therefore serves two
interrelated functions – helping Sari Wangi keep
up to speed with the latest developments in
regulation, governance and transparency (which
includes the adoption of technology) as well as
getting Nutrigasi off the ground.
Indonesia plantations by size
800
US$ million
600
400
200
0
2002
2003
Cocoa
2004
2005
Coffee
2006
2007
Tea
2008
2009
2010
2011*
2012*
Sugar
Source: Statistics Indonesia
* Preliminary data
Indonesia tea plantation output
150
Thousand tons
120
90
60
30
0
2002
2003
2004
2005
2006
Source: Statistics Indonesia
The structure of its investment reflects
these purposes. CLSA subscribed to a threeyear convertible note with the option of taking
a minority stake in either the parent or the
subsidiary; although it may end up with exposure
to both. Much rests on building demand for the
technology, and not just among tea farmers.
When Sari Wangi trialed Netafim’s drip
irrigation technology on its plantations, yields
improved by 60% on a per kilo basis while
fertilizer use fell by 50%. Pilot projects involving
sub-surface sensors, bio-fertilizers and biopesticides have since been implemented, and
Number 29 | Volume 26 | July 30 2013 | avcj.com
2007
2008
2009
2010
2011*
2012*
* Preliminary data
parallel improvements to seed or fertilizer quality.
“The government responded positively and
announced that it must implement the program
more widely,” says Menayang. “We have identified
22,000 hectares on government plantations
where this technology can be applied
immediately and another 60,000 hectares where
they need to be thinking seriously about it.”
Independent sugar producers – typically
those with projects of 10,000 hectares or more –
are also expected to be a rich source of demand
for technology. Astra International, Indonesia’s
largest listed company, announced last year
that it planned to add sugar and rubber to its
agribusiness portfolio and there have already
been discussions with Nutrigasi. Domestic
conglomerates Rajawali Group and Medco
Group are also entering the spacehave both
been allocated land for sugar plantations on the
Merauke Integrated Food and Energy Estate in
Papua province.
Outsourcing solution
But the ultimate objective for Nutrigasi is
to establish itself as a third-party plantation
manager, cultivating multiple crops on a contract
basis. This fits in with Sari Wangi’s differentiation
drive: tea plantations covered 64,500 hectares
in 2012, according to preliminary data from the
Indonesia government statistics bureau; 92,100
hectares were devoted to cocoa, 47,900 hectares
to coffee and 456,700 hectares to sugar. Palm oil
is the runaway leader on 5.4 million hectares.
Sari Wangi owns approximately 3,500 hectares
of plantations, while Nutrigasi already operates
nearly 2,000 hectares with more in the pipeline.
Government-owned plantations were an obvious
first target.
“Tea is very labor intensive so they basically
run like small villages, with hospitals, schools
and housing. They understand how to manage
large pools of labor in the agricultural space and
not many people can do this, particularly these
new financial investors that are coming in,” says
Kennedy. “And then the government is fairly
inefficient in managing some of this land so there
is an opportunity for someone to come in and
manage it for them.”
Menayang compares Nutrigasi to a turnkey
operation: it puts in the infrastructure, whether
for drip irrigation or tissue culture, manages
the day-to-day operations, and then Sari Wangi
handles the off-take. Given the Indonesian
government controls about 150,000 hectares of
sugar crop and 35,000 for tea, there is massive
potential for expansion if the business succeeds
in generating sufficient momentum.
The day of reckoning comes next year when
CLSA’s note converts to equity in Sari Wangi or
Nutrigasi. The PE firm entered with a five-year exit
horizon and 2014 should also offer some clarity
as to what form that exit will take. Either the
parent or the subsidiary could pursue an IPO, and
another option is selling Nutrigasi to a foreign
strategic investor keen to sell technology into
Indonesia.
For now, Kennedy is keeping his options
open. “As a private equity firm we wanted the
downside protection of investing in the cashgenerative parent, which might deliver a high
teens return,” he explains. “But Nutrigasi is a green
field operation so there is the potential of a VCstyle return if it takes off.”
15
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