Q2 analysis: Still open for business

1) Exits: The roll continues

Three months ago, the question was whether bumper first-quarter trade sale and IPO numbers could be sustained. It appears they can - at least for the time being.

According to provisional data from AVCJ Research, trade sales for May-June generated $7.3 billion, just short of the first quarter's $7.5 billion, while overall exits came in at $13.2 billion, compared to $13.3 billion for the previous three months. As with the previous quarter, one large-ticket item moved the needle: Australia's QIC scooped $6.2 billion by sellingQueensland Motorways to Transurban Group, AustralianSuper and Abu Dhabi Investment Authority. Without it, the total looks far more ordinary.

As is usually the case, trade sales account for the bulk of the top 25 exits for the quarter. More notable is that seven of the entries were IPOs (i.e. full or partial exits from companies on listing). Australia figures prominently, confounding observations that sparse first-quarter activity was evidence of the public markets window closing. Having abandoned its IPO in the first quarter, CVC Capital Partners-owned Mantra is now listed. This was one of eight PE-backed IPOs in Australia that between them raised $2.7 billion between April and June, the highest quarterly total on record.

More than half of these proceeds were generated by two offerings: catering and cleaning contractor Spotless Group (A$994.6 million, $931 million) and hygiene and paper products manufacturer Asaleo Care (A$655.7 million). Pacific Equity Partners and its co-investors retain a minority interest in the former and fully exited the latter, taking approximately A$537 million from both IPOs. Ironbridge Capital also received proceeds of A$168.4 million through the exit of all but a 5% holding in in vitro fertilization specialist Monash IVF. Meanwhile, Quadrant Private Equity secured A$241.5 million from the IPOs of media monitoring business iSentia and Burson Auto Parts.

Asia-wide PE-backed IPOs generated $8.3 billion for the quarter from 40 offerings, down from $9.7 billion for the previous three months. A large portion of this came from Chinese online retailer JD.com, which raised $1.78 billion - pricing its offering above the indicative range due to investor demand and whetting the appetite for what may follow when Alibaba Group also goes public in the US.

Tiger Global Management, DST Advisors, Hillhouse Capital Management and Capital Today all made partial exits, sharing approximately $674 million. But what they retain is far more valuable. Six disclosed PE and VC investors - the aforementioned four plus Bull Capital Partners and Sequoia Capital - have between them an economic interest of more than 40% in a business with a market capitalization of $38 billion and net revenues that increased threefold to $11.5 billion in the two years to 2013.

Capital Today invested $18 million in JD.com between 2007 and 2009, and held 6.8% of the company immediately after the IPO and is said to be sitting on an unrealized return of more than 100x.

2) Fundraising: A China VC story

The rich seam of China VC fundraising continued into the second quarter of 2014, with an astonishing $3.7 billion raised across 16 vehicles. This is more than double the total for January-March and takes VC fundraising for the first half to $5.6 billion. To put that in context, it is 79% of all capital entering Asian VC funds during the period.

With six months left to run, 2014 is already the second-biggest year on record for China VC fundraising, trailing only 2011, which represented not only the peak of the pre-IPO investment boom but also the last time a lot of the established firms were in the market. This phenomenon also explains the uptick in activity in 2008. There are other factors - fundraising is always going to be easier on the back of a string of IPO exits, for example - but historically the big names in China tend to seek new capital around the same time. It begs the question of what happens from the third quarter onwards and the reality is the headline number will drop off, perhaps dramatically.

Of the 20 largest funds in Asia to reach a final close in the second quarter, eight were China venture capital vehicles. GGV Capital led the way with $621.9 million for its fifth Sino-US fund, followed by IDG Capital Partners, Legend Capital, Matrix Partners and Lightspeed China. All closed at or above target, and all can claim a loyal following among blue chip US institutional investors.

The outlier is arguably Shunwei Capital Partners, which raised $525 million for its second fund. There is no US affiliation or legacy; the GP was co-founded by Lei Jun, super angel and CEO of smart phone manufacturer Xiaomi. It is an example of the China technology story going full circle: entrepreneur receives venture capital backing and builds a successful business; entrepreneur then uses a portion of the proceeds to invest in the next generation of start-ups before going one step further and raising a formal VC fund. In this respect, China is following a path already marked out in Silicon Valley.

Two more funds that reached final closes in the second quarter tick a number of the same boxes. Neither Yunfeng Capital nor Vision Knight Capital is a VC firm; the former also does later stage investments and the latter is operationally-focused. However, they exist at the nexus of consumer and technology; they have roots in successful tech businesses; and they relied heavily on entrepreneur contributions for Fund I before tapping institutional investors for Fund II. Yunfeng, set up by Target Media founder David Yu and Alibaba Group founder Jack Ma secured $1.1 billion for its second fund, while Vision Knight, which was founded by former Alibaba.com CEO David Wei, raised $550 million.

VC funds accounted for 60% of the capital committed to Chinese private equity in the second quarter; include Yunfeng and Vision Knight and it rises to 86%. The VC contribution to Asia fundraising as a whole was a more modest 30% as the three-month total reached $14.8 billion, the highest level since the first quarter of 2013. The China venture capital impact was counterbalanced by activity from the pan-regional buyout funds, with CVC Capital Partners and TPG Capital announcing final closes on their most recent vehicles, at $3.5 billion and $3.3 billion, respectively.

3) Investment: Philippines rising?

When CVC Capital Partners acquired SPi Global in early 2013 it was the Philippines' largest-ever private equity buyout. Unsurprisingly, the transaction sent PE investment in the country to a quarterly high of $340 million. Now that figure has been bettered, but the $444 million deployed in the second quarter of 2014 was spread more evenly across four deals.

GIC Private was responsible for two of these transactions, backing Metro Pacific Investments' hospital business in a deal that could be worth $234 million and committing $76.6 million to Century Canning Corporation (CCC) ahead of an IPO. The third came as TPG Capital and Malaysia's Khazanah Nasional invested $132 million in housing developer 8990 Holdings.

The Philippines accounted for close to one third of Southeast Asia's $2 billion in private equity investment for the quarter, contributing to a first half total of $3.6 billion, the highest sixth-month total in nearly three years.

Needless to say, KKR's agreed $1.1 billion privatization of Singapore-listed container manufacturer Goodpack was the dominant factor, but the Philippines represents the more interesting trend. The country's private equity industry is still at a very early stage but this activity gives credence to reports of rising investor interest. What with the widely-expected relaxation on foreign investment restrictions in the banking sector, momentum may continue to gather.

Asia PE investment reached a three-year high of $23.4 billion in the first quarter of 2014 and this was never likely to be matched in the second quarter. Deal value did drop to $16.7 billion but January-June still represents the most active six-month period since the second half of 2010, suggesting that a relatively disappointing 2013 will not be repeated. In addition to Southeast Asia, Australia and China saw an uptick in quarter-on-quarter deal flow and there are snippets worth noting in each case.

The Australian total was predictably buoyed by a big infrastructure deal as Abu Dhabi Investment Authority invested $779 million in Queensland Motorway. Less predictably, the country also saw its largest-ever VC investment as Insight Venture Partners committed $250 million to global marketing specialist Campaign Monitor. The software-as-a-service industry is indeed unconstrained by geography.

In China, the food thesis remains of huge relevance. Four sizeable dairy industry transactions announced since September 2013 will see PE capital used to develop farms with a view to meeting consumer demands for higher quality milk. The most recent of these came in June as Yunfeng Capital and CITIC PE agreed to invest $320.5 million in Mongolia Yili Industrial Group's livestock subsidiary.

A consortium comprising KKR, Baring Private Equity Asia, Hopu Investments and Boyu Capital also took the food thesis one step further, committing $270 million to COFCO Meat, a hog farm and meat processing plant operator. As with the dairy investments, the PE firms will contribute technology and expertise from overseas in order to boost quality and capacity.

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• Topics
• Greater China
• Southeast Asia
• Fundraising
• Exits
• IPO
• Capital Today China Group Company
• Fundraising
• China
• Yunfeng Capital
• Philippines
• CVC Capital Partners
• Exit