AVCJ at 25: Roy Kuan of CVC Capital Partners

One of the reasons for Asian Venture Capital Journal's creation was to serve as an independent voice for the nascent industry, communicating opportunities for the asset class in the region and, hopefully, making it easier for managers to raise money. The publication has also helped others enter the industry. Roy Kuan, managing partner at CVC Capital Partners, is a case in point.

"My advanced study project in the MBA program at Wharton Business School was Asian private equity. I received a ‘distinction' on this project and much of the source information came from AVCJ," he says. "I wasn't really aware of what private equity was until I got to Wharton but I became fascinated by it, and Asia private equity in particular."

Within three years of Kuan joining CVC's regional operation - then part of the Citicorp private equity business - in 1995, the Asian financial crisis prompted a paradigm shift in private equity that would generate material for dozens more research papers. The restructuring opportunities that arose also vindicated CVC's early arrival in the region compared to most global buyout firms.

Kuan was part of the team focusing on in Southeast Asia, principally Indonesia and the Philippines, and South Korea. These were expansion capital deals of $10 million to $50 million, often featuring convertible bonds or new shares with a put option. The underlying legal structures and protections were immature and untested, and in some cases target companies were weak or poorly governed. These issues were brutally exposed by the financial crisis.

But those that remained active in the region - CVC's downside was limited thanks to bank-mandated foreign currency hedges - suddenly found doors opening. The scale of buyout and restructuring deals quickly exceeded the capacity of individual investors, with equity checks in the region of $100-150 million. "None of our funds were big enough to accommodate that so there were a lot of consortium deals, notably between UBS Capital [now Affinity Equity Partners], J.P. Morgan Partners [now Unitas Capital], and ourselves," says Kuan. "That had a knock-on effect on subsequent fundraising."

The momentum created by this deal flow led to the creation of CVC Asia Pacific in 1999, a Hong Kong-headquartered joint venture with the private equity firm's original parent, Citigroup. CVC assumed majority control nine years later. A debut Asia fund of $750 million was raised in 2000, and there have since been two successor vehicles, most recently the 2008 vintage CVC Asia Pacific III, which attracted commitments of $4.2 billion.

There were two main strategies in Asian restructuring: financial services and non-financial services. While the likes of Newbridge Capital, The Carlyle Group and Ripplewood Holdings pursed the former to stunning effect, CVC opted for the latter. In both areas, South Korea, crippled by credit problems in the wake of the crisis, was the primary market.

Corporate carve-outs

According to AVCJ Research, private equity firms committed more than $4.1 billion across 22 buyout and restructuring transactions in South Korea between 1998 and 2001. Before that, the country had been almost exclusively the preserve of venture capital investors. CVC was involved in four of the 16 non-financial services deals, accounting for nearly half its buyout activity by volume in Asia Pacific as a whole during the period.

"Many of these groups were overleveraged, they had expanded into non-core areas such as real estate, and they were forced by creditors to sell off assets," Kuan says. "The operations themselves were usually fine - it was merely carving them out from a distressed group. The focus of these deals was to retain new management and work on new business plans and value creation initiatives."

In the case of Haitai Confectionery & Food, it was necessary to replace the existing management team in its entirety. Over the course of 30 years, the company had established itself as South Korea's second-largest producer of confectionery, ice cream and frozen foods, but also diversified into areas far removed from its core business such as electronics and construction, even running a baseball team. Haitai collapsed under $3 billion of debt and was declared bankrupt in 1999, leading to months of legal negotiations as creditors put off liquidation while they looked for alternatives.

That alternative arrived two years later as CVC, UBS and J.P. Morgan acquired the confectionery assets through a leveraged buyout worth $369 million. The firm was exited to domestic rival Crown Confectionery for $490 million in 2005. CVC went through a similar process for Mando Climate Control, the air conditioner unit of bankrupt Mando Group in 1999 and Daewoo Telecom's IT business in 2000.

"The peak period for these deals was 2001, it slowed gradually and evaporated within four years," says Kuan. "But it changed the complexion of private equity in Asia. It went from expansion capital, very much focused on Southeast Asia and China, to buyouts in Korea, Japan and Australia."

A number of trends prevalent in Asian private equity are linear and can be tied to wider macroeconomic or industry-specific developments, such as the switch in focus from export-driven investments to domestic consumption, the emergence of country funds operating regional vehicles, and increasing emphasis placed on value creation and deploying operating partners. Other areas are more cyclical: markets perform strongly, liquidity levels rise and valuations go up, followed by an adjustment, pockets of distress and the emergence of buyouts in place of the growth capital norm.

"It was ironic that expansion capital became such a big part of the industry again after 2005 and strong performances from the early-vintage China funds, because during the mid-1990s these deals fared quite poorly," says Kuan. "But when we look at China now it is very much like Southeast Asia pre-1997, and so we expect more control deals."

If there is one aspect of the evolution of private equity in Asia that has surprised him, it is the sheer volume of funds competing for these transactions. When Kuan wrote his business school paper, the industry was dominated by a handful of names: Prudential Asia Investments, HSBC Private Equity, AIG and ChinaVest, with H&Q Asia Pacific and Walden International leading the venture space.

"It is shocking how it kept growing," he says. "When I started working in this industry, the AVCJ directory was so small you could fit it in your pocket."

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