At the intersection of technology, finance and the Pacific Rim.

Monday, June 29, 2009

This from the NY Times Deal Blog:

In 2003, Fortress Investment, a private equity and hedge fund firm that has since gone public, bought some of Mr. Jackson’s loans from Bank of America after the pop singer missed some payments. Shortly before Christmas in 2005, Fortress threatened to call the loans because of his delinquency, The Times reported.

A few months later, a new deal was reached, as part of a $300 million refinancingstructured by Citigroup.

Mr. Jackson’s financial problems continued, however, and in spring of 2008, it looked as if Fortress would foreclose on the Neverland Ranch. But Colony Capital, a private equity firm led by Thomas Barrack, stepped in to buy Mr. Jackson’s loan from Fortress, averting an auction.

A few months later, the deed to Neverland was transferred to Sycamore Valley Ranch Company, a joint venture between Mr. Jackson and Colony.

Just a few weeks ago, Mr. Barrack expressed optimism about Mr. Jackson’s career and his plans for a concert series in London. “You are talking about a guy who could make $500 million a year if he puts his mind to it,” Mr. Barrack told The Los Angeles Times.

Friday, June 26, 2009


KKR has been rumored to be going public on the NYSE. The key to the deal would be to de-list its public entity in the Netherlands and merge it with the main operations of KKR. The Deal Book of the New York Times has this to say about the deal (note the thinking methodology on value and valuation):

K.K.R. Plans Are Returning to Earth, and Amsterdam

June 26, 2009, 4:41 AM

A tough year seems to have brought reality home to the buyout barons at Kohlberg Kravis Roberts, Breakingviews says. The firm’s latest step toward a full stock market listing looks more practical than last year’s overambitious plan, the publication says.

In July, K.K.R., the private equity firm, wanted to buy and delist its Amsterdam-listed investment vehicle, KKR Private Equity Investors, also known as K.P.E. Shortly afterward, it intended to list the enlarged K.K.R. on the New York Stock Exchange. But the deal seemed too complicated even before the market turmoil.

The equity firm’s aspirations on its own value also looked like a stretch, Breakingviews says. Last year, K.K.R. hinted at a market cap in its predeal form of up to $15 billion, when about two-thirds that size seemed more reasonable, the publication suggests.

Now, everything appears to fit a little better, according to Breakingviews. K.P.E.’s shares trade at around $6 apiece, for a market cap of $1.2 billion. They have risen lately, but being closely held and not very liquid, they probably do not reflect the full value of K.K.R.’s offer, the publication says.

The underlying net asset value of KKR Private Equity Investors’ holdings is $2.6 billion. Split the difference, and the 30 percent of K.K.R. that K.P.E. will get could be worth around $1.9 billion, Breakingviews calculates.

That means the other 70 percent — essentially, K.K.R. — would be worth about $4.5 billion, it says. The second stage of K.K.R.’s plan, a New York listing of the enlarged firm next year, could raise that valuation somewhat.

Consider Blackstone, a publicly traded rival. Like K.K.R., Breakingviews says, it lost money last year. But Blackstone’s stock trades at about 10 times the five-year average of its “economic net income,” an adjusted measure of pretax profit. Apply the same multiple to the five-year average of K.K.R.’s economic net income, and it would be worth about $5.2 billion, the publication suggests.

Investors sometimes use other measures to value fund managers. Blackstone’s market cap as a percentage of its $92 billion of assets under management is around 14 percent. Using that figure, K.K.R.’s $47 billion of assets — admittedly, a different mix than Blackstone’s — would be worth $6.6 billion, Breakingviews says.

Based on these metrics, a publicly traded version of K.K.R. might be valued from $5 billion to $7 billion, according to the publication. K.K.R. thought it was worth more than twice that last year. So if they’re determined to go public, Breakingviews says, even masters of the universe must inch closer to earth.

Tuesday, June 23, 2009

Bain Capital and Gome

A few weeks ago, we discussed the interest of private equity investors in Gome, one of China's largest retailers. Apparently, Bain has won the deal. The NY Times reports:

"Bain Capital, an American private investment firm, said Monday that it had agreed to invest as much as $432 million to acquire a minority stake in Gome Electrical Appliances, one of the biggest Chinese retailers.......Under the terms of the deal, Bain will invest about $233 million in a convertible bond and purchase as much as $199 million worth of new shares in the company, if those shares are not taken up by existing shareholders in what is called an open offer.

Gome shareholders have several weeks to decide whether to increase their holdings; whatever is not acquired by those shareholders is expected to be bought by Bain. After the deal, Bain will hold between 9 and 23 percent of Gome."

Question: Why invest in a convertible bond in this situation?

Saturday, June 20, 2009

This from the Economist on Texas Pacific Group's exit from a Shenzhen Development Bank:

BACK in 2004, when China was more convinced that the West had something to offer its financial system, TPG, an American private-equity firm, was permitted to bypass the country’s restrictive regulations and buy a controlling 17% stake in a publicly traded basket case called Shenzhen Development Bank (SDB). The news, on June 12th, that TPG is to sell its stake to Ping An, a large Chinese insurer, draws another line under that era.

SDB was the first bank to list on Shenzhen’s stock exchange, and in the craze that followed the shareholder list swelled to more than 600,000 individuals. But by the time of TPG’s purchase, it was in a sorry state. Disclosed non-performing loans accounted for 14% of loans; the actual amount was undoubtedly much higher.

SDB did, however, have several assets that in the Chinese context were almost priceless: a national banking licence and more than 260 branches covering almost all of the country. The potential for a banking collapse was enough for the Chinese authorities to waive rules barring foreign control, foreign management and foreign purchases of domestic shares. The potential in China’s embryonic banking market was enough for TPG to take a chance.

In the aftermath of the acquisition performance improved, as did SDB’s share price. But there were limits on further progress. Writing off bad loans, building systems and extending more credit requires capital, but SDB’s various efforts to raise funds could not get past China’s regulators. This is unlikely to be a problem for Ping An, which is well-treated at home but found itself lost abroad after a calamitous recent investment in Fortis, a now-dismantled European bank. In theory Ping An has the resources to address SDB’s capital needs, and could pair its domestic insurance franchise with SDB’s national banking reach.

For TPG, being seen to have rehabilitated a bank and successfully passed it on could open doors for future deals that China’s increasingly xenophobic regulators would be otherwise unlikely to approve. After a disastrous investment in Washington Mutual, a failed American bank, TPG was also doubtless under pressure to show some gains for investors. Although the terms are complex and not fully public, TPG put less than $300m into SDB (perhaps much less) and will take out more than $1.6 billion (perhaps much more).

The size of TPG’s returns has prompted reports that the deal may be blocked by officials. No private-equity firm likes having its exit strategy undermined but this would be no disaster. Barring another round of banking failures, no foreign firm will be granted a similar franchise in China for years to come. Even with strings attached, TPG would be hard-pressed to find a more interesting place for its money.

Wednesday, June 10, 2009

Funds being raised in Asia

This gives a sense of the funds and their focus which are being raised today in Asia (complements of Asia Private Equity Review):

Fujian Government Plans Venture Capital Fund

The People's Government of Fujian Province plans to establish a venture capital fund that will have a target size of 600 million yuan (US$87.5 million). It will be managed by Fujian Investment & Development Group Co., Ltd.. (People's Republic of China)

Fund to Promote Female Entrepreneurship

Huamulan (Beijing) Investment Fund Management Co., Ltd. has been set up by a group of women to seek investment opportunities in companies established by female entrepreneurs. Backed by the Beijing-based Hongsen Group, the management firm is raising to raise at least 500 million yuan (US$73.2 million). (People's Republic of China)

Industrial Fund to Target Steel Industry

China Huarong Asset Management Corporation is to set up the country's first industrial fund to invest in the steel industry with Hunan Valin Steel Group Co., Ltd.. The fund has an initial target size of 1 billion yuan (US$146.3 million). (People's Republic of China)

South Asia Greets its First Special Situation Fund

The India-based Spice Finance has teamed up with the Singapore-based 3 Degrees Asset Management Pte Ltd. ('3 Degrees') to set up a private equity fund focused on special situations. The sponsors will commit US$21 million to the fund that invests in India and Southeast Asia. (South Asia)

Tuesday, June 09, 2009

Warburg Pincus in China

Below is from the Financial Times and shows how regulatory matters can mess up investment returns. Note the structure of using convertible bonds as the investment vehicle. We will discuss more.

Warburg Pincus bales out of Huiyuan Juice

By Sundeep Tucker in Hong Kong

Published: June 8 2009 23:42 | Last updated: June 9 2009 06:22

Warburg Pincus, the US private equity fund, has abandoned its investment inChina Huiyuan Juice, becoming the first major shareholder to pull out of the company following the collapse of Coca-Cola’s $2.4bn takeover offer.

Warburg Pincus had declined to exercise an option to swap its convertible bonds for a 7 per cent equity stake in China’s leading juice maker, people familiar with the matter said.

Huiyuan shares in Hong Kong fell as much as 10.3 per cent on Tuesday in reaction to the news.

Warburg Pincus and France’s Danone made cornerstone investments in Huiyuan months ahead of its Hong Kong listing in February 2007. Each stood to collect lucrative returns had Coke’s bid succeeded.

Warburg Pincus had pulled out of its Huiyuan investment through Royal Bank of Scotland, to whom it had loaned its convertible bonds in 2007, people familiar with the matter said. They added that an option held by Warburg Pincus to re-acquire the bonds and convert them into equity had expired in late May. RBS has since sold the holding into the market.

China’s antitrust authorities controversially blocked the Coke takeover in March citing competition concerns, although people familiar with the matter told the Financial Times that Beijing was concerned about losing a leading brand to a foreign group.

The high-profile failure of the deal has triggered speculation over Huiyuan’s future ownership and whether its leading shareholders would attempt to seek a new buyer for the company or divest holdings.

Zhu Xinli, Huiyuan’s founder and chairman, owns 36 per cent of the company, while Danone has 23 per cent.

Global private equity funds recently held talks about a possible minority investment in Huiyuan, although Mr Zhu and Danone are only expected to consider offloading their stakes if they receive a lucrative offer.

Coke offered HK$12.20 a share in cash, almost treble Huiyuan’s last closing price ahead of the announcement of the proposed deal in September last year.

Huiyuan’s shares fell to HK$4.33 in the days after the rejection, but have climbed in recent weeks to HK$6.50, amid hopes of a fresh buyer.

Warburg Pincus and RBS declined to comment.

Monday, June 08, 2009

KKR-KDB "Partnership"

This is old news from the Joong Ang Daily (comments are mine in parenthesis):

Korea Development Bank formed an investment partnership with Kohlberg Kravis Roberts yesterday, fanning expectation that the New York-based investment firm may join KDB to form a private equity fund to buy assets and subsidiaries from cash-strapped local companies.

The state-run bank has repeatedly said it hopes to team up with other institutional investors to form such a fund, aimed at buying assets from companies here to help them improve their cash conditions. (I may be a little cynical, but usually MOUs like this mean "Please bring me your deals to invest in, we will look at it, and then decide whether to invest or not")

Cho Hyun-ik, KDB’s vice governor, signed the memorandum of understanding for the partnership with Joseph Bae, managing partner at KKR Asia, at KDB headquarters in Yeouido, Seoul, yesterday.

"The partnership with KKR will help advance the local private equity fund market," said Cho.

Bae also said the U.S. company would be a "long-term investor" in the Korean market. KKR, which won a high-profile bid to take over OB Brewery earlier this month, has been expanding its presence in Asia since 2005. Bae declined to reveal how much KKR plans to invest here or in its partnership with KDB. (ok, everyone says they are a "long term" investor)

The development comes as KDB searches for investment partners for its so-called "corporate restructuring fund," aimed at helping cash-strapped corporate borrowers raise cash and improve their finances. According to KDB’s plan, the fund, to which KDB will pledge at least 100 billion won ($78,926,598), would buy non-core assets or subsidiaries from highly leveraged companies and sell them back to their former owners later when they get back on their feet, taking profit in the process.(very doubtful that that partner would be KKR; the conflicts in style would be quite large)

KDB has already taken preliminary steps, and is in talks with the cash-strapped Dongbu Group to buy its subsidiary Dongbu Metal.

Saturday, June 06, 2009

State of the Market

THe WSJ PE Analyst has an interview with a fund manager of Riverside Partners, a middle market buyout firm. They had this to say about the current state of the market:

The fund will continue its strategy, investing in small North American-based companies with earnings before interest, taxes, depreciation and amortization of $5 million to $15 million. Since August, the firm’s pipeline “sort of evaporated,” Kohl said. “We had about half a dozen deals that died during that period.”

As for lending, Riverside could borrow four to five times Ebitda, or as much as 75% of the purchase price at its peak; today, the firm caps out at three times to 3.5 times, or not more than 50% or 60% of the deal price, Kohl said.

“Another cruel fact is that we’re paying 300 basis points more for debt,” he said. “We’re borrowing less and paying more; that’s a bad formula. The good news is that we’re purchasing at a lower multiple.”

Friday, June 05, 2009

The Financial Times reports the following on one of the largest PE backed buyouts in the past few years, Clear Channel Communications. Where are the banks in the deal?

Clear Channel lenders threaten refinancing plan

By Henny Sender and Andrew Edgecliffe-Johnson in New York

Published: June 3 2009 23:32 | Last updated: June 3 2009 23:32

Some of the largest lenders to the private equity groups that led the $23.8bn buy-out of Clear Channel Communications intend to turn down a proposed debt exchange, hoping to drive the radio and outdoor advertising company towards default.

The company, taken private in a leveraged deal that came to symbolise the excesses of the buy-out boom, has proposed a swap of some parent company debt for debt in Clear Channel Outdoor Holdings, its listed billboard division, regarded as a crown jewel despite the current steep advertising downturn.

However, some of its largest senior creditors say they would rather wait, in the hope the company will violate its lending agreements, enabling them to force a default and to take control of its equity at a steep discount. Clear Channel declined to comment.

Negotiations continue and the company is not yet violating its covenants. Default could be averted by an agreement with lenders or a reversal of the advertising slump that has affected radio and outdoor advertising businesses particularly severely.

Shares in Clear Channel Outdoor leapt 56 per cent to $5.62 when it announcedplans to refinance a $2.5bn intercompany note on Tuesday. Barclays Capital analysts said a parent company bankruptcy filing could benefit the outdoor business.

The debt exchange efforts pit Bain Capital and Thomas H Lee Partners, the private equity owners, against lenders including Apollo Management, Blackstone’s GSO, Centerbridge Partners, OakTree Capital and Wall Street firms that provided the deal’s original financing. Bain and TH Lee own about $2.5bn of senior debt and will throw their weight behind the proposed exchange.

But the intention of some Wall Street lenders to resist it indicates the diminished power of even the largest private equity groups.

Agreed at the peak of the credit markets in 2006, the original Clear Channel buy-out would have seen Bain and TH Lee put up only 6 per cent of the total value, making the purchase one of the most leveraged deals on record. Bad feeling between the banks and the sponsors once credit markets turned spilled into the courts. It took until July 2008 for the two sides to complete a deal on revised terms .

Banks swiftly wrote down the value of the loans, selling some to Bain, TH Lee and to hedge funds.

EMI and Terra Firma

We have emphasized before the role of PE in "managing the CEO".  And last week we talked about the difficulty of the investment in EMI, the music company. Though this paper is known more for its "gossip", rather than it rigorous journalistic standards, The NY Post writes:

The relationship between EMI chief Elio Leoni-Sceti and his boss, Terra Firma's Guy Hands, is so strained that whispers around the record label's halls are that Leoni-Sceti could be gone before the year's out, The Post has learned.

Though Leoni-Sceti and Hands used to be chummy -- their families went on holiday to Italy together in March, for instance -- multiple sources inside EMI or who have working relationships with the label said the pair recently had a falling-out. The crux of the friction centers on Ronn Werre, the recently named chief operating officer for EMI North America.

According to two sources with knowledge of the situation, during contract renegotiations Hands directed Leoni-Sceti to make Werre a "take-it-or-leave-it" offer, figuring that the music industry is in such disarray that he would jump at any new deal. Werre not only rebuffed the offer, but also got himself a bigger job at rival Sony Music.

That so surprised and incensed Hands that sources said he told Leoni-Sceti to do whatever he had to do to get Werre back. Sources said Leoni-Sceti chafed at the directive, both because he was acting like a good foot soldier in carrying out Hands' initial ill-conceived directive and also because he didn't want to go back to a supposed underling with hat-in-hand.

Tuesday, June 02, 2009

Private Equity and Public Private Partnerships

From the NY Times Deal Blog:

The private equity group CVC Partners has offered to pay just under £2 billion pounds, or $3.3 billion, for a 30 percent stake in state-owned postal group Royal Mail, The Sunday Telegraph reported...CVC Partners has emerged as the front-runner because it is prepared to inject a substantial sum to modernize Royal Mail’s technology, something the government has said is essential to safeguard the group’s long-term future, according to the newspaper.

This from the Private Equity Blog of the WSJ:

Carlyle Group: Humbler, but in Many Ways Bigger

Laura Kreutzer, of Private Equity Analyst, reports:

Carlyle Group may have been “humbled” in 2008 as it suffered some body blows in the weakened economy, the firm’s second annual report makes clear its own business still expanded, even as its employee ranks and the total volume of its commitments to its funds contracted.

peaThe Washington private-equity firm wrapped up 10 funds in 2008 and 2009, raising a total of $19.9 billion in new capital to deploy, according to the 2008 annual report, though at least some of that money appears to have closed prior to 2008. The firm’s total assets under management increased to $85 billion across 64 funds, up $4 billion from the $81 billion across 60 funds it reported a year earlier.


The report didn’t specify exactly how much of the asset growth came from new inflows of capital since the last report and how much came from increases or declines in overall value of assets held.

New inflows were likely significant, given that the firm’s assets increased even though it liquidated at least two funds in 2008, hedge fund Carlyle Blue Wave Partners Management and the publicly traded Carlyle Capital Corp.

Carlyle also appears to have reeled in about 100 new investors since its last annual report, increasing its total investor base from more than 1200 limited partners to more than 1300, according to the two reports.

While Carlyle’s investment pace slowed in 2008, the firm still managed to deploy $12.6 billion in equity, including $9.7 billion in equity in 117 new corporate and real-estate transactions with an enterprise value of $16 billion, according to the 2008 report.

Since its inception in 1987, Carlyle has invested a total of $54.6 billion in 896 private equity and real estate transactions, the report stated.

Despite the growth, Carlyle underwent its first company-wide layoff last year, cutting about 100 positions, or roughly 10% of its work force, and closing several offices. The firm has about 900 professionals and 28 offices, according to the 2008 report.

At the same time, the total overall capital that Carlyle has committed to its own funds declined slightly to $3.3 billion from $3.5 billion a year earlier. A decrease in the general partner commitment seems unusual, given the overall increase in Carlyle’s assets.

However, spokesman Chris Ullman said the decline in Carlyle’s own capital commitments resulted from discontinued funds. Though he didn’t name specific funds, the 2008 demise of Carlyle Capital and Carlyle Blue Wave, both of which received significant support from Carlyle itself, would have wiped out those GP commitments.

At $3.3 billion, Carlyle’s overall commitment to its funds represents a total of about 3.9% of its assets under management, slightly ahead of the industry average. The average general partner contribution to funds raised in 2008 and 2009 was 3.5% of total capital raised, according to the 2009 edition of Dow Jones Private Equity Partnership Terms & Conditions. That represents an increase over the 2.5% average GP commitment that firms made to funds raised in 2006 and 2007.