October 15, 2007

Forging links
By Al Killeffer

      It's no secret that China and the United States are worlds apart. The two countries have vastly different languages, histories, cultures and customs. One thing they do have in common is a desire to do business with one another.

      Yet the path to commercial cooperation is often beset by obstacles, as each nation acclimates to the other's way of working, and more often than not, enterprises fail as a result of miscommunication and misunderstanding.

      Enter Dynasty Resources, a small company with big ambitions for reshaping the way China and the US do business.

      Less than a year old, Dynasty Resources is a new type of consulting firm in New York that seeks to aid Chinese businesses in the US and help American companies in China.

      By acting as a middleman and interpreter, Dynasty works to provide firms from both nations a soft landing when attempting to penetrate each other's markets.

      For Chinese companies that want to do business in the US, that often means helping them understand the US mentality.

      "It's adjusting to the American mindsetand dealing with the branding and marketing," says Dynasty marketing head Ken Meyers, a veteran international consultant.

      "I describe it as teaching them the language of the natives."

      In the case of Evermore, a Chinese firm that makes accounting software, one of the first things Dynasty recommended the company to do was change its name to Kwailex, a moniker Dynasty thought Americans would find far more appropriate for a software company.

      "We're helping them assimilate to this culture," says Josh Bobley, Dynasty's seasoned China hand.

      To assist Chinese companies gain a foothold in the US market, Dynasty created a program that consolidates many services such firms would need under one roof.

      Through its attempt to serve as a one-stop resource for legal and financial services, marketing advice and even office space, Dynasty aims to spare companies the pain that beginning in a new country generally entails. Within six months, Meyers says, Dynasty should be able to tell a Chinese firm whether its business will work.

      In addition to its efforts to help integrate Chinese companies into the American market, Dynasty also works to aid US businesses in China, particularly in the clean energy and clean technology sectors, where the firm thinks there is enormous potential for growth.

      One way in which Dynasty aids both US and Chinese businesses in China is by helping secure investment capital from overseas sources.

      The firm is now working to broker a deal between a Hong Kong company that has found a cheaper, more environmentally friendly way to produce particleboard. Dynasty has paired the company with US and British investors.

      The Hong Kong firm sought out Dynasty to find a way to secure financing for it and after taking a look at the company's business plan, Dynasty agreed to help.

      "We are trying to engineer a deal so that it's not only palatable to the Chinese, but it's equally acceptable to our group," Meyers said.

      Yet as much as Dynasty wants to improve commercial ties between China and the US, it hopes that in doing so it will strengthen the two nations' relationship as well. By helping more Chinese and Americans work together, the company is looking to leave a lasting impression on links between the two countries.

      As Dynasty financial guru Diana Glassman says, "I think the business relationship is ahead of the political relationship".

      A former editor of the Shanghai Daily, Josh holds a second master’s degree from New York’s Columbia School of Journalism as well as a degree from National Taiwan University, where he studied in 1990. Since the age of 12 when his interest in China first emerged, he has traveled extensively throughout China’s provinces and Special Economic Zones where he developed personal friendships with local citizens and government officials.

Source: China Daily - 10/15/2007 Page 6

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October 21, 2007

Year of the PE Firm?
China's growth prospects have US players ready for action
By Kelly Holman

A great horde is amassing in the People's Republic of China. The laowai, or outsiders, are BlackBerry-toting investment bankers, business executives, corporate attorneys, venture capitalists and private equity executives, all seeking to tap private investment opportunities in the world's fastest growing economy. But the battery of foreign dealmakers may get more than they bargained for in China.

Welcome to the new China, where foreign financiers, investment bankers, lawyers and accountants hurry through the bustling streets of Shanghai and Beijing, and Chinese officials of a once capitalist-averse nation now work out big deals with the titans of New York's leveraged buyout community. The Middle Kingdom was vaulted into the private equity dealmaking spotlight in May when the Blackstone Group agreed to sell a 9.4% stake in its general partnership, valued at $3 billion, to the Chinese government's $200 billion Beijing-based sovereign fund, China Investment Corporate Ltd. The deal was the geo-financial equivalent of a Chinese New Year's celebration.

Blackstone further cemented its stature in China in September when it announced that it had agreed to commit up to $600 million to the Beijing-based specialty chemicals behemoth China National BlueStar Group. The transaction put Blackstone China Chairman Antony Leung and Ben Jenkins, head of Blackstone's Asia Pacific private equity group and a former Celanese director, on National BlueStar's board, bolstering its executive connections in a country where deals are sourced -- often as they are in the US -- through relationships.

In a move to strengthen its presence in China and the Asia region, Blackstone hired Leung, the former Hong Kong financial secretary from 2001 to 2003, in January to head up its China investment operations from a newly formed Hong Kong office. The firm said the primary focus of the office would be to source new private equity transactions as well as assist its portfolio companies with entering or expanding into the region. Blackstone chief executive, Stephen Schwarzman, affirmed the investment house's commitment to China at the time, saying, "We believe that significant foreign direct investment in the Chinese economy is vital to its continued growth and development."

China's economic growth isn't expected to slow any time soon. The International Monetary Fund raised its growth forecast on Oct. 17 for China's economy in 2007 11.5% from 11.2%, which is being fueled by strong exports. In addition, the country's enormous labor pool, including a large number of young workers, is helping drive growth. In a report by Merrill Lynch, the investment bank said "we think China still has 45-50 million workers to go -- enough to prolong the boom until 2009-10."

Blackstone's investment in the Chinese chemical company mirrors the buyout industry's interest in the Far Eastern nation. China, of course, isn't a new recipient of private equity capital. New York's Warburg Pincus was an early entrant in the market about two decades ago, industry observers say, followed by Washington's Carlyle Group about 10 years later, making Blackstone a late arrival by industry standards. Nonetheless, the deal by the New York firm further boosted the nation's prominence in the financial community at a time when its initial public offering market was hot, and had investment banks like Lehman Brothers jockeying for position on the book-running of major IPOs such as China CITIC Bank's $5.9 billion offering.

And, homegrown interest in private equity by Chinese entrepreneurs and prominent investment bankers such as Goldman Sachs' Fang Fenglei, who reportedly left the bank to raise his own domestic private equity fund, have joined the ranks of foreign institutions seeking to raise China-focused funds, including renminbi-denominated investment vehicles.

Historically, foreign acquirers have had to partner with local owners to strike majority stake deals whereby the local partner would own a majority interest. Moreover, private equity deals in China have been structured as growth equity investments due to regulations surrounding foreign ownership, as well as the limited availability of debt financing. In addition, foreign suppliers of debt have been hamstrung due to recent regulations.

"The difficulty of using leverage to fund acquisitions has also been a factor to explain the fact that most investments are minority plays," says Andrew Colosimo, a private equity partner in Fried Frank Harris Shriver & Jacobson's Hong Kong office. "Limitations on the ability to dividend equity makes debt service for offshore financing tough. There are also limits to the collateral that can secure the loans."

Colosimo says the maturing of the leveraged finance market in China would be a huge boon for the LBO business, but the attorney believes the market's development is still a ways to come.

Fried Frank announced on Oct. 10 that it had opened an office in Shanghai with two partners and four additional lawyers, following the opening of a Hong Kong office in December with eight partners.

Wall Street banking houses and US funds are also continuing to bolster their executive ranks with seasoned dealmakers to source new deals, respectively, in China. Most recently, Lehman named Zhizhong Yang chairman of its China operations in a newly created position where he will steward the firm's investment banking activities, and Credit Suisse hired Jeremy Xiao as a managing director in its Chinese investment-banking group where he will oversee M&A deals in China's telecom and energy sectors.

On the buyout front, TPG added former Lenovo Group chief financial officer Mary Ma as a partner and managing director alongside partner Weijian Shan to help source deals in China. The appointments follow in the wake of other personnel shifts by Citigroup, Merrill Lynch and a joint venture by UBS, as well as Carlyle's hire of director Anand Balasubrahmanyan to lead equity investments in Southeast Asia for Carlyle Asia Partners.

The appointments come as numerous Chinese companies are slated to launch initial public offerings in coming months. IPOs are not exactly insignificant since the new issues market, which has been robust, has served as the primary exit vehicle for private investors in China. In 2006, there were 140 IPOs in China, amounting to $62 billion, exceeding the $48 billion raised by new issuers on the New York Stock Exchange, Nasdaq and American Stock and Options Exchange, according to data collected by PricewaterhouseCoopers. Moreover, the trading value of IPO issues close to doubled to $2.9 billion.

If comments by Carlyle co-founder David Rubenstein this week offer any indication, Carlyle and other US investors will be in China for the long term. Rubenstein told a group of visiting Chinese students who were invited by the firm, as part of essay contest on private equity and China, that Carlyle's $400 million investment in China Pacific Life Insurance could potentially be the single best investment the firm has made in the last 20 years. Carlyle has invested about 50% of its latest $1.8 billion Asian fund in China, says a spokesman for the firm.

Despite the promise of an economy underpinned by a massive consumer base of 1.2 billion people, buyout dealmaking in China isn't as easy as in the US. In August 2006, the Chinese government imposed more onerous legal requirements, tightening the acquisition of state-owned enterprises by foreign purchasers. The government's Regulations on Acquisition of Domestic Enterprises by Foreign Investors essentially prohibits majority stake investments in Chinese businesses with well-established brand names or those that may affect national economic security.

As it concerns leveraged buyouts the Chinese are at the nascent stage of understanding. "The Chinese are not familiar with private equity. The regulatory authorities there are just beginning to understand what a private equity fund is," says Howard Glazer, a partner at Ropes & Gray.

"They have been starting to put restrictions on the buying or selling of companies that in the past wouldn't have needed government approval," adds Leland Smith, a managing partner at Key Principal Partners, a Greenwich, Conn.-based private equity firm that acquired Beijing-based ASIMCO Technologies Ltd. in 2004 with a $100 million equity investment.

Smith says Key Principal, a noted middle-market investor in China and investment affiliate of Midwestern bank KeyCorp, has turned its attention largely elsewhere when it comes to making control-oriented investments in the last three to four years. But, the firm has continued to open manufacturing facilities in China for its portfolio companies, and assisted other buyout groups with the same. In June, for example, the firm completed a $5 million investment in Newark, Ohio-based Anomatic Corp., which funded the completion of a manufacturing facility for Anomatic, a portfolio company of New York's Brookstone Partners.

When it comes to straight out buyouts, even high-profile private equity firms have encountered challenges, according to Smith. "They definitely have started to get cautious about private equity investment in China, and there's a sense by some [buyout] groups that it was difficult to buy control even in an industry where it was technically allowed," he adds.

Industry observers point to Carlyle's $375 million deal involving China construction equipment maker Xugong Group Construction Machinery. When the acquisition was originally announced in October 2005, Carlyle had planned to acquire a majority stake in the company; it has since retooled the transaction as a minority interest investment, and the transaction has yet to close.

The rules and minority stake focus have not prevented buyout groups from deploying a massive amount of capital in the region or raising new funds. According to Zero2IPO, a Beijing-based financial research and advisory firm that aggregates data on China, $12.97 billion of private equity capital was invested in China in 2006, while 40 Asia-focused private equity funds raised $14.19 billion in 2006. China, meanwhile, ranked first for the largest fresh funds pool for a single country, amounting to $4.6 billion of capital raised in 2006, according to the Centre for Asia Private Equity Research.

Even as US and other foreign investors are showing they are zealously committed to the Middle Kingdom, the Chinese government is taking slow but deliberate steps to tackle the private equity business, both within and outside its borders. When China Investment Corporate, or CIC, as it's known, acquired a stake in Blackstone, the move was viewed by some industry insiders as a means by which the Chinese government could learn more about buyout dealmaking. If the comments by Communist Party delegate Lou Jiwei, also head of CIC, as reported by Xinhua's China Economic Information Service offer any indication of the Chinese government's interest in private equity, the investment in Blackstone could just be the tip of the iceberg: "The company will operate in a completely commercial way," he said.

Diverse industries attract capital

When it comes to industries offering investment opportunities, real estate is especially hot. Other areas offering opportunity include industrial businesses, financial services, and retail, say industry observers. In the financial services area, Orienwise Group, a finance business and portfolio holding of Citigroup Venture Capital International and Carlyle, raised $50 million from GE Commercial Finance this past week.

China, of course, isn't without its ills. As its factories churn out products and fuel economic growth, they also fill its skies with pollutants like sulfur dioxide and tiny particulates. It's a development that, surprisingly, has created another avenue for investors and plays into the government's desire to clean up.

"The government wants foreign investment in energy efficient technologies, including energy efficient buildings and related HVAC and lighting systems," says Diana Glassman, a China energy efficiency and clean technology advisor to Dynasty Resources, a New York- and Shanghai-based China consulting firm.

Glassman says technologies that can treat water, air pollution and agricultural waste, as well as energy efficient lighting, all present attractive investment targets.

KPP's Lewis agrees. "I'd say definitely there is a lot of interest in clean technologies, everything from systems that go into trucks and cars, and also price effective hybrid [automotive] systems."

Setting up shop is a challenge

Dealmakers like Yvan Bourdeau, chief executive of BMO Capital Markets and head of investment banking at BMO Financial Group, a veteran player in the Chinese marketplace, say establishing a private equity firm in China isn't a cakewalk. The China Banking Regulatory Commission (CBRC), for instance, has said that foreign institutions would not be allowed to establish a private equity fund in China even on a joint venture basis with a Chinese partner. Instead, the CBRC has said that only Chinese enterprises would be allowed to establish such a fund either raising money offshore or within China, according to Bourdeau. Even so, the BMO banker is sanguine about the prospects for a joint venture arrangement between a US-style private equity fund and China-based partner if the fund is geared towards China.

"My view is it's only a question of time as far as when the CBRC will authorize the first potential joint venture between foreigners and Chinese enterprises to establish such private equity funds," says Bourdeau.

Bourdeau, who says BMO isn't advising financial sponsors on China-related investment ventures, notes that once private equity funds establish a 100% Chinese fund with Chinese or non-Chinese limited partners it will mark a milestone in the evolution of the buyout business in China. "It will be a new phase, and even in the longer-term, whereby maybe North American private equity funds would establish a 100% Chinese fund in China and the limited partners could be Chinese or non-Chinese."

One thing is certain in China LBO dealmaking: Chinese partners are a necessity. "Local participation will still be important, as success in these processes require that parties have strong relationships with local government authorities to help navigate the difficult process of privatization effectively," says Fried Frank's Colosimo.

Source: (c) 2007 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.

May 15, 2008

Earthquake Causes Minimal Finance Disruptions
Representative office locations are in a different part of the country than epicenter.
By Joshua Hamerman

Monday's devastating earthquake in China did not seriously affect investment banking and other financial services operations in the country.

Most financial institutions in China have representative offices in Beijing, Shanghai and/or Hong Kong. All three cities are far from the epicenter, which was in the southwestern part of Sichuan province. Sichuan is located in south-central China.

The earthquake, which has killed more than 14,800 people, could be felt in other parts of the nation and in neighboring countries such as Thailand and Vietnam.

A spokeswoman for Credit Suisse said she was not aware of any disruptions to the firm's Chinese operations. A source close to Goldman Sachs said none of that bank's offices or employees in China were affected.

A BMO Financial Group spokeswoman said the firm experienced "no impact," while a UBS spokesman told IDD, "UBS has not been affected in terms of death or injury to personnel or damage to offices."

A spokeswoman for Merrill Lynch said the firm has no offices in the Sichuan province.

In addition, a Deutsche Bank spokesman said the bank "experienced no disruption as a result of the earthquake -- business is operating as usual."

Josh Bobley, principal and co-founder of US-China business consultancy Dynasty Resources, said Dynasty's main Chinese office is in Shanghai, more than 900 miles away from the epicenter. Dynasty did not suffer property damage or employee injuries, though Bobley and his colleagues were unable to communicate with their Shanghai counterparts for several hours after the earthquake.

Bobley said he spoke to someone in Beijing who could feel the earthquake but was not injured. He called two friends in Sichuan, who were okay.

A spokesman for the US-China Business Council said staff in the organization's Beijing and Shanghai offices could feel tremors but reported no damage or injuries. The US-China Business Council has not received reports of extensive disruptions in the Chinese financial services sector.

Stewart Kim, managing partner and founder of Los Angeles-based boutique PGP Capital Advisors, said one of his colleagues, who is fluent in Mandarin, monitored Mandarin-language media reports from China about the earthquake. According to Chinese media sources, the earthquake occurred 30 minutes before the market close and caused no interruption, though several buildings in Shanghai's financial district were evacuated. Sixty-six public companies based in southwestern China suspended trading on Tuesday.

"Sichuan is largely an agricultural province, especially around the area of the epicenter," said Kim. "Chengdu and Chongqing, the two major cities in Sichuan, are not financial hubs in China. Due to the distance from the epicenter and the lack of related news and announcements, I presume the impact to investment banks and financial institutions is limited."