PRINT THIS PAGE Filling the gap
13/07/2005. Source:Asia Private Equity Review.
Asian mezzanine financing is demonstrating its value to private equity investors, as four of the five transactions that received this form of financing reported positive returns. The winds that come with a maturing buyout market have arrived in Asia, says the Asia Private Equity Review. The profile of mezzanine debt funds has become increasingly pronounced on the Asian private equity terrain during the past 12 months.
In April last year, Search Investment Group ('Search') participated in its first mezzanine financing transaction when it joined JP Morgan Partners Asia ('JPMP Asia') in the US$188 million buyout of Sanda Kan Industrial Ltd.
It was the fifth known transaction that employed mezzanine financing.
One of the oldest names in the Asian private equity scene, Search was known to have entertained the idea of setting up a mezzanine fund with an initial capital pool of US$50 million. By the fourth quarter of last year, news of Asia's first mezzanine fund arrived. Kendall Court Mezzanine (Asia) Fund I ('Kendall Court'), reportedly with an initial capital of US$35 million, takes on the mandate to focus on mezzanine opportunities in Southeast Asia.
Formed by a group of investment bankers, Kendall Court is attracting enquiries from big names in the Asian financial industry. At the same time, a veteran investor in Asian private equity was also making plans to launch a pan-Asian mezzanine fund as well. All these movements affirm that the time must be ripe now for mezzanine financing.
Asia private equity welcomed its first mezzanine financing institution in 2001 when Intermediate Capital Group ('ICG'), one of the best-known names in this fund management segment, set up an operation in Hong Kong with its two senior executives. In the following year, as the Asian buyout market demonstrated solid evidence of growth (fig.9), ICG believed that demand for mezzanine financing in the Asian private equity market warranted a dedicated fund, and announced its intention to raise a US$150 million fund.
As ICG worked to form a fund to seize mezzanine opportunities in Asia, the region's leading buyout houses began to employ this kind of investment instrument. CVC Asia Pacific ('CVC Asia') is perhaps the most active advocate. It was in Australia where the market infrastructure is mature that CVC Asia first tested the mezzanine financing concept.
In November 2001, CVC Asia teamed up with Catalyst Investment Managers in the A$770 million commitment to Pacific Brands.
In the largest transaction that year, the private equity houses deployed A$235 million of equity capital, equivalent to 30.5% of the transaction amount. The residual came through A$475 million in senior bank debt and A$60 million in mezzanine financing. In June 2003, CVC Asia again engaged mezzanine financing when it took up a 58.5% stake in Tech Pacific. In the Australia-based company, which commanded a transaction value of A$320 million (US$250 million), investors forked out 39.2% of the transaction size in equity capital, being A$90 million, with A$200 million coming in as senior bank debt and A$30 million in mezzanine capital.
Later that year, CVC Asia and JPMP Asia ('the consortium') partnered in refinancing their investment in Yellow Pages (Singapore) Ltd. ('Yellow Pages') through the introduction of mezzanine funds. The consortium took up a S$32 million (US$19.6 million) payment-in-kind mezzanine package that was arranged and provided by ICG (details in Case Study: Yellow Pages section) (fig.10).
The benefits of mezzanine financing began to shine in 2004. Divestment processes for four of the five transactions that had previously employed mezzanine capital took place.
The outstanding return on Pacific Brands was well-documented. The investment yielded a 5.1 multiple of invested capital to its investors and an internal rate of return of 144%.
For ICG, its first harvest came in December last year. Yellow Pages was among the crop. ICG was not the sole party that benefitted from Yellow Pages' public offering. "Mezzanine capital is ideal for helping to improve equity returns and allows private equity to allocate its capital more efficiently", said Mr Piers Millar, director of ICG. One of the fund managers of the two private equity houses, CVC Asia and JPMP Asia, acknowledged mezzanine financing has indeed bolstered their returns in the directory publisher.
Case Study: Yellow Pages
Since committing capital to Yellow Pages, the consortium has employed a variety of options to maximise their liquidity in this long-term equity holding. The first was the employment of mezzanine financing.
In June 2003, the private equity investors committed to a S$228 million (US$139 million) transaction in taking over the Singapore-based telephone directory publisher. The investment was held by Asia Directory, in which the consortium took up a combined 98% while the residual 2% was allocated to the management as well as other individual investors.
To fund this transaction, Asia Directory took out a S$140 million bank loan, with the consortium committing to the residual S$88 million. Of the latter amount, S$83 million came in as a loan and S$5 million was in equity to Yellow Pages (fig.11).
In the fifth month of the partnership, the consortium took the move to refinance part of their investment in Yellow Pages. ICG arranged and provided S$32 million payment-in-kind mezzanine capital. The refinancing has facilitated the two private equity houses in making an early return of capital to their investors, effectively reducing their exposure in Yellow Pages from S$88 million to S$56 million.
Following this arrangement, ICG assumed an 8.5% equity stake position in Asia Directory, while CVC Asia and JPMP Asia held a 44.60% stake each with the residual taken up by the management and others. ICG declined to specify the equity and debt percentages that it has assumed in become a shareholder of Yellow Pages (fig.12).
Following the completion of the company's equity financing matter, the investors of Yellow Pages attended to its bank loan commitment. On 30th September 2004, Yellow Pages issued a S$130 million bond primarily to repay the bank loan, which had S$126 million outstanding as at June 2004.
In December last year, the mezzanine finance provider, ICG, joined CVC Asia and JPMP Asia in receiving one of its very first Christmas gifts from Asia. The offering of 128,065,000 shares at S$1.66 consisted of 58,065,000 new shares and 70,000,000 vendor shares (post-exercise of over allotment option) held by Asia Directory. The actual percentage of shares that ICG has released through Yellow Pages' initial public offering ('IPO') is not known. What is known is that JPMP Asia has disposed 81% of its holdings that has more than returned its committed capital.
Yellow Pages raised a total of S$212.6 million through its public offering. Asia Directory received S$83 million as repayment for the debt it had financed. According to a public communiqué from JPMP Asia, following the disposal of its shares in Yellow Pages, it recorded 2.6 times return of its cost basis in the deal.
After Yellow Pages' public debut, Asia Directory continued to hold 30,000,000 shares or the equivalent of a 18.98% stake in Yellow Pages. Based on the IPO offer price, these residual shares were worth S$49.8 million. But the amount could be larger as Yellow Pages' share price has been trading on an upward path. ICG has not only provided equity investors liquidity in the first place, but also benefitted from the strong fundamentals of the investee company.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
|
