At the behest of a friend, I’m setting out a number of observations about the private equity deals that occurred in 2014. Being January 29, 2015 when I finished writing this post, it is a little late, but I prefer to be as thorough as I can be when examining these deals. In the interest of keeping this post from ballooning into a multi-page epic, I am limiting my analysis to just the top five private equity deals in Asia in 2014 by deal size.

Overview

Table 1 above sets out the top five private equity deals with principal place of operations, deal size, type, date, and investors. In 2014, we had three deals involving Chinese companies in the top five. That’s pretty similar to the situation in 2013, where there were four private equity deals involving companies with their principal place of operations in China, assuming that we include an acquisition of shares in a securities brokerage firm by the State Development & Investment Corp. (国家开发投资公司) from the Securities Investor Protection Fund (中国证券投资者保护基金有限责任公司) in the rankings. The remaining two deals are North Asian (Japan and Korea). (Digressing briefly, we had two Singaporean companies in the top ten,1 not an inconsequential achievement.)

The mix of deal types was fairly evenly divided between carve-outs and take-privates, with one lone pre-IPO deal involving China Huarong Asset Management Co., Ltd. (中国华融资产管理股份有限公司). The two Chinese take-private deals both involve companies that had listed on U.S. stock exchanges (Giant Interactive Group, Inc. on the NYSE in 2007 and AsiaInfo-Linkage (亚信联创) on the NASDAQ in 2000). Their stock prices had both fallen significantly from their all-time highs, a consequence of the allegations of fraud, auditor resignations, and SEC investigations against Chinese stocks listed in the United States that began in 2011 and which sapped investor demand for Chinese stocks.

The majority of deals were club deals involving several private equity sponsors and/or sovereign wealth funds. Indeed, a total of three sovereign wealth funds took part in two these deals: Temasek Holdings, Qatar Investment Authority, and Khazanah Nasional. This is largely in line with a trend I noticed beginning in 2012 of sovereign wealth funds and large institutional investors opting to co-invest directly in private equity deals. The reason most frequently given by sovereign wealth funds for co-investing in private equity deals is to reduce the cost of investing in private equity by avoiding management fees and carried interest on at least a part of their private markets investments, and develop institutional knowledge that will eventually allow these funds to run their own in-house “private equity” style investment programs.

The two carve-outs, however, were led and funded solely by a single private equity sponsor each. This reflects the greater operational complexity associated with successfully carving out a division from a larger business; the carved-out division often has complex operational dependencies on other parts of the business, which must be priced and then addressed post-acquisition. I would argue that carve-outs tend to be better pursued on a standalone basis by a private equity sponsor rather than as a club deal. Too many sponsors in a carve-out will often hamper the decision-making needed during the post-acquisition restructuring.

And now, let us look at each of the transactions separately to see what we can discern from them.

Giant Interactive Group

Giant Interactive Group listed on the NYSE on November 2, 2007 at a share price of $18.23. In October 2011, after Chinese stocks began to come under question for fraudulent practices, its share price fell to $3.15, before finally rising to approximately $11.41 on November 25, 2013 when Mr. Shi Yuzhu and a private equity consortium (which already owned 47 percent of the company) made a take-private offer at $11.75 per share, which the bidders raised to $12.00 per share on March 16, 2014. This was the final per share price paid when the take-private occurred on July 17, 2014.

The transaction was funded by $850 million in debt financing (five-year tenor) underwritten by China Minsheng Banking, BNP Paribas, Credit Suisse, Deutsche Bank, Goldman Sachs, ICBC and JP Morgan, and approximately $800 million in equity.

This buyout was fairly clearly a response to a diminished share price. The company was an attractive buyout target: it had net cash of $509 million in September 2013, had approximately $101.7 million in total debt on its balance sheet, and had paid out an average of $88 million in dividends (50 percent payout ratio) from operating cash flows in 2013 and 2012. Its annual EBITDA growth for 2013 and 2012 had been 11 percent and 20 percent respectively, and its business model of online multiplayer games resulted in recurring revenues from in-game purchases of virtual items and services, with average revenue per user growing steadily from RMB217 in Q3 2011 to RMB245 in Q3 2013 (~6.3 percent p.a.). It had a solid product pipeline in 3D online multiplayer games and was exploring mobile and web-based games to tap into new customer segments.

I do not expect to see many of these kinds of take-privates happening in 2015 or beyond. The pool of candidates that might be profitably taken-private has diminished, with the best already having gone private.

I would not be surprised if the sponsors eventually list the company on the Hong Kong Stock Exchange. This seems to be a company that was listed on the wrong stock exchange in an attempt to gain “prestige” from a U.S. stock listing, while the investors that would be best position to appreciate its value are all based in Asia, particularly in Hong Kong.

China Huarong Asset Management Co., Ltd.

This was a fairly straightforward pre-IPO private equity investment. Huarong was looking for additional capital to invest in acquiring non-performing loans and distressed credits in China, and obtained it from a consortium of private equity sponsors and sovereign wealth funds. It sold an equity stake of approximately 21 percent.

I find this transaction interesting mostly because it involved a rare private equity investment by Khazanah Nasional, Malaysia’s sovereign wealth fund. Khazanah has historically been more active on the domestic public markets, though it seems to have become fairly active in private equity investments around 2013 and 2014.

The company is planning an initial public offering on the Hong Kong Stock Exchange in H1 2015, which offers the private equity sponsors a clear exit strategy after any applicable lock-up on their shares expires.

Tyco Fire & Security Services Korea Co. and ADT Korea

This deal was an auction process in which Affinity, Bain Capital, MBK, and KKR & Co. were both bidders. The Carlyle Group won this transaction, deploying a part of the $56 billion in dry powder they had available as at the end of 2014. It was the largest buyout (in $ value) in Korea since 2008. Debt financing (reportedly $867 million, or approximately 44 percent of the total funds used) was provided by Korea Exchange Bank, Kookmin Bank, Industrial Bank of Korea, Korea Investment & Securities and UBS.

The logic for this buyout is again fairly conventional: strong and stable cash flow from operations, recurring revenue from the provision of security and fire protection solutions to a broad base of customers, an excellent brand name, etc. The growth factors likely included deeper penetration of the market, particularly for residential and commercial segments, which comprised only eight and ten percent of the customers of ADT Korea at the time of its acquisition.

The transaction also highlights a gradual thaw in the relationship between private equity sponsors and the Korean government, which had been strained ever since the debacle between the Korean government and Lone Star in relation to the gains from the sale of a stake in Korea Exchange Bank. For private equity sponsors with solid local relationships and knowledge, there may be the possibility of carving out non-core assets from some of Korea’s vaulted Chaebols.

I’m somewhat uncertain of the exit strategy: a re-listing on the Korean stock exchange (Tyco had taken the predecessor to ADT Korea private in 1999), a sale to a strategic buyer, or a secondary sale to another financial sponsor?

Panasonic Healthcare Co., Ltd.

At the time of the sale, Panasonic was recovering from some of the largest losses in Japanese history, having lost $7.5 billion in each of the last two years.2 It was engaged in a corporate reorganization to focus on industrial technology (e.g. environmentally friendly technologies for buildings, green energy components for automotives, etc.) and away from consumer electronics. Panasonic Healthcare manufactured and sold in vitro diagnostics, blood sugar monitoring systems, hearing aids, electronic health records and medical computer systems.

KKR & Co. was able to secure debt financing of $1.37 billion from Mizuho Bank and Sumitomo Mitsui Banking, which amounted to almost 67.9 percent of the capital structure of the healthcare division post-acquisition, and funded its 80 percent equity stake with approximately $244.5 million of cash.

This deal was interesting for two reasons. First, the healthcare division was profitable, if capital constrained. Japanese conglomerates have historically been fairly reluctant to sell profitable divisions, and even more reluctant to sell such divisions to private equity buyers (Toshiba was apparently a bidder in the auction). Second, it involved Panasonic retaining a 20 percent stake in the divested asset and continuing to be involved in the management of divested asset.

AsiaInfo-Linkage

Like Giant Interactive Group, AsiaInfo-Linkage was a Chinese company de-listed in the aftermath of the 2011 change in investor sentiment towards Chinese stocks. It had the most precipitous plunge of the two take-privates, falling from a high of $99.56 per share on March 4, 2000 to a low of $3.23 on November 6, 2002. It was taken private for $12.00 a share on January 16, 2014.

Debt financing in an amount of $330 million was provided by Bank of Taiwan, Cathay General Bancorp, China Development Industrial Bank, ICBC, Maybank Investment Bank Berhad,3 and Nomura International Private Equity Group, while the balance of $557 million came from the private equity sponsors and sovereign wealth funds (Temasek and Qatar Investment Authority).

The interesting element of this deal was the fact that it was at the time of acquisition EBITDA and net income negative (although it had been net income and EBITDA positive in the two preceding financial years and had positive cash flows from operations at the time of its acquisition).

Like Giant Interactive Group, I would also not be surprised to see this company eventually listed on the Hong Kong Stock Exchange, to take advantage of a larger pool of investors with a preference for Chinese stocks.