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China, India to help sustain Asia pvt equity growth

Written by: Staff
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Hong Kong, Dec 5: Fragmented industries in China and Indiahold rich opportunities for private equity investors, said a seniorofficial at the private equity arm of Franklin Templeton Investmentswhich will invest via mezzanine financing.

Simon Sham, managing director at Darby Asia Investors (HK) Ltd.,said the strong flow of private equity investments into Asia willcontinue for at least 12-24 months, drawn by the fast-growing economiesof China and India.

His firm, however, uses the unique route of structuring dealsusing mezzanine financing -- a hybrid of debt and equity -- to helpmid-sized and infrastructure firms meet demand for risk capital.

Private equity investment in Asia has totalled .7 billion sofar this year, up by about two-thirds from .2 billion for all 2005,according to Asian Venture Capital Journal data.

''China and India are the real major markets,'' Sham said, addingthat mid-sized companies in those two countries have limited access tocapital markets and bank finance and are thus hungry for other sourcesof investment.

''Many industries in China and India are fragmented andinefficient -- over time there will have to be consolidation,'' hesaid, underlining the need for capital to finance acquisitions whichwill help achieve better economies of scale.

He singled out the consumer products sector as an attractive betfor private equity investors while adding that valuations for theentire region in general were attractive.

''Asia has good value -- we are paying 7.5 times operating cashflows when making investments, versus 9-10 times in Europe and theU.S.,'' he said.

Private equity funds are sitting on mountains of cash looking for deals in Asia.

Last week, a report from Merrill Lynch estimated private equityfunds had enough money to finance a year and half's worth of deals.

''Admittedly, five years ago money raised by firms divided by dealvolume meant there was five to seven years' worth of dry powder,'' thereport said, referring to the slow emergence of private equity in theregion.

China Investment

Last month, Darby made its first investment from its second Asia mezzanine fund in a China-related company.

Darby invested million in Hong Kong-based Shayne InternationalHoldings Ltd. via notes which carry warrants that have the option ofconverting a part of the loan into equity when the borrower goes public.

That offshore holding company would in turn invest the money in a100 percent-owned unit based in Hangzhou, China which makes and exportshigh-end upholstered furniture and leather apparel.

Darby also has a representative on Shayne's board for providingadvice on strategic, financial and corporate governance matters and isalso helping prepare the company for going public in roughly two years,Sham said.

The deal contrasts with typical private equity deals that buy direct equity stakes.

''Hopefully we can share the equity upside of this investment withthe original owner, even though originally we entered this transactionas a creditor,'' he said.

Darby's second Asia mezzanine fund will invest 0 million whenfully invested. Its first Asia mezzanine fund was launched in 1998,which became fully invested in 2004 after committing over 5 million.

Reuters

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