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China,India to help sustain Asia private equity growth

Written by: Staff

HONG KONG, Dec 5 (Reuters) Fragmented industries in China and India hold rich opportunities for private equity investors, said a senior official at the private equity arm of Franklin Templeton Investments which 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 will continue for at least 12-24 months, drawn by the fast-growing economies of China and India.

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

Private equity investment in Asia has totalled .7 billion so far 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, adding that mid-sized companies in those two countries have limited access to capital markets and bank finance and are thus hungry for other sources of investment.

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

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

''Asia has good value -- we are paying 7.5 times operating cash flows when making investments, versus 9-10 times in Europe and the U.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 equity funds had enough money to finance a year and half's worth of deals.

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

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 International Holdings Ltd. via notes which carry warrants that have the option of converting a part of the loan into equity when the borrower goes public.

That offshore holding company would in turn invest the money in a 100 percent-owned unit based in Hangzhou, China which makes and exports high-end upholstered furniture and leather apparel.

Darby also has a representative on Shayne's board for providing advice on strategic, financial and corporate governance matters and is also 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 with the original owner, even though originally we entered this transaction as a creditor,'' he said.

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


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