Archive for November 2011

Asian LBO Market Develops Taste for Abalone

November 29, 2011

The following was published in May of this year in IFR Asia Magazine. Thank you, Robert Bishop, for passing it along:

HONG KONG, May 14 (IFR) – Leveraged finance bankers are coming to grips with industries ranging from chemical manufacturing to abalone farming as buyout sponsors, faced with growing competition from cash-rich corporate buyers, increasingly turn to niche markets.

Private equity firms are looking at Singapore-listed, China-based abalone producer Oceanus Group and US-listed contract chemicals manufacturer Chemspec International.

“While there are some big assets out there, most are being dominated by corporate buyers generally willing to pay more and have access to cheaper funding than the PE [private equity] funds,” said one LBO banker. “With corporate buyers becoming more aggressive, I think we’ll see PE funds looking more at niche market industries that aren’t attracting the strategics.”

Leveraged buyout loans of a combined US$105m were completed in the first four months of 2011 in Asia, excluding Japan and Australia, comparing favourably with last year’s annual total of US$190m. Overall activity, however, remains weak compared with 2007 and 2008, when Asian LBO loans reached US$8.5bn and US$11.3bn, respectively.


Greater China accounts for a significant portion of the LBO market, with KKR seeking two leveraged financings for Oceanus Group and Taiwanese electronic components maker Yageo.

Reuters reported in late April that KKR was in talks to buy Oceanus in a deal that might be worth around US$500m. Oceanus’ share price spiked on the news and bankers are still awaiting word from KKR if it wants to proceed with the buyout.

“Leverage on debt normally seen on this type of deal would be around 4.0-4.5 times Ebitda,” said a banker looking at the buyout. The company’s 2010 Ebit was Rmb278m or US$42.8m, according to an OCBC Bank analyst’s note, which would put debt for the buyout at around US$170m-$190m.

The company’s profits were expected to rise in a few years as young abalones matured, said bankers. However, they have expressed concerns over how to evaluate the company.

“While Ebitda should rise as more abalones mature, it’s always risky to make judgments on projected Ebitda, especially in the agriculture industry, where crops can be vulnerable to many things,” said a Singapore-based leveraged finance banker.

Some bankers have also expressed concerns over the structure of Chinese buyouts, since offshore holding companies cannot merge with onshore operating entities. The debt remains at the holding company level and can be subordinated to debt sitting at the operating company level. In addition, offshore banks often have no recourse to onshore assets and can only be paid through dividends or offshore receivables, due to an inability to take cash out of China.

Adding to the wariness over Chinese LBOs is the recent slew of mainland companies facing fraud allegations. One of the most high-profile cases is that of Hong Kong-listed China Forestry Holdings, a Carlyle Group investment.

Trading in the plantation operator’s shares has been suspended since January, and the company admitted in April that its previous management had falsified bank statements and logging permits provided to auditor KPMG. China Forestry reported a 2010 loss of Rmb2.71bn after drastically lowering the value of its plantation holdings.

While bankers mulled the Oceanus financing, the NT$31.1bn (US$1.08bn) five-year loan backing the US$1.6bn bid by KKR and Yageo founder Pierre Chen to take the company private was almost fully subscribed in the early bird stage, bankers said.

The facility, which UBS and Nomura had underwritten, had received commitments well in excess of NT$20bn, one banker added. Final commitments are due on May 20 and around 10 banks have joined so far.

The facility has an opening margin of 250bp over the secondary CP rate and offers four ticket levels, with a top-level all-in of 301.5bp.

The pricing is considered tight by international standards, but it is enough to attract strong interest from the liquidity-flush local banks. A handful of international lenders, mostly those with a local presence and access to Taiwanese dollar deposits, have also joined.

“There aren’t many deals to choose from right now, so, even though pricing is thin for us, we are certainly looking at it,” said a source at an international bank when the deal was launched.

In Hong Kong, MLAs Chinatrust Commercial Bank, Fubon Financial Holdings and ING Bank closed a circa-US$200m equivalent loan this month to back IK Investment Partners’ US$350m buyout of Offshore Incorporations. Seven lead arrangers joined the loan, which was split into a US$153m tranche and a ?31m euro tranche. The loan was heavily oversubscribed with each of the seven banks joining in participation scaled back by 57%.

The dollar portion goes towards the acquisition cost, which will be about 40% debt funded. The euro portion will be drawn down by Vistra, another IK portfolio company in Europe. A banker said the loan had a leverage of around four times the combined Ebitda of Offshore and Vistra and a leverage of less than 5.5 times the Ebitda of Offshore itself.


Also in Hong Kong, private equity fund Permira secured a US$215m loan earlier this month via Goldman Sachs, HSBC, ING Bank, SG and Standard Chartered Bank to take out the around US$200m it paid to buy Asia Broadcast Satellite in September 2010.

Permira and the ABS management team bought Kingsbridge, the holding company for ABS, from Citigroup Venture Capital International. The deal was originally funded entirely through equity.

Meanwhile, Standard Chartered has completed a 15-month, US$70m bridge loan for the privatisation of Chemspec, on which one additional bank joined. The debt has leverage of around 1.5 times Ebitda, according to a banker.

Chemspec CEO Jianhua Yang and private equity fund Primavera Capital Group, founded by former Goldman Sachs Greater China chairman Fred Hu, have teamed up for the privatisation transaction.

In March, the company announced it would merge with Halogen, an entity jointly owned by Yang and an affiliate of Primavera. At the time of the announcement, Yang owned about 55% of Chemspec’s outstanding ordinary shares.

Chemspec is expected to de-list from the New York Stock Exchange in or after the third quarter



Aquaculture Myths That Constrain Investment (Part II)

November 20, 2011
I’ve been awfully remiss the past couple of weeks in keeping up the blog. Been  immersed in activity and conversations that, I promise, will serve as grist for constructive information sharing in the growing Aquaculture Means Business community.  As part of the continuing topic “Aquaculture Myths That Constrain Investment”, my work has been done for my by Gareth Lott,  founder and CEO of Australia-based Aquanue, who has kindly contributed the following:
Aquaculture Investor-Ready 101

As an Aquapreneur looking for investment into a large aquaculture project, the biggest myth I’ve encountered is that all aquaculture is equal.  Investors have heard about other investors who have lost money on aquaculture, and they assume that every venture is the same.

That’s like saying that because some people have lost money on mining, all mining investment opportunities should be avoided.  Too many would-be aquapreneurs don’t know nearly enough about the business side of their proposed venture, and worse – they don’t understand why investors invest!

The investment sector folks need to take a course in  “Aquaculture Enterprise 101”.   But equally, aquaculture operators need to take “Investor-Ready 101”.

Investors don’t put their money, or the money of the funds they represent, into ventures that don’t tick all the boxes. Knowing how to grow fish and having a few people on the team that have worked in aquaculture before is not enough – by any stretch.

Until people trying to secure investors into their aquaculture venture address the full list of criteria that today’s investors are looking for, they will struggle to find third-party money, and the industry will struggle to shake off its amateur profile.

Investors want:

  1. An exit strategy.  “Oh, we’ll just keep growing fish” is NOT an exit strategy.  “Oh, we’ll make 10% profit” is NOT an exit strategy.  Unless you have a track record of developing and selling profitable businesses, if you can’t clearly articulate how and when the investor is going to make their profit, you’ll find it very hard to convince them that they should invest;
  2. An extraordinary entrepreneur with unique insight – including the extraordinary drive, energy, passion, and commitment to take on the tough task of starting a company, and the ability to attract a first class team;
  3. They want to see momentum, or ‘traction’ as they call it.  The group of investors who put money into ventures that have no operating history is very small.  This can be overcome, in SOME cases, by the strength and experience of the management group, or being able to show a history of past activities/businesses where investors made good money;
  4. They want to see that the operator has a deep understanding of the market – including being shown that there extreme pain being felt by an individual or group and people with this pain/motivation to build a large business;
  5. They want to see that the product adequately addresses the need (without introducing new problems in the supply chain);
  6. They want to see that there long-term sustainable differentiation and barriers to entry for potential competitors, and that the differentiation between your product and the status quo is strong enough to beat any potential major competitors whose size, distribution, customer base, and credibility, would give them an immediate unfair advantage if they decided to compete, even with an inferior product. Investors want to invest in businesses that have some unique advantage, whether it’s patented IP, trade secrets or team members with unique abilities and knowledge that no one else can easily replicate;
  7. They want to see that the operator can build a viable business model around the solution.  Knowing how to grow fish does NOT convince an investor that the operator knows how to build a business.  Just look at most tradespeople in the market today who think that because they can lay bricks or install plumbing they can operate a business properly;
  8. They want to see a great management team – which is far more than just a competent aquaculture operations staff list.  ‘A’ players attract other ‘A’ players. ‘B’ players attract ‘C’ players. Therefore the starting team should ideally be all ‘A’ players;
  9. They want to see that the company can be built in a capital-efficient way.  With lower exit valuations these days, the one reliable way to ensure both the entrepreneur and investor will end up with a good return is to build the business using a small amount of capital;
  10. They want to see that the operator and his/her management team understands ALL the relevant issues.  Aquapreneurs are often by nature very passionate about their particular system or species, which, in itself, is a good thing — but investors know that unfortunately that passion often blinds the operator to other important issues. Like the real risks.
  11. They want to see businesses that have identified the range of risks that come with the opportunity – and that the assessment of the risks has been done with integrity.  “We’ll handle that one when we come to it” is NOT a risk-management strategy, nor is “It has never happened before”.

Aquaculture might be the art of growing fish, but making it attractive and compelling to investors requires much more – it needs to be a complete business package, with an exit strategy, and it has to make sense to people who each year see dozens, if not hundreds, of investment opportunities.

Aquaculture Myths That Constrain Investment (Part I)

November 6, 2011

I hadn’t intended this blog to become a running advertisement for the Aquaculture Means Business LinkedIn group, but lately the discussions have been so diverse and interesting they’re making it very easy for me to feed the blog beast.  Last week I launched a discussion called: Top 10 Aquaculture Myths That Limit Its Access to Private Capital. As so often is the case, the conversation has ranged beyond the initial question to range over the breadth of topics related to aquaculture’s difficulties appealing to private investors. Some excerpts:

Some excerpts:

From Durwood M. Dugger, president of Biocepts International, Inc.:

Myth – Access to a “niche” market for an aquaculture product is a viable basis to start and aquaculture business. Niche markets are ephemeral in the best case and you better have a business plan production cost structure capable of competing with the industry low cost producers. Relates to why many people don’t go the venture capital route.

Myth – “I’ll start small and grow my aquaculture business on its profits.” Wrong. Aquaculture is like modern agriculture where success is generally based on achieving optimum economies of scale. If you want to have any hope of profitability you need to start within the optimum economies of scale or be prepared to subsidize your losses until you reach them. Relates to why many people think they can avoid the venture capital route.

Myth – You should borrow money to start your aquaculture venture. You don’t finance high-risk aquaculture start ups on debt – ever. Anything involving a live product is high risk. 

Patrick Wood, whose LinkedIn profile describes him as “expert at seafood for Europe & warmwater aquaculture”, suggests that it is not myths but basic VC  psychology that constrains access to private capital for aquaculture:

 Most investors probably don’t think it is an easy call so don’t get involved. They are also not interested so much in long-termism and, if not sexy enough (yes they need to be tickled) and not rewarding enough they will tend to shy away.

Another “myth” addressed is that of  “farmed fish never taste as good as wild.  Dave Conley,  Founding Partner – Aquaculture Communications Group, LLC, responds:

 I have seen a number of articles/reports about blind taste tests using wild and farmed salmon and the results showed that the average person cannot tell the difference, and in some cases they preferred the farmed product. Even some so-called experts could not tell the difference. Having lived on Vancouver Island, the hot-bed of anti-salmon farming activism, I have heard this comparison ad nauseam so I used to take farmed salmon to various neighbourhood BBQs and offer it to people without telling them what it was. Guess what…they liked it! 

Honeylette Conol, veterinarian at Tres Hermanos Catfish and Panagasius Farms, adds:

A farmer can design his own fish taste according to what feeds he is giving and the quality of water he is introducing. Hence, most consumers prefer these products.

I’ve only scratched the surface of the discussion here and strongly encourage anyone with an interest in the business of aquaculture to check it out and contribute.  I will be mining the discussion for more posts over the next few days; these people make a lazy aquaculture blogger’s life very easy!

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