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Q.: What trends are driving cross-border merger and acquisition transactions in the wider Asia Pacific regions today?
Mr. Jalowayski: The clearest cross-border trends involve China, Africa and South East Asia. Tremendous liquidity worldwide especially from the US monetary policy is also having an impact. Yet, the China growth story continues to dominate both private equity and strategic M&A. Strategics worldwide are eager to expand and are looking for opportunities in China. Recent strategic example includes purchase of Feixiang Chemicals by Rhodia SA (France). Our team advised Bain Capital on the sale.

Also, China's thirst for natural resources as well as competition in the global natural resources industries are significantly influencing Asia-Pacific M&A. Such as the Rio Tinto (UK) takeover of Riversdale (Australia) with coking coal deposits in Mozambique, and China Minmetals recent bid for Equinox Minerals and its copper assets in Zambia.
Q.: What are the most common leverage buyout themes this year compared to last year?
Mr. Jalowayski: I think we will continue to see an increase in leverage Ebitda multiples and a decrease in equity contribution levels as liquidity improves and more funds are raised. For example, in early 2010 Australia was averaging about 3 - 3.5 turns of Ebitda whereas by Q4 2010 that number had risen to 4 to 4.5 turns. In addition, a very common theme these days is "homecomings". Asian and global funds are seeking opportunities to take private Chinese businesses that are listed on an exchange outside of China such as the Singapore Stock Exchange, NYSE or Nasdaq; and then relist them in Hong Kong or on a mainland Chinese exchange. Other theme includes the rapid development of the private equity industry in Asia, and the second generation of sponsors and fundraising that is taking place regionally and worldwide.
Q.: Can you elaborate on the "homecomings" Is this a take-private transaction and then a re-listing?
Mr. Jalowayski: Yes, these are public-to-private deals which generally envision a later exit in an IPO on an exchange where investors are better positioned to understand the true value. So, for Chinese businesses, that can mean the Hong Kong Stock Exchange or an exchange in PRC. Returns are driven by higher valuations given to such businesses on re-exit, as well as private equity's ability to leverage expertise to grow the business when it is a private concern--i.e., prior to the re-listing or sale.

The process varies significantly depending on the jurisdiction in which the company is currently listed as well as the jurisdiction in which the company is incorporated. This will determine the directors' duties in the private takeover context, as well as the rules governing takeovers. In the US, the process is driven fundamentally by State law relating to fiduciary duties of the directors, as well as the Exchange Act of 1934. The former is what governs how the directors must act in the best interest of shareholders when considering a sale, and the latter governs the rules regarding acquisitions of listed companies.
Q.: In you observation, what regions are attracting private equity investments in Asia today?
Mr. Jalowayski: China continues to attract a tremendous amount of capital. Funds are also actively looking at Vietnam. A recent example of this is KKR investment in Masan Consumer. Japan continues to be an attractive market for private equity funds that have deep operating company and industry experience because of private equity's skill in rationalizing businesses and creating value.
Q.: What are the macro trends in the antitrust approvals in China?
Mr. Jalowayski: The Anti-Monopoly Law clearance mechanism contemplates an initial 30-day review period within which concentrations that pose no substantive antitrust concern should be cleared. However, what is happening is that in practice even concentrations that pose little substantive antitrust issues are being pushed into a 2nd phase of review, which extends the review period for up to an additional 90 days. This is believed to relate primarily to the volume of filings relative to the manpower resources in Ministry of Commerce PRC (MOFCOM) rather than increased scrutiny of transactions on MOFCOM's part, but it nonetheless has the potential to delay closings in PRC M&A transactions.
Q.: From a legal perspective, what are the risks for managing in-bound transaction in China?
Mr. Jalowayski: From an acquirer's perspective the overall risks are very similar for private equity and strategic acquirers and this is a result of PRC government attitudes becoming more favorable towards private equity investors. On a marco-level, corruption is on-going issue in high risk jurisdictions such as China and India. It is no secret that China is a difficult environment for doing due diligence on companies. The recent revelations regarding China Forestry underscore the risk. So I would say that simple business fraud is the single biggest risk. These factors together with the US Department of Justice's focus on PE Funds and certain industries in China (such as pharma, distribution) contribute to significant risks that require planning.
Q.: How can private equity plan for pre- and post- acquisition?
Mr. Jalowayski: Pre-investment, buyers need to carry out robust, thoughtful and targeted legal due diligence and institutionalize appropriate level of checks and balances to dispassionately assess the risks of potential deals. Post-investment, FCPA (Foreign Corrupt Practices Act) and anti-corruption policies and procedures need to be developed and implemented. In the case of PE funds, the nature of such policies and procedures may vary depending on factors such as the specific industry the target operates in and the degree of the fund's control over the target's operations and governance.
Q.: What are the chief obstacles faced by private equity firms in acquiring assets in China today?
Mr. Jalowayski: For foreign PE houses, the PRC's limitations on foreign exchange, which, together with limitations in the existing PRC Company Law makes it difficult to effectively push down offshore leveraged financing to a PRC operating company. This remains the most difficult challenge faced by PE firms in acquiring PRC assets. Assets can technically be acquired but without being able to add leverage to increase returns, the investment proposition becomes potentially unattractive. It is one of the themes driving the push towards Renminbi (RMB) funds, and one of the reasons for growth equity activity in the form of minority stakes.
Q.: What is the nature of ownership structures that technically constitutes to a buyout vs. a minority stake? How does PRC compare with other Asian markets?
Mr. Jalowayski: In a leverage buyout, a holding company owned by a PE fund purchases an operating company. The funds used to purchase the operating company come from equity contributions by the fund as well as debt financing from banks. Following the purchase of the target, the PE backed holding company is usually merged into the operating company so that the operating company effectively becomes the borrower and cash generated from the opco's business is used to repay the debt. This deal structure isn't possible in the PRC, and it is also extremely difficult for an onshore subsidiary to guarantee an offshore holding company's debt. So, it is difficult to structure and execute a traditional LBO deal in the PRC because banks are generally reluctant to lend to entities that do not own the assets of the business. The legal framework in many other jurisdictions in Asia enables LBO structures including Japan, Korea and Taiwan--though each has its own level of complexities. Generally speaking, minority investments or "buy-in" are smaller and typically do not use leverage, hence are easier to execute.
Q.: There has been large number of "Asian" funds raised by the global fund community. Are these funds fully deployed and what's the affect on competition, valuations?
Mr. Jalowayski: Generally speaking the funds have been deployed or the investment period of the pre-08 funds is running out. Many regional and global funds are out raising new funds, plus there are number of new sponsors in the market raising funds for the first time. The funds that are being raised include both dollar and RMB-denominated funds, of course. As I mentioned before, the loose US monetary policy together with the number of new funds, and return of liquidity continues to drive valuations and competition for good assets in the region. I think we will continue to see valuations go up in the near term.
Q.: Can you expand on how the competition is playing out among different players for PRC deals, and who benefits?
Mr. Jalowayski: In the PRC, we have seen many assets go to onshore strategics simply because they will likely not have to go through any approval process. This vastly increases the certainty of the transaction and can accelerate the timeline. So one can imagine onshore strategics are extremely attractive to the sellers. This is by far the most common competitive issue between PRC funds and strategics vs. offshore acquirers.

As for the competition between strategics vs. funds (whether onshore or offshore), the dynamic is similar to the rest of the world: when leverage levels were lower, strategics had a distinct advantage because they could (and did) pay more for assets. With leverage levels rising private equity funds may be able to stretch a bit more on price so I expect competition to heat up.
Q.: What are the legal considerations for RMB funds for sponsors? What is the dynamics between the RMB vs. foreign funds?
Mr. Jalowayski: Sponsors raising RMB funds face a whole host of complicated issues and so it is imperative to have both local and international counsel involved early. The issues range from navigating a nascent legal framework in PRC to complicated cross-border tax structuring, and include a number of other international issues such as rationalizing fund terms and of course, dealing with the dynamics between RMB funds and foreign funds from the same sponsors.

On the latter point, the dynamics are fairly complicated. There is a tension on the sponsor side to be able to control the allocation because the decision may impact deal execution and the speed with which a transaction can be completed. Limited Partners on the other hand--particularly offshore LP's, want to be assured that the offshore fund will be afforded its fair share of deal allocation.
Q.: Shifting to Japan, what are your thoughts about private equity investing themes in light of the devastating crisis? Do you foresee opportunities being created by reconstruction efforts over the next few years?
Mr. Jalowayski: I think broad themes have not changed. Japan represents an incredible yet exceedingly difficult opportunity for PE funds. In Japan primary way to drive value is from operational efficiencies and industry innovation since neither pure growth nor cheap assets are drivers of high return. There is however certainty since all of the enabling commercial legislation to affect private equity deals has been put in place over the last decade and this reduces ambiguity and risks.

I am hopeful that the theme that emerges from the reconstruction and healing efforts is an embracing of the political reform necessary to kick-start the rationalization process for the broader economy-including measures that incentivize business owners to put assets in the hands of those that can create more value for shareholders.
Q.: In your experience, how do you advise your private equity clients on IPO exit options? For example what's the difference between ShangPharma versus NT Pharma offering?
Mr. Jalowayski: Structuring flexibility is important. It often is not clear what exchange will make the most sense, or for that matter whether an IPO is an appropriate exit at all. For ShangPharma, which listed on the NYSE, and NT Pharma, which listed on the Hong Kong Stock Exchange, the exit processes were very different. In a nutshell, the US SEC registration process is a disclosure-based system whereas the Hong Kong system is a merit based review system. The systems are very different, but suffice it to say that they are not equally flexible. So, it is critical to have both private equity and cap markets structuring advice early on in the go-in to make sure an IPO on either exchange is not foreclosed or made exceedingly difficult.
Q.: What differentiates the Asia team at Roper & Gray in the deal making process?
Mr. Jalowayski: Our focus on the private equity industry worldwide, our depth of service offering in the region and our ability to collaborate sets us apart. In Hong Kong, we have seasoned group of partners with M&A, Fund Structuring, Debt Finance, Real Estate and Fund Compliance expertise. We bring local language skills and on-the ground presence to service our clients from the global fund industries.
Q.: On a personal note, what book are you reading?
Mr. Jalowayski: I am currently reading the Bullpen Gospels by Dirk Hayhurst. Though I've lived in Asia for more than a decade, I'm still a baseball fan at heart.
Q.: What differentiates the Asia team at Roper & Gray in the deal making process?
Mr. Jalowayski: Our focus on the private equity industry worldwide, our depth of service offering in the region and our ability to collaborate sets us apart. In Hong Kong, we have seasoned group of partners with M&A, Fund Structuring, Debt Finance, Real Estate and Fund Compliance expertise. We bring local language skills and on-the ground presence to service our clients from the global fund industries.
Q.: In your experience, how do you advise your private equity clients on IPO exit options? For example what's the difference between ShangPharma versus NT Pharma offering?
Mr. Jalowayski: Structuring flexibility is important. It often is not clear what exchange will make the most sense, or for that matter whether an IPO is an appropriate exit at all. For ShangPharma, which listed on the NYSE, and NT Pharma, which listed on the Hong Kong Stock Exchange, the exit processes were very different. In a nutshell, the US SEC registration process is a disclosure-based system whereas the Hong Kong system is a merit based review system. The systems are very different, but suffice it to say that they are not equally flexible. So, it is critical to have both private equity and cap markets structuring advice early on in the go-in to make sure an IPO on either exchange is not foreclosed or made exceedingly difficult.

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