Asia Mezzanine Capital – Company Profile

Mezzanine financing company overview

Mezzanine firm logo:

Asia Mezzanine Capital - mezzanine financing company logo

Headquarters location:

Hong Kong

Typical mezzanine financing range:

US$15-50 million in single transactions. Up to US$100 million in single transactions via co-investment with strategic partners.

Geographic focus:

Asia

Industry focus:

Less cyclical with proven technologies and moderate to high returns on capital, including, but not limited to: Infrastructure-related: electric power, transportation, water treatment and environmental protection services, Healthcare services, Business services, Education services, Consumer products, Financial services, Media and publishing, Niche manufacturing. Less preferred: More cyclical with some technology risk and/or lower returns on capital, including, but not limited to: Heavy equipment, Commodity retail, Biotechnology, Traditional distribution (lower value-added), Agriculture, Transportation equipment, Airlines, Natural resources, Commodity industries (i.e., steel, petrochemical, cement), Most types of real estate.

Company profile

Listed in the following regions:

Asia
Asia Mezzanine Capital Group (AMCG) is an independent direct investment fund management group based in Hong Kong. Together with its constituents, AMCG invests in the strategic development of promising medium-sized companies with Enterprise Values of US$100 million to US$500 million that have substantial operations in Asia and need capital for:

  • Major expansions
  • Mergers and acquisitions
  • Restructurings
  • Recapitalizations
  • Privatizations
  • Buyouts

The firm partners with companies, private equity investors and their advisers by providing longer-term hybrid and mezzanine-type capital, which is structured with a combination of debt and equity components.

AMCG manages the Asia Strategic Capital Fund, L.P. on behalf of the ORIX Corporation of Japan, New York Life Insurance Company and other institutional investors. Investments range from US$10 million up to US$100 million.

AMCG serves as a fiduciary for global institutional investor clients that have increasing needs for alternative asset investment management services. The clients want to benefit from the continued relatively higher growth and positive structural changes underway in most Asian countries despite the current adverse conditions prevailing in the global and local debt and equity markets, by way of direct investment funds with prudent levels of risk exposure. AMCG is focusing on delivering cash flow and credit-oriented investment management, with the aim to generate superior risk-adjusted returns from a combination of current income and capital appreciation while protecting capital and participating in equity.

AMCG sees that it can provide the following benefits to companies and their shareholders:

  • Minority Investor: AMCG is a non-controlling investor with aligned interests, and potentially a lower cost of capital than equity alternatives.
  • Mitigation of Dilution: they structure investments as debt or quasi-debt, with equity participation, reducing the dilution compared to equity.
  • Asia Focus: they focus exclusively in Asia, and serve Asia-based companies. They are attuned to the demands and sensitivities of Asian mid-cap companies seeking to grow to the next stage.
  • Regional and Global Reach: they can mobilize their extensive network of Asian and global relationships for the benefit of their investee clients.
  • Long-term Financing Capability: AMCG actively seeks investments with a horizon of five to seven years.
  • Capital Access: they can execute larger transactions via co-investment from their investors, providing investee client’s significant additional sources of capital. AMCG can also enhance the terms of senior debt, and attract other capital.
  • Flexibility in structuring and speed in execution.
  • Value-Added: AMCG provides financial and strategic advice, as well as guidance based on their experience and networks. Examples of ways AMCG management team members provide value to clients include:
    • Consulting on capital structure and financial restructuring issues and arranging for follow-on financings.
    • Advising on exit strategies and timing and method of asset and subsidiary divestitures.
    • Introducing add-on acquisition opportunities.
    • Strengthening investee’s corporate governance and management practices.

AMCG Strategic Capital typically seeks to fill a financing gap between senior bank debt and common equity. AMCG’s mezzanine investments are generally structured as subordinated debt or preferred equity with a current cash coupon and an equity participation feature, most often in the form of warrants or options. AMCG characterizes its approach as strategic capital investing. From a risk-return perspective, AMCG believes that there are three distinct zones of mezzanine finance:

  • Debt-oriented: Debt-oriented mezzanine places highest priority on preservation of principal, even to the extent that it will fully forgo potential upside in order to achieve this objective. Debt-oriented mezzanine will usually have a high degree of creditor protections, and ordinarily the debt-oriented mezzanine investor expects little or none of its return to emanate from an equity component.
  • Equity-oriented: Although still focused on some degree of principal preservation, equity-oriented mezzanine seeks the highest returns by pursuing transactions in which the security issued by the investee is positioned at a very junior level in the capital structure (with significantly higher expected returns and risks). This mezzanine often requires a rate of return close to equity.
  • Strategic: Strategic Capital refers to capital positioned between “debt-oriented” and “equity-oriented” mezzanine. This is the type of hybrid/mezzanine capital provided by funds managed by AMCG.

AMCG Strategic Capital is generally characterized by the following features:

  • Overall approach: AMCG brings a creative approach to transaction structure, with freedom to modify security types, interest rate mechanisms and equity participation to meet the needs of each unique situation.
  • Intermediate cost of capital: AMCG aims to achieve all-in cost of capital between that expected by senior debt and equity.
  • Intermediate risk: AMCG investment instruments are designed to be subordinated to senior debt of a borrower, but senior to ordinary equity.
  • Flexible: Debt with warrants is typical structure, but will employ a wide variety of structural alternatives. Aim to flexibly fill gap between relatively rigid senior debt and ordinary equity.
  • Current return: AMCG normally seeks some form of current return by way of a fixed-interest coupon. Can include a PIK/rollup interest feature.
  • US dollar and/or Asian currency financing: May be denominated in either US dollars or Asian currency.
  • Partner without conflicts: AMCG is independent and not controlled by any financial institution. Also, it does not undertake control buyouts and does not compete with financial sponsor firms for control investments.

AMCG Strategic Capital has applicability in financing of growth companies, buyouts, acquisitions, as well as in leveraged financings and refinancings, recapitalizations, and other situations. Other examples may include pre-IPO mezzanine placements, going-private transactions, SOE privatization financings, and mezzanine PIPEs. AMCG tailors each transaction to the issuer and circumstances, and does not employ a single “cookie cutter” approach.

Investment philosophy/criteria

AMCG partners with promising medium-sized Asian companies to help them achieve their goals. AMCG provides an alternative or complement to traditional equity or debt in the form of highly flexible intermediate capital. The firm provides strategic capital, usually in the form of subordinated debt with warrants or equity options, although a variety of instruments may be utilized, including preferred equity. AMCG focuses on reasonable downside protection with positioning for sharing equity upside.

Typical transaction sizes are in US$15-50 million range for a single transaction. Up to US$100 million investment in a single transaction is also possible via co-investment with strategic partners. While the company primarily seeks non-controlling investments it looks to provide support to the business operations and often financial strategy. Depending on the situation, the mezzanine financing provided can be geared towards being debt-oriented, strategic or equity-oriented.

Summary of AMCG investment focus

Target investee clients are established medium-sized Asian businesses with predictable cash flow, as well as, debt service capacity.

  • Geographic scope is Asia, with particular focus on:
    • Greater China
    • Japan
    • India
    • Southeast Asia
    • South Korea
  • Typical investment size
    • US$20-50 million equivalent,
    • As large as US$100 million can be arranged with other financing partners
  • Use of proceeds:
    • Capital expenditures
    • Permanent working capital
    • Funding of acquisitions and buyouts
    • Refinancings of existing debt
    • Recapitalizations-cum-dividend distribution
  • Investment instruments utilized (primarily mezzanine capital):
    • Subordinated debt with equity participation
    • Convertible debt
    • Convertible preferred equity
    • Redeemable preferred equity
    • Pay-in-kind securities
    • Participating debt
    • Equity warrants
    • Ordinary equity instruments or equivalent (subject to limitation)
  • Currency Denomination
    • US$
    • Various Asian currencies

More in-depth review of the investment criteria

  • The firm focuses on established less-cyclical businesses with steady cash-flow generating ability utilizing proven technologies, including in the industries below and excluding real estate development and investment.
  • Enterprise Values of approximately US$100 million up to US$500 million equivalent (on a pro-forma basis) and a minimum EBITDA of approximately US$10 million equivalent.
  • Current capital requirements ranging from US$10 million to US$100 million for major strategic development, e.g.: expansion via large capital expenditure programs and/or mergers/acquisitions, restructurings/recapitalizations, privatizations, leveraged and management buyouts; and special situations.
  • Controlling and influential shareholders with reputable character and a commitment to improving corporate governance practices.
  • Experienced and competent managements with successful track-records who have significant ownership interests.
  • Defensible market positions with potential for high growth and/or significant efficiency improvements.
  • Based in Asia, or elsewhere with significant growing activities in Asia.
  • Assets, including securities which are available to act as collateral.
  • Industries:
    • Electric power generation
    • Waste-to-energy
    • Telecommunications
    • Transportation infrastructure
    • Logistics services
    • Storage facilities
    • Water supply and waste management
    • Resources extraction services
    • Higher value-added distribution services
    • Healthcare products and services
    • Consumer products and services
    • Education services
    • Business services
    • IT services
    • Media
    • Financial services
    • Higher value-added manufacturing

Representative transaction structures (simplified – for illustration purposes only)

Leveraged Financings, Refinancings, Recapitalizations, Shareholding Restructurings:

  • AMCG role: Provides capital to support transaction which enables shareholders to reduce amount of equity required for transaction, and increase potential returns.
  • Representative structure: AMCG provides structurally subordinated debt with equity warrants to HoldCo, with proceeds down-streamed to OpCo.

Buyouts and Acquisition Financings:

  • AMCG Role: AMCG may assist private equity firms and other acquirers to increase significantly their potential returns, enhance their flexibility, and/or strengthen competitiveness of a bid.
  • Representative structure: 2 or 3-tier structure involving HoldCo(s) and OpCo, with AMCG-provided capital structurally subordinated to senior debt (usually from commercial banks). AMCG provides senior debt to upper HoldCo, and receives equity warrants in HoldCo (or other entity) or other form of equity participation. Part of AMCG debt return may comprise PIK interest.

Pre-screening investment evaluation criteria:

  • Size of Company:
    • Positive: Approx. US$100 to US$500 million+ enterprise value
    • Negative: Smaller than US$50 million enterprise value
  • Size of Investment:
    • Positive: US$15 to US$50 million +; Up to US$200 million with others
    • Negative: Less than US$10 million
  • Size of Equity Ownership:
    • Positive: 5% to 20%
    • Negative: More than 25%
  • Management Team:
    • Positive: Experienced with significant ownership stake
    • Negative: Inexperienced/Little ownership in business
  • Corporate Governance:
    • Positive: Must be key priority of management
    • Negative: Not important/less important to management
  • Market Position of Investee:
    • Positive: Defensible market position with strong growth opportunities; must have identifiable competitive advantage
    • Negative: Weak market position or strong position in commodity business; no identifiable competitive advantage
  • Cash Flow Characteristics:
    • Positive: Sound basis for expected stable cash flows
    • Negative: More cyclical cash flow history, little historical information
  • Stage:
    • Positive: Strategic development; expansion, acquisition, merger, restructuring, recapitalization, buyout
    • Negative: Start-ups; new, unproven products, services or technologies
  • Security Requirements:
    • Positive: Reasonable asset coverage; second lien on fixed assets; pledge of shares
    • Negative: None
  • Debt Service:
    • Positive: Debt service capacity projected to enable amortization of total debt over 5 to 8 year period with grace period
    • Negative: Little ability to service debt; need for high component of PIK interest
  • Investment Exit:
    • Positive: Number of potential exits from equity position, including: IPO, trade sale, other sale, recapitalization/refinancing, contractual agreement with shareholders
    • Negative: Only one viable exit
  • Preferred Industries/Sectors:
    • Positive:
      • Less cyclical with proven technologies and moderate to high returns on capital, including, but not limited to:
      • Infrastructure-related: electric power, transportation, water treatment and environmental protection services
      • Healthcare services
      • Business services
      • Education services
      • Consumer products
      • Financial services
      • Media and publishing
      • Niche manufacturing
    • Negative:
      • More cyclical with some technology risk and/or lower returns on capital, including, but not limited to:
      • Heavy equipment
      • Commodity retail
      • Biotechnology
      • Traditional distribution (lower value-added)
      • Agriculture
      • Transportation equipment
      • Airlines
      • Natural resources
      • Commodity industries (i.e., steel, petrochemical, cement)
      • Most types of real estate

AMCG has a streamlined commitment process for its mezzanine investment transactions.

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