“One of the biggest challenges we're facing is the seller mentality and educating the seller on the very basics of corporate finance and M&A transactions,” said B. Bold a former JPMorgan banker who chairs the country's stock exchange. “There is no lack of deals in Mongolia, as many businesses are looking for cash,” said Mongolia Opportunities Partners Managing Director Mandar Jayawant. However, there is “very little precedent” in Mongolia on how to structure deals, what role a private equity investor plays in a business and how businesses are valued, he said. In addition some business owners have “quite unrealistic expectation of valuation,” Jayawant said.
Private-equity investments in Mongolia are mostly growth equity, where investors want the company owner to remain with the business, rather than the later-stage private equity in the West that is heavily debt-financed, Bold said. “You don't have financial engineering to get your IRRs, which means you don't have a lot of room for mistakes,” Bold said, referring to how investors measure internal rates of return. “If you do 10 deals and one goes sour, that could wipe out all your IRRs.” When Malaysian tycoon Robert Kuok of Kerry Mining sold QGX Coal to Mongolian Mining Corp. (MMC), the transaction involved an initial up-front payment of USD 464 million. However, the total deal size can be adjusted up or down, possibly rising as high as USD 950 million, depending on changes to the coal reserves and mine life. “Earn out structures... allowed both the buyer and seller to get comfortable and proceed with the transaction,” said Douglas Farrell, Citigroup's director of mergers and acquisitions for Asia Pacific. Citigroup advised MMC on the deal. “It may not necessarily be unexpected or a bad thing if initially there isn't a meeting of minds between the buyer and seller.” Jayawant said his fund often uses rachets, which allow a private-equity investor to lower their investment cost if the target company later raises more funds at a lower cost. “There's likely to be a large divergence between what management thinks they're able to achieve and what we think is realistic,” Jayawant said. “If certain numbers are met, we have no problem giving up value to the owners, but we also have to protect our downside.”
Most investment interest in Mongolia comes from strategic investors like Japanese and Korean companies, rather than investment funds out of New York or London, Jayawant added. Sovereign-wealth funds China Investment Corp. and Temasek have invested hundreds of millions of dollars in coking coal producer SouthGobi Resources and iron ore entity Lung Ming.
The Mongolia Opportunities Fund, which bills itself as the country's first private equity fund, targets an “underfunded niche” of deals between USD 5 million and USD 10 million. It focuses on mining services and infrastructure, and will look at investments in financial services and export industries. It aims to help companies grow to a size where they could be sold later to large investors like Banpu of Thailand which is finalizing the USD 493 million acquisition of Hunnu Coal. George Tumur, Hunnu’s Managing Director, mentioned that the sale price being obtained by Hunnu’s shareholders is 9 times the IPO price of February 2010.
The panel moderator, Jim Dwyer, formerly a life-long M&A professional based in New York who is now Executive Director of BCM commented “it’s a “9-bagger!” “Having an active M&A market means that investors who want to come in here know there's an exit,” Mark Lehmkuhler, a Hong Kong-based partner at Davis Polk & Wardwell, said. “There are all sorts of possible sources of capital that can come into a country that aren't going to come in on a greenfield basis... but they will come in and buy a company that has reached a certain stage.”
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