Future uncertain for Candover's Asia business

The UK private equity firm announces a downsizing that will see the Asian operations restructured or shut down, following a large decline in profits.

UK-headquartered private equity firm Candover Investments on Monday announced dismal results for the financial year ending December 31, 2008, and said its Asian and Eastern European operations will turn self-financing or be shut down.

Candover declared a profit before tax of £5.2 million ($7.3 million), down 75% from £21 million in 2007, due mainly to provisioning for lower future investment income from portfolio companies.

Candover saw its net asset value per share halve during 2008 to £1.02 from £2.06 in 2007. The 50.3% decrease is greater than the 32.8% drop in the FTSE all-share index over the same period and comes after five successive years of NAV increases at the buyout fund, which was formed in 1984.

"The current global financial problems do not seem likely to be resolved in the short term," says Colin Buffin, managing director of Candover Partners, in a London Stock Exchange filing issued on Monday. "Our focus, therefore, is on working closely with our portfolio companies and their management teams to maximise the value of our investments."

Accordingly, Candover will not be making any further investments in the foreseeable future and will be reducing staffing levels. "Our cost base has to be reduced to reflect the current financial position and, very sadly, we are having to make redundant a number of our staff," says chairman Gerry Grimstone in the LSE filing.

Candover attributes the decline in realisations from its portfolio to falling stock markets, the uncertain economic outlook and severely reduced debt funding.

Candover has made provisions for seven portfolio companies: luxury motor boat firm Ferretti; bed and mattress manufacturer Hilding Anders; mail solutions firm DX group; betting and gaming group Gala Coral; premium fitness equipment firm Technogym; laboratory-based testing business Alcontrol; and specialty packaging film manufacturer Innovia Films. The write-downs have been taken both because these are consumer businesses which have shown weaker trading results due to the environment and because their comparable companies trade at lower valuations than when the investments were made.

With respect to Ferretti specifically, only a week ago, on February 26, Candover announced that it would not be participating in a capital restructuring of Ferretti. Candover owns 50.2% of the luxury motor boat manufacturer, representing approximately 12.1% of its net assets, and informed shareholders that its existing stake in the business, previously valued at around £54 million, now has no value.

"We were developing operations in Asia and in Eastern Europe but we do not currently have the capacity to finance investments in these regions," adds Grimstone. "The teams concerned are investigating the possibility of raising capital so that they can become effectively self-financing." Grimstone added that should these fund-raising efforts be unsuccessful the businesses in Asia and Eastern Europe will be wound up.

Candover's Asian operations are very young. Just one year ago the firm recruited Jamie Paton to spearhead its plans for the region. Paton was at the time on a sabbatical from the private equity industry after two decades at London-based private equity firm 3i, of which 17 years were spent in Asia.

Paton has built a team across the continent that includes Olly Stratton, who was hired from consultancy firm Bain where he was head of the Hong Kong office. In Mumbai, Harsha Raghavan, a co-founder of Goldman Sachs's principal investment team, moved across to Candover to help grow the private equity firm's portfolio in India. In all, Candover has seven executives in the region.

"The goal had always been to start the process of raising a dedicated Asian fund during 2009," Paton told FinanceAsia yesterday with respect to the Candover announcement on Monday. "In the interim, as we are seeing opportunities across the region, we plan to pool funds from interested investors if the circumstances are appropriate."

In the UK, Candover has appointed Merrill Lynch and Lexicon to advise on its options.

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