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Asia’s Private Equity News Source avcj.com October 08 2013 Volume 26 Number 38
Focus Deal oF the Week
From brick to clickChina’s traditional retailers respond to the e-commerce challenge Page 7
Taking in the sights VCs identify niches in Asia online travel Page 11
Clean bill of healthKKR announces buyout of Panasonic unit Page 14
Nominations open for the AVCJ India Awards
Page 3
Apollo, China Media Capital, CDC, DRC, General Atlantic, GGV, GSR, ICG, Ignitioin, Integral, Macquarie, Matrix, Mavcap, Northstar, OPTrust, Qiming, SAIF, Temasek
Page 4
eDitor’s VieWpoint
neWs
Deal oF the Week
The Abraaj Group’s Aman Lakhaney discusses emerging markets
Page 15
J-Star completes buyout of serial private equity play Primagest
Page 14
inDustry Q&a
©2013 Bloomberg L.P. All rights reserved. 54914729 0813
ASIA EDGE Live from Hong Kong. Weekdays 11am SIN/HK
INDIVIDUALLY, THEY OUTPERFORM.TOGETHER, THEY’RE OFF THE CHARTS.
Number 38 | Volume 26 | October 08 2013 | avcj.com 3
eDitor’s [email protected]
IndIa buyouts have crossed the $1 billion threshold in only two years since private equity first came to the country. Those years were, unsurprisingly, 2006 and 2007, the peak of the pre-global financial crisis boom, when total PE investment reached $7.7 billion and then the all-time high of $17.9 billion.
Nine months into 2013 and buyout deal flow is once again within touching distance of the $1 billion mark. India has seen 15 transactions and the grand total is $954.7 million. Indeed, depending on how one classifies KKR’s $470 million acquisition of Alliance Tire Group – the company is international and was founded in Israel so AVCJ Research classifies it as coming from that jurisdiction, although others would beg to differ – this might already be India’s best buyout year on record.
So far, the overall vintage has not proved particularly stellar. Private equity firms have deployed $6.2 billion (not including Alliance), lower than the full-year totals for each of the previous three years. It would take a busy final quarter to surpass the 2010 and 2011 figures, although the $7.1 billion of 2012 is a realistic target.
What this means is that the buyout concentration is unusually high – 15%, lower than the 19% of 2006 but well in excess of the 6% posted in 2007 and anything since then. A few big deals make a lot of difference: Partners Group’s $270 million acquisition of business process outsourcing firm CSS Corp; Baring Private Equity Asia’s (BPEA) $262 million investment in Hexaware, which could pass $400 million once a mandatory tender offer kicks in, are the largest buyouts in seven years.
These transactions, alongside BPEA’s $260 million investment in Lafarge India – a growth deal but perhaps a sign of what is to come – will likely feature prominently in the 2013 AVCJ India Awards. A cluster of cleantech investments may
also come into the reckoning for Private Equity Deal of the Year.
Today we invite AVCJ readers to have their say. Nominations for the 4th annual India Awards are now open and will remain so until October 31. Submissions should relate to India investment, exit and fundraising activity between November 1, 2012 and October 31, 2013. The categories are listed below.
For more details of the process, rules and qualification criteria, or to make a nomination, please go to www.avcjforum.com/awards. Alternatively, nominations can be submitted by email ([email protected]).
The AVCJ Editorial Board will evaluate the entries and submit long lists to a select panel of industry judges. The judges will consider these recommendations and final short lists will be drawn up in consultation with the AVCJ Editorial Board.
The shortlists will be posted online for the entire private equity and venture capital community to vote on from November 8 until November 22. The AVCJ subscriber base has a 50% say in the final result, with the judges and the AVCJ Editorial Board each accounting for 25%.
The winners will be announced at a gala dinner in Mumbai on December 5, during the AVCJ India Forum.
the 2013 IndIa awards categorIes:• FirmoftheYear• PrivateEquityProfessionaloftheYear• ExitoftheYear• PrivateEquityDealoftheYear• VentureCapitalDealoftheYear• FundraisingoftheYear
TimBurroughsManaging EditorAsian Venture Capital Journal
Will buyouts boss the 2013 India Awards?
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INDIVIDUALLY, THEY OUTPERFORM.TOGETHER, THEY’RE OFF THE CHARTS.
avcj.com | October 08 2013 | Volume 26 | Number 384
ASIA PACIFIC
Asia PE fundraising recovers to $9.5b in 3QAsia-focused private equity funds raised $9.5 billion in the third quarter of 2013, up from the multi-year low of $5.2 billion in the previous quarter, according to provisional data from AVCJ Research. The number was boosted by KKR Asian Fund II, which announced a final close of $6 billion in July, contributing $3 billion to the quarterly total - adding to the $3 billion first close that came last year.
CDC hires UTI Capital’s MurugappanCDC, the UK development finance institution, has hired Alagappan Murugappan as managing director with its Asia funds team. Murugappan was previously CEO with private equity firm UTI Capital. He will manage the team responsible for the organization’s fund investments across South Asia, as well as its pre-existing investments in China and Southeast Asia.
ICG adds Nyree Hu to Asia teamIntermediate Capital Group (ICG) has hired Nyree Hu as Asia director with its 11-strong global distribution team. Hu joins ICG from CQS where she was director of marketing for Asia. Prior to that Hu held a number of senior sales positions at UBS Wealth Management and Ecofin, the utilities specialist investment management firm.
AUSTRALASIA
Canada’s OPTrust opens Sydney office Canada’s OPSEU Pension Trust (OPTrust) has opened an office in Sydney, to focus on infrastructure and private equity investment across Asia. It has relocated managing director Stan Kolenc and portfolio manager Morgan McCormick to Sydney from London.
GREATER CHINA
KKR buys 10% stake in Qingdao HaierKKR has acquired a 10% stake in Qingdao Haier, a Chinese home appliance maker, for RMB3.38
billion ($552 million) - its biggest investment in China to date. Haier is selling 299.5 million shares at RMB11.29 each to KKR in a private placement, a 15% discount on the September 12 closing price, the last day before Haier suspended trading prior to announcing the deal.
VC-backed Forgame raises $206m in HK IPOForgame Holdings, a Chinese mobile game developer backed by several VC firms, saw its stocks jump 32.4% to HK$67.50 ($8.7) a share on its first day trading following its $206 million Hong Kong IPO. The Guangzhou-headquartered firm’s backers include TA Associates, Qiming Venture Partners and Ignition Capital Partners.
China Media Capital backs Charm take-privateHong Kong-based China Media Capital is backing management buyout of Charm Communications, a US-listed Chinese advertising agency. The bid values the company at about $180 million. A consortium, led by Charm’s chairman and founder He Dang, and China Media Capital, has offered to acquire all outstanding shares that it doesn’t already own for $4.70 apiece.
Baidu, VC-backed Qunar files for $125m IPOQunar, a Chinese travel website majority-owned by internet search giant Baidu, is looking to raise up to $125 million through an IPO in the US. GSR Ventures and GGV Capital still hold minority positions in the company but it is unclear whether they plan to use the offering as an opportunity to exit.
Temasek commits $100m in China 21VianetTemasek Holdings has invested $100 million in 21Vianet Group, a US-listed Chinese internet data center services provider, for about a 10% stake. About 87% of the investment will be newly issued ordinary shares and the remainder will be ordinary shares sold by existing shareholders.
VC-backed 58.cm targets $150m US IPOChinese venture capital-backed local marketplace website 58.com filed for its US IPO, targeting up to $150 million. The company’s VC investors include SAIF Partners, DCM and Warburg Pincus. Founded in 2005, provides classified ads for flat rental, recruitment, second hand goods and cars.
IDG, Temasek-backed IGG eyes $123m HK IPOSingapore-based mobile game developer I Got Games (IGG), which is backed by IDG Technology
Investors see bifurcation in real assets exposureInvestor appetite for real assets in Asia is strong, but infrastructure and real estate players speaking at the AVCJ Real Assets forum in Singapore noted that the nature of demand differs to the extent that a classic PE-style fund is in some cases no longer the most appropriate option.
Grant Kelley, co-head of Asia Pacific at Apollo Global Management, drew a distinction between real estate and infrastructure in this context: while
the former is time-sensitive and government-independent, the latter often appears immune to cycles but is highly influenced by government policy. “There is a prevailing view that real estate is all about location, but it’s not. It is about timing,” he said. “The mindset is of a trader is essential for real estate success. Infrastructure is much more about long-term gains.”
Vijay Pattabhiraman, managing director and CIO for global real assets - Asia infrastructure at J.P. Morgan Asset Management, also highlighted the role that land prices play in these differing outlooks. He estimates that land accounts for less than 5% of the overall cost of power projects, which means volatility has little impact on returns. In real estate, the forces are reversed.
J.P. Morgan is increasingly looking a hybrid projects that offer a combination of stable infrastructure returns, with associated real estate providing additional upside. What remains at issue is whether LPs are comfortable with these kinds of blended returns. Andrew Yee, managing director and global head of infrastructure principal finance at Standard Chartered Bank, noted that although investors may want exposure to real estate and infrastructure, they don’t necessarily want them together.
neWs
Number 38 | Volume 26 | October 08 2013 | avcj.com 5
Venture Investment and Temasek Holdings, intends to raise as much as HK$950 million ($123 million) through an IPO in Hong Kong. IGG plans to sell 327 million shares at HK$2.40-2.91 apiece.
IDG, CreditEase to launch financial innovation fundIDG Capital Partners and CreditEase, a Chinese peer-to-peer (P2P) microcredit lender, have set up a financial innovation fund, targeting a first close of $100 million. The vehicle - IDG CreditEase Financial Innovation Fund – will support online financial technology start-ups.
NORTH ASIA
DRC Capital exits Japan’s Casa to Ant CapitalDRC Capital has sold Japan’s Casa, a rent guarantee provider formerly known as Rento Go, to Ant Capital Partners and the firm’s management. Casa provides the rent guarantee insurance typically needed in Japan when someone rents a unit from a landlord.
VC-backed Value HR sees shares double after IPOVC-backed Value HR, a Japanese human resources benefits service provider, saw its stock more than double in value to JPY4035 ($41.5) on its trading debut in Tokyo last Friday. The company sold 414,000 shares, including 245,000 new shares, at JPY2,000 apiece to raise JPY828 million in its IPO.
Kyoto University launches $60m venture fundJapan’s Kyoto University has launched its second VC fund, a $60 million vehicle which will invest in start-ups in Japan and the rest of Asia. The Kyoto University Venture Fund (KUVF) aims to support the development of ideas by faculty, students, and alumni, as well as anyone who wants to work with the institution to launch a business.
Japan’s Integral backs TBI GroupJapanese PE firm Integral Corp. has acquired part of TBI Group, a restaurant chain operator with 78 outlets, as part of a management buyout. The financial terms of the deal were not disclosed. TBI was founded in 2003. It has additional business lines in real estate, advertising, travel and apparel with $75 million in revenue in 2012.
SOUTH ASIA
PE investors seek action against FourceeGeneral Atlantic and India Equity Partners are pursuing legal action against their portfolio
company Fourcee Infrastructure Equipments, accusing executives of “extensive forgery and willful deceit.” The investors want a Company Law Board-appointed administrator to take control of Fourcee and investigate the company’s financial affairs. They are also evaluating several litigation options in India and other jurisdictions.
TVS Capital Funds restructured TVS Capital Funds, which manages the INR11 billion ($178 million) TVS Shriram Growth Fund, will merge with holding company TVS Investments to simplify the corporate structure. The merged entity will be called TVS Capital Funds.
Matrix backs hotel reservation site StayzillaMatrix Partners India has acquired a significant minority stake in Stayzilla.com, a site which allows users to research and reserve hotels at discounted rates in more than 750 Indian cities.
Macquarie, SBI invest $18m in Ashoka ConcessionsPE funds managed by State Bank of India and Australia’s Macquarie Group have invested INR1.1 billion ($17.9 million) in Ashoka Concessions (ACL), a toll road builder. The funding is the third tranche of a $150 million (INR 8.307 billion at the time) commitment made in August 2012.
ZoomCar raises $1m in seed roundNew York-based Empire Angels has led a $1 million seed round for Indian car rental service ZoomCar. Funders Club, Basset Investment Group and former US Securities and Exchange Commission (SEC) Commissioner Lady Barbara Thomas Judge also took part in the round.
SOUTHEAST ASIA
Mavcap to launch $200m tech investment platformMalaysia Venture Capital Management (Mavcap) plans to launch a $200 million investment fund platform fund later this year that will back technology-based companies at home and abroad. As part of its third Outsource Partners Program (OSP), Mavcap will allocate $100 million to funds run by four selected VC firms, each of which will then raise a minimum of $25 million.
Northstar seeks $1b for Southeast Asia fundNorthstar Group, the Singapore-based private equity firm backed by TPG Capital, is looking to raise around $1 billion for its fourth fund, which will focus on Southeast Asia. According to Reuters, Northstar is still finalizing details for the new fund. Sources close to the firm previously told AVCJ that Northstar Equity Partners IV would be roughly the same size as its predessor, which closed at $820 million in 2011. Separately, LP sources indicate that Northstar has indicated that it will not exceed $1 billion.
Northstar was founded by former Goldman Sachs banker Patrick Walujo (pictured) and Glenn Sugita in Indonesia in 2003. After the close of Fund III, it was announced that TPG - an LP in Northstar’s early funds and a frequent co-investor - would enter into a cross-shareholding
arrangement with the firm. TPG is now believed to own 10-20% of Northstar, while Northstar owns less than 0.5% of TPG.
Speaking to AVCJ last year, Walujo said the firm’s investment strategy hadn’t change much between Funds II and III despite the latter being nearly three times the size of the former. Rather, the co-investment share would be scaled back. “We have invested nearly $2 billion together with our co-investors. About $700 million of that was from the funds we manage, meaning we have provided more than $1.3 billion of co-investment opportunities to our partners,” he said. “Our strategy has evolved as our assets under management have grown and, going forward, Northstar-managed funds will represent a bigger share of our deals.”
neWs
AssociAte your brAnd with excellence: If you would like to be associated with recognising and rewarding excellence in the Indian private equity industry, award sponsorship opportunities are available. Please contact samuel lau on +852 3411 4963 or [email protected]
the AVcJ indian Private equity & Venture capital Awards 2013
aims to recognise and honour firms and professionals who have raised
the bar for the private equity and venture capital industry.
Tell us who you think deserves recognition.Submissions for nominations are open until october 31, 2013.
Simply visit www.avcjindia.com/nominations and fill out the form.
For enquiries, please contact [email protected]
India Award categories
Firm of the year Private equity Professional of the year exit of the year Private equity deal of the year Venture capital deal of the year india Fundraising of the year
AVCJ Indian Private Equity & Venture Capital Awards 2013
Nominations are open until October 31, 2013
Sponsored by
Recognising excellence in indian PRivate equity
Number 38 | Volume 26 | October 08 2013 | avcj.com 7
coVer [email protected]
sunIng applIance Is changIng the way it does business. Having become China’s largest electronics retailer on the back of a traditional bricks-and-mortar approach chain store, the company is now adding click to its brick.
Last month, Suning launched an open platform program underpinned by an online and offl ine (O2O) link that integrates the entire retail process, from procurement to shipment to after-sales service. For shoppers, it means paying the same price, regardless of whether a product is bought online or in the store.
Speaking at a recent conference, Jindong Zhang, co-founder of Suning, said the approach is a response to the next phase of evolution in China’s retail industry.
“Pure B2C e-commerce players barely turn profi table, while about 80% of online merchants who sell their products through B2C platform are actually losing money. We believe an O2O integrated retailing model is the only way to expand in the market substantially,” Zhang explained.
Suning is one of the most aggressive traditional vendors trying to bite back at e-commerce players eating its business. Last year, the electronic appliance market descended into a price war when pure online retailer JD.com, formerly known as 360Buy, off ered to cut its gross margin to zero. Suning and Gome Electrical Appliance in turn off ered to match or undercut their rival’s prices.
This multi-platform challenge is markedly diff erent from the competitive environment in which these retailers emerged. Seven years ago, when Gome bought 501 stores from China Paradise Electronic Retail, the third largest player in the market, making its network twice the size of Suning’s, it could justifi ably claim supremacy. Now it is about more than bricks and mortar.
Private equity fi rms face a new reality as well. China retail investments used to be fairly straightforward: provide capital to help a business scale up, off er supply chain and branding expertise to improve effi ciency and quality, and then take it public. Nearly a decade on, some of the creatures these PE fi rms created are among the incumbents that dominate virtually every segment of retail.
It all comes back to business model and implied cost, and while consumption growth in China remains comparatively robust, it is slower than before, which magnifi es the impact of change.
Cost pressures“There is no doubt that consumer demand is growing fast. But companies should adjust themselves from a hyper-growth environment to a more rational growth environment. In the old days, many businesses only thought about driving revenue growth. That ‘cowboy strategy’ won’t work anymore,” says Derek Sulger, managing partner at Lunar Capital. “Companies have to think more about margins, costs, as well as professional management.”
Chief among these cost concerns are real estate and labor – both have seen sharp increases, particularly in the fi rst-tier market in China. The average hourly wage for an employee of a foreign-invested enterprise was RMB55 last
year, compared to RMB30 in 2007, according to government statistics. Property developers, meanwhile, have pushed up rental prices eightfold in the last 10 years, making China one of the most expensive commercial property markets in the world.
One option is to abandon expensive, and increasingly saturated, fi rst- and second-tier cities in favor and move deeper into the country’s
interior, although this strategy presents costs and challenges of its own. Another is to switch from asset-heavy to asset-light retail by pushing into the online market.
“We are seeing more private equity fi rms increase their investment in online stores in tier-one cities, while simultaneously increasing investment in physical stores outside the tier-one cities in order to establish brand across China,” says C.V. Ramachandran, Asia Head for advisory fi rm AlixPartners.
Retail experience from across the globe can still be brought to bear, whether it is in-store operational improvements, pricing realignment to off set infl ation or better quality after-sales service. Indeed, it is not only emerging chain stores in China that require assistance; a new opportunity set has opened up in helping turnaround established players that are struggling to cope with the changing retail dynamic.
TPG Capital stepped to restructure Hong
Kong-listed Li-Ning last year, as the retailer faced pressure from Nike and Adidas at the top of the market and from Anta and Peak Sports at the bottom, and with the entire domestic sportswear industry drowning in excess inventory.
Store closures and inventory cuts narrowed fi rst half net losses to RMB184 million ($30 million), compared to a full-year defi cit of RMB1.98 billion in 2012. Jin-Goon Kim, a partner
Asset-heavy to asset-lightFacing competition from e-commerce platforms, China’s traditional offl ine retailers are moving online – and the ideal combination is a combination of the two. PE investors are seeking opportunity in the disruption
AssociAte your brAnd with excellence: If you would like to be associated with recognising and rewarding excellence in the Indian private equity industry, award sponsorship opportunities are available. Please contact samuel lau on +852 3411 4963 or [email protected]
the AVcJ indian Private equity & Venture capital Awards 2013
aims to recognise and honour firms and professionals who have raised
the bar for the private equity and venture capital industry.
Tell us who you think deserves recognition.Submissions for nominations are open until october 31, 2013.
Simply visit www.avcjindia.com/nominations and fill out the form.
For enquiries, please contact [email protected]
India Award categories
Firm of the year Private equity Professional of the year exit of the year Private equity deal of the year Venture capital deal of the year india Fundraising of the year
AVCJ Indian Private Equity & Venture Capital Awards 2013
Nominations are open until October 31, 2013
Sponsored by
Recognising excellence in indian PRivate equity
China PE investment in consumer segments
Source: AVCJ Research
1,500
1,000
500
0
50
40
30
20
10
0
US$
mill
ion
Dea
ls
Retail/wholesale (deals) Travel/hospitality (deals)Consumer products/services (deals)
2008 20102009 2011 2012 2013
Consumer products/services (US$m) Retail/wholesale (US$m) Travel/hospitality (US$m)
avcj.com | October 08 2013 | Volume 26 | Number 388
at TPG who was brought in as executive vice chairman of Li-Ning, believed “the worst is behind,” although the company has yet to prove it can follow this up with sustainable top-line growth.
Kim’s high-level involvement suggests that Li-Ning recognizes the contribution TPG can make in a turnaround situation and the PE firm is able to wield influence that outweighs its minority position. In other cases, where the founder’s ownership position might be stronger and his
control more complete, a minority investor could struggle to bring about desired changes.
Lunar Capital’s Sulger notes that many of the problems in China’s consumer sector are tied to weak governance, not a drop in fundamental demand for what companies are selling. This thinking influenced Lunar Capital’s decision to focus on mid-market control transactions.
“Companies often lack good professional managers and the ability to make timely strategic decisions. Therefore, we believe that the more control you have, the more ability you have help make those decisions in real time, rather than waiting to react to a problem,” Sulger explains. “You also have a greater ability to bring in professionals who can help address challenges as this market evolves.”
However, control deals remain the exception to the rule in China. In cases where the retailer is large, listed and in needs of new direction, a buyout isn’t necessarily feasible – Li-Ning, for example, has a market capitalization of $1.2 billion, so a substantial amount of money, plus owner support, would be required to assume control.
As for smaller companies, there is often a residual discomfort in allowing a third-party to take a majority position, especially if it is a private equity firm with existing investments in the sector. “Entrepreneurs will be cautions if investors leaking their business strategies to their competitor if they sit in both companies’ boards,”
says John Yang, a partner at Excelsior Capital.Confronting the challenge presented by
online retail requires a deep understanding of where a portfolio company fits into the changing sector.
Taken on their own, the numbers are astounding. As of July, China had 820 million internet users and 334 million 3G subscribers. Online shopping gross merchandise volume reached RMB1.3 trillion ($190 million) in 2012, according to Beijing-based consultancy
iResearch, accounting for 6.2% of total retail sales. It is expected to reach RMB3.6 trillion – or 10.8% of total retail sales – by 2016. McKinsey & Company puts current US online shopping activity at $220 million, or 5% of total retail sales.
Apparel and footwear make up just over a quarter of online sales in China, with computers, communication and consumer electronics (3C) a few percentage points further back.
Mixed fortunesHowever, as David Wei, CEO of Vision Knight Capital Partners, points out, an increase in online shopping doesn’t hurt traditional retailers across the board. He divides companies into four groups. First, those selling products that can be digitalized will be replaced by online platforms, as illustrated by HMV’s slide into bankruptcy. Second, retailers of standardized products, such as electronic appliances, will be “killed softly and slowly” by e-commerce.
“It will be a bloody fight among Gome, Suning and JD.com,” Wei said earlier this year. “They will continue fighting in the next 3-5 years. Both sides – traditional retail and online peers – are losing money. Gome and Suning are losing margin, while JD.com can’t improve margin.”
Third, retailers offering non-standard products that can’t be sold online easily, such as furniture, will benefit from the growth of the internet in terms of wider marketing reach. Finally, retailers that provide offline services that can’t
be replaced by online businesses, for example wedding shooting photo services, will carry on regardless.
Many venture capital investors are watching the first and second categories with interest. In addition to eating into the market share of bricks and mortar retailers, e-commerce platforms are engaged in a fierce battle with each other. High valuations and uncertainty as to the future prospects of these firms, most of which have yet to turn a profit, have prompted a number of VC firms to hold back.
According to AVCJ Research, venture capital investment in the e-commerce space peaked at $4.15 billion in 2011, jumping from $915 million the previous year. However, it slowed to $3.4 billion in 2012, and only $383 million has been deployed year-to-date.
Tmall, a B2C site under Alibaba Group, JD.com and Suning.com are ranked as the top three e-commerce sites in the country, with Tmall claiming 50% of the market. AlixPartners’ Ramachandran expects online sales to swell to 25% of total retail sales in the next 3-5 years, with the space “dominated by pure e-commerce players like Alibaba.”
In other words, new entrants are unlikely to survive. This is in part the function of a market that remains fragmented and defined by consumers who are motivated by price rather than any sense of brand loyalty. It means that e-commerce sites are effectively buying market share, building up scale in order to go public at the highest possible valuation, and this explains their notoriously high capital burn rate.
VC backers won’t stick around forever so the longer the wait for an IPO the more questions are asked about a company’s future. A handful of the larger Chinese e-commerce firms – those perceived as having sufficient scale to survive – are expected to list, notably JD.com and Vancl, China’s largest online clothing retailer. JD.com’s investors are indeed betting big, with Ontario Teachers’ Pension Plan, Kingdom Holding and Tiger Global among those to put up a $700 million round of funding late last year.
Hurst Lin, a partner at DCM and formerly COO of Sina Corporation, says he stopped investing in e-commerce players in 2010, after backing travel website Tuniu and Dangdang.com.
“The e-commerce sector development is actually very unhealthy now. It is packed with companies engaged in price war in order to lure more customers,” he explains. “We may consider returning to this sector as long as business becomes more rationalized in the next 2-3 years – when sites are no longer just competing on price, but emphasizing product quality and logistics services.”
There is also a trend for online firms to open
coVer [email protected]
Tmall.com 50.6%JD.com 17.5%Tencent 5.6%Suning 5.0%Amazon China 2.2%Vipshop 2.0%Gome 1.9%Dangdang 1.8%Yihaodian 1.4%Vancl 0.7%Others 11.6%
China B2C websites by share of gross merchandise volume, 2Q 2013
Source: iResearch China
offl ine physical shops, driven by a desire to escape the cutthroat competition of online pure-plays, establish a brand name in the street, and off er more services.
Meilele, an online furniture retailer, has established about 260 stores that off er customized services, coordinate product shipments and supply after-sales services. “If you are only selling products through e-commerce sites, you will never scale up your business to become a big player in the industry,” says Yang Gao, CEO of Meilele. He adds that offl ine showrooms enhance a customer’s shopping experience.
Of course, it helps that the company falls into Wei of Vision Knight’s third category – retailers off ering non-standard products that can’t be sold online easily. Shoppers don’t necessarily want to see cosmetics or clothing in a “consumption environment” before purchasing.
The way forwardHow, then, will offl ine and online elements become reconciled in China, if at all? Certainly, the business model as it stands is markedly diff erent from the US. Of the top 10 retailers in the US, only one – Amazon – is an online pure play. In China, eight of the top 10 are online-only, according to iResearch. Industry participants
don’t expect China to ultimately conform to the US model.
“In the US, e-commerce is important but as a complementary to offl ine traditional retail. However in China, it will not be a complementary; online players will become the mainstream retailers,” Vision Knight’s Wei explains. “It will be more important to be online.”
He off ers two pieces of evidence in support of his argument: on November 11, 2012, online sales reached RMB19.1 billion, exceeding the offl ine total for the fi rst time, a phenomenon that has yet to happen in the US; and during the fourth quarter of 2012, Taobao’s sales revenue was greater than that of Amazon and eBay combined, another fi rst.
In this context, the e-commerce platform war is far from over, which means the incumbents are by no means guaranteed to retain their leading positions for the long term.
“Tmall is dominant now but I don’t think it will remain dominator in the next few years. There will be more players coming out, even along the lines of the platforms or online department stores concept,” says Ray Yang, head of the consumer investing practice at Northern Light Venture Capital.
There is also expected to be more investment in online brand owners, so-called “category killers”
that span multiple brands across women’s shoes, fashion and cosmetics. Merchants will eff ectively move horizontally along the value chain – claiming a larger share of the revenues as they go – by designing products themselves and driving the online marketing. Few will be able to execute this strategy in every segments so there will be numerous winners.
While brands were previously launched only in Tmall, the proliferation of platforms allows a much wider reach. Yang believes these brands now have suffi cient scope that they are attractive to venture capital investors.
On the traditional retail side, private equity players are looking to take regional brands national through adding an online element to a predominantly offl ine proposition. Lunar’s Sulger compares selling a product through Tmall to rolling it out in a new department store – the brand has an opportunity to gain traction with a new audience. However, success depends on emulating the model that Suning is investing so much in: integration across platforms.
“Few in China do that well,” Sulger adds. “Even globally this has been a challenge, although there are emerging benchmarks like Apple which ensure that when you shop online, you see exactly the same products at the same price you can buy in the stores.”
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avcj.com | October 08 2013 | Volume 26 | Number 3810
contriButeD article
In recent years the “China dream” became reality for countless retailers as the country’s underserved, billion-plus consumers acquired a serious shopping habit. But while this new generation of shoppers is buying more, they are also getting choosier as home grown and foreign brands from all corners of the world reach ever deeper into the market.
With consumers spoilt for choice, living the retail dream is getting much harder. And now in an already crowded retail market there is a new headache: the disruptive arrival of e-commerce as a mainstream shopping habit. Companies need to retool for this new melting pot of competition where social media leads retail behavior.
Globally, online sales are transforming traditional retail and are now the single largest single contributor to industry growth. In China, we are already seeing an unprecedented industry upheaval as companies rush to either learn or acquire the skills necessary to compete. While online represents just 5% of overall retail sales, the market looks primed for growth.
E-commerce has some favorable headwinds in China. There is both a limited footprint of traditional bricks and mortar retail while almost half the country’s 1.3 billion population now has internet access. According to consultancy Bain & Company, retail e-commerce in China will surpass the US this year. And with e-commerce already approaching 20% in digitally advanced markets like South Korea, it’s easy to see why everyone is paying attention.
As the online and offl ine worlds collide, brands and retailers now must compete in an intense shopping scrum.
The textbook answer to serve this new market is the Omni-channel strategy, which integrates bricks and mortar outlets with e-commerce to give an integrated and optimized shopping experience. Social media is added to the mix, allowing interactive communication with customers. This is bound to appear like quite a leap for many companies, which explains why Omni-channel is often referred to as a “retailing revolution.”
But it promises to be a disruptive change. Even if only some retailers or brands get on board, the best practice and expectations amongst shoppers is quickly reset.
The process of integrating back-end of logistics, distribution and establishing e-commerce operations is likely to be time-consuming and require considerable investment. What companies should do as a priority, however, is focus on the communications challenges for this new digital shopping environment.
For one, they need to maintain a profi le in a much larger, converged offl ine and online world. It is also clear Omni-platforms will be driven by social media whether companies like it or not. The importance of getting this part of the communications strategy right is now much greater as social media recommendations
emerge as a key consumer purchase driver in China. According to a recent PricewaterhouseCoopers survey, 57% of respondents follow brands or retailers on social media in China, compared to 38% in a global sample.
Not surprisingly we are seeing a fl urry of activity as retailers, e-commerce portals and even social media companies adapt to this changing dynamic. An e-commerce strategy is increasingly a must rather than a nice to have. This means traditional retailers have to learn a variety of new skills – fulfi llment, distribution and digital marketing.
Electronics is one sector that has been exposed to online competition where 360Buy has been outpacing growth at traditional retailers Gome and Suning. To redress this Suning has not only moved to a portal but also integrated offl ine and online procurement, logistics and product management. Now sales can be generated from physical stores, websites and mobile platforms.
Meanwhile, internet retailers have evolved from selling purely online to also creating a physical presence.
Another sign of how the retail landscape is evolving is the increasing presence of the social media giants. Tencent bought a majority stake in 51Buy for an undisclosed amount, while in April this year Weibo sold an 18% stake to Alibaba for $586 million. The stated aim was both companies would explore new business models for social commerce.
Amid all this maneuvering, this year has been one of mixed fortunes for major retailers in China. The country’s largest shoe retailer Belle International was just one of a number of players to report slowing sales this year. China was the only major market in which Nike reported a decline in sales last quarter.
But at the same time Adidas bucked the trend after a successful expansion into woman’s clothing with a new Taiwanese pop singer as brand ambassador. Japan’s Fast Retail, which owns the clothing brand Uniqlo is also performing strongly and is the number one apparel retailer in Asia. It continues to expand aggressively in China, opening 80-100 shops annually. One reason for its success is its strength integrating its online and offl ine shopping channels, as well as deploying innovative social media interaction.
The lesson to all retailers – offl ine or online – is they need to harness social media and build trust and engage customers. Increasingly in China this is a tool not just to communicate but also directly drive transactions. Companies that gain traction here will also have a much better chance of keeping the China retail dream alive.
Richard Barton is managing partner at Newgate Communications - Hong Kong. Newgate specializes in fi nancial and corporate communications, public aff airs and government [email protected]
Retail success in a digital world
Number 38 | Volume 26 | October 08 2013 | avcj.com 11
“For most people In chIna, tourIsm has always involved people travelling in large packs with a guy walking ahead holding a flag, but that model is changing. China is shifting gear from an export and manufacturing driven economy to a consumption- based economy and travel is going to be a big part of the that,” says Juxin Foo, a partner with GGV Capital in Shanghai, who describes an industry brimming with opportunity and ripe for disruption.
The statistics speak for themselves. According to the China National Tourism Administration, the number of outbound tourists reached 37.9 million in the first five months of 2013, up 17.3% year-on-year. Domestic travelers numbered 998 million in the first quarter, an increase of 14.1%, while domestic tourism revenue reached RMB765.7 billion ($123.9 million).
This trend is replicated throughout the region. Four years ago, Asia Pacific overtook North America to become the world’s largest aviation market, with around 647 million travelers taking flights within the region compared to 638 million in North America, International Air Transport Association (IATA) data show. In the first four months of 2013, Asia Pacific travel rose 6% year-on-year, the highest rate of any market.
Space to rentIn line with this growing opportunity, the region has seen a number of innovative venture capital-backed businesses being set up, particularly in the online space. Working around the handful of larger players that have emerged in the last decade, VCs continue to find opportunities, with specialist travel booking and short-term rentals emerging as particular sweet spots.
China has seen a number a successful players in the latter category – operating under a similar model to that established by US vacation rental sites Airbnb and HomeAway, where users can book anything from a single room to a beach condo retreat.
Tujia.com, which closed a Series B round of financing led by GGV earlier this year, is typical of the recent crop. The company – which claims to be China’s first online vacation homes rental service – offers vacationers an alternative to the traditional hotel stay by allowing users to rent out their second homes on a short-term basis. It has a database of 400,000 rental properties in 65
Chinese cities and 45 foreign cities.At first glance competition in the space would
appear to be fierce, which a number of broadly similar sites in operation. One month before Tujia’s latest round closed, two other vacation rental websites, Xiaozhu.com and Mayi.com, each received $10 million in VC backing.
However, GGV’s Foo maintains the market is far from crowded. “The challenge is not competition,” he says. “The real challenge is knowing the market and educating the market, getting the user to understand vacation rentals as a new way to travel.”
Foo adds that the tourism space is still very nascent in China, with leisure accounting for just
30% of the travel, compared to 70% in the US. Consolidation is seen as inevitable and
a number of established players are already making strategic investments in innovative travel start-ups, in some cases alongside VC investors. NASDAQ-listed Ctrip, China’s largest online travel company, and HomeAway took part in a Series A round for Tujia.com last year.
China’s internet giants have also sought to move into the space. Baidu agreed to pay $306 million for VC-backed booking site Qunar back in 2011 and is in the process of taking the company public, while this year Alibaba Group has invested in travel app ZLS365 and information site Qyer to complement its existing offering, Taobao Travel.
Acquisitions have extended into other markets too with HomeAway acquiring Singapore- based TravelMob, a vacation rentals site backed by Jungle Ventures, Accel Partners, New Zealand Venture Investment Fund and Sparkbox Ventures, in July.
“There will be some level of consolidation,” Amit Anand, co-founder of Jungle Ventures, told AVCJ at the time. “Travel is a business where the margins are pretty thin but there is also phenomenal amount of volume in Asia.”
In India, MakeMyTrip.com – which had received VC backing prior to its 2010 IPO – has made a number of strategic investments. In 2011, it joined SAIF Partners in acquiring majority stake in Indian travel search engine IXigo for $18.5 million. It also bought Hotel Travel Group, the company behind hotel booking site Hoteltravel.com, for $25 million in November last year.
At the marginsLike China, start-ups in India have found the country’s large domestic market offers plenty of scope to carve out a niche despite competition from industry incumbents. Stayzilla.com, a hotel-bookings site that recently funded by Matrix
Partners India, operates in a space seemingly dominated by the likes of global online travel firm Expedia yet has managed to find its feet.
“There are 4-5 entrenched peers, but they are focusing on perhaps the top 10 destinations and hotels that are three stars or above because those have the tech infrastructure to create an online inventory,” explains Tarun Davda, vice president with Matrix. “The opportunity for Stayzilla is where there was a lot of fragmentation, in the tier two and tier three cities.”
By building up a network of one- and two-star hotels outside the top destinations, the company claims to have tapped into as much as 70-80% of India’s personal and business travel market.
“It is challenging and it takes time to build the network,” Davda adds. “But that is where there is an opportunity to become a huge differentiator – by working out a way to work with these hotels it creates a barrier to competitors.”
GGV’s Foo echoes the sentiment that online tourism market has the scale to allow for multiple players especially if they can find a niche to fill. “At the moment it is anybody’s game,” he says. “The market is big enough for more than one player; three or four players is not that big.”
Ticket to ride Online tourism is on the rise in emerging Asia and numerous venture-backed businesses are looking to hitch a ride on the consumer growth trend. The key is finding the right niche
“There is an opportunity to become a huge differentiator – by working out a way to work with these hotels it creates a barrier to competitors” – Tarun Davda
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Steve ByromHead of Private EquityFuturE Fund
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12-14 November 2013 Four Seasons Hotel, Hong Kong
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Registration: Pauline Chen T: +852 3411 4936 E: [email protected]
Contact us
Steve ByromHead of Private EquityFuturE Fund
Pak-Seng LaiManaging director & Head of AsiaAudA
Wim BorgdoffManaging PartnerAlPInvESt PArtnErS
Thomas KubrExecutive ChairmanCAPItAl dynAMICS
Nicole Musiccovice PresidentOntArIO tEACHErS’ PEnSIOn PlAn
Jeremy CollerExecutive Chairman & CIOCOllEr CAPItAl
Jay ParkManaging directorBlACKrOCK PrIvAtE EquIty PArtnErS
D. Brooks ZugSenior Managing director & FounderHArBOurvESt PArtnErS, llC
Fritz BeckerCEO & Managing directorHArAld quAndt HOldIng gMBH
Jim Pittmanvice President, Private EquityPSP InvEStMEntS
Sherry LinManaging PartnerMOuSSE PArtnErS
and many more…
Keynote speakers
Senior LP speakers already confirmed include:
Christopher FlowersFounderJC FlOWErS & CO
Dwight PolerManaging directorBAIn CAPItAl
Steve KoltesCo-Founder & Managing PartnerCvC CAPItAl PArtnErS
Plus global economist Byron Weinvice ChairmanBlACKStOnE AdvISOry PArtnErS lP
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avcj.com | October 08 2013 | Volume 26 | Number 3814
prImagest, a FIrm whose prImary business is using optical character recognition (OCR) to turn documents in data, appears every bit the tech-savvy up and comer. However, it has been doing the same thing – in one form or another – for 45 years.
Set-up in Tokyo in 1968, Primagest – then known as Recognition Equipment Incorporated – was one of first companies to sell large-sized OCR systems for converting printed information into machine-encoded text. Nearly half a century later, there has been significant change in both the technology and the company’s ownership.
Last week Primagest was acquired by J-Star, which now owns around 66% of the business. Financial details were not disclosed, but according to AVCJ Research, the first tranche of the investment, which took place in June, saw J-Star buy an initial 34.7% stake for JPY498 million ($5 million).
Until recently, Primagest’s core business has
involved developing software and hardware used for OCR and intelligent character recognition (ICR). However, a greater portion of revenue now comes from business process outsourcing (BPO) services, work essential to paperwork-laden organizations including financial institutions and local governments.
“Often clients will have many paper items – such as insurance applications – that need to be scanned, so they outsource the work to Primagest, which stores the information and backs it up on the client’s database,” says a source familiar with the transaction. “Japan is very original-heavy country and, while there is a move to digitization, many organizations
still rely on paper originals.” The company’s ties with J-Star goes back
a decade as many of the GP’s current team were at venture firm JAFCO in 2002 when it backed a $82.5 million management buyout of Primagest. At the time, it was a subsidiary of
BancTec – a Texas-based BPO provider that had been acquired by New York buyout shop Welsh, Carson, Anderson & Stowe in 1999 – and was trading under the name BancTec Japan.
Following the JAFCO carve-out, the company listed on JASDAQ in 2006 before going private once again three years later with a second MBO, led by CEO Kiyohiro Miisho.
The deal is both an opportunity to recapitalize the business, paying down debt held from the previous MBO, and a succession solution with many of the company’s top management seeking to exit the business and retire.
J-Star is said to be looking at a typical three-year holding period, during which time the company – which recorded JPY11.6 billion in revenue in 2012 – will look to maintain a steady cash flow. Of the various exit options, a strategic sale to a big data vendor that wants to gain access to Primagest’s extensive client roster is regarded as the most likely.
This latest investment was made through J-Star No. 2, a JPY20.4 billion vehicle that reached a final close in July.
KKr’s acquIsItIon oF panasonIc Healthcare marks a return to form for the firm after its earlier efforts to acquire Japanese chipmaker Renesas were frustrated by the government-backed Innovation Network Corporation of Japan (INCJ). The deal had raised concerns in the industry over unfair government-linked competition and even to conjecture that this next deal would actually see KKR team up with INCJ or one of its equivalents.
These rumors proved unfounded. KKR has sealed its largest Japan buyout to date, taking an 80% stake in Panasonic’s healthcare unit for JPY165 billion ($1.66 billion). It is close to five times the size of the firm’s second-biggest investment, Intelligence Holdings, which was exited earlier this year.
The investment also weighs in as the 10th largest private equity buyout Japan has seen, ironically just behind the INCJ-led bailout of Renesas, which was valued at $1.67 billion.
The sale process dates back to March when Panasonic, under pressure to jettison assets, announced it was seeking a partner to assist
the future growth of the unit. Around 10 private equity firms and a handful of strategic investors were said to have entered first-round bids, including Toshiba Corp. and a consortium including Bain Capital, Mitsui & Co and the Development Bank of Japan (DBJ).
Last month it emerged that KKR had obtained preferential negotiating rights.
Panasonic Healthcare claims to be the leading global manufacturer of blood glucose monitoring meters and sensors used to monitor diabetes. Its Medicom business, meanwhile, is the domestic market leader for medical receipt computers, electronic health record systems and other IT equipment. The company is also strong at home and overseas in biomedical laboratory equipment such as carbon dioxide incubators and ultralow temperature freezers.
“Panasonic Healthcare has excellent market positions and high-level technical capabilities,
and we believe it has significant growth potential,” said KKR co-founder and co-CEO Henry
Kravis, in a statement.According its president, Kenji
Yamane, Panasonic Healthcare now aims to accelerate growth by building out its global sales channels to major overseas healthcare facilities, while leveraging KKR’s networks. The unit generated JPY8.7 billion in operating income and JPY134.3
billion in sales for the financial year ended March 2013. The operating profit margin was 6.5%.
Panasonic, which will continue to hold 20% of the healthcare unit, has not fared so well in recent times, posting combined losses of $15 billion over the last two financial years.
This prompted the vast restructuring efforts that led to the sale of the healthcare unit and number other assets, including Sanyo Electric’s digital camera business, which was sold to domestic mid-market buyout firm Advantage Partners in December.
Deal oF the [email protected]
J-Star buys ‘fourth hand’ Primagest
Panasonic unit gets KKR cure
Panasonic unit: In the pink
Primagest: original innovator
Number 38 | Volume 26 | October 08 2013 | avcj.com 15
Q:WhathastheacquisitionofAureoslastyearbroughttothefirm?
A: The benefit in bringing the two organizations together was the close to zero geographic overlap. Aureos had sub-Saharan Africa, South America and Southeast Asia as a focus, and no presence in the Middle East or North Africa where Abraaj is present. We have a platform with offices in each of the countries we invest in and six regional hubs. In Southeast Asia we have country offices in Singapore, Indonesia, Malaysia, Philippines, Vietnam, Thailand and Brunei and a hub in Singapore. We have over 30 offices globally, and I don’t think there is another PE firm operating in global growth markets with the geographic presence that we have.
Q:WhatistheallocationtoSoutheastAsia?
A: We closed our $250 million second Southeast Asian fund in March. Our most recent investments include ODG, an Indonesian mechanical and electrical contracting and engineering services provider; Crossland Logistics, which is a cross-border trucking company in Thailand; and Orca Global, an English Language Training provider based in Singapore, with a presence in Indonesia and Thailand. We are sector agnostic, but there are certain sectors we tend to focus on, such as consumer, fast moving consumer goods, quick service restaurant casual dining, healthcare, education and logistics. In agriculture, ASEAN is interesting in terms of being an exporter to China and other parts of the world. We are
looking at opportunities in the processing space in particular.
Q:Therehavebeenanumberofhealthcaredealsintheregion–AbraajrecentlyexitedtheFilipinoDanielO.MercadoMedicalCenter,VejthaniHospitalandIHHHealthcare...
A: Healthcare is a big focus for us and we are evaluating a number of opportunities. This includes hospitals and also medical and laboratory chains, generic pharmaceutical manufacturing, pharmacy retail and medical consumables. If you look at any macro statistic in terms of healthcare spending, there is a significant gap. At the same time you have growing middle classes and with that comes demand for increased quality. So healthcare for us is about injecting additional funds and helping companies grow within their domestic markets first and then helping them expand outside their national boundaries.
Q:Howhasincreasedinvestorinterestintheregionaffectedcompetitionfordeals?
A: We see a lot of competition in a Southeast Asian context as the last three years has seen an influx of international firms and the growth of domestic and regional players. Many PE firms focus on the same sectors. I think the key differentiators for us are the deal size and local presence. Many international firms pursue $100-million-and-above investments where the number of companies that are potential targets is small and often competition is intense, driving up valuations. By focusing on $15 million investments and up, we have a much bigger spectrum
to play in. In certain sectors, we are also seeing opportunities for a series of smaller deals in fragmented sectors, which bring together platforms we can help partner companies expand into
places like Africa, the Middle East and South America as well. Within a growth markets context we’re one of the few that have that kind of operating expertise across geographies and across sectors.
Q:Canyougiveanexampleofthisexpansion?
A: Pancake House, which is a fast casual dining chain in the Philippines with about 300 outlets. It was completely Philippines-based but we helped the firm expand into Malaysia and find a joint venture partner
there. It also has a few Middle East franchisees. Crossland is another example. Right now it operates routes solely within Thailand. We’re in the process of doing add-ons there which will give it a presence in Malaysia, Singapore, Vietnam and China, so it will have a contiguous ASEAN route. Southeast Asia is grouped as a bloc but every country is completely different in terms of the local sponsors, as well as regulatory environment and language. The ASEAN economic community will be implemented over the coming years and we see that as a big opportunity.
Q:Dotheoperationalchangesapplytominoritystakes?
A: We’re never passive in our investments. In many emerging markets, family groups or entrepreneurs are not willing to give up control. We look for a sizable minority stake of at least 25-30%, where we have an alignment of interest with the parties involved and can bring in the right operating expertise to help them grow. There is a lot of liquidity in the market so when you’re meeting entrepreneurs and family groups you need to be able to demonstrate that you bring more than just capital. The Abraaj Portfolio Acceleration Group helps us do that. It’s a 25-member group comprised of people with specific operating expertise that works with the investment teams from inception of the deal. It looks at potential investments from an operating lens and adds value in the due diligence process through the creation and subsequent execution of 100 day plans, and value creation with partner companies through to exit.
AMAN LAKHANEY | inDustry Q&a [email protected]
Beyond BRICSThe Abraaj Group’s acquisition of Aureos Capital last year was a massive short cut to a larger Asia presence. Aman Lakhaney, director at The Abraaj Group, explains the firm’s approach to non-BRIC emerging markets
“I don’t think there is another PE firm operating in growth markets with the geographic presence that we have”
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