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Asia’s Private Equity News Source avcj.com November 04 2014 Volume 27 Number 41
PE returns: On target? Page 11 Names: A brand issue Page 29 VC pioneer Tim Draper Page 39
CONFERENCE SPECIAL ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM HONG KONG 2014
Safe hands?Private equity targets emerging Asia’s succession planning opportunity Page 19
Unlocking liquidity for private equity investors
www.collercapital.com London, New York, Hong Kong
Anything is possible if you work with the right partner
Number 41 | Volume 27 | November 04 2014 | avcj.com 3
CONTENTS
EDITOR’S VIEWPOINT 05 Asian PE will continue to grow in asset
terms, but slower and in multiple directions
NEWS 07 Carlyle, China Life, DCM, Evercore, Hony,
J-Star, SoftBank, PEP, Warburg Pincus
PERFORMANCE Under pressure11 To varying degrees unimpressed by Asian
PE performance, LPs are asking more of their managers on the operations side
SUCCESSION PLANNING Family ties19 Private equity investors eye buyout
opportunities as emerging Asia’s aging founders struggle to find credible heirs
21 Case study: Mekong Capital and Vietnam’s AA Corporation
25 Case study: Bain Capital and Dominos Japan
BRANDING What’s in a name?29 PE firms attach increasing importance to
finding the right name. This is no easy task when operating in multiple markets
31 Eastern perspective: Feng shui masters rate private equity firms’ Chinese names
33 Western perspective: How branding consultants help find the magic formula
TECHNOLOGYThe Palo Alto prescription35 Asia’s innovation hubs are aspiring to
become the next Silicon Valley, but some are more global than others
38 Venture capitalists want government to facilitate start-up development, not try and pick winners directly
INDUSTRY INTERVIEWS16 Olver Gottschalg of HEC School of
Managment talks PE performance
27 Howard Marks of Oaktree Capital Management on risk and reward
39 Tim Draper of Draper Associates on exporting the Silicon Valley model
Risk Capital Advisors (RCA) is the market leader in advising on and structuring insurance solutions for transaction risks. With a wealth of experience across Asia-Pacific and an impressive track record of successful transactions, RCA provides expert, commercial advice on a range of transaction risk strategies and insurance-based solutions.
As the largest team in Asia-Pacific, the RCA team has a combined 60+ years of Private Equity, M&A and insurance experience, and is the preferred advisor to structure transaction risk insurance solutions.
In the past 5 years, the RCA team has successfully advised on and closed more than 450 transactions, making RCA the most experienced team in the Asia Pacific region.
The transaction risks we provide advice on include:
Warranties & IndemnitiesTaxLitigationProspectus LiabilityEnvironmentalContingent Liabilities
De-risk your transaction with the market leaders in M&A insurance solutions
LONDON I MELBOURNE I SYDNEY
For more on how RCA can help contact Rick Glover on +61 401 123 235, [email protected] or visit riskcapital.com.au
Number 41 | Volume 27 | November 04 2014 | avcj.com 5
EDITOR’S [email protected]
ONE OF THE HOTTEST TOPICS IN LAST year’s AVCJ Forum was whether the Asian private equity and venture capital industry can remain on its growth trajectory. The region’s assets under management have expanded 12-fold in the last 20 years. While there is no doubt the industry will continue to get bigger, the nature of the growth is likely to alter course – in terms funds, investments and people.
Private equity has graduated from its position as head of the alternatives asset class to spearheading wider private market investment strategies. Just a few years ago, most private equity firms had a focused approach with small adjustments based on the size of their current funds. This was true for both buyout funds and venture capital players.
Today the landscape looks very different. Most of the global firms with a presence in Asia have diversified their offerings. Buyout strategies were altered to accommodate growth capital years ago, but firms are now expanding up and down the capital structure. Distress, mezzanine and structured credit strategies are in place and in some cases real estate too. Several global players no longer describe themselves as “private equity firms,” preferring something along the lines of “private markets investor.”
As for venture firms, they have diversified their funds to include larger growth capital deals as well as seed-stage investments. Most remain focused on specific markets, although Sino-US strategies are popular in some quarters, while a few of the bigger US firms have been franchising
their brands out. In terms of investments, naysayers having
been predicting, for years, that with no financial crisis and China’s growth slowing, the golden age of Asian private equity is over. This may be partly true but it should be remembered that capital can also drive a market. Bring together some of the smartest people in the financial world and tie compensation to their ability to make money for investors and you will see results. Investment cycles will continue to give and take away, but Alibaba Group’s IPO and the Oriental Brewery trade sale are proof that multi-billion dollar exits are still possible in today’s market.
Private equity is – and always will be – a relationship business, with people the most important asset. As many of the founding fathers give up day-to-day duties to pave the way for a younger generation, we may see a short-term decline in the number of so-called “personalities.” But the void will eventually be filled as other investment professionals rise to “rock star” status. And with the industry expanding its focus, there will be more people filling the space.
As somebody who has observed the industry grow from a small part of the region’s financial services sector to the behemoth it is today, Asian private equity will find ways to grow.
Allen LeePublishing DirectorAsian Venture Capital Journal
Onwards and upwards
Managing Editor Tim Burroughs (852) 3411 4909
Staff Writers Andrew Woodman (852) 3411 4852
Winnie Liu (852) 3411 4907
Creative Director Dicky Tang Designers
Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow
Senior Research Manager Helen Lee
Research Associates Herbert Yum, Isas Chu, Jason Chong, Kaho Mak
Circulation Manager Sally Yip
Circulation Administrator Prudence Lau
Subscription Sales Executive Jade Chan
Manager, Delegate Sales Pauline Chen
Director, Business Development Darryl Mag
Manager, Business Development Anil Nathani, Samuel Lau
Sales Coordinator Debbie Koo
Conference Managers Jonathon Cohen, Sarah Doyle,
Conference Administrator Amelie Poon
Conference Coordinator Fiona Keung, Jovial Chung
Publishing Director Allen Lee
Managing Director Jonathon Whiteley
The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of
AVCJ Group Limited. ISSN 1817-1648 Copyright © 2014
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No.66 Nanshatan,Chaoyang District, Beijing,People’s Republic of China
T. (86) 10 5869 6203F. (86) 10 5869 6205 E. [email protected]
Risk Capital Advisors (RCA) is the market leader in advising on and structuring insurance solutions for transaction risks. With a wealth of experience across Asia-Pacific and an impressive track record of successful transactions, RCA provides expert, commercial advice on a range of transaction risk strategies and insurance-based solutions.
As the largest team in Asia-Pacific, the RCA team has a combined 60+ years of Private Equity, M&A and insurance experience, and is the preferred advisor to structure transaction risk insurance solutions.
In the past 5 years, the RCA team has successfully advised on and closed more than 450 transactions, making RCA the most experienced team in the Asia Pacific region.
The transaction risks we provide advice on include:
Warranties & IndemnitiesTaxLitigationProspectus LiabilityEnvironmentalContingent Liabilities
De-risk your transaction with the market leaders in M&A insurance solutions
LONDON I MELBOURNE I SYDNEY
For more on how RCA can help contact Rick Glover on +61 401 123 235, [email protected] or visit riskcapital.com.au Private equity funds under management in Asia
Source: AVCJ Research
600,000
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400,000
300,000
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20062007
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Jag Dhal iwal l
+65 6329 9658
jag.dhaliwall@principle -partners.com
Will Tan
www.princ ip le -partners .com
+65 6329 9659
will . tan@principle -partners.com
Asset Management Hedge Funds Private Equity
Premier buy-side executive search
Number 41 | Volume 27 | November 04 2014 | avcj.com 7
GLOBAL
Warburg Pincus raises $4b global energy fundWarburg Pincus has closed its first dedicated energy fund at the hard cap of $4 billion, comfortably exceeding the $3 billion target. The new vehicle, which launched in November 2013 and reached a first close in May 2014, will be a companion fund to the $11.2 billion Warburg Pincus Private Equity XI.
ASIA PACIFIC
Evercore adds to Asia private funds groupBoutique investment bank Evercore has hired Ian Bell from Credit Suisse to head up distribution and origination for its private funds group in Asia Pacific. Bell, who was previously responsible for Credit Suisse’s institutional investor coverage in the region, is based in Hong Kong.
AUSTRALASIA
PEP makes another partial exit from Veda GroupPacific Equity Partners (PEP) has generated around A$218 million ($192 million) through a partial exit from Australia-listed credit-checking firm Veda Group. It still holds 19.6% stake of the business. The PE firm offloaded 100 million shares via an underwritten block trade sale.
PE firms settle with Asahi over Independent LiquorPacific Equity Partners (PEP) and Unitas Capital have agreed a private settlement with Asahi over the sale of Independent Liquor that means the dispute will not proceed to trial. The judge adjourned the case for a week to allow the parties to formalize a deal. Asahi bought Independent Liquor from the PE firms in 2011 but then sought damages, claiming that earnings had been overstated.
Tamarisc leads Series A round for SerraviewAustralian software-as-a-service (SaaS) start-up Serraview has raised a Series A round of funding from US-based venture capital firm Tamarisc as it looks to expand into US markets. The company
provides cloud-based workplace management software designed to increase productivity and improve communication between business units.
GREATER CHINA
China Life to boost alternatives exposureChina Life has mandated one of its investment subsidiaries to deploy up to RMB150 billion ($24.5 billion) of insurance funds into alternative asset classes over the next year. If the mandate awarded to China Life Investment Holding is fully exercised, it would take the insurer’s overall alternatives allocation past 10%.
COFCO plans IPO for PE-backed businessesChinese agricultural conglomerate COFCO Corporation is looking to list some of its assets, including Noble Group’s agribusiness unit and Dutch grain trader Nidera Holdings, both of which were acquired with PE support.
DCM leads $30m Series B for gay social appDCM has led a $30 million Series B round of funding for Blued, a Chinese gay dating app. The transaction values the company at $300 million. Earlier this year, the firm received RMB10 million ($1.6 million) in Series A funding from Crystal Stream.
Mobile marketing firm Lomark raises $30mA group of VC investors – DFJ DragonFund, KPCB, ABC Capital and Shenzhen Fortune Venture Capital – have committed $30 million in Series B funding to Lomark, a Chinese mobile advertising firm. The company previously raised a Series A round of undisclosed size from DFJ.
BVCF-backed Jaguar Animal Health targets US IPOJaguar Animal Health, a veterinary drugs developer backed by China-focused healthcare investor BVCF, is looking to raise as much as $54 million through a NASDAQ IPO. The company plans to sell 5 million shares - not including the overallotment option - at $7-9 apiece. BVCF’s holding will be diluted to 15.6% from 31.3%.
Photo-sharing app Blink secures $20m roundBlink, a Chinese photo sharing and messaging mobile app, has raised $20 million in Series A funding from Tencent Holdings, Sequoia Capital, H Capital, ZhenFund and Innovation Works. Rather than center around a text-based online chat function, a camera is activated as soon as the app opens. Users can take photos and then add text by drawing on the image.
Cycle Capital to enter China cleantech marketCanada-based cleantech investor Cycle Capital Management (CCM) will help set up a venture capital fund in Qingdao as part of an investment partnership with the eastern China city. The fund will be run by Qingdao City Construction
Hony seeks healthcare, restaurant buyoutsChina-focused GP Hony Capital is seeing more buyout opportunities involving healthcare and restaurant chains and it has created two sector-focused operational teams to consolidate these industries.
Speaking at his firm’s annual general meeting in Shanghai, Hony CEO John Zhao noted that the government is deepening industry reforms in order to open up the domestic market and
encourage innovation. As such, Hony’s approach - previously characterized by minority stakes, local markets and manufacturing businesses - is increasingly focused on
services, cross-border strategies and buyouts.The two sector-focused teams will contribute
to the due diligence process and offer post-investment operational services for this new wave of buyouts. The healthcare team, known as Grand Accordia Healthcare, is led by Xiaopeng Zhao, formerly vice principal of Beijing University’s Cancer Hospital.
The PE firm’s cross-border ambitions are now focused on bringing companies into China. “Last year we were still talking about helping Chinese companies expand overseas. However, they weren’t as welcomed as we thought. Now we are only focused on acquiring the best brands overseas and expanding them in China,” Zhao said.
NEWS
avcj.com | November 04 2014 | Volume 27 | Number 418
Investment Group with input from CCM. The Canadian firm will also invest in local cleantech enterprises.
NORTH ASIA
Carlyle crosses $600m threshold on Japan fundThe Carlyle Group has crossed the halfway mark on its third Japan buyout fund, with approximately $600 million raised predominantly from domestic investors. The private equity firm is seeking around $1 billion for the vehicle. David Rubenstein, co-CEO of Carlyle, said they are now in the process of raising capital outside of Japan.
SCPE leads deal for Korean packaging businessStandard Chartered Private Equity (SCPE) is participating in the KRW415 billion ($396 million) acquisition of South Korean conglomerate Hyosung Corporation’s packaging business. . The identities of other investors have not been disclosed.
J-Star secures 5x exit from healthcare firm HCMJapanese mid-market buyout firm J-Star has exited Tokyo-based healthcare service provider HCM Corporation to Alshok Group at an enterprise value of JPY8.88 billion ($78.7 million), generating a 5x cash multiple and a 60% IRR. J-Star - which held a 56.9% stake in HCM - invest $30 million in the company in May 2011.
SOUTH ASIA
SoftBank leads $210m round forTaxi-booking app India taxi-booking app Ola has raised $210 million in a Series D round of funding led by SoftBank. Existing investors Tiger Global, Matrix Partners India and Steadview Capital also participated.
Warburg Pincus backs Laurus Labs, Fidelity exitsWarburg Pincus has paid INR5.5 billion ($89.6 million) for a minority stake in Indian drug maker Laurus Labs, triggering a partial exit for Fidelity Growth Partners India. AVCJ data show that Fidelity, invested INR2 billion in company in February 2012.
Mandala commits $24m to cold chain business
Mandala Capital has acquired a 30% stake in the cold chain unit of Indian express distribution and supply chain solutions provider Gati for INR1.5 billion ($24.4 million). The new funding will enable the cold chain unit - known as Gati Kausar - to build a nationwide network of warehouses over the next three years, offering integrated cold chain logistics and supply chain management.
Sequoia leads $8m round for ZoomcarSequoia Capital has led an $8 million round of funding for Zoomcar, an Indian car-rental start-up, alongside existing investors including Empire
Angels, FundersClub, Basset Investment Group and Triangle Growth Partners. The company’s previous round was worth $3 million.
Adlabs Imagica raises $8m from NYLIM, Jacob BallasIndian theme park operator Adlabs Entertainment has raised INR500 million ($8.18 million) in a pre-IPO round of investment from NYLIM Jacob Ballas India, a vehicle co-owned by New York Life Insurance Company and Jacob Ballas Capital. The company owns theme park brand Adlabs Imagica.
NRI investors sue ICICI Venture for damagesICICI Venture is being sued by a group of 69 non-resident Indian investors who are seeking $103 million in damages from over alleged losses from a property fund run by the GP. They claim that, as of March this year, only one of the 13 Indian real estate projects backed by Dynamic India Fund III had been completed in the nine years since the it launched. ICICI Venture denied the allegations.
Creador offloads more of Repco Home FinanceCreador has made another partial exit from India’s Repco Home Finance (RHF), bringing its stake in the company to just under 2%. The GP sold just under 400,000 shares at INR470.07 apiece - or 0.6% - for INR187.8 million ($3 million).
SOUTHEAST ASIA
Jynwel targets oil producer Salamander EnergySalamander Energy, an Asia-focused oil and gas exploration and production company, has received a buyout offer from Jynwel Capital, a Hong Kong-based PE firm controlled by Malaysian businessman Jho Low. Jynwel is leading a consortium in partnership with CEPSA, a Spanish oil and gas company.
Catcha launches VC unit for Southeast Asia TMT dealsSoutheast Asia-focused media company Catcha Group has launched a venture capital unit that will invest in new media, technology and mobile businesses throughout the region. Catcha Ventures has a remit to commit $50-100 million to selected companies over the next three to five years. It will focus on growth-stage companies.
SoftBank injects $627m into India’s SnapdealJapanese tech giant SoftBank Group has agreed to invest $627 million in Indian e-commerce site Snapdeal, bringing the start-up’s total funding to more than $1 billion. The investment - made via SoftBank unit SoftBank Internet and Media (SIMI) - represents the the biggest e-commerce deal in the country since the $1 billion round raised by Snapdeal rival Flipkart in July. AVCJ Research data show that - including this latest round - Snapdeal has now raised about $1.6 billion from VC backers.
Snapdeal was launched in 2010 and currently claims 25 million registered users and more than 50,000 business sellers. It will use the new capital to expand its operations and help compete with market rivals.
SoftBank become Snapdeal’s largest investor, with Nikesh Arora, CEO of SIMI, joining the company’s board. This is the Japanese firm’s second Snapdeal investment. Last year it participated in a consortium that committed $74 million last year. The deal also marks the start of an India spending spree for SoftBank, which previously said it would inject $10 billion in the country’s most promising tech start-ups.
NEWS
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Number 41 | Volume 27 | November 04 2014 | avcj.com 11
CHINA ACCOUNTS FOR ONE IN FIVE OF THE world’s population and one in three of its deaths from lung cancer. Aequus Capital Partners wants to help do something about it. The newly-formed PE firm is looking to invest in companies with technologies focused on early-stage diagnosis and treatment of cancer.
It is part of a strategy that will leverage government efforts to drive private sector participation in Chinese healthcare. In many cases, the technologies will be established overseas and Aequus will roll them out locally. The PE firm may also invest in the diagnostic and check-up centers that use these technologies. It wants to raise a $200 million pan-regional fund, most of which will be deployed in China.
“The capital requirement is in our sweet spot and the government is very open to driving specialized care away from public hospitals and providing access even at tier-two city level through these clinics,” Amit Kakar, co-founder of Aequus, says of the check-up center opportunity.
A total of 742 funds in Asia have been successfully raised since 2006 with healthcare forming part of the remit, according to AVCJ Research. Funds claiming to be healthcare only number 88, although it includes several that have seen some strategy drift. Nearly half are affiliated to corporations, governments and financial institutions. Only 22 truly independent funds have been raised in the last three years, and half of those were renminbi-denominated vehicles.
But Aequus could be part of a new breed of GP. It is very much mid-market. It is a spin-out from a larger platform – Kakar used to lead Asia healthcare investments for Avenue Capital, while his two co-founders previously worked at CLSA Capital Partners and medical devices-focused GP Dinova Capital. It is also a sector specialist.
Whether the transition involves larger firms building up silos of expertise in certain industry verticals or smaller players emerging to target particular niches, PE investors in Asia are finding their sweet spots. This is part natural evolution and part necessity. Specialization is a well-trodden path by Western GPs, but Asian managers are also responding to particular concerns about performance. A general observation by LPs over the last two years is that Asia hasn’t delivered the returns expected.
Consequently, there is now greater scrutiny of how managers add value to portfolio companies.
Even without this pressure, tougher macroeconomic and exit environments in certain markets are challenging the historical notion that a growth investment will see stellar growth. Now more than ever, portfolio companies need deep expertise in addition to capital.
“The market is more penetrated and prices reflect the level of competition and capital, so it is more a case of what you do with companies,” says Katja Salovaara, senior portfolio manager for private equity at Finland-based pension insurance system Ilmarinen. “We are a looking for investment skill and value-add, but I also think
Asia has an issue with continuity and keeping talented teams together.”
She adds that certain markets in Asia haven’t lived up to expectations over the past few years and trail distributions in the US and Europe. There may be more exits to come from these markets, so “we are getting to the moment of truth.” These sentiments are echoed by other LPs, though with varying degrees of earnestness.
Damage assessmentAs to the root cause of these performance concerns, industry participants identify two issues. First, Asia has struggled with a public markets downturn. While US and European stock
Special measuresAsian private equity has, by some accounts, failed to meet LP expectations in terms of risk-adjusted returns. With GPs under pressure to show they can be company builders, is specialization the inevitable end game?
Regional private equity performance by IRR
Source: Preqin
Asia PE performance
Europe PE performance353025201510
50
-5
%
19971998
19992000
20012002
20032004
20052006
20072008
20102009
2011
North America PE performance25
20
15
10
5
0
-5
%
19971998
19992000
20012002
20032004
20052006
20072008
20102009
2011
First quartile Median Third quartile
40
30
20
10
0
%
19971998
19992000
20012002
20032004
20052006
20072008
20102009
2011
S E E M O R E A T L E K . C O M
L.E.K. CONSULTING
Beijing .� Boston .� Chennai .� Chicago .� London .� Los Angeles .� Melbourne .� Milan .� Mumbai .� MunichNew Delhi .� New York .� Paris .� San Francisco .� São Paulo .� Seoul .� Shanghai .� Singapore .� Sydney .� Tokyo .� Wroclaw
Your Trusted Advisor forCommercial Due DiligenceL.E.K. assists Private Equity to identify, invest in, develop and sell businesses in China, Asia-Pacific and around the world.
In the past ten years, L.E.K. has worked with Private Equity investors to evaluate over 200 different opportunities in Greater China and 3,000 worldwide. We have also undertaken a large number of projects focused on growth and performance improvement to maximize the value of portfolio companies.
Time and again, L.E.K. has demonstrated the ability to bring China and global experience to give our clients the edge.
Number 41 | Volume 27 | November 04 2014 | avcj.com 13
indices are close to record highs, facilitating strong distributions to LPs, emerging markets have seen a sell-off in recent years. Exits are not easy and money isn’t coming out. Second, the region is still dealing with the consequences of its own growing pains: the surge of interest in Asia ahead of the global financial crisis led to imprudent allocations to inexperienced GPs and inefficient deployment of capital.
Having raised $55.8 billion over the three years to 2005, Asia-focused managers raised $174 billion over the next three. Between 2006 and 2011, $433.5 billion was invested in Asia by single country, regional and global GPs, with the latter years witnessing an explosion in activity from newly-raised renminbi funds. Since 2008, the region has seen less than $300 billion in exits.
“Way too much money has flown into Asia in the last few years and if you look at funds that had performance when they were at $100 million suddenly were managing $1-2 billion, it’s not surprising it’s not surprising there are some negative surprises,” says Thomas Kubr, executive chairman at Capital Dynamics.
Cambridge Associates has the net IRR accruing to LPs from all Asia-focused PE and VC funds at 13.3% on a 10-year basis, trailing buyout funds from Australia, Western Europe and North America. On a five-year basis, Asia beats Western Europe but trails the other two markets and then ranks second after North America by three-year returns. On a one-year basis, Australian funds lead the way with a net IRR of 25.9%, followed by Asia on 24.8%.
“On the face of it, Asia PE and VC has just about kept pace with returns from buyout strategies in Australia, Western Europe and North America. This may suggest that, if additional risk was imputed to Asian investments, there has not been additional return over that of other geographies to compensate for that risk,” says Vish Ramaswami, managing director for investment research at Cambridge Associates.
Strip out all but the top quartile funds, though, and the picture changes. On a five, three and one-year basis, the region outperforms Western Europe and North America, with a one-year net IRR of 46.9%. Given the nascent state of the market, a sizeable difference in performance between good and poor funds is perhaps unsurprising, but it does emphasize the importance of manager selection.
One of the implied criticisms of the phase during which everyone piled into the market is they were not discerning enough. “If your investment thesis is too macro-oriented and you under appreciate the importance of the GP, you are going to get stuck,” says Donald Pascal, president of Commonfund Capital. “Growth
investing looked like a sweet spot in China and India – you could ride the macro tailwinds of growth, find some good companies, and get multiple arbitrage. There was a wave of easy money, but that was the early days. A lot of investors plowed money in and some have been quite disappointed.”
Preqin tracks all sub-sets of private equity across Asia, Europe and North America. The data, which cover vintage performance in net IRR terms from 1997 through 2011, are instructive in underscoring the differences between then and now. For 1999 through 2003, the median returns generated by Asian funds were better than of their European and North American counterparts in all but one vintage. In 2001, even third quartile managers produced a net IRR of 20.3%, while the top quartile reached 38.4%.
Over the course of these few years, China-focused managers such as CDH Investments were prolific. They restructured companies
offshore, doing most of the work pre-investment, and then filed for IPOs in Hong Kong almost as soon as the money went in. IRRs were robust. However, regulatory reforms encouraging Chinese companies to go public domestically and a listings logjam created by the volume of PE firms pursuing pre-IPO strategies made the exit process more complicated and time-consuming.
Any risk-adjusted premium generated by Asia began to erode from around 2006 – also the year when fundraising really took off. The median
return from the region has surpassed North America only once over the next six vintages, while top quartile managers have beaten North America’s top quartile on two occasions.
“At the start of any market you get supernormal returns because you have naivety and a smaller number of players. Then capital floods in, new players emerge, prices are bid up, and if you have any problem in the system – as you could argue we’ve had with the paucity of IPOs and the impact on exits in places like China and to some degree India – returns moderate down to a median position,” says John Morrison, managing director at Munich Private Equity Partners (MPEP).
Allocation implications So what does this mean for LP allocations to Asian private equity? For those that seek to construct diversified portfolios, the answer is not much. Asia has to feature to some extent
and many of these groups consider themselves underweight on the region. For those chasing pure alpha, irrespective of manager location, Asia could fall in the pecking order.
Yet Ilmarien has no specific geographic allocation, preferring to follow the best opportunities, and Salovaara expects Asia to feature more prominently over the next five years. The group, which is in the process of increasing its global private equity allocation from 5% to 8%, first backed an Asia-based GP in 2007 and has proceeded with caution.
S E E M O R E A T L E K . C O M
L.E.K. CONSULTING
Beijing .� Boston .� Chennai .� Chicago .� London .� Los Angeles .� Melbourne .� Milan .� Mumbai .� MunichNew Delhi .� New York .� Paris .� San Francisco .� São Paulo .� Seoul .� Shanghai .� Singapore .� Sydney .� Tokyo .� Wroclaw
Your Trusted Advisor forCommercial Due DiligenceL.E.K. assists Private Equity to identify, invest in, develop and sell businesses in China, Asia-Pacific and around the world.
In the past ten years, L.E.K. has worked with Private Equity investors to evaluate over 200 different opportunities in Greater China and 3,000 worldwide. We have also undertaken a large number of projects focused on growth and performance improvement to maximize the value of portfolio companies.
Time and again, L.E.K. has demonstrated the ability to bring China and global experience to give our clients the edge.
Private equity returns by region
Source: Cambridge Associates
1-year 3-year 5-year 10-year
1-year 3-year 5-year 10-year
Asia ex-Australia PE & VC Australia buyouts Western Europe buyouts North America buyouts
All funds
Top quartile funds
Net I
RR to
LPs
(%)
Net I
RR to
LPs
(%)
30
20
10
0
50
40
30
20
10
0
avcj.com | November 04 2014 | Volume 27 | Number 4114
“Our approach is bottom-up in the sense that we focus on finding the right managers,” Salovaara adds.
MPEP considers itself to be comparatively overweight on Asia for a Europe-headquartered investor but has no plans to alter its allocation. The long-term opportunity presented by the region remains attractive. This is not a pure GDP growth play; expectations of a growing acceptance of private equity in Asia, particularly in terms of how businesses can be improved and management enhanced, are more important.
Put another way, reservations about performance have not destroyed LP confidence in Asian GPs, but investors are developing more nuanced approaches as to how and through whom they want exposure to the region.
There was a window in which Chinese companies could be quickly flipped into IPOs but it has closed; the public markets are selective and exit multiples less heady. Perhaps more importantly, the general investment environment in emerging Asia has changed. Economic conditions in China and India are challenging and entrepreneurs are now looking for expertise in addition to capital.
“If you don’t have a different set of skills around operational capabilities and a more value-added governance model, you are not going to get the PE-type returns you want,” one fund manager observes. “There is going to be a lot more discipline about which GPs to back. LPs are going to ask tougher questions about what you do in terms of value-add. You can’t just opportunistically arbitrage the public markets.”
Asked how this line of questioning works in practice, Jonathan English, managing director at Portfolio Advisors, offers a selection of checkpoints designed to differentiate between those capable of executing operational change and those paying lip service to the strategy in order to raise a fund.
The central question is whether the manager’s professional background fit the investment remit. If operational professionals have joined the roster, are they young tykes or experienced gray hairs? The latter are more likely to be taken seriously by entrepreneurs but at the same time it is not unknown for these people to depart after a couple of years, leading to another strategic repositioning. This is not black-and-white assessment and it requires step-by-step analysis of case studies.
Big means better?Alluding to the upturn in performance recorded by Cambridge Associates’ one-year returns, English notes that he has seen a tremendous amount of distribution and exit activity in Asia over the last 20 months, most of it from the pan-
regional managers. The implication is that these GPs are better positioned to deliver in the current market conditions.
“LPs first entered the market with pan-regional managers but then they wanted to be more specific in looking for alpha generation and went with the single country guys, particularly in India and China,” English says. “Now, though, people are seeing healthy returns coming out of the pan-Asian managers. Given their experience,
networks and know-how in accessing global markets and M&A activity, they may be better suited to delivering returns when other capital markets slow down. As a result, you have seen more support for these managers from a fundraising perspective.”
In the eyes of some LPs, many of these qualities are not possessed by pan-regional managers alone, but rather any private equity firm with the resources to build up silos of expertise in certain verticals. For example, three of KKR’s last four deals in China have been predicated on meeting growing Chinese
consumer demand for high quality and safe food products. Building on a vertically-integrated farming thesis first developed for China Modern Dairy eight years ago, the private equity firm has set up a dairy farm venture and partnered with local players on pork and poultry production.
By a similar token, CDH and Hony Capital, the largest Chinese managers, have to some extent moved on from the transactions through which they made their name.
Hony has created two sector-focused teams to work on buyout opportunities in healthcare and restaurants. The healthcare group is led by the former vice principal of Beijing University’s cancer hospital with 10 healthcare professionals working underneath him. A first investment came several weeks ago with the purchase of Shanghai Yangsi Hospital, the largest privately-owned hospital in Shanghai. This will serve as a platform for the acquisition of 10-15 hospitals in the next three years.
MPEP is among those backing the transformative powers of the larger manager
Regional private equity performance by net multiple
Source: Preqin
First quartile Median Third quartile
Asia PE performance40
30
20
10
0
Mul
tiple
19971998
19992000
20012002
20032004
20052006
20072008
20102009
20122011
2013
Europe PE performance 2.5
2.0
1.5
1.0
0.5
Mul
tiple
19971998
19992000
20012002
20032004
20052006
20072008
20102009
20122011
20142013
North America PE performance 2.5
2.0
1.5
1.0
0.5
Mul
tiple
19971998
19992000
20012002
20032004
20052006
20072008
20102009
20122011
20142013
Number 41 | Volume 27 | November 04 2014 | avcj.com 15
in Asia, having decided three years ago that it would shift focus from the smaller end of the market to larger size funds.
Exits featuring strongly in the LP’s thinking. First, if IPOs were going to remain a key exit route for Asian GPs, MPEP believed that public market investors would respond best to candidates from either end of the spectrum: VC-backed tech companies and larger, more mature businesses with strong corporate governance. Second, when multinationals examine M&A options they tend to go after one of the two top players in particular market. Bigger funds were seen as more likely backers of these top companies.
“Another part of the equation is we do believe this level of operational change and real impact in the portfolio companies will come over time, although maybe not in the same form as Europe or America,” says MPEP’s Morrison. “And it will be more towards the larger, more professionally run businesses. It will still be proportionally harder to do that in smaller companies.”
With this in mind, MPEP is an LP in Hony’s most recent fund, which closed at $2.36 billion in 2012. However, it is also backing BVCF, a China life sciences-focused GP currently investing its $200 million third fund. This represents a nod to the expected rise of specialist managers in Asia and the role they can play in a differentiated portfolio.
An evolving conceptAs recently as three years ago, Asia growth managers would reject the notion of sector specialization on the grounds that they would miss out on a huge amount of potential deal flow. The more challenging fundraising environment prompted a change in strategy. Thinking more about marketing than reality, GPs emerged claiming to be specialists in the financial services, consumer and industrial sectors – a broad enough focus to cover the majority of deals available. While these players still exist, genuine specialists are also in the market.
“In the last 24 months quite a few healthcare-focused funds have emerged in Asia, as one example of sector specialization. In the US and Europe you see a lot of GPs that focus solely on one sector. We now see this sector focus starting to emerge in Asia, particularly for the healthcare and consumer sectors,” says Pamela Fung, principal at Morgan Stanley Alternative Investment Management.
Some of these are spin-outs from established platforms. Kakar will be joined at Aequus by members of his healthcare team from Avenue Capital, which is expected to focus more on special situations for its next Asia fund. There are similarities between this and other situations in which executives have departed regional firms
because fund sizes, and therefore equity checks, are getting larger. If these executives are seeing plenty of deals that no longer fit the firm’s remit, there is a natural inclination to launch something mid-market and more focused.
There are also managers who start out agnostic but gradually become more concentrated. QIC, an asset manager owned by the Queensland government in Australia, gravitates towards funds of $300-500 million and has not participated in a fund larger than $1.1 billion in Asia. Some form of specialization, whether defined by sector or transaction type, is a given.
“If I look across a sample of our Asian our managers, one was generalist last fund but has
now narrowed down to two sectors and is 60% of the way through investing the fund. Another is purely focused on one sector, while a third is a bit more agnostic but has other deep resources on the operational side and their ability to analyze markets. There is enough specialization available to find what we want,” says Marcus Simpson, head of global private equity at QIC.
The advantages of specialist managers are clear – sophisticated industry knowledge, ability to add value, familiarity with potential partners and acquirers – but in an Asian context, so are the potential drawbacks. Chief among them is whether these GPs are able to generate enough deal flow in their formative years to keep their team of experts in place and build scale. Without a core base of LPs that are sufficiently convinced to overcome these reservations and back a specialist manager even though they have yet to see a large number of such funds perform in Asia, it can be difficult to get traction.
Vincent Ng, a partner at placement agent Atlantic Pacific Capital, suggests there is not a lack of supply of specialist funds, but a lack of demand.
“If I have a portfolio of 16 generalist GPs and
I still need to put money to work, I might back a specialist,” he says. “But if I’m making 2-3 bets in Asia each year, my risk-adjusted bet is probably safer with a generalist even if they don’t have 15 PhDs evaluating healthcare opportunities. If healthcare is overpriced or extremely competitive, my generalist can look elsewhere.”
Needs more disciplineNevertheless, specialization is expected to continue to take root in Asia, among the large regional players and the smaller independents. In this respect, the evolutionary path is seen as no different from that of the US or Europe. Using a nine-inning baseball analogy, Commonfund’s Pascal says that Asia is still on its second or third inning, and maturing on a reasonably predictable course. He estimates that the region’s managers could progress at a faster rate than the US pioneers, adopting 4-5 years’ worth of industry best practices from other markets for every 2-3 years that passes.
But will specialization help Asian private equity deliver the risk-adjusted returns LPs want to see? Doug Coulter, head of Asia private equity at LGT Capital Partners is skeptical. He has yet to see any evidence that specialist funds outperform in the region, but at the same time, take all the outperformers as a group and it’s a mixed bag in terms of size, strategy and geography.
With this in mind, it might be argued the evolution of the asset class in Asia should not be seen as a graduation from passive to active, or from stock flipping to company building, but from a frontier environment to a professional environment. LPs want to be presented a framework of discipline, governance and transparency through which they can trace consistent performance across deal sourcing, structuring, value creation and exit.
“While no clear evidence that good governance, transparency and institutionalization has been correlated to better returns in Asia, a lack of governance and institutionalization has often led to subpar returns,” Coulter says.
Mounir Guen, CEO of placement agent MVision, is more bullish. He describes the ideal scenario as a GP that packages every deal into a 250-page report, detailing every aspect of their work on a company. He says such approaches are increasingly adopted by local managers in Asia.
“Institutionalization is very important. A GP must understand the power of their firm is to be able to synthesize and capture their DNA,” he explains. “It is evolutionary. As markets develop, GPs understand how to formulate and structure their businesses. If you can take that discipline and put it on top of what is happening in Asia, you can have very successful results.”
“In the US and Europe you see a lot of GPs that focus solely on one sector. We now see this sector focus starting to emerge in Asia, particularly for healthcare and consumer” – Pamela Fung
avcj.com | November 04 2014 | Volume 27 | Number 4116
Q: You have developed a performance assessment system – PERACS – to replace IRR. What is wrong with IRR?
A: IRR is polluted by two things. First, was the manager lucky or unlucky in catching a good macro environment? If you catch the upswing then the IRR will be very large because you were operating during a boom period and got the sector right. Second, if you have a very early, very successful exit it just biases the IRR. If a manager has a bunch of winners in the early 2000s, IRR might be high, but there may not be more winners in the late 2000s because with the first bunch the manager got lucky with some quick hits in a strong external market environment. This dynamic pollutes the persistence mechanism and therefore the likelihood of finding a winner in the next cycle. A cash in-cash out multiple isn’t a good measure of performance persistence either. You might have two GPs with very different longevity in their deals because of different approaches to how they transform businesses. If both double their money but one takes three years and the other takes six years the multiple looks
the same but it’s an imperfect performance measure because it ignores the time factor.
Q: You are also critical of IRR being compared against public market index performance…
A: Assessing PE relative to the public markets is the right thought but you have to approach it with the appropriate methodology. What people usually do is take the long-term IRR on PE and compare it to long-term buy and hold on the stock market. That’s overly simplistic. Not only do you fail to capture any difference in risk, but you also ignore the specific timing of investments in private equity. Say you invest in a PE fund, your capital is drawn in 2003 and you get double your money back in 2006. That’s fine, but you have to see what the stock markets are doing over the same period of time. If you would otherwise have been long on the stock market, there is an opportunity cost to PE. You have to take into account not only dividends, but more importantly, dollar appreciation. If the stock index doubled over those three years, you haven’t gained anything in relative terms.
Q: What other factors come into play?
A: First, the performance of a sector. If you want to be more exact, don’t compare performance against the entire public market, but the specific sector in which the private equity fund is investing. It is the same when looking at the use of debt. If you have completed a buyout in the retail sector then you need to calculate the difference between the debt on your deal and the average debt of the retail sector index constituents. Then there is the impact of different economic climates. In a boom period everyone does well and so private equity adds little in terms of performance. However, during a downturn private equity generates alpha that protects
values or allows moderate value appreciation while everything else is depreciating.
Q: How does the PERACS multiple address the public market comparison problem?
A: For the normal multiple, you calculate the stream of cash flows, and the multiple is distributions over contributions. We do the same thing but take into account the present value of the distributions against the MSCI Global Index as our standard proxy for LPs’ opportunity cost. We discount the returns available on the index at specific times during the period under analysis, matching the timing of each cash flow. It gives you a present value of all contributions and distributions and through this you get a ratio in net present value terms of money out and money in.
Q: Instead of IRRs and multiples, you document the persistence of five other indicators – alpha, holding period, loss ratio and return dispersion. Performance persists when measured in alpha (i.e. the annual return achieved minus the impact of extenuating circumstances, such as the return that could have been earned on the stock market, timing and the use of leverage). Why is persistence in the other factors important?
A: The holding period is a manifestation of the GP’s strategy. Some guys roll up their sleeves and do very long transformation deals; others spot relatively quick turnaround opportunities. If holding periods persist, it indicates consistency in the type of deals a manager does
INDUSTRY Q&A | OLIVER [email protected]
Still top quartile?Oliver Gottschalg, professor at HEC School of Management and head of research at PERACS, a quantitative analytics provider to the PE industry, explains why IRR is not the best judge of performance
Extenuating circumstances excluded: Indentifying PE alpha
*Alpha is the excess return of a private equity investment above a comparable investment in sharesSource: Golding Capital Partners
Stock marketreturn
Timinge�ect
Sectore�ect
Leveragee�ect
Adjusted stockmarket return
Alpha* Return from theprivate equity
investment
Number 41 | Volume 27 | November 04 2014 | avcj.com 17
and therefore makes it easier to look at past performance and get an idea of future performance. With loss ratio and performance dispersion, again it is a question of discipline. Is a manager taking the venture capital approach and doing two deals that are home runs while another six are lost? That would be one profile. Alternatively, a GP could do eight deals and each one is 2x. A low loss ratio and minimal returns dispersion point to a stable GP.
Q: What about the impact of significant economic change? In emerging Asia the opportunity set might be very different from five years ago, and this would have implications for performance assessment
A: This is a big caveat. All the persistence research has been done in relatively stable markets in Europe and North America. You would expect persistence to be lower in Asia. You have to be very careful applying this logic. The objective is to match the indicator of past performance with an understanding of how value has been created – and that is the much more substantive component of what we do with PERACS. We measure alpha: you start with the PERACS multiple, which tells you by how the capital has grown after market swings, and then the PERACS alpha looks at this growth on an annual basis. But then we do lots of things that illustrate value creation so the LP has enough data points to say, ‘This is how they did it. Now let me match it with my understanding of what the world will look like in the future and we will have enough information to decide whether or not we want to back these guys.’ It is all about reaching a qualitative understanding of the relative strengths and weaknesses of a GP.
Q: Aren’t some LPs already doing this kind of analysis?
A: The more sophisticated LPs are already doing it, but perhaps only after 10 weeks of initial due diligence work. We allow people to look at these issues very early on in the process. This allows LPs to do a first screening, before starting due diligence, and decide whether or not a fund is worth their attention.’ If an LP has scare resources and it looking at 1,000 funds or so, a first screening can be very valuable. At the same time, at the other end of the spectrum, a small family office might treat this analysis not only as a first screening but also as a pretty good final decision-making tool that replaces in house efforts.
Q: How do you deal with LPs that are accustomed to using IRR
and don’t want to change?A: It is really challenging to go
against the received wisdom of the entire industry. Many people have been using the potentially biased IRR measure for a long time and there is a large amount of inertia. Even if you convince them that there is a better approach, they still have board members or other constituents who want to continue doing things in a particular way. My business card should really say chief evangelist. The good news is that investors who bet on these measures have a real advantage in the marketplace. My back-testing demonstrates there might be 300-400 basis points in performance to be gained by switching to the smarter measures.
Q: How many GP clients do you have?
A: We have a good double-digit number of GP clients. Managers using PERACS have between them raised more than $65 billion over the past two years. The client base is split between North America and Europe and initially there was a bias towards the larger groups, simply because that is where we started with the marketing. If the biggest PE firms feel PERACS has value then we have a better chance of going against IRR. Now we are entering the middle market segments in North America and Europe, and we have recruited our first client specializing in emerging markets. We have yet to get our first Asian client but I don’t think it will be long.
OLIVER GOLTSCHALG | INDUSTRY Q&A [email protected]
A tale of two managers: Qualitative analysis vs IRR analysis
Source: Golding Capital Partners
Formation: 1998Fund volume: EUR800mStrategy: EU buyouts
Fund I (1999): 25%Fund II (2002): 30%Fund III (2005): 21%Fund IV (2010): 18%Gross IRR: 23%
Formation: 1999Fund volume: EUR500mStrategy: EU buyouts
Fund I (2000): 23%Fund II (2003): 31%Fund III (2007): 22%Fund IV (2009): 17%Gross IRR: 23%
Lower return dispersion
Lower loss ratio
Lower holding period
Higher alpha
Fund manager A
Alpha(ø 1.0%)
Holdingperiod(ø 4.5 years)
Loss ratio(ø 7.5%)
Returndispersion(ø 0.6)
98 99 00 01 02 03 04 05 06 07 08 09
Period 1
0.5%
4 years
6.9%
0.6
Period 2
1.0%
4.5 years
7.5%
0.7
Period 3
1.4%
5 years
8.7%
0.5
ø
ø
ø
ø
Fund manager B
Alpha(ø 8.7%)
Holdingperiod(ø 3.3 years)
Loss ratio(ø 2.8%)
Returndispersion(ø 0.2)
98 99 00 01 02 03 04 05 06 07 08 09
Period 1
9.1%
2.5 years
2.4%
0.2
Period 2
8.2%
3.5 years
2.9%
0.3
Period 3
8.8%
4 years
3.2%
0.2
ø
ø
ø
ø
Jersey for Private EquityJersey is a jurisdiction of choice for private equity and has attracted a significant number of venture capital, private equity, mezzanine, real estate and hedge funds. The net asset value of private equity funds under administration in Jersey stands at £43 billion*. Clients have access to the breadth and depth of expertise in fund administration, asset servicing, tax advice, accounting and legal support from Jersey firms, who deliver structured products and specialist vehicles that meet diverse financial and investment objectives.
To learn more about Jersey’s private equity offering, please visit www.jerseyfinance.je
*Figure as at June 2014 - Financial Services Industry Quarterly Report
www.linkedin.com/company/jersey-finance @jerseyfinance www.youtube.com/jerseyfinance
LONDON
WEDNESDAY , 19TH MARCH 2014
To book your place, visit: jsy.fi/JFLfundsbooking2014
For further information, visit: jsy.fi/JFLfundsevent2014
A WORLD OF OPPORTUNITY JERSEY FINANCE ASIA ROADSHOW
A DATE FOR YOUR
DIARY
17-18 November
Hong Kong19 November
Kuala Lumpur20 November
Singapore
For further information please visit: http://www.jerseyfinance.je/jersey-finance-roadshow-2014
Number 41 | Volume 27 | November 04 2014 | avcj.com 19
SUCCESSION [email protected]
OVER THE COURSE OF THREE DECADES, Chinese meat snacks producer Guizhou Yonghong – best known for the popular Niutou jerky brand – has grown from a small rural operation to be one of the leading players in its market. The three founders, who set up the company in 1984, are now in their 70s and considering retirement. However, they are unable to keep the business in the family.
It is an increasingly common dilemma for Chinese entrepreneurs of this generation. Many have become rich enough to send their children to be educated overseas, but on return these youngsters express no interest in succeeding their father or mother as CEO. Property development and financial services in Shanghai have more appeal than factory management in relatively remote provinces like Guizhou.
Yonghong’s founders examined their options. An IPO was quickly crossed off the list and the prospect of allowing the business to be swallowed up by a local competitor was unappetizing. This left option three: partnering with Lunar Capital, a local consumer-focused private equity firm that said it could give the founders liquidity and protect their brand. The GP bought a majority stake in the business last year for $50 million.
“The pitch – far from being a financial pitch – was a solution for how they maintain their legacy and how the business can keep going,” says Derek Sulger, founder and CEO of Lunar. “Succession issues are the source of many deals in our pipeline. It is an enormous opportunity in China that strategic players are taking advantage of, but private equity, which mostly focuses on minority deals, is not.”
A scale opportunitySuccession planning is a well-established source of private equity deal flow in developed markets but in Asia’s emerging economies it is only just coming to the fore. This is particularly the case in a country like China where the first wave of entrepreneurs who set up shop in the late 1980s and 1990s, when the country’s economic reforms began to take hold, are now those graying founders looking to retire.
The opportunity could substantially alter Chinese private equity – “We are now going to do more buyout deals, in particular for private
companies. Aged entrepreneurs are willing to sell their businesses because of succession issues,” John Zhao, CEO of Hony Capital, said last week – but it remains to be seen if it can be properly addressed. And while studying patterns in more mature markets is logical and potentially helpful, it also underlines how sensitive and bespoke these situations tend to be.
Demographics are one of the major causes of succession planning challenges in China. While the lack of an heir apparent is an issue
that affects family businesses worldwide, the situation is especially acute in China where the one-child policy has ensure that the pool of next generation CEOs is even smaller.
Younger generation talent that might be available is not only disinterested because of
more enticing opportunities elsewhere; running a business is hard. Chinese companies are no longer able to ride a wave of macroeconomic growth. The typical mid-market consumer business targeted by Lunar is likely suffering from margin squeeze as rising labor and input costs are no longer counterbalanced by sales growth. Professional management is required to eke out efficiencies.
“Most of these kids have been educated in Europe or North America and have decided
they are not up for the hard work of running a consumer products business,” says Sulger. “You are no longer talking about an industry with 300% growth in a year. Instead it is full of competitors, both regional and national. You have to be good at what are doing to survive.”
But the issue goes beyond just a lack of credible successors. There has also been a shift in how entrepreneurs view exits. Three years ago, retiring might not have been a priority for many founders; rather, they were thinking about the riches to be obtained by selling a minority stake in their business at a valuation of 30-40x forward earnings via the IPO market.
That window is now closed. The 12-month embargo imposed on mainland share offerings created a huge backlog of companies waiting to list, and the regulators are scrutinizing IPO candidates much more closely than before. David Shen, managing director at Olympus Capital, notes that even if a founder managers to jump the queue and list within three years, his
A matter of legacyLong a feature of the developed markets private equity, succession planning opportunities are beginning to pop up in emerging Asia. Regardless of geography, convincing a founder to sell his business is a challenge
“It is an enormous opportunity in China that strategic players are taking advantage of, but private equity, which mostly focuses on minority deals, is not” – Derek Sulger
Jersey for Private EquityJersey is a jurisdiction of choice for private equity and has attracted a significant number of venture capital, private equity, mezzanine, real estate and hedge funds. The net asset value of private equity funds under administration in Jersey stands at £43 billion*. Clients have access to the breadth and depth of expertise in fund administration, asset servicing, tax advice, accounting and legal support from Jersey firms, who deliver structured products and specialist vehicles that meet diverse financial and investment objectives.
To learn more about Jersey’s private equity offering, please visit www.jerseyfinance.je
*Figure as at June 2014 - Financial Services Industry Quarterly Report
www.linkedin.com/company/jersey-finance @jerseyfinance www.youtube.com/jerseyfinance
LONDON
WEDNESDAY , 19TH MARCH 2014
To book your place, visit: jsy.fi/JFLfundsbooking2014
For further information, visit: jsy.fi/JFLfundsevent2014
A WORLD OF OPPORTUNITY JERSEY FINANCE ASIA ROADSHOW
A DATE FOR YOUR
DIARY
17-18 November
Hong Kong19 November
Kuala Lumpur20 November
Singapore
For further information please visit: http://www.jerseyfinance.je/jersey-finance-roadshow-2014
NeutralYes No
Asian business families succession survey 2013
Source: Deloitte
Is business family management succession important to you?
The business family believes that the next generation will be able to take over the business
Number 41 | Volume 27 | November 04 2014 | avcj.com 21
SUCCESSION [email protected]
holding will still be locked up for another three years. During this period the founder must meet shareholders’ performance expectations.
“GDP in China is slowing down to 7-8%, so growing at 30% a year is not a given,” says Shen. “So you have got to put in a lot more effort. As a result, a lot more entrepreneurs are receptive to proposals from sponsors like us.”
Common featuresChina, by virtue of its size, may represent the largest opportunity, but it is not the only one. Succession- planning issues permeate the region and, China’s unique demographics situation apart – similar factors are driving founder-owners to seek an exit route.
A recent Asia-wide survey carried out by Deloitte in conjunction with the Singapore Management University’s (SMU) Business Families Institute shows that family-owned companies are still overwhelmingly in favor passing control on to next generation. According to the study, 89% of businesses said family management
succession was important while a further 81% said they believed the next generation would take over, versus 6% that said no.
However, there is also an acceptance that the desired succession may not come to pass. Nearly one third of respondents said they expected management of the family business to transfer to a non-family member, while 26% anticipated monetizing their businesses via an IPO or an acquisition. One of the major push factors, cited by 65% of first-generation family business, was lack of family talent to take over.
“What is happening is that the next generation is either too comfortable, or they are too happy doing something like investing in real estate,” says Karam Butalia, co-founder and CEO of Southeast Asia-focused GP KV Asia. “What the parents have been doing is really hard work in comparison, so inevitably there is no succession.”
In some cases, succession opportunities are not so much triggered by legacy issues as a founder’s desire to free up the wealth accumulated over the years so it can be easily
passed on the next generation. This is more prevalent in developed markets such as Japan where entrepreneurs fear their family wealth could be diminished by the country’s onerous inheritance tax laws.
“If you die in Japan and you own a lot of stock, not only is it quite difficult to transfer it to your children, but you have to think about how they are going to get liquidity,” says David Gross-Loh, managing director with Bain Capital in Tokyo. “Even if they are going to continue working and do something else, they need to figure out a way to solve that.”
Richard Folsom, a co-founder and representative director with Japanese mid-market buyout firm Advantage Partners, adds that while succession opportunities are a well-established feature of the domestic market, they are also growing in number. He estimates that of the deals his firm has closed in its near 20-year history, around 40% have been succession solutions; however, in the past two years it has been closer to 80%.
It is not just a function of more founders looking to transition out of their businesses, but also that they are increasingly willing to work with private equity. They have a better understanding of the asset class and recognize the advantages of selling to a financial investor over a trade buyer. “Generally, strategics are regarded with skepticism by founder-owners,” says Folsom. “There is the fear of being absorbed by a competitor as they have an emotional attachment to the business and a pride in the brand and product they have created.”
The reality of being acquired by a larger competitor that offers similar products is redundancies designed to remove overlaps. In these situations there is a reasonable chance the that the brand will not survive. Giving the Australian perspective, Richard Burrows, a director with Wolseley Private Equity, notes that, in building their businesses, founders usually spend a lot of time battling larger industry players. As such, they don’t like selling to them.
There are similar concerns among Chinese founders, but their lack of familiarity with PE can be an obstacle. Prospective investors must therefore create an attractive succession solution.
“Legacy is important and they don’t want a financial buyer who will turn up and slash and burn,” says Olympus’ Shen. “And at the same time they don’t want to sell to a strategic, so they are stuck in a way. This is where – if you can bring a well-crafted proposition and message – they are willing to listen.”
Pitching an opportunity Accessing these founders requires a pro-active approach. Lunar’s Sulger describe a process by
Case study: Mekong Capital and AA Corporation Setting up Vietnam-based interior design business AA Corporation in 1994, Nguyen Quoc
Khanh hoped to demonstrate that by leveraging his skills and experience as a designer, he could also become a successful business owner. But Kanh underestimated the size of the task.
By 2006, with the business really starting to grow and annual revenues reaching $8 million, he found himself stretched. His abilities were not enough to see the business through to the next stage. Khanh sold the business to Mekong Capital, which put in place a professional management team.
“Khanh wasn’t operationally minded. He was a designer and an architect by nature and he soon realized he was the bottleneck to the company’s growth,” recalls Chad Ovel, partner with Mekong and a former CEO of AA Corporation. “So he generated the idea that he should step aside and take a chairman role, he found me, and recruited me into the CEO role.”
As a result of this decision, AA Corporation was able to increase its top line revenues nearly 10-fold over the course of Mekong’s six-year holding period. However, the process of handing over control was a gradual process. Even if Khanh was ready to exit, his personality and leadership was deeply ingrained in corporate culture.
“It was all about converting the culture of the company,” says Ovel. “For the employees it was historically all about loyalty to the founder as an individual – that is what got them out of bed in the morning, what motivated their performance.”
Prior to Mekong coming in, all performance-based compensation was essentially linked to the Khanh’s personal assessment of the employee. This was the private equity firm’s first big challenge: restructuring performance evaluation and democratizing the bonus system so it was tied to quantifiable performance targets.
The next job was to change the way employees thought about the company. The cult of the founder had to be replaced by the cult of the company – which meant staff had to start believing in what they were doing, as opposed to what Khanh thought of what they were doing.
“It took two years to achieve this and during that period he took the CEO title and I took the deputy CEO title,” says Ovel. “Once we felt the employees were willing to shift their thinking – to respond to anyone in senior management not just the founder – then I was promoted to CEO.”
With over 30 years of experience in Asia, Cleary Gottlieb Steen & Hamilton LLP has handled some of the largest and most innovative transactions in the region, including private equity M&A and fund formation matters.
Our Private Equity practice brings together leading lawyers across a range of geographies and practice areas — from fund formation to M&A and capital markets — working seamlessly in pursuit of our clients’ goals. We help sponsors form and structure new funds focused on an array of industries and markets in Asia and represent alternative investment funds in their transactional and regulatory matters, all with the goal of maximizing the success of our clients in the region.
All-Star Firm for Investment Funds The Asian Lawyer, 2014
“Well-resourced to handle large- scale transactions and coordinate them across various jurisdictions” Chambers Asia-Pacific, 2013
Investment Funds Client Service Firm of the Year Chambers and Partners, 2012
clearygottlieb.com
NEW YORK
WASHINGTON
PARIS
BRUSSELS
LONDON
MOSCOW
FRANKFURT
COLOGNE
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MILAN
HONG KONG
BEI J ING
BUENOS A IRES
SÃO PAULO
ABU DHABI
SEOUL
Number 41 | Volume 27 | November 04 2014 | avcj.com 23
SUCCESSION [email protected]
which his firm will identify a favored consumer sub-sector and then narrow down the pool of targets to those that can be pitched. From the start of negotiations, the GP emphasizes how it can bring in a strong management and transition the old-fashioned founder-led business into a modern and professionalized organization.
“We always discuss our ability to make decisions because a lot of times legacy founders
are in a bit of a trap,” says Sulger. “They have family members and old employees involved. We find that even with 100% control, they may not have the will to direct 100% of the decision-making, and often welcome new outside involvement to help make tough but necessary decisions.”
Being proactive is also important because founders generally don’t publicize their willingness to sell. Even if they hire an advisor, it is often a small, informal process. For this reason Eugene Lai, managing director and co-managing partner with Southeast Asia-focused GP Southern Capital highlights the value of local sourcing networks.
“We have to explain what kind of partner we will be. The ability to work well with the founder and his team is very important and that plays to the strengths of a local team.” he says “We often know people who know the founder or his team and that provides a reference point for them to get comfortable with us.”
Most GPs note that this process rarely delivers immediate results. The objective is to get a foot in the door and then maintain the relationship over time, with a view to securing a deal 2-3 years down the line. While mature markets are generally more accessible, networks are still vital. In any situation where deals come about via closed process, a GP that is not visible doesn’t stand a chance.
“It is on us to be able to get our story out there to the various people who act as advisors to founders so they can see the success stories and understand how we can work through whatever issues and complexities there might be,” says Advantage’s Folsom. “Hopefully we then move to the top of that short list of potential buyers.”
This was the case with Komeda Coffee, a road side café chain in which the Japanese GP acquired a 78% interest in 2008, paying JPY15 billion (then $146 million). The founder, who
was approaching 70, had decided that, for the company to achieve the next level of growth, he needed to pass control to outside professional management, rather than a family member.
Advantage felt Komeda had the potential to expand its 300 locations to 800-1,000, but this would require additional infrastructure in terms of management and operational systems and controls. The founder retained a 10% stake in
the business and stayed on as non-executive chairman for a year. He exited when Advantage sold its stake to MBK Partners in January 2013 for JPY40 billion.
However, not all deals go the same way. Bain’s Gross-Loh says a lot of Japanese founders are keen to exit straight away. They recognize they are no longer in control and worry about how and when they will sell that last piece in the business – so many just decide to sell the whole thing. This was the intention when Advantage bought Hokou Service, an assisted living facilities
company, but the founder shelved his retirement plans because he was interested in the strategic initiatives the GP had proposed.
“We closed the transaction, bought the company and he reinvested 20% and decided to stay on as CEO for at least the next couple of years,” says Folson. “We then augmented the management team with a CFO and a COO.”
In emerging markets, the consensus among GPs appears to be that the founder should retain a stake. Keeping the founder on board as a shareholder is a key part of Lunar’s value proposition: if he retains a 20-40% stake, he is
better incentivized to support the GP’s efforts and ensure a smooth transition. However, Lunar insists the founder gives up all decision-making powers.
Olympus’ Shen echoes the importance of the founder staying involved, but he is less insistent on control. “We view buyouts a little more cautiously because there is a reason why the entrepreneur is important to the business,” Shen says. “If all of a sudden you take him out there is a potential risk.”
Family feudsFounders are not the only stakeholders to consider when negotiating a transition. Disputes over family involvement in a business are commonplace, although the nature of the problems vary by market. The issue is less pronounced in China, where most entrepreneurs are first-generation, but it does come up. Lunar looks to avoid situations where there is infighting between shareholders, content to wait patiently on the sidelines for tensions to pass.
“This is a critical reason why we proactively target businesses – we never want to be in a position where we feel that we must rush a deal and agree to some crazy things like continuing to employ relatives, or accommodating other requests that add to the potential for nuisances
or confusion,” says Sulger. “It flies in the face of the whole reason they decide to do a deal with us in the first place.”
However, in jurisdictions where families are large and the businesses have longer histories, tensions can be harder to avoid. On several occasions, KV Asia’s Butalia has walked away from deals where the founder agrees to sell and then it turns out his children are the ones really running the business. The GP wasn’t satisfied with the children’s ability and sought to replace them, but naturally the family resisted.
Oftentimes, the more mature the market,
“We often know the people who know the founder or his team. That provides a reference point for them to get comfortable with us” – Eugene Lai
With over 30 years of experience in Asia, Cleary Gottlieb Steen & Hamilton LLP has handled some of the largest and most innovative transactions in the region, including private equity M&A and fund formation matters.
Our Private Equity practice brings together leading lawyers across a range of geographies and practice areas — from fund formation to M&A and capital markets — working seamlessly in pursuit of our clients’ goals. We help sponsors form and structure new funds focused on an array of industries and markets in Asia and represent alternative investment funds in their transactional and regulatory matters, all with the goal of maximizing the success of our clients in the region.
All-Star Firm for Investment Funds The Asian Lawyer, 2014
“Well-resourced to handle large- scale transactions and coordinate them across various jurisdictions” Chambers Asia-Pacific, 2013
Investment Funds Client Service Firm of the Year Chambers and Partners, 2012
clearygottlieb.com
NEW YORK
WASHINGTON
PARIS
BRUSSELS
LONDON
MOSCOW
FRANKFURT
COLOGNE
ROME
MILAN
HONG KONG
BEI J ING
BUENOS A IRES
SÃO PAULO
ABU DHABI
SEOUL
Who should succeed the current genration and take over the management of the family business?
Source: Deloitte
0 20 40 8060 100
Non-family member Family member Either family or non-family member%
Generation 1
Generation 2
Generation 3
Generation 4
*Based on a review of various venture capital fund agreements drafted by our primary competitors conducted January 2014.
© 2014 Cooley LLP IFC - Tower 2, Level 35, Unit 3510, 8 Century Avenue, Pudong New Area, Shanghai, 200120, China +86 21 6030 0600
Light. Fast. Flexible.
Your fund agreement works for you, not the other way around. A lot of law firms don’t get that. They come at fund formation from a tax mindset. They create agreements that are too long, too convoluted – and about as user-friendly as the IRS code.
That’s not us. Our fund team is more MBA than CPA. When an investment opportunity arises, you need to make decisions. Our agreements capture your business deal in a way which is easy to understand. They are written to give you clear guidance without complicating the issues. And to be interpreted without needing your lawyers and accountants.
Our competitors’ fund agreements average 112 pages.* Ours average 56. Your fund agreement is something you’ll live with for years to come. Let us save you significant time and money. Do yourself and your investors a favor. Go Cooley.
Number 41 | Volume 27 | November 04 2014 | avcj.com 25
SUCCESSION [email protected]
the deeper more intractable the issues become. “Once ownership of a family business has gone into the second or third generation, ownership might be dispersed among many family members and at that point it can become almost impossible to achieve a consensus about what to do,” says Advantage’s Folsom. “So, almost all of the succession deals we have done have been in situations where the first generation founder-owner has complete decision making capability.”
Bain’s Gross-Loh also describes encountering a range of family issues in Japan. In some instances a GP might even be forced to pick sides where a father is trying to kick out his children or vice versa. Bain makes its excuses and leave.
“The process of negotiating these deals is complicated and time-consuming because you are dealing with a lot of emotional issues that are not driven by economic goals,” he says. “So the deal processes goes through ups and downs and there is a lot of uncertainty but that is what is necessary to unlock the opportunity.”
Even once these issues are ironed out, problems can persist in the post-investment period. GPs across all markets describe scenarios in which a founder has held a lot influence over his company, running it in almost a dictatorial manner. As a result, the organization has suffered from a lack of professional senior management and excess or redundant middle managers. Reorganizing this inefficient structure is normally top of a GP’s to-do list.
“Most companies have too many employees,” says Lunar’s Sulger. “Rather than a core executive team of six or seven people, they have 30 middle managers and they realize when they are in thick of it that it can be exhausting dealing with the trials and tribulation of managing many people.”
There is also the issue of a founder – who might now be relegated to a position on the board – not being able to let go of his former power. Untangling an individual from an organization he might have fashioned in his own image is challenging, particularly if he effectively controls supply chain relationships through long-standing personal ties, or he retains a natural authority over staff.
Chad Ovel , a partner with Mekong Capital in Vietnam, has seen a number of cases in which the founder, after giving up the reins, walks around the office asking people what is going on because he is not yet confident in the new management team.
“One of the big success factors is getting the founder and the new CEO – who typically is external – to truly speak with one voice to the organization.” says Ovel. “Employees will try and drive a wedge between them. For so many years they worked under one person and have become accustomed to how he treated them,
and suddenly there is a new sheriff in town.”No matter how much effort goes into aligning
interests and securing a consensus before going into a deal, there will be differences of opinion. Southern Capital’s Lai stresses that there is no magic bullet and being able to manage patterns when disagreements arise is just one of the skill-sets GPs need if they are to successfully execute a succession strategy.
“We don’t try to micro-manage or second-guess everything they do, there is a bit of give and take,” says Lai. “In the worst-case scenario we will have to change the CEO and that might happen in 20-25% of cases.”
Moving forwardsHowever, once the new management is in place, the private equity investor can implement the growth strategy that might have won the deal in the first place. One of the key reasons a founder looks to partner with a PE firm is because it can provide the expertise and networks needed to take the company to the next level. If all parties can get behind this plan, interests become aligned: the business grows, the founder’s legacy is protected, and everyone profits.
The emerging markets succession
opportunity is still in its nascent stages and the number and nature of deals will be influenced by cultural and macroeconomic factors, as well as the individual entrepreneur’s familiarity with the asset class. But many of the parallels with developed markets are likely to hold because the same broad theme applies: success hinges on building and maintaining relationships.
Lunar’s Sulger recounts a recent meeting with the founder of baby wear company Yeehoo – another of the private equity firm’s portfolio companies – in Palo Alto, California, where she now spends six months of the year. He remarks that the woman who now attends meetings in her tennis shoes is far removed from the apprehensive individual he first met several years ago, so worried about giving up control.
“She still has concerns about the business – why we hired that guy or fired that guy and that’s natural. Overall she realizes her legacy is really being built upon,” says Sulger. “Whoever thought the babywear brand she started in Guangzhou in 1985 could grow to 2,000 stores and be acquired by a really well-known Italian luxury brand? I can’t think of a time a founder has experienced seller’s remorse – a week after closing they are normally our biggest cheerleader.”
*Based on a review of various venture capital fund agreements drafted by our primary competitors conducted January 2014.
© 2014 Cooley LLP IFC - Tower 2, Level 35, Unit 3510, 8 Century Avenue, Pudong New Area, Shanghai, 200120, China +86 21 6030 0600
Light. Fast. Flexible.
Your fund agreement works for you, not the other way around. A lot of law firms don’t get that. They come at fund formation from a tax mindset. They create agreements that are too long, too convoluted – and about as user-friendly as the IRS code.
That’s not us. Our fund team is more MBA than CPA. When an investment opportunity arises, you need to make decisions. Our agreements capture your business deal in a way which is easy to understand. They are written to give you clear guidance without complicating the issues. And to be interpreted without needing your lawyers and accountants.
Our competitors’ fund agreements average 112 pages.* Ours average 56. Your fund agreement is something you’ll live with for years to come. Let us save you significant time and money. Do yourself and your investors a favor. Go Cooley.
Case study: Bain Capital and Dominos Japan Ernesto Higa, the former CEO of Higa industries and the master franchisee for Domino’s Pizza
in Japan, is fairly unique among domestic founders in that he helped instigate a succession plan where the beneficiary was a private equity firm. The way the deal came about speaks to the importance of having a strong network of contacts when seeking out such opportunities.
Higa had already part-exited the business to a Japanese strategic –Duskin Co, owner of the Mister Donut chain – and Daiwa SMBC Capital, a direct investment arm of Daiwa Securities Group. He wanted to sell his remaining 12% stake and step down as a CEO, but Duskin was not convinced it could take over the business. His only other option was to reach out to Bain Capital.
“We knew Ernie because he had a good relationship with Yuji Sugimoto, who was a managing director in our Tokyo office and they had met from time to time,” recalls David Gross-Loh, a managing director with Bain in Tokyo.
Higa’s children were not involved in the business, so he saw it as a good time to make a transition and move on to something else. However, it wasn’t simply a matter of handing over the company, but also the Dominos Japan brand. The situation was potentially complex because taking on Higa Industries meant taking on certain caveats that came with being a master franchisee.
“The company hadn’t really opened new stores but the seller wanted to make sure there was a commitment to open new stores,” says Gross-Loh. “This was partly to keep the business growing but also because there was master franchise in place with Domino’s Pizza in the US and a requirement to grow the store count.”
Fortunately, Bain had previously made investments in Dominos International in the US. Drawing on its track record in the industry, it was able to reassure Dominos in the US and secure an exit for Higa. Free of his responsibilities, Higa moved on to his next venture – as CEO of hamburger chain Wendy’s Japan. .
Affinity Equity Partners is an independently owned
private equity fund manager and currently advises and
manages over US$8 billlion of funds and assets, making
it one of the largest independent financial sponsors in
this region. The Affinity team has executed transactions
for values aggregating US$12 billion.
www. affinityequity.com
Mando ClimateControl Corp
Lead Investor
First leveraged buyoutin Korea by financial
sponsors
October 1999
The FaceShop Korea
Sole Investor
Leveraged buyout of aleading cosmetics company
in Korea
October 2005
Joint Lead Investor
July 2009
Leveraged buyout of thesecond largest brewery
in South Korea
Oriental Brewery Co Ltd
Lead Investor
May 2011
Leveraged buyout ofNew Zealand's largest
poultry producer
Tegel Foods Ltd
October 2011
Leveraged buyout of Australia'slargest meat processor
Primo GroupHoldings Pty Ltd
Lead Investor
NS Electronics Bangkok Ltd
Sole Investor
Largest financial restructuringand recapitalisation buyout inThailand by a financial sponsor
February 2000
August 2007
Investment in Korea’s onlydigital satellite TV
broadcaster
Korea Digital SatelliteBroadcasting
Sole Investor
Korea Digital Satellite Broadcasting
Himart Co Ltd
Lead Investor
Leveraged buyout ofKorea’s largest consumer
electronics retailer
April 2005
Haitai Confectionery& Foods Co Ltd, Korea
Joint Lead Investor
Leveraged buyout of thesecond largest confectionery
company in Korea
September 2001
Loscam Limited
Sole Investor
Leveraged buyout of aleading returnable packaging
hire company in Australia
August 2005
October 2009
Buyout of the leadingmanufacturer of energy-savingelectrical equipment in China
Beijing Leader & HarvestElectric Technologies
Lead Investor
Joint Lead Investor
November 2007
Leveraged buyout of a leadingindependent semi-conductor
test and assembly service providerlisted on the Singapore Exchange
United Test andAssembly Center Ltd
September 2014
Investment in a leading poultry producer in
South East Asia
Leong Hup International
Sole Investor
October 2014
Investment in a leading Australian airline loyalty
program
Velocity
Frequent Flyer
Sole Investor
September 2012
Investment in the leadingconsumer automotive services
group in Indonesia
Lead Investor
PT MitraPinasthika Mustika
September 2012
Investment in the third largestlife insurer in Korea
Kyobo Life Insurance
Lead Investor
September 2013
Leveraged buyout of thelargest vertically-integrated
music company in Korea
Loen Entertainment Inc
Sole Investor
October 2013
Investment in the largest dairyfarming operation in Beijing
Beijing Sunlon LivestockDevelopment Co Ltd
Sole Investor
Number 41 | Volume 27 | November 04 2014 | avcj.com 27
Q: You have concerns about the current excess liquidity and low levels of risk aversion, but at the same time you say the investment environment is not as dangerous as before the financial crisis. Will it worsen?
A: It all starts with the fact that interest rates are so low that people can’t make a decent return in money market instruments or intermediate term treasuries. They have been forced up the risk curve to make the kinds of returns they want or need. To some extent they have had to surrender their characteristic risk aversion, and when this happens, markets become more dangerous. Warren Buffett says: “The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs.” Since the darkest days post-Lehman there has been a strong recovery in prices and investor psychology. Conditions aren’t as bad as they were pre-crisis, but they are at a level at which caution is important.
Q: In terms of the macro environment, in 2012 you said you felt more uncertainty than ever before. What about now?
A: The US economy is doing pretty well; Europe and China are bumping along. The world has done a little better than I thought it would. On the other hand, the world is still a very uncertain place. Will US economic growth recover to prior levels? What is the outlook for European competitiveness and cohesion? It’s still an open question whether China will have a hard landing or a soft landing. Can Prime Minister Abe’s policies re-introduce
dynamism to the Japanese economy? In the 1990s the world seemed like a safe place, but this is an interesting example of how markets work. The environment seemed so predictable that securities prices did exceptionally well, which eventually made the market a dangerous place. Excess clarity is not a good thing, because it gets incorporated into excess asset prices. I think today the world is a complex and uncertain place, and yet risk premiums aren’t high.
Q: So, in an investment context, people seem overconfident…
A: Yes, and that’s a dangerous combination for future prices. We’ve had what one of my friends describes as an excess of complacency incorporated into securities prices. If things then go bad and they hadn’t been anticipated to go bad then by definition you can have a substantial correction.
Q: How does Oaktree behave in this kind of environment?
A: Since the economy is benign there isn’t a lot of fear in the streets. It is a hard time to find bargains; they come when people panic and don’t want to own securities and shrink from risk. There are very few compelling markets and when that’s the case you have to recognize it. The biggest mistake is when there are no bargains you behave like there are bargains and buy things hand over fist, paying full prices. In general, Oaktree’s mandate for the last three years has been “move forward, but with caution.”
Q: Does your Asia strategy differ from your global strategy?
A: It doesn’t differ. The interesting question is whether our characteristic approach is applicable to Asia. When I think about Oaktree, what are we? Credit: we invest mostly in debt. Value: we emphasize things that are demonstrably cheap in the here and now. Opportunistic: we don’t take a strategic approach to industries and companies and countries, rather we buy the things that pop up as cheap. In Asia it might be the case that you have to take ownership of companies to get the big play on the upside. We have tried a couple of forays into Asian private investing and have done modestly well. We have an emerging markets team managing public equities where we can take an opportunistic approach, but we have not
been able to demonstrate its successful application to private markets yet.
Q: Oaktree has a joint venture with non-performing loan specialist China Cinda Asset Management. How significant an opportunity is this?
A: It’s a seat at the table. In every market there are distressed debts. In every market there are transactions that turn out to be too optimistic and have to be restructured. I believe they will exist in China as well. Historically we have been involved in buying and restructuring things. It’s a good activity for us. Cinda we believe will be one of the leading participants in that field of endeavor, so we are very glad to associate with them. Now exactly how that area develops in China is yet to be seen. What happens in bankruptcy in the US, very simply, is the old owners are wiped out and the creditors become the new owners. Will that happen in China? Will the rule of law be dependable? I don’t think these questions have been answered yet, but we are optimistic they will be answered.
Q: Elsewhere in emerging Asia people are offering structured debt to entrepreneurs who are reluctant to give up equity. Would you consider this?
A: We will look at it. For some of these funds, the approach is much more long-term and strategic than what we would normally do. To over-exaggerate the difference: we date, they get married. We have to decide whether that activity is right for us. If it is, then we have to tool up with skilled people on the ground.
HOWARD MARKS | INDUSTRY Q&A [email protected]
The risk factorHoward Marks, chairman of Oaktree Capital Management, gives his appraisal of the current investment and economic environments, and explains how his firm is developing its Asia strategyt
“Things aren’t as bad as they were pre-crisis, but they are at a level at which caution is important”
Affinity Equity Partners is an independently owned
private equity fund manager and currently advises and
manages over US$8 billlion of funds and assets, making
it one of the largest independent financial sponsors in
this region. The Affinity team has executed transactions
for values aggregating US$12 billion.
www. affinityequity.com
Mando ClimateControl Corp
Lead Investor
First leveraged buyoutin Korea by financial
sponsors
October 1999
The FaceShop Korea
Sole Investor
Leveraged buyout of aleading cosmetics company
in Korea
October 2005
Joint Lead Investor
July 2009
Leveraged buyout of thesecond largest brewery
in South Korea
Oriental Brewery Co Ltd
Lead Investor
May 2011
Leveraged buyout ofNew Zealand's largest
poultry producer
Tegel Foods Ltd
October 2011
Leveraged buyout of Australia'slargest meat processor
Primo GroupHoldings Pty Ltd
Lead Investor
NS Electronics Bangkok Ltd
Sole Investor
Largest financial restructuringand recapitalisation buyout inThailand by a financial sponsor
February 2000
August 2007
Investment in Korea’s onlydigital satellite TV
broadcaster
Korea Digital SatelliteBroadcasting
Sole Investor
Korea Digital Satellite Broadcasting
Himart Co Ltd
Lead Investor
Leveraged buyout ofKorea’s largest consumer
electronics retailer
April 2005
Haitai Confectionery& Foods Co Ltd, Korea
Joint Lead Investor
Leveraged buyout of thesecond largest confectionery
company in Korea
September 2001
Loscam Limited
Sole Investor
Leveraged buyout of aleading returnable packaging
hire company in Australia
August 2005
October 2009
Buyout of the leadingmanufacturer of energy-savingelectrical equipment in China
Beijing Leader & HarvestElectric Technologies
Lead Investor
Joint Lead Investor
November 2007
Leveraged buyout of a leadingindependent semi-conductor
test and assembly service providerlisted on the Singapore Exchange
United Test andAssembly Center Ltd
September 2014
Investment in a leading poultry producer in
South East Asia
Leong Hup International
Sole Investor
October 2014
Investment in a leading Australian airline loyalty
program
Velocity
Frequent Flyer
Sole Investor
September 2012
Investment in the leadingconsumer automotive services
group in Indonesia
Lead Investor
PT MitraPinasthika Mustika
September 2012
Investment in the third largestlife insurer in Korea
Kyobo Life Insurance
Lead Investor
September 2013
Leveraged buyout of thelargest vertically-integrated
music company in Korea
Loen Entertainment Inc
Sole Investor
October 2013
Investment in the largest dairyfarming operation in Beijing
Beijing Sunlon LivestockDevelopment Co Ltd
Sole Investor
Emerging from a period of economic volatility, you don’t need us to tell you how complex and competitive private equity has become. But you do need to work with people who understand your business and can keep you ahead of the game. That’s why KPMG has a dedicated Private Equity Group in Asia Pacific, organised with your needs in mind.
Just like you, we do more than deals. With skills across Audit, Tax and Advisory, and a network covering our member firms in Asia Pacific and around the world, we can tailor our services to suit you from effective tax structuring and strategic corporate intelligence right through to due diligence and cost optimisation, for value improvement after the transaction.
KPMG. Dedicated to Private Equity. Dedicated to your success.
For more information contact: Asia Pacific PE Group LeaderHonson To+86 (10) 8508 7055 [email protected] AustraliaDavid Willis+61(2) 9346 [email protected] China David Xu+86 (10) 8508 [email protected]
Hong KongKenneth Pang+852 2140 [email protected] IndonesiaDavid East+62 (21) 574 0877 [email protected]
JapanPaul Ford+81 (3) 5218 [email protected]
KoreaJin-Man Kim+82 (2) 2112 [email protected] MalaysiaChan Siew Mei+60 (3) 7721 [email protected] New ZealandIan Thursfield+64 (9) 367 5858 [email protected] PhilippinesMichael Guarin+63 (2) 885 7000 ext. 347 [email protected] SingaporeAndrew Thompson+65 6213 [email protected]
TaiwanVincent Chang+886 (2) 8101 6666 ext. [email protected]
ThailandBob Ellis+66 (2) 677 [email protected] VietnamJohn Ditty+84 (8) 3821 9266 ext. [email protected]
Turning complexity into opportunity
kpmg.com © 2
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Number 41 | Volume 27 | November 04 2014 | avcj.com 29
SIX MONTHS BEFORE ANNOUNCING the spin-out from its parent, Axa Private Equity formed a group comprising representatives from the communications and corporate departments, senior management and two external PR agencies. Their task: to come up with a list of possible names for the newly-independent entity.
There were two guiding criteria. First, the name should start with the letter A, acknowledging the company’s heritage as part of Axa Group. Second, from a linguistic perspective, it should be rooted in Europe.
“Many large PE firms are from the US. We were born in France so we wanted to go for European languages. We considered Latin but then decided to look at Francique, the language of Northern Europe. We wanted a name that had meaning for ourselves – a name that said something of who we are,” explains Jérémie Delecourt, head of corporate & international development at the company now known as Ardian.
A list of 100 options was whittled down to ten and then a final three, from which senior management selected their favorite. Ardian derives from the centuries-old word “hardjan” and embodies a sense of courage and code of honor. The name’s meaning was cross-checked in Arabic and Chinese, and as a final step, the firm ran their choice past a couple of LPs.
A global gameNaming private equity firms used to be a reasonably straightforward process. Kohlberg, Kravis, Roberts & Co, as it was originally known, was named for its founders; The Carlyle Group’s founders named their firm for the New York City hotel in which its formation was often discussed. Others looked to nature – plants, rock formations and water features – in order to convey a sense of stability, growth and renewal.
However, as the Ardian process suggests, times have changed, globally and in Asia. These have become bigger, more public decisions for a bigger and more public asset class.
“Private equity is growing globally, so we are seeing different behavior in terms of branding and marketing,” says Matthew Stotts, founder of Tenor Partners, which helps PE firms develop marketing strategies. “Private capital markets have become much more competitive and so PE and VC firms are under pressure to establish
a presence and win deals in target markets. Branding strategies become much more critical in times like these.”
Establishing a brand that is both credible and recognizable is also important from an investor perspective. Private equity has moved into the mainstream as an asset class and this institutionalization has several consequences.
First, it invites greater regulatory scrutiny, which places firms in the public eye, stimulating greater awareness of image management. Second, it creates an industry dynamic in which large firms are becoming larger, introducing products across multiple asset classes. A powerful, unified brand can be helpful in this context. Third, the asset class is gradually moving from a pure institutional client base to one that
includes an element of retail participation. This in turn is likely to require broader and more commercial marketing efforts.
“More savvy firms are creating engaging brand names that resonate with potential audiences, provide a simple domain name, and invite further dialog – a continuing conversation that speaks to the company’s core value proposition,” says Phil Davis, founder of corporate naming and branding firm Tungsten.
He previously worked with a US-based M&A firm that wanted a new name as part of efforts to re-positioning as a transaction advisor and also to connect at a higher level with clients. Davis discovered the firm had four major partners, and lived in a city with four major rivers, which connected everything and everyone in town. He came up with the name FourBridges Capital.
“The word ‘bridges’ is a metaphor for connecting customers and capital. The word ‘four’ provided a backstory to the founders. Both create
immediate topics for discussion,” he explains. Though relatively young in private equity
terms, Asia is part of this global evolution. But there are also regional nuances on the naming side. Private equity firms are operating in markets in which local people might not only struggle to communicate in English but also lack familiarity with Romanized character systems. Finding a name is often a multi-layer process that has to strike a balance between the needs and limitations of various stakeholder groups.
In some respects, finding a Western name is no different for a firm in Asia than in Europe. Leveraging the parent company’s name is a classic strategy.
Headland Capital Partners, which spun-out from HSBC in 2011, was in a similar position to Ardian: the new name had to begin with H. “We wanted to retain the link with our former parent,” says Marcus Thompson, Headland’s CEO. “Starting with H also simplified the selection of names! If we had tried to find a name starting with any of the 26 letters, it would have made the process a lot more challenging.”
Headland bought in a consulting firm, which drew up a dozen options based on the attributes the 16 partners said they wanted to convey. This was followed by a vote and Headland was the unanimous choice. The internal view was that the name projects a positive image of the firm – a rock outcrop extending into the sea, bathed in pleasant weather. However, there is also a military connotation: capturing a headland allows an army can seize a strategic advantage.
“It’s a vantage point from which a general is able to see what’s going on around him and plan accordingly. The same is true for private equity. We’re a long-term investor, and we want to see what’s going on around us and develop a vision of what sectors will be the best performers before we invest in them,” Thompson says.
Not all Asia spin-outs have followed the Ardian and Headland model. Affinity Equity Partners and Unitas Capital were among the first generation managers that uncoupled from investment banks in the early 2000s. Their names no longer have any relation to the former parents, UBS and J.P. Morgan. These differing approaches might be explained by the relevance of the name to the target market. HSBC has a retail banking business and strong brand name
A brand apartAs private equity becomes more of a mainstream asset class, brand-consciousness kicks in. Finding a suitable name can be a challenge, particularly when operating in multiple markets and languages
“Private equity is growing globally, so we are seeing different behavior in terms of branding and marketing” – Matthew Stotts
Emerging from a period of economic volatility, you don’t need us to tell you how complex and competitive private equity has become. But you do need to work with people who understand your business and can keep you ahead of the game. That’s why KPMG has a dedicated Private Equity Group in Asia Pacific, organised with your needs in mind.
Just like you, we do more than deals. With skills across Audit, Tax and Advisory, and a network covering our member firms in Asia Pacific and around the world, we can tailor our services to suit you from effective tax structuring and strategic corporate intelligence right through to due diligence and cost optimisation, for value improvement after the transaction.
KPMG. Dedicated to Private Equity. Dedicated to your success.
For more information contact: Asia Pacific PE Group LeaderHonson To+86 (10) 8508 7055 [email protected] AustraliaDavid Willis+61(2) 9346 [email protected] China David Xu+86 (10) 8508 [email protected]
Hong KongKenneth Pang+852 2140 [email protected] IndonesiaDavid East+62 (21) 574 0877 [email protected]
JapanPaul Ford+81 (3) 5218 [email protected]
KoreaJin-Man Kim+82 (2) 2112 [email protected] MalaysiaChan Siew Mei+60 (3) 7721 [email protected] New ZealandIan Thursfield+64 (9) 367 5858 [email protected] PhilippinesMichael Guarin+63 (2) 885 7000 ext. 347 [email protected] SingaporeAndrew Thompson+65 6213 [email protected]
TaiwanVincent Chang+886 (2) 8101 6666 ext. [email protected]
ThailandBob Ellis+66 (2) 677 [email protected] VietnamJohn Ditty+84 (8) 3821 9266 ext. [email protected]
Turning complexity into opportunity
kpmg.com © 2
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Shearman & Sterling has an established presence with a 140-year legacy. It is one of the world’s leading international law firms known for its expertise in virtually every area of law relating to commercial and financial activity, from advice on investment funds, capital markets, corporate/mergers and acquisitions, project development and finance transactions through to representation in international arbitration and litigation.
With a long-standing commitment to Asia for over 30 years, we offer a sophisticated approach to deliver innovative and integrated strategic, tactical and technical advice to our clients. Our core practice areas include:
INNOVATION...SOPHISTICATION...INTEGRATION...
▪ Acquisition Finance▪ Asset Management▪ Banking & Finance▪ Capital Markets▪ Direct Investment▪ Fund Formation
▪ Intellectual Property▪ International Arbitration ▪ Litigation & Dispute
Resolution▪ Mergers & Acquisitions▪ Private Equity
▪ Privatizations▪ Project Development
& Finance▪ Regulatory & Compliance
ABU DHABI | BEIJING | BRUSSELS | FRANKFURT | HONG KONG | LONDON | MILAN | NEW YORK | PALO ALTOPARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC
shearman.com
Number 41 | Volume 27 | November 04 2014 | avcj.com 31
recognition throughout Asia. Certain groups that remain captive also
draw on the reputations of their parents. Intel Capital and Google Ventures are obviously tech specialists; CITIC Capital, which targets state-owned enterprise (SOE) restructurings, relies on the brand cache of its parent, CITIC Group, when dealing with SOEs; and CICC Private Equity might be popular among IPO-hungry entrepreneurs because of its ties to China International Capital Corp, a leading domestic brokerage.
Chinese challengesIn this context, finding an appropriate Chinese name is also important. The first character of Headland’s Chinese name is the same as that of HSBC. But the name in full – “Hui Rui,” meaning a combination of talents – was picked for its applicability to the PE firm’s cause. Ardian was told by a Chinese financial institution that its English name sounds like an animal that
symbolizes happiness and good luck in the Chinese mythology. The animal now features in its Chinese name, “An Lin.”
For many of the local Chinese private equity firms, the Chinese name came first and they wanted something of similar meaning or pronunciation in English. This is the case for Hony Capital and FountainVest Partners, as well as VC players Ceyuan Ventures, Qiming Venture Partners, and Banyan Capital.
“Smaller PE firms or the traditional VC firms might only have 15 LP relationships, 30 at the most. That is manageable through face-to-face relationships and so the name isn’t so important for LPs. But it is very important for the markets they invest in – for generating qualified deal flow, for attracting management teams, for increasing
market presence, and for being differentiated from other firms,” Tenor’s Stotts says.
When Qiming was founded in 2005, co-founder Gary Rieschel delegated responsibility for coming up with a Chinese name to his wife Yucca, a Hong Kong native. She organized a dinner to discuss options with friends and finally proposed Qiming. “Qi” – which is often found in the names of publishing companies in Hong Kong – means to enlighten or inspire. It has elements of scholarship and mentorship, and when combined with other characters, can reflect innovation.
“Both our kids have Qi in their Chinese names, and we were joking this was our third child” Rieschel says. “There was also a feeling that it showed purpose and weight. And, while a very Chinese name, it is not too difficult for foreigners to pronounce. Finally, we chose the traditional characters because [co-founder] Duane Kuang and I agreed that the aesthetics were better.”
FountainVest’s name was not decided until one month before the final close of its debut fund in 2012, after long debate. The team decided it wanted a link with water, one of the five elements – known as the “Wu Xing” – in Chinese philosophy. There were several reasons for this.
“One is that in China, water is often associated with money and fortune. Water also quietly helps everything grow, a role that we see for ourselves with companies we invest in,” Frank Tang, CEO of the PE firm, explains. “In addition, ‘fang yuan’ means source of water in the country of China. We then added ‘Vest’ to the English word ‘Fountain,’ a translation of our Chinese name, to produce FountainVest.”
Elements of other PE firms’ names are taken from Chinese classic works – known as the Four
Books and Five Classics – that illustrate the core value and belief systems in Confucianism. John Zhao, CEO of Hony, took “Hong Yi” from a piece of Chinese calligraphy displayed in the office of Legend Holdings CEO Chuanzhi Liu. Hong Yi is a Confucianism saying that implies people should work hard to achieve, with a long-term vision.
Most firms seek advice from a Fengshui master on a name. According to Yeetak Choi, a Hong Kong-based Fengshui master, a name should be balanced with the founders’ lives. For example, a person’s date of birth and the time at which they were born can be cross-referenced with the Wu Xing. If there is not strong balance across the five elements, a name will be suggested that represents the missing element.
“We not only consult the Wu Xing, we also look into the pronunciation of the name and its underlying meaning, and whether it could bring good thoughts to people. If the words are good, it sounds like a blessing when you call out the
name. We believe this could bring fortune to the business,” says Choi.
In perhaps the most striking endorsement of a private equity firm’s Chinese name, the Fengshui master Vision Knight Capital consulted ended up investing in its fund.
The firm, co-founded by former Alibaba Group executive David Wei, is known as “Jia Yu” in China. The “Jia” is taken from the Chinese name for Kerry Center, the Shanghai building in which Vision Knight has its headquarters. “Yu” comes from neighboring building’s name. It is a reminder that one should never forget one’s birth place, while the combination of the two characters means “better managing the horse” – a metaphor for operational improvement.
The English name Vision Knight bears no
Feng shui masters rate private equity firms’ Chinese namesChinese names Lingling Mak Yeetak Choi Remarks
弘毅 (Hony) ★★★ ★★★★★ Both: Very positive.The name implies people should work hard to achieve, with a long-term vision
鼎暉 (CDH) ★★★★ ★★★★★ Choi: It's a good name, which implies the firm is sitting on the top of other players
方源 (FountainVest) ★★★★ Nil Mak: It will be a good name if the founder is missing water in Wuxing Choi: 源 is pronounced the same as another Chinese word meaning "the end"
博裕 (Boyu) ★★★★★ ★★★★ Mak: The name means wide, in depth, plenty of things you need
新天域 (New Horizon) ★★★ ★★★★ Both: The name literaly translates as “new universe.” Not impressive
厚朴 (Hopu) ★★★ Nil Both: 厚means prosperous, but 朴means plain. The two words are not well-matched
嘉御 (Vision Knight) ★★★★★ Nil Mak: The name gives founders power to control the business Choi: 御 is often associated with a Chinese emperor. They have power but they are always alone
滙睿 (Headland) ★★★ ★★★★ Choi: It reminds me of a team of talents - but what about the business expecations?
骏麒 (Affinity) ★★★ ★★★★ Choi: 骏 is horse; 麒 is a mythical creature symbolizing prosperity. The name is not easy to understand
联宇 (Unitas) ★★★ ★★ Both: It means “big universe.” Not impressive
啓明 (Qiming) ★★★★ ★★★★ Both: The name looks common but the meaning is simple and straighforward
凯雷 (Carlyle) ★★★ NilBoth: Direct translations from the English. The names have no specific meaning in Chinese
黑石 (Blackstone) ★★ Nil
Shearman & Sterling has an established presence with a 140-year legacy. It is one of the world’s leading international law firms known for its expertise in virtually every area of law relating to commercial and financial activity, from advice on investment funds, capital markets, corporate/mergers and acquisitions, project development and finance transactions through to representation in international arbitration and litigation.
With a long-standing commitment to Asia for over 30 years, we offer a sophisticated approach to deliver innovative and integrated strategic, tactical and technical advice to our clients. Our core practice areas include:
INNOVATION...SOPHISTICATION...INTEGRATION...
▪ Acquisition Finance▪ Asset Management▪ Banking & Finance▪ Capital Markets▪ Direct Investment▪ Fund Formation
▪ Intellectual Property▪ International Arbitration ▪ Litigation & Dispute
Resolution▪ Mergers & Acquisitions▪ Private Equity
▪ Privatizations▪ Project Development
& Finance▪ Regulatory & Compliance
ABU DHABI | BEIJING | BRUSSELS | FRANKFURT | HONG KONG | LONDON | MILAN | NEW YORK | PALO ALTOPARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC
shearman.com
03387_private_equity_A4.indd 1 03/11/2014 15:14
Number 41 | Volume 27 | November 04 2014 | avcj.com 33
relation to the Chinese; Wei just picked two words he liked. FountainVest’s name has a similar basic meaning in both languages. Unlike Qiming or more recent creations such as Boyu Capital, the managers declined to use the pinyin versions of their Chinese names as their English names.
CDH Investments, which spun-out from CICC in 2002, was also reluctant to do this. The firm is known in Chinese as “Dinghui.” The “Ding” points to the three-legged urns used to burn incense in Chinese temples – a character that denotes stability. “Hui” means the first ray of light before the sun rises. It was devised in house, with a Fengshui master confirming the name had the right number of character strokes.
“At the time, there weren’t many home-grown PE firms in China. Some used the pinyin version of their Chinese names and didn’t pick an English name,” explains Stuart Schonberger, managing director at CDH. “We rejected the pinyin of Dinghui because it doesn’t sound good in English. The word ‘ding’ has negative connotations and it didn’t make sense to take any risks with a creative name when no one knows who you are.”
The stars alignThere are a few examples in India’s private equity community of firms tapping into local culture like their Chinese counterparts. Kalaari Capital, which was known as Indo US Venture Partners until 2012, found inspiration for its name in a form of martial art. In North Asia, the vast majority of firms are named after the financial institutions from which they originated. In many cases, they are still wholly captive; those that are not like the credibility the brand brings.
It is perhaps surprising that Japan, where the kanji script is based on Chinese character sets, has not seen the same naming trends as China. The separate phonetic alphabet – katakana – is one reason for this. It allows direct phonetic use of English or other languages. For example, Advantage Partners’ name is simply written in Katakana, rather than using kanji.
Other firms refrain from using traditional Japanese characters. When the group now known as J-Star was coming up with a name, one partners suggested using something along the lines of “Japan Buyout” in Japanese characters – “Nippon Baiautto Toushi.” But Greg Hara, director and president of the firm, thought this sounded too stuffy, so looked for English name.
“Most of the people we deal with understand basic English, so ‘they get that J’ stands for Japan and ‘Star,’” Hara explains. “Our model is solution capital and our target companies have to shine like stars. Companies might be small stars or large stars but we want each one to shine.”
The firm had to endure some teasing in
the early years. J-Star was set up by members of Jafco’s PE team and industry participants – mistakenly but in jest – said the name meant they were “Jafco’s star team members.”
One area in which Asia differs fundamentally from traditional Western practices is incorporating the founders’ names into the firm name. It has happened in only a handful of cases. From a Chinese perspective, this reluctance is perhaps explained by the perception that prominent business people are easy targets in government crackdowns.
“It might be a cultural thing in the sense that people value their privacy, particularly in the case of China’s princeling funds where there is a desire to hide connections,” one Asia-based LP observes. However, he notes that using founders’ names was characteristic of US private equity in the 1970s, 1980s and 1990s. Now they prefer initials.
Another consideration that applies to all firms regardless of geography is the need to create a sustainable PE franchise with a deep bench of talent. Highlighting 1-2 founders in a firm’s name does not send out the right message. Tungston’s Davis adds that it takes years to imbue a founder-named firm with meaning, while removing or removing people can be problematic.
No one wants a name to become overcomplicated – not when operating in an asset class that is increasingly globalized as well as institutionalized. A name that is short, simple and easy to pronounce or translate will inevitably have the most cross-border currency. Sino-US VC firm Granite Global Ventures rebranded itself as GGV in 2007 for this very reason.
“If you have the opportunity to name your firm, you should think about the global market, your long-term strategy, and the types of companies you want to attract as well as current and future LPs. All of these components should be factored in choosing a compelling name that would be relevant with all of your audiences,” Tenor Partners’ Stotts says.
At the same time, a private equity firm could take on almost any name and still attract capital from LPs if there is strong performance. GPs are simply advised to avoid causing offense or taking someone else’s name, and just try to convey broad institutional qualities. Entrepreneurs, too, are smart enough to look past the brand to the people and processes that shape a firm.
“Over the last 5-10 years, we’ve seen people being more creative, coming up with interesting and playful names for the new firms,” says Jeff Richards, who joined GGV in 2008 after spending 13 years as an entrepreneur in the US and Asia. “But ultimately, entrepreneurs want to work with a firm that’s successful. Everybody loves the name Amazon. But if Amazon were a terrible company, nobody would like the name.”
03387_private_equity_A4.indd 1 03/11/2014 15:14
Go West: What’s in a name? Two months ago, London-based Isis Private
Equity announced it would change its name to avoid associations with the terrorist activities of another ISIS – shorthand for The Islamic State in Iraq and the Levant. It is an unfortunate and impossible-to-foresee outcome for a firm originally named after an ancient Egyptian goddess.
When looking for a replacement, Isis might do well to avoid the realms of ancient myth and legend. Fund managers have already snapped up virtually every Egyptian, Greek and Roman deity in the pantheon. Sanskrit and Latin are becoming popular almost by necessity.
Branding agencies are often called in to help out. Phil Davis, founder of US-based corporate naming and branding firm Tungsten, says the naming processes usually goes through five stages: discovery, concept, refine, winner and market.
“We start by helping a company determine its ‘pivot pints’ – that singular attribute around which their services revolve. This could be protecting, connecting, enhancing, or building. Once a client has a better sense of who they are as a company, we can then determine the best naming strategy to convey that key benefit,” he says.
After meeting with key stakeholders in the firm, a consultancy firm will reduce the initial hundreds of candidates to 8-12 that meet all the branding criteria. They must convey the right message, have an available trademark and domain name, and provide a marketing platform. “There is a wide assortment of naming strategies for consulting firms, such as coined or invented names, positive connotation names, metaphors, and descriptive hybrid names,” Davis says.
Abstract and invented brand names in the PE space include Accel, Sigma Partners and Meritech Capital Partners. They are favored by trademark attorneys because of their un-established nature. However, significant time and investment is required to imbue with meaning, says Matthew Stotts, founder of Tenor Partners.
Private equity firms that want to avoid the abstract or mechanical gravitate towards nature. Sequoia Capital and Oaktree Capital are cited as names that are grounded and approachable, yet convey growth.
D uring the last few years a large section of the European private equity community has been
focused on the European Union’s (EU’s) drive for increased regulation, principally through the Alternative Investment Fund Managers Directive (AIFMD).
Speaking to promoters and investors further afield it is quickly apparent that AIFMD has been less of a pressing issue however, when they discover that it means a growing compliance burden and therefore increased costs then they are instantly more cautious about raising money from within Europe.
the guernsey model
Yet, rather than being part of the problem, Guernsey is part of the solution because while the Island is in Europe geographically, it is not in the EU and therefore, has not been required to implement AIFMD.
Guernsey has introduced a dual regulatory regime whereby it is possible to continue to distribute Guernsey funds into both EU and non-EU countries.
The approach means managers and funds with no connection to Europe can still use Guernsey’s continuing regulatory rules which are completely free from the requirements and costs associated with AIFMD.
For managers wishing to market into
Europe, Guernsey provides a European platform but one which is not actually in the EU. Indeed, the National Private Placement (NPP) route is being favoured by many as it means little or no change to how things were done before AIFMD.
For those managers with elements of EU and non-EU business, parallel structures can be utilised. It will be possible to place non-EU business in a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary.
Guernsey also has a new opt-in regime which is fully AIFMD compliant for those who require it.
The point is that Guernsey’s dual regulatory regime provides optionality that allows clients to be serviced in the manner most appropriate to their specific circumstances.
substance
Guernsey has significant substance already present within many existing structures and professionals with expertise in portfolio and risk management. Corporate governance is enhanced by having a significant pool of experienced non-executive directors.
Global private equity houses Apax, Apollo, BC Partners, Coller Capital, HarbourVest, Pantheon and Permira have their funds domiciled and serviced in
Guernsey (with a number also having offices and staff present).
Guernsey has administrators and custodians ranging from major international names, such as Northern Trust and State Street, to specialist independent private equity service providers.
global reach
Guernsey’s funds industry now manages and administers more than 1,000 funds valued at nearly half a trillion US dollars, with the net asset value of private equity funds increasing 123% over the last five years. Guernsey domiciled investment funds are distributed to all corners of the globe.
The first Chinese currency focused bond fund, the Renminbi Bond Fund was established in Guernsey in 2007 by Stratton Street Capital LLP as an open-ended fund in a Protected Cell Company (PCC) structure. It is listed on the Irish Stock Exchange.
Quality of service in Guernsey is evidenced by the fact that our providers now service $140 billion worth of open-ended funds which are domiciled in other jurisdictions where there may be local substance challenges.
Guernsey’s strong ethos of corporate governance is also demonstrated through its position as a centre for listed vehicles; the two largely go hand-in-hand as companies are subject to and adhere to the rules applicable to the various international stock exchanges on which they list.
Guernsey acts as a gateway to list vehicles on stock exchanges around the globe, including, among many others, the local Channel Islands Securities Exchange (CISE), exchanges in Frankfurt and Amsterdam, the Hong Kong Stock Exchange (HKEx) and the London Stock Exchange (LSE). LSE figures show that there are more Guernsey entities listed on its markets than from any other jurisdiction globally (ex-UK).
conclusion
Non-EU managers, including many from Asia, are of the view that regulation is making it especially difficult to market funds into the EU. Guernsey offers a solution based in a European time zone with access to the EU market but without the administrative and cost burden of AIFMD and from a jurisdiction which has significant substance, high standards and a global reach.
Guernsey – A European fund centre with a difference
By Fiona Le Poidevin, Chief Executive of Guernsey Finance – the promotional agency for the Island’s finance industry.
www.guernseyfinance.com | [email protected] | +44 (0) 1481 720071
Number 41 | Volume 27 | November 04 2014 | avcj.com 35
FLIPAGRAM IS A MOBILE APP THAT allows users to convert photo sets into animated slideshows set to music. Launched in 2013 by Los Angeles-based Cheerful, Flipagram has featured among America’s top 10 photo and video iPhone apps for over a year. It was the most popular download in the iOS App Store on New Year’s Day 2014 and retains a place in the top 100.
For Hong Kong-based Mind Fund, Flipagram represents a substantial home run for its first fund. The VC firm led the Series A round in Cheerful in 2012 and the saw Charles River Ventures and Trinity Ventures come in for the Series B in 2013. When Mind Fund launched Fund II, it was encouraged to stick to a US-centric strategy. But Adam Lindemann, the firm’s managing partner, was looking closer to home.
“I’d started to see activity in Hong Kong,” he explains. “I decided this fund would focus much earlier – we are running an entrepreneur-in-residence program, rather than the previous Series A stuff – and on Hong Kong companies
that are global from day one. It is a strategic shift, and the jury is still out, but I’m very bullish.”
Lindemann adds that his decision was driven by the emergence of top entrepreneurs in Hong Kong who are building companies that could sell products anywhere. If this phenomenon achieves critical mass, it would be a welcome endorsement of the tech start-up credentials of a market previously accused of neglecting them.
Hong Kong is one of multiple Asian
jurisdictions seeking to become an innovation hub. It is a logical ambition for policymakers, but it remains to be seen how these places negotiate the obstacles that stand between them and lasting comparisons with Silicon Valley.
More pertinently, they are operating in an increasingly globalized start-up environment, which has implications for competitive edge.
“If you have a good product with a good customer benefit, that product can spread around the world faster than it ever could before. It really matters less and less that someone has to be in Silicon Valley, but it is more likely that great companies will come from technology hubs because there are more innovative ideas floating around,” says Tim Draper, founder of Draper Associates and founding partner of DFJ.
Support systemsOne of Hong Kong’s initiatives reaches a climax next week with the unveiling of three winners of the 2014 StartmeupHK venture program. The
government-supported program is open to any entrepreneur with an innovative, scalable business ideas that can be built in Hong Kong. The winners receive work space, professional services and mentorship over a 12-month period.
It is part of a wider set of tech-friendly policy packages credited with helping fill up incubator programs and co-working spaces over the last 12 months. Cyberport, a “creative digital community” that opened in the early 2000s and
was subsequently written off by many as a white elephant, is said to be busier than ever before.
It is generally acknowledged that, in order to become self-sustaining, a technology hub must offer innovation, capital and liquidity. Tytus Michalski, managing director at seed investor Fresco Capital, says Hong Kong has plenty of innovation and capital, although the latter is a broad constituency and not all investors understand start-ups.
“A healthy environment needs support systems to help start-ups from the earliest stages through the growth stage,” Michalski adds. “There are areas where Hong Kong has done well, like having more than 30 co-working spaces which helps to mitigate the challenge of high real estate costs. But there also areas where Hong Kong still needs to improve, such as encouraging banks to support start-ups.”
According to sources familiar with the situation, Hong Kong used several other tech hubs as reference points when reviewing its own offering in the last few years. These included Singapore, which stands out as the market in Asia that has most actively sought to cultivate start-ups. Singapore has sought to emulate Silicon Valley before but the latest wave of efforts is notable for its methodological approach.
A number of early-stage financing programs – often run as matching schemes with the government contributing an equal amount of capital to that raised from the private sector – were already in place but there was insufficient funding to get companies off the ground. As a result, incubation schemes were introduced. Now the focus is on stimulating Series A stage investors that can take companies from revenue generative to profitable, essentially working with start-ups that graduate from the incubators.
The objective is to create an ecosystem that is self-sustaining. While it might be argued that Singapore’s initiatives are still too young to be properly assessed, Peng T. Ong, managing director at Monk’s Hill Ventures, claims there is now sufficient momentum in the market place.
“Even now if you turned off some of these programs the marketplace would keep going. It is like an engine – you need to jump-start it with the battery but once you’ve done that you can turn off the battery and it keeps going,” he says.
Evidence of this could lie in the entrepreneurs
Global mandatesInnovation hubs have traditionally been defined by the size of their immediately addressable market. But with better access to capital, information and technology, some Asian jurisdictions are going global
D uring the last few years a large section of the European private equity community has been
focused on the European Union’s (EU’s) drive for increased regulation, principally through the Alternative Investment Fund Managers Directive (AIFMD).
Speaking to promoters and investors further afield it is quickly apparent that AIFMD has been less of a pressing issue however, when they discover that it means a growing compliance burden and therefore increased costs then they are instantly more cautious about raising money from within Europe.
the guernsey model
Yet, rather than being part of the problem, Guernsey is part of the solution because while the Island is in Europe geographically, it is not in the EU and therefore, has not been required to implement AIFMD.
Guernsey has introduced a dual regulatory regime whereby it is possible to continue to distribute Guernsey funds into both EU and non-EU countries.
The approach means managers and funds with no connection to Europe can still use Guernsey’s continuing regulatory rules which are completely free from the requirements and costs associated with AIFMD.
For managers wishing to market into
Europe, Guernsey provides a European platform but one which is not actually in the EU. Indeed, the National Private Placement (NPP) route is being favoured by many as it means little or no change to how things were done before AIFMD.
For those managers with elements of EU and non-EU business, parallel structures can be utilised. It will be possible to place non-EU business in a parallel or feeder structure for which AIFMD compliance would neither be required nor necessary.
Guernsey also has a new opt-in regime which is fully AIFMD compliant for those who require it.
The point is that Guernsey’s dual regulatory regime provides optionality that allows clients to be serviced in the manner most appropriate to their specific circumstances.
substance
Guernsey has significant substance already present within many existing structures and professionals with expertise in portfolio and risk management. Corporate governance is enhanced by having a significant pool of experienced non-executive directors.
Global private equity houses Apax, Apollo, BC Partners, Coller Capital, HarbourVest, Pantheon and Permira have their funds domiciled and serviced in
Guernsey (with a number also having offices and staff present).
Guernsey has administrators and custodians ranging from major international names, such as Northern Trust and State Street, to specialist independent private equity service providers.
global reach
Guernsey’s funds industry now manages and administers more than 1,000 funds valued at nearly half a trillion US dollars, with the net asset value of private equity funds increasing 123% over the last five years. Guernsey domiciled investment funds are distributed to all corners of the globe.
The first Chinese currency focused bond fund, the Renminbi Bond Fund was established in Guernsey in 2007 by Stratton Street Capital LLP as an open-ended fund in a Protected Cell Company (PCC) structure. It is listed on the Irish Stock Exchange.
Quality of service in Guernsey is evidenced by the fact that our providers now service $140 billion worth of open-ended funds which are domiciled in other jurisdictions where there may be local substance challenges.
Guernsey’s strong ethos of corporate governance is also demonstrated through its position as a centre for listed vehicles; the two largely go hand-in-hand as companies are subject to and adhere to the rules applicable to the various international stock exchanges on which they list.
Guernsey acts as a gateway to list vehicles on stock exchanges around the globe, including, among many others, the local Channel Islands Securities Exchange (CISE), exchanges in Frankfurt and Amsterdam, the Hong Kong Stock Exchange (HKEx) and the London Stock Exchange (LSE). LSE figures show that there are more Guernsey entities listed on its markets than from any other jurisdiction globally (ex-UK).
conclusion
Non-EU managers, including many from Asia, are of the view that regulation is making it especially difficult to market funds into the EU. Guernsey offers a solution based in a European time zone with access to the EU market but without the administrative and cost burden of AIFMD and from a jurisdiction which has significant substance, high standards and a global reach.
Guernsey – A European fund centre with a difference
By Fiona Le Poidevin, Chief Executive of Guernsey Finance – the promotional agency for the Island’s finance industry.
www.guernseyfinance.com | [email protected] | +44 (0) 1481 720071
Asia early-stage VC funding by major market
Source: AVCJ Research
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014YTD
US$
mill
ion
8,000
6,000
4,000
2,000
0
OtherJapan South Korea
Southeast AsiaAustralia IndiaGreater China
Number 41 | Volume 27 | November 04 2014 | avcj.com 37
themselves. Silicon Valley is defined by a virtuous cycle of capital perhaps best exemplified by the alumni of money-transfer service PayPal who have gone on to set up, join or invest in a vast array of VC firms and start-ups, including the likes of YouTube, Yelp, LinkedIn and Tesla Motors.
Industry participants say they are seeing similar, albeit smaller scale, movements in Hong Kong and Singapore. The dynamic is visible on a much larger scale in markets like China.
Domestic bulwarksA peculiar development noted by William Bao Bean, investment partner of SOS Ventures in China and managing director of the firm’s accelerator program, is that second-generation entrepreneurs are the ones exiting their businesses and putting money back into the system to support the a new generation of start-ups. Many of the first-generation entrepreneurs are still running their companies – and these groups are frequent buyers of businesses from the second generation.
This has precipitated an explosion in angel investment over the last two years. When David Chen co-founded AngelVest in Shanghai seven years ago it comprised a handful of professionals with a passion for start-ups and a sense that many Chinese entrepreneurs were not getting the mentorship they needed. The network now numbers more than 80.
“The rise in angel investing in China has in part been driven by start-ups becoming more popular as an investment asset class; people have seen the money to be made from exits,” Chen says. “There is also a lack of domestic investment opportunities compared to four years ago when everyone was putting their money into real estate and hoping to get a 100% return annually.”
One of the reasons this rapid growth is possible in China is scale. The start-up environment is highly competitive but the addressable market for new products and services is huge.
The government has played a role in initiating innovation – Patrick Loofbourrow, a partner with Cooley in Shanghai, notes the contribution of subsidized premises, tax breaks and equity investment programs in the nation’s seemingly ubiquitous technology parks – but the market opportunity is an incentive in itself. Draper recalls DFJ struggling in the early days and losing money on deals, but it wasn’t long before the firm teamed up with search engine Baidu in what remains its most successful investment ever.
Yet Baidu is an interesting case study in the context of what other technology hubs in the region are trying to achieve. The company has grown to more than $80 billion in size on the back of domestic growth. In China, like India and
the US, it is possible to create multi-billion-dollar businesses without venturing into new markets.
Japan and South Korea, meanwhile, are caught in the middle ground. Their domestic economies are large enough to support start-ups that reach the billion-dollar mark, but the danger is that entrepreneurs will get comfortable and neglect to look overseas early enough. They end up with corporate cultures and technical systems that are not easily transferable or – even worse – someone else takes their business model global.
“Quora supposedly got its idea from Naver Corporation’s Q&A service, which is dominant in Korea,” says Bernard Moon, co-founder and general partner at Sparklabs Global Ventures.
“Korea should not be an idea generator for the US, it should be a leader. Entrepreneurs must look abroad as soon as they can.”
For Hong Kong and Singapore, domestic markets have never been an option. Their value as start-up platforms is only as strong as their regional reach – into China and Southeast Asia, respectively. At the same time, while there is logic in targeting proximate markets, these jurisdictions are not bound by it. StartmeupHK’s criteria state that candidates should be aiming to develop a business globally with the intent to establish an Asian or Greater China office in Hong Kong, not a China or Asia-specific business.
Global ambitionsEmpowered by cloud-based technologies and seamless communications, the 21st century start-up might target a particular geography but it could equally well forge a global path.
“It is not only because of the cloud that you can start a company anywhere; it is also inexpensive to start that company – getting an idea and putting a website or an app together. Costs have come down so it’s much easier to take that first step,” says Jessica Archibald, managing director at US-based VC fund-of-funds Top Tier Capital Partners. “Globalization and capital efficiency have been a good leveler.”
Skype is the most easily identifiable example of this phenomenon – a company founded in Estonia by a Swede and a Dane. But it is also prevalent in Australia, a far-flung market, yet one in which start-ups have leveraged their lower costs, skills and native-level English language ability to address international markets.
99designs, an online graphic design
marketplace through which customers can use crowdsourcing to solicit designs for websites, T-shirts and logos and then pick their favorite, was founded in Melbourne in 2008. Initial marketing efforts were so US-centric – the company branded with a +1 phone number – that relatively few people were aware of the company’s origins. Backed by VC funding, 99designs has since expanded its global footprint, entering Europe and South America.
Most of Blackbird Ventures’ portfolio companies are in Sydney and Melbourne, but has also ventured further afield – to Brisbane, Adelaide and Perth – driven by pockets of local activity. “We are looking for businesses in
Australia that tackle a global market from day one and where customers don’t really know or care that they are Australian,” says Rick Baker, managing director at Blackbird. “You can build these businesses from anywhere in the world.”
A recent investee is SafetyCulture, a software start-up based in Townsville in northeast Queensland. Despite the somewhat remote location, the founders have built up a base of 200,000 users and more than 200 corporates, including General Electric. However, Baker accepts that SafetyCulture will have to set up in other cities in order to access the resources required to scale the business.
In this sense, entrepreneurs and start-ups will still gravitate to technology hubs, albeit perhaps later in the corporate lifecycle than has historically been the case.
“As companies go beyond that initial product development phase, they need to be well-located in order to recruit sales people and properly address financial, HR and management issues,” says Shane Chesson, a partner at Singapore-based Northstar Silicon Island. “A seed investor may back a company with three founders and less than 10 people overall, but one of the investments we are looking to do is more like 60 people. It’s not the sort of thing you want to run on a distributed basis.”
A start-up might run its call center out of the Philippines, locate its back office in Vietnam and retain an IT development team in India – each one a decision based on cost-efficient outsourcing. In order to attract top in-house talent, the start-up requires a location that is reasonably affordable, geographically accessible, has good immigration arrangements, and above
“It’s not only because of the cloud that you can start a business anywhere; it is also inexpensive to start a company” – Jessica Archibald
avcj.com | November 04 2014 | Volume 27 | Number 4138
all is a place where people want to live.The appeal of Singapore and Hong Kong in
this context is their status as global cities, offering rule of law, intellectual property protection, strong universities and multiculturalism.
“That is why it would be hard to create a Silicon Valley in a farming community in the US,” says Top Tier’s Archibald. “You might have a great idea but can you attract software engineers to that area? It is easy to convince people to move to Silicon Valley.”
Viki, a video streaming site characterized by community-generated subtitling, is by some distance Singapore’s most successful VC-backed tech exit. The business was bought by Japanese e-commerce giant Rakuten paid $200 million last year. Viki’s founders – who hail from Armenia and South Korea and met at business school in the US – had no deep ties to Singapore. They set up there because the business was suited to Asia and Singapore was an attractive and convenient base, with local funding also available.
Education, education, educationThe globalization of venture capital has been supported by an explosion in the amount of information available on how start-up communities work. It is no longer necessary to network in Silicon Valley, Beijing or Mumbai to find out how companies are funded; entrepreneurs everywhere now tend to go into meetings much better informed.
This more widely dispersed knowledge base has also increasingly found its way into academic programs – there is now a science to fostering innovation, with processes and best practices becoming institutionalized.
Massachusetts Institute of Technology (MIT) runs a regional entrepreneurship acceleration program that admits eight teams a year from locations all over the world. Singapore and South Korea are the only Asians in the current intake. Four series of workshops are held over a 24-month period during which existing ecosystems are analyzed, development frameworks are drawn up, and regions can share experiences and best practice.
Draper University represents another entrepreneurship education program. Draper says the university’s strength lies in a willingness to subvert standard modes of instruction. Students undergo survival training as well as business training and there is a culture of accepting failure. “At Draper University you can have a pile of team points based on something extraordinary you’ve done, whether it succeeds or fails,” he explains.
The importance of strong educational institutions that encourage entrepreneurship is emphasized by all industry participants as central
to the innovation hub ethos. Blackbird’s Baker says the best investment the government could make would be in education. He wants to see science, information technology, coding and engineering firmly imprinted in school curricula and taught through university.
Draper University’s efforts aside, a failure-tolerant culture is the hardest thing to teach as it cuts across numerous Asian cultural norms. In the US start-up community, failure is viewed in the context of learning and using the experience to reduce the chances of failure next time. In some Asian markets, there just isn’t a next time.
“Nobody wants to take as much risk as in the US and this has to do with social values,” says Eddy Lee, principal at Fenox Venture Capital. “Running a small business is often associated with not having choices – not having the choice to work for a large corporation, which in Japan
is still one of the most sought after professions on leaving school. Working at a multinational is viewed as the first choice job.”
Mind Fund’s Lindemann expresses frustration at parents with “old fashioned” conservative values that prevent them from encouraging their children to take risks in business. He expects change but not overnight. Rather, attitudes will evolve for the same reasons that start-up ecosystems emerge: once successful entrepreneurs put their expertise and capital back into the system as mentors for the next generation of companies.
“We just need to tough it out for a little while longer to get those banner successes in Hong Kong,” he says. “There are entrepreneurs and investors who have been around for the last few years and who are all focused on the same thing: let’s get some wins under our belt.”
The role of government Technology start-ups were among the casualties in Australia’s austerity budget announced
earlier this year, with several programs discontinued. They included the Innovation Investment Fund (IIF), which sponsors venture capital funds, start-up grants program Commercialisation Australia, and research institution National ICT Australia.
Yasser El-Ansary, CEO of the Australian Private Equity & Venture Capital Association remains frustrated by the government’s stated support for innovation but its failure to articulate the economics. Rick Baker, managing director at domestic VC firm Blackbird Ventures, says he disappointed at the cuts but disheartened by Australia’s attitude towards start-ups.
“There is some quite good monetary support,” Baker explains. “The main one is the R&D tax credit. It is about the same cost or possibly a little cheaper to hire engineer in Australia versus the US. With the R&D tax credit it becomes a lot cheaper.”
The issue of how much resources governments should put towards fostering innovation and what form this takes is hotly debated in Asian start-up circles. While the authorities in Australia and Hong Kong are described as “fairly light touch” in their approach, Singapore is more proactive, with a raft of policies covering incubation to institutional funding. But how much is too much?
The consensus view is that as soon as governments start trying to pick winners directly, problems ensue. Its role should be that of initiator – if putting capital work, it should do so in a largely passive way. Matching funds, where the GP identifies and executes an investment and the government puts in an equal sum, are good example of this. Australia’s IFF operated along these lines, as do programs in markets such as Korea and Singapore.
“For the most part it’s been good because the government hasn’t been overreaching. It has been match-ups or start-up training or taking start-ups abroad,” Bernard Moon, co-founder and general partner at Sparklabs Global Ventures, says of the Korea experience.
This begs the question how long such schemes will go on when the objective is to create a self-sustaining ecosystem. Commenting on Singapore, Shane Chesson, a partner at Northstar Silicon Island, expects the government to become less involved on the financing side over time and focus more on the infrastructure aspect: reasonable immigration legislation, affordable premises, and access to different networks. Meng Weng Wong, co-founder of Singapore-based accelerator JFDI.Asia, adds he would like to see more top-down initiatives that make it easier to do business across Southeast Asia.
These sentiments strike a chord with other investors in the region. “In the broader ecosystem, the government can ensure that the regulatory environment is start-up friendly,” says Tytus Michalski, managing director at Hong Kong-based Fresco Capital. “Many rules and regulations are well-meaning but they end up restricting or hurting start-ups. A balance needs to exist to ensure that regulations meant for large corporates are not simply copied for start-ups.”
Number 41 | Volume 27 | November 04 2014 | avcj.com 39
Q: How did the DFJ affiliate network start?
A: It started back when it was just me as Draper Associates. Oil prices had dropped to $6 a barrel and the Alaska government wanted to develop a new economy, so asked me to come up and put together a fund – the Polaris Fund. It did well, but only because we invested half the money in Silicon Valley. We backed Redgate, a Florida-based company that was sold to AOL for stock. Depending on where they sold AOL it was either a good fund or a miracle fund. The Alaska government didn’t offer to re-up and we didn’t ask them. We felt we were on to bigger and better things. But what I learned was that venture capital didn’t have to be limited to one or two regions, to Silicon Valley and Route 128 in Boston.
Q: What happened next?A: I ran into a friend from Harvard
Business School who knew I’d done a small business investment company (SBIC) and wanted to set up one for Utah. That was Wasatch Ventures. After that it was rapid fire. We saw we could create a hub-and-spoke network for venture capital and it would see much more deal flow and be much more in tune with what was going on around the US. We did Pittsburgh, Los Angeles, Denver, Chicago, Houston – we had most of the US covered and then we met a couple of guys who wanted to take it international. That led to DFJ ePlanet. Along the way we noticed that the hub-and-spoke network was actually a star network with everyone connected to everyone else and learning from each other. We
funded Skype, which was based in Estonia but started by a Swede and a Dane, and we helped get Baidu going in China. We were the first venture capital firm ever to seed billion-dollar enterprises in three continents – and we are close to doing it in a fourth.
Q: So the first market you entered in Asia was China?
A: We first went into Asia with DFJ ePlanet, which was a representative office in China. It was followed by what is now Draper Dragon, another office that was DFJ only, and then DFJ Compass. Now we are down to just Draper Dragon. It will be our central brand in China.
Q: The original Alaska initiative was government-driven. What about the others?
A: Most of the US groups were private. Some of their money might have come from various government entities, but generally they were privately funded privately driven. We interviewed about 20 different groups in New York before we decided which one we wanted to bring into the network. The idea was that we pick a location with potential and work with a team that is building its own venture presence.
Q: What does a location need?A: A government that understands
competitive governance. A population base that is large enough, and ideally good technical universities and maybe a good business school as well. Most of the cities we went into we were the first VC firm so we had to teach the whole ecosystem model that was here
in Silicon Valley. We talked to all the stakeholders and tried to create a forum in each place. A successful entrepreneur from the region would address the audience and then we would have a networking session. We wanted to get people thinking that they could start their own businesses.
Q: How involved should
governments become in developing these ecosystems?
A: Government can be a really good cheerleader and create a business environment that is very friendly. When I started with a SBIC the US government levered my money 3:1, so I was able to borrow $3 for every $1 I invested and put a lot of money to work. I wouldn’t have been able to that in another way at the time. But the more strings
governments attach the worse the returns end up being. If they say they want to be a LP and they want you to set up an office somewhere, that light touch governance can be very helpful. If they say you can only invest in people who live in this city it can be very limiting. Most companies if they are any good are going to be global and those constraints can limit the idea.
Q: You launched Draper University to provide crash courses in entrepreneurship. Is it possible to teach this?
A: I watched venture capital evolve with my father and grandfather. People said to me you can’t teach venture capital, but whenever anyone tells me I can’t do something, I start thinking about how can do it. We are looking for those 18-28 year-olds that have extraordinary capabilities and vision. We have created a 6-8 week course of study that is somewhat transformative to the way they think. We teach in a way that makes our students more dynamic, worldly and prepared to be entrepreneurs.
Q: How do you achieve this?A: We teach future instead of
history, we teach by team rather by individual. We have survival training as well as activities that are business and design-oriented. They learn about finance, contracts, marketing, social media and crowd sourcing. Much of what we do no rational school board would consider a good thing to pursue. That is where we have a real edge. We allow our students to try many new things. We encourage them to try and fail.
TIM DRAPER | INDUSTRY Q&A [email protected]
Voice of the valley A third-generation venture capitalist, Tim Draper is founder of Draper Associates and founding partner of DFJ. He explains the key ingredients for rolling out the Silicon Valley model at home and overseas
“The hub-and-spoke network was actually a star network with everyone connected to everyone else”
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