Recovery Positions DEG’S Marcus Bracht on Targeting Emerging Asia How Private Equity Firms Can Take Action When Investments Go Wrong Page 7 Page 15

Asia’s Private Equity News Source avcj.com July 28 2015 Volume 28 Number 28

EDITOR’S VIEWPOINT What companies want from board directors Page 3

NEWS Allegro, Blackstone, Carlyle, DCM, GLP, IVFA, L Capital, Orios, Paine & Partners, PEP, Temasek, Warburg Pincus Page 4

DEAL OF THE WEEK NSI Ventures serves up kitchen robotics deal Page 10

FUNDS GSR, Go Scale get $1b for China cross-border deals Page 11

LP INTERVIEW Recovery positions DEG’s Marcus Bracht on targeting emerging Asia How private equity firms can take action when investments go wrong Page 7 Page 15

DEAL OF THE WEEK FOCUS

India’s missing link Wishing upon a star Sequoia backs genetic research business Page 10 Do China’s start-ups need celeb support? Page 14 ESG FORUM Co-hosted by: 2015 18 September | Renaissance Hong Kong Harbour View Hotel SAVE US$200 Book before

31 July 2015 Mitigate risk and maximize exit returns with responsible investing The first event of its kind in the region, the inaugural AVCJ PRI Responsible Investment Forum will provide a platform for education, benchmarking and the exchange of ideas on how GPs operating in Asia can incorporate Environmental, Social and Governance (ESG) principles across the companies in their portfolio.

Keynote Ken Mehlman Member & Global Head of Public Affairs speaker KKR

Leading GPs and LPs confirmed are: Adam Black Melissa Brown Chris Chia Partner, Head of Partner Managing Partner Sustainability DAOBRIDGE CAPITAL KENDALL COURT CAPITAL DOUGHTY HANSON & CO PARTNERS PRIVATE EQUITY Doug A. Coulter Brian Lim Frederick J. Long Partner Partner Founding Managing LGT CAPITAL PARTNERS PANTHEON Director OLYMPUS CAPITAL ASIA

Darren Massara Ed Norton Nicholas Parker Managing Partner Senior Advisor, ESG Founding Managing NEWQUEST CAPITAL TPG CAPITAL Partner PARTNERS GLOBAL ACCELERATION PARTNERS INC. Steven R. Okun Jessica Robinson Public Affairs Director Chief Executive Officer View the full list of speakers at KKR ASrIA avcjesg.com

Registration Enquiries: Sponsorship Enquiries: Pauline Chen T: +852 3411 4936 Darryl Mag T: +852 3411 4919 E: [email protected] E: [email protected] Enquiry

Co-Sponsor

Join your peers avcjesg.com #avcjesg ESG FORUM Co-hosted by: EDITOR’S VIEWPOINT 2015 [email protected] 18 September | Renaissance Hong Kong Harbour View Hotel SAVE US$200 Managing Editor Tim Burroughs (852) 3411 4909 Book before Staff Writers Andrew Woodman (852) 3411 4852

31 July 2015 Winnie Liu (852) 3411 4907 Graybeards Holden Mann (852) 3411 4964 Mitigate risk and maximize exit Creative Director Dicky Tang Designers returns with responsible investing Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow JUST OVER EIGHT YEARS AGO, I PENNED equity value-add. Nick Nash, group president The first event of its kind in the region, the inaugural AVCJ PRI Responsible Investment an article for another publication on the role of of consumer internet platform Garena – and Senior Research Manager Forum will provide a platform for education, benchmarking and the exchange of independent directors at Chinese state-owned formerly of General Atlantic, an investor in Garena Helen Lee enterprises (SOEs). This was mid-2007, and China – suggested that fewer than 50% of the people Research Associates ideas on how GPs operating in Asia can incorporate Environmental, Social and Herbert Yum, Jason Chong, Construction Bank (CCB), Bank of China (BoC) PE firms appoint to boards are actually people Kaho Mak Governance (ESG) principles across the companies in their portfolio. and Industrial & Commercial Bank of China (ICBC) portfolio companies want to hear from. Senior Marketing Manager had all completed Hong Kong IPOs in the past 18 Aik Meng Eng, CEO of TE Asia Healthcare Sally Yip months or so. Partners, added that the last thing competent Circulation Administrator Having been technically insolvent a few years management teams want is investors who spend Prudence Lau Keynote Ken Mehlman earlier, the state-owned banks wanted to convey board meetings firing off countless questions Subscription Sales Executive Member & Global Head of Public Affairs a sense of stability to investors as they prepared and telling them why they are doing a bad job. In Jade Chan speaker to go public. High-profile foreign investors were this sense, investors are best served nominating Manager, Delegate Sales KKR brought in as a source of expertise and credibility, an operations executive who understands Pauline Chen and the banks met Hong Kong’s requirement for the industry or geography and can forge a Director, Business Development at least three independent directors by recruiting constructive relationship with management. Darryl Mag Leading GPs and LPs confirmed are: various corporate heavyweights. “If the company gets into trouble you want Manager, Business Development ICBC got John Thornton, former Goldman the CEO to reach out to the shareholders or Anil Nathani, Samuel Lau Adam Black Melissa Brown Chris Chia Sachs president, and Antony Leung, former the board. You need board members who are Sales Coordinator Partner, Head of Partner Managing Partner Hong Kong financial secretary. BoC appointed engaged and can be trusted,” Eng said. Debbie Koo Sustainability DAOBRIDGE CAPITAL KENDALL COURT CAPITAL Peter Cooke, previously of the Bank of England, There is a huge gulf between the average Conference Managers DOUGHTY HANSON & CO PARTNERS and Anthony Neoh, former head of Hong Kong’s Chinese state-owned bank and the average PRIVATE EQUITY Jonathon Cohen, Sarah Doyle, Securities and Futures Commission, to its board. Asian PE-backed company, particularly when Conference Administrator Ian Wilson, ex-Standard Chartered CEO, and Tom GPs are making minority investments in private Amelie Poon Doug A. Coulter Brian Lim Frederick J. Long Manning, former CEO of Cap Gemini Asia Pacific, enterprises. But in order to perform his role Conference Coordinator Partner Partner Founding Managing Fiona Keung, Jovial Chung went to CCB. effectively – whether it is representing public LGT CAPITAL PARTNERS PANTHEON Director “Many companies in China are now paying shareholders or a single private investor – a Publishing Director OLYMPUS CAPITAL ASIA greater heed to the need for good corporate director must convince management that he can Allen Lee governance and the fact that things like contribute. Darren Massara Ed Norton Nicholas Parker transparency can increase shareholder value,” said It is not just about being a technical resource; Manning. He estimated there were still less than in executing their fiduciary responsibilities, Managing Partner Senior Advisor, ESG Founding Managing Incisive Media NEWQUEST CAPITAL TPG CAPITAL Partner 50 Western independent directors with the top directors may perform the role of traffic cop, Unit 1401 Devon House, Taikoo Place 50 or so Chinese firms. diplomat, older sibling, objective arbiter or 979 King’s Road, Quarry Bay, PARTNERS GLOBAL ACCELERATION Hong Kong PARTNERS INC. Given that the banks dance to Beijing’s tune, well-intentioned catechizer. But in order to T. (852) 3411-4900 it was unclear whether they really believed in the do this, they must find a way of working with F. (852) 3411-4999 E. [email protected] Steven R. Okun Jessica Robinson shareholder value angle or were simply paying management and other stakeholders, adapting URL. avcj.com Public Affairs Director Chief Executive Officer View the full list of speakers at lip service to it. Independent directors could to circumstance and corporate culture as Beijing Representative Office KKR ASrIA never hope to have much sway on issues such as necessary. No.1-2-(2)-B-A554, 1st Building, avcjesg.com No.66 Nanshatan, appointments, and board meetings were said to In recent months, Japan has also emphasized Chaoyang District, Beijing, be so crowded with members and assistants that the link between corporate accountability People’s Republic of China T. (86) 10 5869 6203 opportunities for insightful dialogue were limited. and performance. Part of this effort involves F. (86) 10 5869 6205 Independent directors with these and other encouraging listed companies to appoint more E. [email protected] Registration Enquiries: Sponsorship Enquiries: Chinese companies noted that they could independent directors. It remains to be seen how only bring their experience to bear by fully readily such changes are implemented and the Pauline Chen T: +852 3411 4936 Darryl Mag T: +852 3411 4919 The Publisher reserves all rights herein. Reproduction in whole or Enquiry understanding the challenges and opportunities extent to which directors are willing and able to in part is permitted only with the written consent of E: [email protected] E: [email protected] AVCJ Group Limited. the businesses faced. And this was often best prove their value to management. ISSN 1817-1648 Copyright © 2015 achieved by making visits outside of meetings Co-Sponsor and building relationships with management on site. This article was nudged from the depths of Tim Burroughs my memory at the recent AVCJ Singapore Forum, Managing Editor which featured a panel discussion on private Asian Venture Capital Journal

Join your peers 3 avcjesg.com #avcjesg Number 28 | Volume 28 | July 28 2015 | avcj.com NEWS

ASIA PACIFIC PEP to sell Energy PE-backed CICC files for Developments for $1.4b Hong Kong IPO Temasek, UOB to offer Pacific Equity Partners (PEP) has agreed to sell China International Capital Corp. (CICC), which is Energy Developments, an Australia-based backed by KKR, TPG Capital and Singapore’s GIC $500m in venture debt provider of distributed power, to utilities business Private, among others, has filed for a Hong Kong Singapore’s government-sponsored investment Duet Group for an enterprise valuation of A$1.92 IPO. The company is said to be looking to raise fund Temasek Holdings and United Overseas billion ($1.4 billion). The two companies have around $1 billion. Bank (UOB) have agreed to form a joint vehicle entered into a scheme of arrangement whereby which will offer $500 million in venture debt Duet will pay A$8.00 in cash for all outstanding VC-backed parenting site financing to start-ups in China, India and shares in Energy Developments. Southeast Asia. UOB will purchase a 50% stake in PEP-owned Greenspark Power Holdings Babytree raises $300m InnoVen Capital, a wholly-owned subsidiary of Chinese online beauty products retailer Jumei Temasek. Each group will then commit an initial International has led a $300 million round of $100 million to the venture. funding for Babytree, a Chinese parent-focused social platform backed by several VC investors. DCM closes second Android Jumei invested $250 million in the round, comprising a $120 million convertible loan and fund at $100m $130 million in revolving credit. DCM has raised $100 million for its second Android-focused fund, which will target CDB invests $242m in eHi start-ups building apps for Google’s mobile operating system. The vehicle, A-Fund II, received Car Services commitments from existing LPs including China Development Bank (CDB) has agreed to Tencent Holdings, Gree and Naver, as well as new provide RMB1.5 billion ($242 million) to eHi Car investors such as Baidu, Softbank Group, and has a 67.1% interest in the company, while Services, China’s second-largest automotive Qualcomm. Investors Mutual holds 9.6% and Coopers rental services provider, which is backed by Investors has 4.6%. PEP acquired a 79.6% interest several VC investors. EHi, which went public in Blackstone’s Michael Chae in Energy Developments in early 2010, paying the US last year, has more than 1,200 service approximately A$343 million, or A$2.75 per share. centers across 100 cities in China. named CFO Energy Developments operates a network of The Blackstone Group has appointed Michael power stations in Australia, the US, the UK and App testing platform Testin Chae – its international private equity head, who Greece from fuel sources such as landfill gas, spent four years in charge of Asia PE operations – waste coal mine gas, natural gas and liquefied raises $54.9m to be CFO. He will replace Laurence Tosi, who will natural gas. It provided 4 million megawatt hours Testin, a Chinese mobile apps testing platform, become CFO of Airbnb. of energy - enough to power over 650,000 homes has raised $54.9 million in its latest round of - in the year ended June 2015. funding led by Haiyin Capital, followed by IDG The A$1.92 billion valuation comprises an Capital Partners and Banyan Capital. Founded in AUSTRALASIA acquisition equity value of $1.41 billion plus net 2011, the firm allows app developers, especially debt of A$512 million. The offer equates to 8.8x games operators, to test products before launch. Costa slips below IPO price Energy Developments’ unaudited EBITDA of after $401m offering A$218 million for the 2015 financial year. China P2P lending site Costa Group, an Australia-based fresh fruit and Firstp2p raises $41m vegetables producer controlled by Paine & Carpet Court, making the business free of bank Firstp2p, a Chinese online peer-to-peer (P2P) Partners, is trading below its IPO price following a debt on completion of the deal. financing site, has raised a $41 million Series B $550 million ($401 million) offering. The company round of funding from San Shan Capital, CITIC sold 244.7 million shares at A$2.25 apiece. As of Capital and China Equity. The start-up previously July 27, the stock was at A$2.17. The PE firm has GREATER CHINA secured Series A funding from CCB International taken A$204.5 million off the table and the value and China Equity. of its remaining interest is A$84 million. GLP forms $7b China logistics fund Leading Capital backs take- Allegro buys controlling Singapore-listed warehouse operator Global private for Mecox Lane stake in Carpet Court Logistic Properties (GLP) has launched a $7 billion China health, beauty and lifestyle products Australasia distress specialist Allegro Funds has fund for developing logistics facilities in China. retailer Mecox Lane has received a take-private announced the third investment from its second GLP China will hold a 50% stake in the fund, offer from majority shareholder Cnshangquan fund with the acquisition of a controlling stake called CLF II, and will also serve as the manager. in conjunction with private equity firm Leading in Carpet Court, a New Zealand-based flooring A total of $3.7 billion has been committed to the Capital. It values the business at approximately retailer. The GP will restructure and recapitalize vehicle so far. $52 million.

4 avcj.com | July 28 2015 | Volume 28 | Number 28 NEWS

China after-school tutoring PE firms must think more brands. DeGustibus, which was founded in 1996 by renowned chef Rahul Akerkar and whose app raises $24m deeply about value-add brands include Indigo, Neel, and Moveable Feast, Entstudy.com, a Chinese after-school tutoring PE and VC firms should think more carefully currently has 15 locations across Mumbai and mobile app, has raised $24 billion in an extended about how they can add value to portfolio Delhi. Series B round from two domestic VC firms: Kun companies, using their board representation Ling Capital and Sharing Capital. Last month, the as a tool for constructive guidance as much as Orios launches $150m company raised $20 million in Series B funding oversight, industry participants told the AVCJ from Tencent Collaboration Fund. Singapore Forum. India early-stage fund Nick Nash, group president of consumer Indian VC firm Orios Venture Partners has internet platform Garena, a company he invested launched a new $150 million fund to support NORTH ASIA in while at General Atlantic and then left private start-ups in various branches of the technology equity to join, said he often asked entrepreneurs sector. The launch of the new fund comes less Carlyle registers $775m for whether they really value the contribution of than a year after the firm’s first fund closed at $50 directors PE firms place on their boards. “If we million. third Japan fund are brutally honest, less than 50% are people the The Carlyle Group has registered just over $775 Warburg Pincus invests million for its third Japan fund - Carlyle Japan Partners III. The amount includes $550 million $284m in Piramal Realty under a second vehicle named Carlyle Japan Warburg Pincus has agreed to invest INR18 International Partners III. The fund is targeting a billion ($284 million) in Piramal Realty, the real final close of JPY100 billion ($807 million). estate development arm of Indian conglomerate Piramal Group. Piramal will use the funds to VC-backed Metaps files for expand its portfolio and to acquire more land for IPO development in and around Mumbai. Metaps, a Japanese mobile software developer Tiger Global, Flipkart backed by a slew of VC investors, has filed for its Tokyo IPO and is expected to raise as much commit $12m to NestAway as JPY3.8 billion ($30.6 million). The company - companies would actually want on their boards,” Indian e-commerce giant Flipkart and its backer which has received $52.5 to date - closed a $36 he said. “It’s very important that the person on Tiger Global have together invested INR760 million Series C round in February. the board who represents the capital is truly million ($12 million) in online home rentals adding value to the company.” start-up NestAway. Bangalore-based Nestaway Korea launches another Aik Meng Eng, CEO of TE Asia Healthcare is an online marketplace for home rentals Partners, added that the last thing competent predominantly aimed at young professionals attempt to sell Woori stake management teams want is investors who spend seeking inner city accommodation. The Korean government is once again trying to board meetings firing off countless questions sell its controlling stake in Woori Bank, this time and telling them why they are doing a bad job. In dividing the asset into multiple tranches so that this sense, investors are best served nominating SOUTHEAST ASIA there is no one dominant shareholder. A 30-40% an operations executive who understands interest will be sold in blocks of up to 10% each. the industry or geography and can forge a Singapore’s Qoo10 raises Domestic pension funds and private equity funds constructive relationship with management. are among those to have expressed an interest. “If you have a good CEO he likes to be left $82.1m Series A alone,” Eng explained. “If the company gets into Singapore-based Giosis, which manages Former Japan Exchange trouble you want the CEO to reach out to the e-commerce site Qoo10, has raised $82.1 million shareholders or the board. You need board in a Series A round led by Singapore Press head joins KKR members who are engaged and can be trusted.” Holdings (SPH). Giosis is a subsidiary of eBay, KKR has named Atsushi Saito, former head of which participated in this round, along with the Tokyo Stock Exchange (TSE) and the Japan Saban Capital Group, UVM 2 Venture Investments, Exchange Group (JPX), as the non-executive INR4.8 billion ($76 million). The firm sold its 6.2 Brookside Capital and Oak Investment Partners. chairman of KKR Japan. million shares in a series of block deals. L Capital originally bought its stake through two separate Sequoia leads $3.25m SOUTH ASIA investments in 2012. round for Malaysia’s KFit IVFA commits $30m to Malaysian online fitness platform KFit has raised L Capital Asia exits India’s $3.25 million in a funding round led by Sequoia restaurant chain operator Capital. KFit, which launched in May with an PVR India Value Fund Advisors (IVFA) will invest $30 undisclosed amount of seed funding, allows L Capital Asia has fully exited its remaining stake million in India’s DeGustibus Hospitality, the users to find and join fitness facilities in their area, in Indian cinema chain operator PVR Cinemas for owner and operator of several popular restaurant including gyms, studios, and sports grounds.

Number 28 | Volume 28 | July 28 2015 | avcj.com 5 Customized Research Report Asian Private Equity Data Made Simple

AVCJ Research can provide your firm with timely and accurate research support to help you simplify and expedite your workflow. We conduct in-depth research and provide insightful analysis in a bespoke report that fully meets your data requirements.

AVCJ’s industry standard data is used by the world’s leading firms in their fundraising, investor relations communications and deal due diligence activities. AVCJ Customized Data Service includes:

✔ Pan-Asian Industry Reviews/Regional Reports – timely updates ✔ Specific industry and financing stage research ✔ Comprehensive statistics on investments and funds ✔ Exits strategic analysis ✔ Market peers comparison

To understand how AVCJ Research can help you with your data needs, please call: 852-3411 4961 or email [email protected] avcj.com COVER STORY Customized Research Report [email protected] Asian Private Equity Worst case scenarios There are various ways for PE investors to seek legal recourse against portfolio companies that have behaved Data Made Simple improperly – provided they have structured deals properly and don’t mind getting their hands dirty

THE DETERIORATION IN RELATIONS risk analysis and consultancy services, one in something is bad or unlikely to be resolved, so between CVC Capital Partners and Lan Zhang, five failed investments are the victims of market there is a sense they might be throwing good founder of Chinese restaurant chain South conditions. In the other four cases, the problem money after bad and damaging their reputation Beauty, went from rumor to media reports to is the management team. A good management in the market, they might decide enforcement is publicly disclosed legal action within the space team, even when paired with a poor business not the best use of their LPs’ capital.” of a few weeks. The GP has now exited the idea, can deliver strong performance. The In this context, there is a general desire for AVCJ Research can provide investment, with nothing to show for it, and converse is not true. resolutions negotiated outside of the public your firm with timely and creditors have brought in restructuring experts to “A bad management team and a good domain. Arbitration is therefore an attractive see what they can recover from the situation. idea – that is where people encounter the most proposition. Unlike litigation, it is private accurate research support Before that, in March, it emerged that CVC trouble. They fall in love with the idea but the and there are typically no appeals. However, and Zhang were involved in arbitration over the management team isn’t up to snuff and things arbitration can also be expensive and may limit to help you simplify and transaction, which last year saw the PE firm pay go wrong,” Kattoulas says. “I know a PE firm that an investor’s options. While an international expedite your workflow. We around $300 million for a majority stake in South invested in bricks and mortar retail not long arbitration award is enforceable in China, for Beauty. CVC also obtained a court injunction ago. It shouldn’t work – we are all shopping example, it can take time, and some industry conduct in-depth research to freeze the founder’s assets. Upholding the online now – but it’s been a brilliant investment participants advocate going through the injunction against Zhang and two other entities, because the management team is great. I’ve seen mainland courts directly. and provide insightful a Hong Kong judge noted that “very substantial other funds go into China healthcare with a bad Swift action is particularly important, given analysis in a bespoke report sums had been paid by them [CVC] and it is still management team and it’s been a disaster.” the local party might have transferred assets unknown where those sums now are.” There is often a common factor driving these out of a joint venture company by the time that fully meets your data The ruling did not explain the nature of the deals: PE firms are under pressure to deploy a court endorses an arbitration ruling made requirements. dispute between the parties. However, it has capital in a highly competitive Asian landscape. overseas. “You go through a very extensive legal been suggested that South Beauty’s earnings This may lead investors to overlook weaknesses, process and you don’t know what is going to were artificially inflated ahead of the deal closing – just as other restaurant chains were beginning to feel the pinch of Beijing’s efforts to rein in “You look for evidence of property ownership AVCJ’s industry standard data is used by the world’s leading firms in their spending by government officials. If there has fundraising, investor relations communications and deal due diligence indeed been fraudulent activity, CVC will want its in enforceable jurisdictions – moveable assets, money back and freezing a person’s assets is one lifestyle assets like fine art, jewelry, luxury cars, activities. AVCJ Customized Data Service includes: way of encouraging them to pay up. The circumstances are far removed from boats – and try to build a picture of what assets those under which the transaction was struck. – Chris Leahy ✔ Pan-Asian Industry Reviews/Regional Reports – timely updates Zhang said that CVC’s vision “highly aligns with might be available in a valid claim” ✔ Specific industry and financing stage research ours in respect of brand positioning, future growth areas, corporate culture and values.” compromise on terms and cut corners on due be left of the company at the end,” says John ✔ Comprehensive statistics on investments and funds Francis Leung, managing partner at CVC, in turn diligence in order to win over the entrepreneur Lees, managing director at JLA Asia, a forensic praised the South Beauty management team for and get the transaction closed quickly. accounting and insolvency management ✔ Exits strategic analysis its “deep industry insights and knowledge as well GPs can be divided into three broad consultancy. as strong execution capabilities.” categories as to the aggression with which they David Mahon, managing director and CIO ✔ Market peers comparison The language is not unusual for investment seek a resolution. First, distress investors are used at Mahon China, which advises or represents announcements. At this point in the process to dealing with problems and unafraid of getting investors in distress situations, adds that where interests are aligned and there are hopes of future adversarial. Second, credit and special situations the Chinese legal system is lacking, relationships growth. But during these halcyon days, how players tend to be highly attuned to downside must come to the fore. Although the courts have many GPs think carefully about what happens protection and how the capital structure can be become far more efficient, local government if the deal turns sour? This has implications for used to secure their interests. Third, generalists, officials are often best positioned to encourage transaction structuring and how PE firms can particularly minority investors, are sometimes counterparties to reach a settlement. recover value in a worst case scenario. reluctant to get their hands dirty. “You have to bring in official support at the To understand how AVCJ Research can help you “PE investing is about having one or two really very beginning, during the investment and with your data needs, please call: 852-3411 4961 or Taking action good hits, which more than make up for ones certainly when there are problems. Too many According to Velisarios Kattoulas, CEO of The that aren’t so good,” says Chris Leahy, co-founder foreign investors look at it and say, ‘Here’s the email [email protected] Poseidon Group, which provides due diligence, at Blackpeak Group, a strategic advisory firm. “If contract, if we have a problem we can go to avcj.com Number 28 | Volume 28 | July 28 2015 | avcj.com 7 COVER STORY [email protected]

court.’ And too many of them try to establish joint venture, which means action can be taken in the British Virgin Islands, and then asked a arbitration outside of China, which often does directly onshore. court to liquidate the business. It also announced nothing to help in China.” On top of this, there might be unsigned plans to redeem shares in Titan and later asked a In addition, arbitration agreements are bound letters of resignation from the founder’s Bermuda court to start liquidation proceedings. by their wording. There are situations in which representative board members and share transfer Titan was also looking for solutions, lining clauses do not clearly define the dispute that has agreements held in escrow and released to the up oil and commodity trader Guangdong arisen and then they only apply to the people investor if there is a desire to claim the security Zhenrong Energy as a buyer for a controlling who are party to them. and assume control of the company. stake in the Hong Kong-listed business and for PE investors enter investments with a broad The threat of legal action is intended to Warburg Pincus’ interest in several other assets. idea of their potential exit routes. The same encourage founders to negotiate. For example, The agreement was conditional on the lawsuit being dismissed and court approval of a debt restructuring plan. Warburg Pincus duly exited Dispute resolutions at major Asia arbitration centers and the restructuring proceeded. 15,000 “The exit was planned before we took the first step towards enforcement,” says one lawyer who worked on the deal. “No one should go into 10,000 these situations blind, without identifying who are the potential investors to take you out. The enforcement process was executed in a relatively 5,000 short space of time – 2-3 months.” New cases heard New More recently, L Capital Asia took portfolio company Jones the Grocer all the way into

0 insolvency in order to secure a desired outcome. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 The gourmet food retailer has operations in Hong Kong International Arbitration Centre Singapore International Arbitration Centre Australia and Singapore and so proceedings were China International Economic and Trade Arbitration Commission instigated in each jurisdiction, with the private Source: HKIAC, CIETAC, SIAC equity firm successfully bidding for both sets of assets out of administration. According to a source familiar with the strategic thinking should go into how to recover once a shareholder in a small company is situation, L Capital “partnered with the wrong value when things turn sour. If a GP ends up in forced to consider the financial implications guy,” and he remained CEO after the PE firm litigation or arbitration, how can it maximize of contesting a court case – the costs might invested in Jones the Grocer in 2012. The parties its ability to win the argument and recover any amount to the value of the company itself – he is were unable to work together and the structure damages that might be awarded? It is not only likely to appreciate the merits of a settlement. of the investment agreement made it difficult a case of whether an arbitration clause should “We are always ready to talk and get a to replace him, hence the decision to enter be used and how it is worded, but also the solution rather than rely on a process,” says administration and start again. jurisdiction in which a dispute will be resolved. Mahon. “In China, once you have engaged with “This is a means by which a shareholder can “Sometimes not enough attention is paid the court then often there is a reluctance to talk. take control of the investment in circumstances to the dispute resolution clause generally. That There is either a belief that the process will go where another shareholder is mismanaging it,” is partly the lawyers’ fault. The people who put on for a long time and the foreign investor won’t notes Randall Arthur, a partner at Kobre & Kim these agreements together are not normally get the satisfaction they expect, or there is a who specializes in insolvency litigation. “We acted litigators so they come at things from a different polarization in the relationship itself. Litigation is for the provisional liquidators of a company that perspective,” says Mark Johnson, a partner and a last resort.” had two directors, one of whom wasn’t pulling member of Debevoise & Plimpton’s international his weight and wasn’t financially stable. The other dispute resolution group. “There is a lot more Forcing the issue director wanted to take over the business, but coordination between corporate and litigation There are, however, cases in which PE firms they couldn’t reach an agreement. So he called lawyers than there used to be, but there are still have gone to great lengths in order to achieve a on some loans he had made to the company, occasions where people simply pull something desired outcome. Warburg Pincus pumped $215 forced it into liquidation and made an offer to the off the shelf and it might not be the right clause million into Titan Petrochemicals, a Hong Kong- provisional liquidator.” for a certain type of agreement.” listed shipping and oil storage company, only In situations where a founder has The standard downside protection for to see the business struggle in the wake of the misappropriated assets from the company and minority investors is a put option – redeeming a global financial crisis. The GP also found evidence placed them under new entities in his own position and taking the assets held as security. that senior executives had secretly provided name, investors can ask the courts to unwind For China investments, this security often unauthorized guarantees to subsidiaries in these transactions. Similarly, if it is possible to takes the form of shares in the offshore vehicle order to keep them afloat, leading to significant prove fraudulent activity, personal assets held pledged by the founder; and so enforcement damages and potential liabilities. by the founder might be attached to the case hinges on a local court accepting that the foreign These details emerged in a 2012 Hong Kong and used as leverage, or even seized. This often party can enforce against a wholly foreign- court filing that was part of a multi-jurisdictional involves identifying assets in jurisdictions where owned enterprise (WFOE). Alternatively, the effort. Warburg Pincus exercised redemption enforcement is seen as easier. investment might be structured as a Sino-foreign rights on securities issued by a Titan subsidiary “You look for evidence of property ownership

8 avcj.com | July 28 2015 | Volume 28 | Number 28 COVER STORY [email protected]

in enforceable jurisdictions – moveable assets, exactly has gone wrong and who is at fault. The are willing to spend more on minimizing their lifestyle assets like fine art, jewelry, luxury cars, counterparty’s misbehavior could have been downside in this respect. Investigative due boats – and try to build a picture of what prompted by any number of factors, ranging diligence is increasingly seen as part of the assets might be available in a valid claim,” says from financial distress to third-party litigation standard process alongside legal, financial and Blackpeak’s Leahy. “A mareva [asset freezing] to family problems, and the investor can only operational analysis. More attention is also being injunction is helpful because it can flush out decide how to proceed towards a settlement paid areas such as political and regulatory risk where cash deposits or significant assets are once in possession of the relevant facts. and competitor analysis. held.” There is a striking resemblance between With larger sums at stake – and in an It is also possible to take action against the issues that emerge during these processes environment of slower growth and rising directors of a company who are engaged in and the areas of examination in deep pre-deal valuations, which means that private equity conduct that is in breach of their fiduciary duties. due diligence: how the business was founded firms must work harder for their returns – there Kobre & Kim’s Arthur was previously involved and achieved scale; the founder’s track record, is greater willingness to give third-party services in a case in which the directors of a Singapore including how he has treated partners, creditors providers the resources and time to perform company passed resolutions to pay themselves and employees, particularly in times of stress; tasks to an appropriate level of detail. That said, dividends as shareholders despite the business the management style and how the company industry participants say there remains a divide being insolvent. The directors owned properties is perceived by customers, suppliers and between those firms that ask for a completely in Hong Kong and there were indications these competitors. non-jaundiced assessment of management would soon be sold, so an injunction was It raises the question of how many distressed teams and those that reduce due diligence to a obtained to freeze the assets. situations and dispute resolutions could be box-check, affirmation exercise to be completed “It wasn’t enough for the full claim in avoided by investors doing their homework in two weeks. Singapore but it covered a substantial amount of before putting any capital to work. “It is a good “Once things have gone wrong there is not a it,” says Arthur. “And it did cause the directors to step to do as much due diligence as possible on lot you can do to turn things around. You need approach them and ask to do a deal.” the entities and individuals being invested pre- to be very lucky, and generally people aren’t acquisition so you know any potential obstacles,” lucky enough,” says Poseidon’s Kattoulas. “The far Be prepared says Keith Williamson, head of the global forensic smarter thing is to limit the possibility of these When consultants are brought in to provide and dispute services team in Hong Kong and things happening in the first place. You have to advice on troubled investments, they are not just China at Alvarez & Marsal. be very rigorous going into relationships and looking for assets to pursue. A fraud investigation The consensus view is that most private transactions and then using sufficient resources must begin with an understanding of what equity firms, wearing the scars of past mistakes, to monitor things properly.”

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To subscribe, call Sally Yip at +(852) 3411 4921 or email [email protected] avcj.com DEAL OF THE WEEK [email protected] / [email protected] NSI Ventures in robot kitchen play

THE OLD PROVERB IS THAT NECESSITY IS German electronics multinational Robert Bosch, than $72 million, with over 5,000 distribution the mother of invention, but in an age of robotics in Series B round of funding. partnership requests. it seems that simple inconvenience is enough “Zimplistic is in the sweet spot of our thesis: “As an investor in robotics, IoT and hardware- to give birth to the next great innovation. that innovative products and services for the related companies, we believe that Southeast Such is the case with the Rotimatic, a “robot” emerging middle class are going to be rising Asia is a preferred place to start a company invented specifically to make whole wheat Indian opportunities in Asia,” says Hian Goh, founder focused on such activities,” says Goh. “The flatbreads or rotis. and general partner at NSI. “The manufacturing heritage of “Even in today’s technologically advanced fact that Zimplistic is making a Singapore as well as its closeness world, [women] still have to come home after robotic hardware device to fulfill to the manufacturing chain long day of work to the tedium of roti-making,” the needs of a rapidly urbanizing meant that we were bullish on explains Pranoti Nagarkar, co-founder and CTO population is core to the way we finding great companies here.” of Singapore-based Rotimatic maker Zimplistic, think about our portfolio and the The proceeds of the explains in a polished promotional video. “I have companies we invest in.” investment will mainly be used been through it and I have seen so many of my Zimplistic was set up by to scale up the production friends go through it.” Nagarkar, a product designer, Rotimatic: Making bread capabilities, testing and But not anymore, she adds. Her answer to in 2008. Its first product claims ultimately the distribution of the this problem sits at a convergence of three to be the world’s first fully automatic flatbread Rotimatic. The core technology that underpins technology trends – hardware, robotics, and the maker, using a patented technology to mix the the product also has significant potential to be internet-of-things (IoT) – while simultaneously correct ratio of flour and water to make one roti developed for use in further products. tapping into the wants of a fast-growing middle per minute. Despite its high price tag – $599 “The opportunity to build a world-class class. (excluding shipping) – sales of the Rotimatic consumer electronics company is there for us A perfect blend for NSI Ventures, which has reached $5 million within the first week of its to capitalize and we intend to work closely with decided to invest $11.5 million in the company launch last year. Robert Bosch VC as well as the management alongside RBVC, the venture capital arm of The waiting list is now said to be worth more team to achieve this aim,” Goh says. MedGenome aims to fill the sequencing gap

INDIA’S VAST ASSORTMENT OF ETHNIC major cities. It called for the expansion of genetic one of its chief strengths, the firm remains groups represents a golden opportunity for testing, along with research into genome focused on extending its reach and knowledge MedGenome. The 2,000 groups that inhabit the sequencing to identify the roots in Asia. “We’re getting samples subcontinent are a treasure trove of information of prominent disorders. not just from India now,” says waiting to be harvested and put to work. MedGenome has since Kumaramangalam. “We’re getting “You have these distinct population groups partnered with over 100 hospitals samples from other parts of Asia, that have evolved for 30-100 generations in a to provide testing material to and even as far afield as Russia.” fairly homogeneous setting, which makes it the understand how the genetics The more samples it collects, the ideal playground to do genetics research,” says Dr. of India’s various ethnicities better the picture the company Kartik Kumaramangalam, chief of global products contribute to their health. “We’re can build of the populations in and services at MedGenome. beginning to understand disease,” MedGenome: India champion the region. Sequoia Capital sees the potential in says Kumaramangalam. “We have Unlike in China, where BGI has India’s ethnic bonanza as well. The GP recently access to patients and populations, and we can become a leader in genome sequencing, India committed $20 million as the sole sponsor of enable pharma and biotech companies in other has no world-class homegrown genetic research MedGenome’s Series B round. The company parts of the world to develop better drugs and enterprise. MedGenome intends to overturn this plans to use that funding to build on its strong better insights into disease.” state of affairs, and give the country the scientific starting position as the leading provider of next- Beyond scientific research, MedGenome institutions that nearly a quarter of the world’s generation sequencing (NGS) services in India. emphasizes the practical side of its testing. To population deserves. MedGenome entered the market at an combat the problem of infant mortality, the “When you think of genomics in India, there’s opportune time. A report issued by KuicK company has recently introduced the Panorama no natural answer that comes to mind,” says Research in 2012, a year after the company’s Non-Invasive Prenatal Test for expecting mothers, Kumaramangalam. The goal of MedGenome is to founding, warned that congenital malformations which was developed by US-based Natera. become that answer. “To fill in the blanks, and say and genetic disorders were the third most MedGenome is the only provider in India. India plus genomics is MedGenome. I think that’s common cause of infant mortality in India’s While MedGenome’s US connections are the mission.”

10 avcj.com | July 28 2015 | Volume 28 | Number 28 FUNDS [email protected] GSR fuels its global ambition

BRINGING OVERSEAS TECHNOLOGY TO There will be no more than three deals, each by Cheng, while Wu owns more than 15%. China is a popular investment thesis among GPs. one worth several billion dollars. GSR will either Prior to the launch of the new fund, GSR Go However, while the likes of Fosun International buy companies or acquire minority stakes in Scale acquired an 80.1% interest in Lumileds, the and Hony Capital have completed several cross- sectors such as clean energy, bio-pharmaceuticals LED components and automotive lighting unit border deals, this is not their sole proficiency. GSR and life sciences, bulk commodity investment, of Dutch electronics giant Philips, in a deal worth Capital is therefore an exception. traditional and internet finance, wireless $3.3 billion. The firm started out as an early-stage VC communication and the cultural industry. In May, the GP led a transaction whereby a investor and recently entered the growth-stage “Everyone understands cross-border arbitrage. majority stake in its Chinese portfolio company, space under Go Scale Capital. Enterprise valuations in China are Lattice Power, was sold to Hong Kong-listed Now it is targeting control deals higher than overseas, especially Shunfeng International Clean Energy (SFCE). Go on a global basis, raising $1 for high-end tech companies. Scale and its fellow investors in Lattice, which billion for the GSR Global M&A But a lot of people don’t know include GSR, Asia Pacific Resources Development fund. Chinese billionaire Kin technology arbitrage. You really (APRD), Crescent Point, Temasek Holdings and Ming Cheng, who has previously need to understand technology Mayfield, received HK$2.04 billion ($263 million) collaborated with GSR and Go in order to source the best deals,” worth of shares in SFCE. Cheng is a shareholder Scale on other deals, is among Wu says. “I have been investing in in both APRD and SFCE. the investors. Technology: Cross-border angle technology and operating tech Wu says those two transactions were made “We have raised $1 billion and firms for over 22 years. We’re the on deal-by-deal basis and they shouldn’t be have sufficient commitments to do $5 billion most tech-focused investor in China.” seen as emblematic of the coming buyout deals. worth of deals,” says Sonny Wu, co-founder of GSR The GP, GSR Go Scale Capital, will work closely “New investments will be in different sectors. Ventures and chairman of GSR Capital and Go with Hong Kong-listed investment company We are not only looking in the US, but also Israel, Scale. “We haven’t decided which deals to do yet, Good Resources on management of all M&A Germany and Sweden. I can bring a new market but we’re targeting transactions that could be deals from the fund. The two parties will co-invest to the portfolio companies. That’s our value worth $5-10 billion.” in certain transactions. Good Fellow is controlled creation angle,” he says.

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Join your peers Join your peers avcjforum.com #avcjforum avcjforum.com #avcjforum FOCUS [email protected] Profile booster Chinese celebrities are entering the venture capital space, offering start-ups endorsement as well as financial support. But can a pop star’s cachet translate into long-term sustainable growth?

FOR CHINESE START-UP HEYJUICE, AN also an actor turned angel investor. Last July, he Start-ups can save a lot advertising fees because investment from Hong Kong actress and model launched a super angel fund – StarVC – together of that,” says Desmond Marshall, managing Angelababy is worth far more than the dollar with actress Bingbing Li and actor Quan Ren. The partner of Rouge Ventures, which specializes in value of her commitment. The company now has debut fund was understood to be worth RMB80 reinventing consumer brands in Greater China. ties to one of the cast of upcoming Hollywood million and a successor vehicle of RMB300 million “To maximize the celebrity effect, founders blockbuster Independence Day 2, and can has now been fully deployed. should consider how to match the target market capitalize on the attention this brings. On the launch of Fund I, StarVC said it with the right star.” Born Ying Yang, the 26-year-old actress shot received over 3,000 emails from entrepreneurs Jin wants Telescope to partner with celebrity to fame on the popular Chinese reality show asking for capital. Early investments included funds in order to save on marketing costs, Running Man, where contestants take part in e-commerce site Handu and video app Miaopai. although he admits that celebrities’ value-add is missions at various landmarks. Angelababy has The latter went on to raise a $50 million Series C still very limited. over six million followers through her Weibo round led by KPCB, alongside Sina Corporation “Based on the investments announced, microblog and has put her name to a number of and Redpoint Ventures. celebrities haven’t put sufficient resources into coffee shops and nail salons in Hong Kong. Announcing its participation in the Series C, boosting companies’ images. They are more like Last month she launched a venture capital StarVC plugged Handu: “Zara belongs to Spain; passive investors, creating a bit of news around firm – AB Capital – and made two investments: H&M is from Sweden; Uniqlo is from Japan; C&A the investment and that’s it. We know about the Chinese cross-border e-commerce site Ymatou investments because we’re in the industry, but and health drinks maker HeyJuice. most consumers do not,” he explains. HeyJuice targets the young adult female “The impact they can demographic, supplying fruit and vegetable- Sustainability issues based juices that assist dieting. The company have relates to the time It is worth noting that angel investment is not plastered Angelababy’s face on its website, a full-time job for these celebrities. By acting proudly announcing that it has China’s most and resources they can as a brand endorser for an investee company, attractive actress as a product manager. devote to promoting they may be in violation of agreements with “Angelababy has tried all the drinks and helped authorized media agencies if there is no sharing us improve the vegetable juice. The new series of these companies” – Ge Jin of commissions. For this reason, and because products will be available within a week,” it said. she is contracted to promoter other drink Having raised funds from Sequoia Capital, brands, Angelababy cannot pose with a bottle of Ceyuan Ventures, VenturesLab, and the founders is from Holland. StarVC asks you to shout: Handu HeyJuice in her hand. of Focus Media and JD.com, HeyJuice has added belongs to Chinese!” The company has since seen Moreover, their fame is very tangible. “There’re a celebrity endorser to its investor roster. rapid growth in its user base. always pros and cons. If the actress is really Over the past 12 months, StarVC has backed famous and the portfolio company suddenly Angel rush 10 companies, including peer-to-peer (P2P) becomes well known, the founder should It should come as no real surprise that celebrities lending platform Wangcai.com and luxury online bear in mind that thousands of paparazzi will have hopped on to China’s angel investment retailer Hichao.com. The VC firm no longer follow the star every day. You can’t predict the bandwagon. They are high net worth individuals announces its investments with great fanfare; consequences and that is the risk,” Marshall says. with capital to deploy and they have seen the rather, the portfolio companies post pictures of Ultimately, the question is whether media frenetic wealth creation in the technology the StarVC team to promote themselves. exposure is meaningful to the portfolio company. space. Celebrities are making independent Celebrity cachet has also been used to source A celebrity might help a start-up achieve rapid investments or setting up funds with others in deals. When Qihoo360 Technology launched growth in the first few months, but can this be the entertainment industry. Their endorsement an Android-focused start-up accelerator sustained over several years? could take years off a brand-building process, but program several months ago, it invited angel “The most important area for a start-up is its is it just a flash in the pan? investor Xiaoping Xu, actor Chao Deng and core operation and developing a sustainable “Celebrity funds’ involvement can bring value movie director Baimei Yu to serve as mentors. business model,” says Joe Wu, founder of to portfolio companies,” says Ge Jin, investment Hongwei Zhou, CEO of Qihoo360, said: “Deng’s early-stage VC fund M Fund, previously CEO director at China retail-focused fund Telescope involvement brings us a good supply of high of 91Wireless. “Celebrities might not be able Investments. “However, the impact they can have quality start-up projects.” to offer this kind of help. Entrepreneurship is a relates to the time and resources they can devote “The core value of the celebrities is to long-term process; short-term success or failure to promoting these companies.” leverage their fame to generate attention. is meaningless. If the start-up can only generate Yang’s AB Capital is not an isolated When they post online to promote the brands, sales through Angelababy’s endorsement, I phenomenon. Her husband Xiaoming Huang is hundreds of thousands of fans will follow. wouldn’t invest in it.”

14 avcj.com | July 28 2015 | Volume 28 | Number 28 LP INTERVIEW [email protected] Frontier veteran Active in Asia for 50 years, German development finance institution DEG can claim a role in the emergence of PE in the region. Singapore-based Marcus Bracht explains how its strategy has evolved since then.

FEW EUROPEAN INVESTORS CAN CLAIM realize their expansion plans and modernizations.” and cultural aspects, each market has its own to have a history in Asia as long as DEG, whose Still, around one quarter of the risk capital challenges. However, our long experience in unabbreviated name translates to German activity took the form of commitments to these markets allows us to deal with them.” Investment Corporation. As the emerging private equity funds. DEG’s fund program markets arm of KfW, Germany’s government- typically focuses on mid-cap funds, which may A broader remit backed development bank, DEG has been be generalist, sector-focused or dedicated to China and India have been the largest Asian investing in the region since its launch 1962. SME impact investing. Like many development markets for DEG’s PE investments to date, but in “Private equity has been an important part of finance institutions (DFIs), DEG often serves as the last couple of years the group has become our investments for decades,” says Marcus Bracht, a vital source of capital to first-time managers, increasingly active in Southeast Asia, particularly vice president at DEG’s representative office in or managers in frontier markets, who otherwise Indonesia, Thailand, Vietnam and the Philippines. Singapore. “The original idea was to promote struggle to attract institutional investors. DEG’s fund commitments in the region over the private sector by mainly assisting German “First-time funds mostly need support from the past 24 months include Armstrong Asset medium-sized companies with their investments DFIs as a result of the still-challenging fundraising Management Southeast Asia Clean Energy in developing countries.” environment in most Asian countries,” says Bracht. Fund, which reached a $164 million final close Bracht explains that historically the group’s “Our experience and cooperation with new, in November 2013, and CapAsia’s ASEAN investments were mainly in debt finance. It professional and like-minded fund managers Infrastructure Fund III, which launched in 2013 later branched out into equity and mezzanine is generally very positive and encourages us to with a $350 million target. financing. From 1990 onwards much of this continue with this strategy.” Meanwhile, recent direct investments in activity had naturally been focused in Eastern While the performance across DEG’s private Southeast Asia include Indonesian pharma Europe, as countries of the former Soviet Union equity investments is quite broad – which is to player Soho Global Health, which raised an transitioned from planned to market economies. undisclosed sum from DEG and Quadria Capital Today, however, Asia plays a much larger role in January, and MAXpower Group, an Indonesian DEG’s portfolio distribution, 2014 across the whole of DEG’s investment portfolio. power plant developer. The company raised The fund has five offices in Asia and the region $12.5 million from a consortium of investors that accounted for more than 31% – or EUR2.4 billion included DEG, the Asian Development Bank, ($2.6 billion) – of its portfolio in 2014. The second- and the International Finance Corporation (IFC), largest region after Asia is Africa, which accounts among others, last year. for 24%, or EUR1.86 billion. “Those early-stage markets benefit from an attractive economic growth and lower valuation Early mover expectations as an outcome of less competition DEG has been making sporadic PE investment in among only a few investors,” Bracht adds. Asia, directly and through fund commitments, for DEG plans to maintain a good geographical decades. The earliest LP investment recorded by mix in Asia, but it will consider ramping up AVCJ Research, however, go back to around 1998 activity in countries like Cambodia, Laos and when DEG made commitments to the INR650 Myanmar. The group’s two most recent fund million ($10 million) Indian Auto Ancillary Fund Africa (Sub-Saharan) 24.0% commitments focus on the edges of South Asia: managed by IL&FS Investment Managers. The Asia 31.3% Zephy Partners’ $42 million Emerald Sri Lanka auto components sector-focused fund generated Latin America 25.9% Fund and Aavishkaar’s recently launched $45 an 18% gross return and a 2.1x multiple. Europe 15.0% million Frontier Fund, which targets Indonesia, North Africa / Middle East 1.5% DEG did not set up a dedicated private Bangladesh, Sri Lanka and Pakistan. DEG is Supra-regional 2.3% equity group until 2004. Since then Bracht says anchor investor for the latter vehicle alongside the fund has seen a significant increase in its PE Source: AVCJ Research Germany’s Federal Ministry for Economic investments. Last year around 45% of DEG’s new Cooperation and Development (BMZ). commitments were in risk capital finance. The “These markets are very much majority of these are direct equity investments. be expected given the markets in which it invests underpenetrated by private equity, but offer “The focus of DEG’s investments has been – the asset class has met expectations. attractive investment opportunities and are part on small and medium-sized companies and “Portfolio diversification in terms of number of our future markets strategy in Asia,” says Bracht. projects in emerging markets,” says Bracht. of investments, industries and regions is an “A sector, which we have a special focus on, is “These companies are usually faced with a low important factor in this success. Partner selection renewable energy and, looking forward, we think capitalization and consequently have restricted is also key to our due diligence and investment of intensifying investments in healthcare as well access to long-term finance which they need to decisions,” says Bracht. “Under regulatory, legal as in the insurance sector.”

Number 28 | Volume 28 | July 28 2015 | avcj.com 15 E:

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