AVCJ & Venture Forum 2012 AVCJ Private Equity & Venture Forum 2012

London Hong Kong 11 October 2012 13 - 16 November 2012 avcjeurope.com avcjforum.com ASIAN JOURNAL

Asia’s Private Equity News Source avcj.com September 11 2012 Volume 25 Number 34

Editor’s Viewpoint Is Korea’s market open for business again? Page 3 PRIVATE EQUITY ASIA Nes w Blackstone, Carlyle, CICC, CLSA, CVC, GIC, Goldman, IFC, Kaiwu, Kaizen, RRJ, Nexus, Northstar, Page 4 Focus M&A ASIA Chinese courts plunge down-side protection tools into uncertainty Page 10 f unds Cathay Capital scores Sino-French mandate Page 11 L P interview Allstate uses fund-of- Exclusivity matters funds to get a first taste of Asian private equity How to access quality deal flow in Asia’s nascent secondaries market Page 7 Page 15

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China property play Cult of personality Century Bridge closes fund at $170m Page 11 Asian celebrities catch on to the PE craze Page 14 Anything is possible...

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Desert Ad_A4.indd 3 22/03/2012 09:59 Editor’s Viewpoint [email protected] ASIAN VENTURE CAPITAL JOURNAL

Managing Editor Tim Burroughs (852) 3411 4909 Senior Editor Brian McLeod (1) 604 215 1416 PRIVATEAssociate EQUITY EditorASIA Susannah Birkwood (852) 3411 4908 Staff Writer Korea redux Alvina Yuen (852) 3411 4907 Creative Director Dicky Tang M&A ASIA Designers Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow

Despite a few issues, South Korea has Post and Military Pension that are becoming Senior Research Manager always been a favored market for Asian private increasingly influential. Of course, there is also Helen Lee Research Manager equity investors. That is hardly surprising as the Korea Investment Corporation (KIC), but it’s Alfred Lam many of the best performing transactions in the overseas-only mandate means it is off limits to Research Associates history of the asset class in Asia have come out of the domestic GPs. Kaho Mak, Jason Chong Korea. It could be argued that the restructuring That’s only the tip of the iceberg, according Circulation Manager to local GPs I met. Financial institutions are Sally Yip deals triggered by the Asian financial crisis – Circulation Administrator Good Morning Securities, Korea First Bank, and so becoming active. In addition to the local banks, Prudence Lau on – transformed private equity in the region. insurance companies are searching for alpha Senior Manager, Delegate Sales This period was followed by a spate of with private equity funds. It is no wonder that Anil Nathani PE investors helped Korean companies gatekeepers and fund-of-funds have been Senior Marketing Manager grow in a meaningful way. Deals representative aggressive in this area. I’m told that virtually all Stacey Cross of this stage included Hi-Mart and Faceshop, Asia-focused fund-of-funds are now hiring or Director, Business Development both of which were exited to strategics for great have already recruited Korean professionals to Darryl Mag returns. help with market access. Manager, Business Development Around 2006, however, the country began to LP support of Korean funds also goes down Samuel Lau lose its international luster. Local conglomerates to the venture capital level. The Korea Venture Sales Coordinator began to embrace the private equity funds (PEFS) Investment Corporation, the government backed Debbie Koo structure and PE investment became a largely fund-of-funds that targets local VCs, has invested Conference Managers Jonathon Cohen, Zachary Reff, Sarah Doyle local affair, with the 2009 buyout of Oriental in more than 230 funds managed by 70 GPs. As a Conference Administrator Breweries by KKR and Affinity Equity Partners one result, Korea has become the third largest market Amelie Poon of few exceptions. globally for venture investment after China and Conference Coordinator Fiona Keung, Jovial Chung As documented in AVCJ, we are now seeing the USA. Publisher & General Manager another wave of deals, which suggest that While most of the Korean GPs I spoke to Allen Lee South Korea is coming back as a market for remain modest, all are quietly confident about Managing Director international private equity investors. Certainly, the future of the asset class in the land of the Jonathon Whiteley on my recent visit to Seoul there was a distinct morning calm. Only time can tell if South Korea Chairman Emeritus feeling of optimism among both GPs and LPs. will once again be a sweet spot for buyouts, but Dan Schwartz There are several reasons why more than its chances seem better than many other Asian $4.5 billion has been racked up in private countries. equity investment so far this year. Yes, chaebols, Incisive Media particularly the smaller ones, are more willing 20th Floor, to do business with private equity. In fact, Tower 2, Admiralty Centre 18 Harcourt Road, one fund manager went as far as saying that Admiralty, Hong Kong T. (852) 3411-4900 many executives at second- and third-tier F. (852) 3411-4999 conglomerates are beginning to see PE as a E. [email protected] URL. avcj.com solution to their liquidity problems. Another key factor is the wider availability of Beijing Representative Office Room 1805, Building 10, financing from Korean banks. Local lenders are Allen Lee Jianwai SOHO, 39 East 3rd-Ring Road, hungry for deals and will go as far as investing Publisher Chaoyang District, Beijing 100 022, China into PEFs to help them secure business for their Asian Venture Capital Journal T. (86) 10-5869-6205 F. (86) 10-5869-7461 project finance divisions. Most of the recent large E. [email protected] transactions were executed by firms that are either local or have been doing business in Korea The Publisher reserves all rights herein. Reproduction in whole or for some time. in part is permitted only with the written consent of AVCJ Group Limited. Finally – and, in the long term, perhaps most ISSN 1817-1648 Copyright © 2012 significant – South Korea’s renewed vibrancy is a function of the fact that the country is now part of the mainstream fundraising circuit. The National Pension System (NPS) remains the biggest LP but there are others like Korea

Number 34 | Volume 25 | September 11 2012 | avcj.com 3 News

ASIA PACIFIC Nexus closes third India fund-of-funds, confirmed it will invest in Kaiwu’s fund at $270m new vehicle. MGPA announces first close Nexus Venture Partners has announced a final Qualcomm backs Dolphin close for its third fund at $270 million, around on Asia real estate fund $50 million more than for its previous vehicle. Browser Series B round MGPA has held a first close on a EUR500 million Investors include endowments, foundations Qualcomm’s VC arm has participated in the Series ($639 million) Asia property fund targeting and financial institutions across North America, B funding round of Dolphin Browser, a Chinese- German investors. The vehicle has so far received Europe and Asia. All major LPs in prior funds made mobile browser. In 2007, Sequoia Capital EUR85 million from three German institutions. participated in Nexus India Capital III. and Matrix Partners China jointly contributed $10 The fund - MGPA Asien Spezialfonds - is regulated million to a Series A round of funding. under German investment laws and is primarily designed for institutional investors in German- RRJ Capital invests $50m in speaking countries seeking exposure to Asian real estate markets. Chinese biotech firm RRJ Capital has injected $50 million in Chinese biotech company Triplex Biosciences, taking an AUSTRALASIA 11-19% stake in the company. The Xiamen-based company manufactures products used to detect Rival PE firm matches TPG’s and diagnose hepatitis B and C and certain $709m Billabong offer cancers from blood and tissue samples. A rival PE firm – reportedly Bain Capital – has CICC PE’s assets under offered to match TPG Capital’s A$694 million Naren Gupta, Nexus’ co-founder, told media ($709 million) buyout bid for Australian surfwear that the fundraising took a “couple of months”. management reach $2.4b company Billabong International. The Billabong The first US Securities and Exchange Commission The private equity arm of China International board maintains that neither offer reflects the (SEC) filing for the vehicle was made in late Capital Corporation (CICC) has seen its assets fundamental value of the business in the context November 2011 and sources previously told under management soar to in excess of RMB15 of a change of control transaction. AVCJ that the process was completed as early as billion ($2.4 billion). These funds include capital March. The third fund will follow the investment within the CICC Jiatai Industry Integration Fund, Lazard extends Australia strategy of its predecessors. the bank’s debut renminbi-denominated vehicle, which was established in May last year with a corporate advisory reach target size of RMB5 billion. Lazard Australia has agreed to purchase firm previously invested $15 million just over a independent corporate advisory firm O’Sullivan year ago. The company plans to use the funding China, Russia sovereign Partners. The Sydney-based player is an to nearly quadruple its headcount to 400 acknowledged media specialist and can also employees by the end of 2013. funds back forestry firm claim to have won several notable private China and Russia’s sovereign wealth funds will equity mandates, including three from KKR. Tony Goldman tables Nine debt invest $200 million for a minority stake in Russia O’Sullivan, founder and managing partner of Forest Products. This will be the first investment O’Sullivan Partners, will become head of Lazard’s proposal channeled through the Russia-China Investment Sydney team. Goldman Sachs has reportedly put together a Fund, a joint private-equity fund established restructuring proposal for Nine Entertainment by China Investment Corporation (CIC) and the Blackstone appoints that would see the Australian company’s A$3.8 Russian Direct Investment Fund (RDIF). Carnegie as senior advisor billion ($3.9 billion) in debt convert to equity, writing off the vast majority of CVC Capital Carlyle-backed China The Blackstone Group has appointed James Partners’ investment. Earlier last week, Nine Carnegie as a senior advisor based in Sydney, Entertainment also sold its ACP Magazines Pacific taps sovereign funds where he will focus primarily on developing division to Bauer for A$500 million. China Pacific Insurance, a portfolio company the firm’s private equity activity in Australia. He of The Carlyle Group, has sold HK$10.4 billion previously spent seven years at Archer Capital, ($1.3 billion) in new shares to Government of leaving the local GP in mid-2011, and before that GREATER CHINA Singapore Investment Corp. (GIC), Norges Bank worked at Macquarie Capital. and Abu Dhabi Investment Authority (ADIA). The Kaiwu Capital to raise 462 million H-shares were sold through a private General Catalyst invests $150m maiden fund placement. $20m in Bigcommerce Kaiwu Capital, a China-based early-stage venture China investment in Europe Australian e-commerce start-up Bigcommerce capital firm, is raising its maiden fund with a has won $20 million in Series B funding from target size of $150 million. Last November, surges in second quarter General Catalyst Partners. The US venture capital Shanghai Venture Capital, a government-backed China’s outbound direct investment reached $24

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billion in the second quarter of 2012, up 67% PE group invests $150m in YES Bank’s Ghosh to join year-on-year, according to a research published by Sino-European private equity firm A Capital. Zhaoheng Hydropower Motilal Oswal PE as co-CEO Investment in Europe – which accounts for 48% Morgan Stanley Infrastructure Partners, Somak Ghosh, Group President of Developing of total deals by value – surged 95%. Fountainvest Partners and Olympus Capital have Banking at YES Bank, has reportedly left the together invested $150 million in Shenzhen- company to join Motilal Oswal Private Equity based Zhaoheng Hydropower, matching a Advisors, the private investment arm of Motilal NORTH ASIA commitment they made two years ago. The total Oswal Securities, as co-chief executive. YES Bank consideration is said to be the largest investment confirmed the departure. Advantage Partners poised ever made in China’s renewable sector by a for Rex Holdings exit foreign group. IFC confirms $20m India Advantage Partners is preparing to exit a 66% energy fund commitment holding in Japanese restaurant operator Rex International Finance Corporation (IFC) has Holdings to Colowide. Local media said the confirmed its $20 million investment in Nereus transaction, worth JPY13.7 billion ($175 million), India Alternative Energy Fund, a vehicle focused would close as early as October. Advantage on renewable power generation and clean completed a of Rex in late technologies. The cleantech fund was launched 2006, paying JPY45.72 billion (then $396 million). earlier this year, targeting $250 million to invest $15-25 million in 7-10 projects. SOUTH ASIA Warburg gets FIPB approval for Future Capital deal Global Environment hires Olympus is the leading outside shareholder in the company and made the largest contribution Warburg Pincus has won approval from India’s Sridhar Narayan for India to the most recent round of funding based on Foreign Investment Promotion Board (FIPB) for Global Environment Fund (GEF), a private existing ownership percentages. According to an INR8.08 billion ($145 million) investment in equity firm that targets energy, resources and AVCJ Research, Olympus previously invested non-bank finance company (NBFC) Future Capital environment-related assets, has appointed $47.5 million in Zhaoheng. Holdings. Cloverdell Investment - an affiliate of Sridhar Narayan as a principal within its India the private equity firm - agreed to buy a 53.67% team. Based in Mumbai, Narayan will help stake in Future Capital in June for about INR5.63 execute GEF’s private equity investment program a group that has agreed to invest around $200 billion ($102 million). It would then have to make in India and South Asia. million in India’s Jain Irrigation Systems. The an open offer for a further 26% of the company. company, which manufactures drip and sprinkler NVP backs healthcare systems as well as agro-processed products, will IFC considers loan for wind use the funds to strengthen its balance sheet and clinics with $4.5m reduce interest costs. power portfolio company Norwest Venture Partners (NVP) has invested International Finance Corporation (IFC) may INR250 million ($4.5 million) in NationWide Non-profit VC firm hires provide a $19 million loan to India’s NSL Group to Primary Healthcare Services, an Indian retail support the development of a wind farm in the chain of primary care clinics. Bangalore-based Navis director western state of Maharashtra. IFC already holds NationWide, which was established in 2010, Sachindra Rudra, former director of India a 9.3% stake in the NSL subsidiary responsible will use much of the fresh capital expand its operations at Navis Capital, has joined Acumen for the project – NSL Renewable Power Private – operations and set up 120 new clinics over the Fund, a non-profit global venture firm addressing while private equity firm FE Clean Energy owns next 18 months. poverty across Africa and South Asia, as the new another 17.4%. country director. He replaces Ankur Shah, the Kaizen commits $4.5m to interim country director who will maintain his SOUTHEAST ASIA school management firm existing role as head of the Education Portfolio. Kaizen Private Equity has invested INR250 CLSA Capital Partners Northstar, GIC in $200m million ($4.5 million) for a minority stake in Altus Learning, an Indian school management firm. The invests in Earth Water Indonesian oil deal funding will be used to help the Gujarat-based CLSA Capital Partners (CLSA CP) has invested Northstar Pacific Partners and Government of operator expand in northern India. $15 million for a 20% stake in New Delhi-based Singapore Investment Corporate (GIC) have Earth Water Group, a water and wastewater reportedly invested $200 million in Triputra Agro IFC, Mount Kellett back management company. The investment will Persada, an Indonesia oil producer. The pair have be used to support existing core businesses acquired a minority stake through a combination Jain Irrigation Systems and future acquisition plans. As part of the of equity and convertible bonds, and they have International Finance Corporation (IFC) and transaction, Sanjeev Krishnan, a director at CLSA the right to inject a further $50 million into the Mount Kellett Capital Management are part of CP, will join the company’s board. company.

6 avcj.com | September 11 2012 | Volume 25 | Number 34 Cover Story [email protected] Access all areas? With sophisticated regional players at one end and smaller novices at the other, navigating Asia’s nascent secondaries market requires patience, teaching skills and reliable information channels

The secondaries market is almost particularly those without dedicated IR teams early 2000s” says Adam Howarth, a senior vice guaranteed to spike in times of uncertainty. and where the CFO hasn’t dealt with secondaries president with Partners Group’s private equity When the global financial crisis left LPs grappling before, tend to be more unfamiliar.” secondaries division in Singapore. “It was a new with the denominator effect as plummeting Difficult can manifest itself in several ways. process to them at the time but through a little public market valuations pushed the alternatives The level of sophistication within individual GPs bit of education they quickly realized the value of share of their portfolios past permitted levels, sale varies based on the managers’ backgrounds, recalibrating their investor base. Once we have signs went up. It wasn’t the first time – a similar rather than geography. However, industry these conversations with them the GPs get on scenario played out after the tech bubble burst, participants note that countries in which primary board with allowing the transfer pretty quickly.” for example. due diligence is a challenge – China, for example Navis Capital Partners was deploying its – are equally problematic on the secondary side. Right of veto debut fund during this period. The managers There is a marked difference between the quality Navis’ Bloy recalls refusing to the transfer of an ended up buying back about 15% of the corpus of information delivered by a GP that wants to LP interest for three reasons: he didn’t know from investors that wanted out and, although it engage compared to one that does not. the buyer directly, didn’t particularly like their turned out to be a lucrative move, there is little Another consideration is that the GP must reputation, and didn’t want them as an investor. expectation of a repeat performance. At $1.1 usually sign off on the transfer of an LP interest. If This conclusion was reached in the context of billion, Navis’ most recent fund – its sixth – is they aren’t comfortable, they might procrastinate balancing the interests of the GP (reputational more than 15 times larger than the debut vehicle. or simply deny approval. Education is critical risk, potential for distraction from core duties) Putting together the financing for an average size when it comes to persuading a less experienced and those of the existing LPs (the impact of LP stake would be a considerable undertaking. fund manager of the benefits of change. introducing a new party with potentially a “We wouldn’t do that and we haven’t had to “It reminds me of dealing with managers different agenda). do it for a number of years because there hasn’t – especially VC managers – in the US in the On a broader level, fund managers may have been the turnover one might have expected post-Lehman,” says Nick Bloy, co-managing partner at the Asia-focused GP. “Also, the whole process has become a lot more professional, with large intermediaries and Pan-regionals: Easy exit advisors. I’m always getting calls asking if there are any positions available while existing LPs he likes of The Carlyle Group, KKR and TPG Capital are equally adept at handling secondary occasionally test values in the market, so you Ttrades for their Asia funds as for their flagship buyout vehicles run out of the US. Indeed, in frequently have advisors calling up to ask about many cases there are similarities between the investor bases for these vehicles. the portfolio.” “With the big pan-regional funds, where there are 100-plus LPs, all of them well-known names,” Although there has been progress, Asia says Tim Flower, a principal at HarbourVest Partners in Hong Kong. “The GPs generally want the remains a mixed bag as far as secondaries are buyer to be an existing investor and investor that will consider their next fund. They have big concerned. Campbell Lutyens expects global investor relations teams that can deal with secondary inquiries.” transaction volume to hit a record high of $30 Carlyle has now taken things a step further. It was reported earlier this year that the GP had billion in 2012, but it remains driven by large attached a liquidity mechanism to Carlyle Partners VI, its latest $10 billion global buyout vehicle deals out of Europe and the US. Most of the that is currently being raised, to facilitate the exit of LPs. Twice a year investors will have the global intermediaries and secondary specialists opportunity to sell their positions to a group of secondaries players, including Goldman Sachs, are still relatively new to the region, which Credit Suisse, Coller Capital, Landmark Partners and Partners Group. contributes to a fragmented market. Market sources tell AVCJ that a similar mechanism has been included in Carlyle Asia Partners As for the GPs, their experience with such IV, which is said to be targeting $3.5 billion. Much like the global fund, about half a dozen LPs transactions ranges from comprehensive to have agreed to act as liquidity providers, although it is unclear whether the mechanism will non-existent – and this has an impact on how operate on the same twice-yearly basis. potential buyers present themselves. The general aim is to assuage investors’ concerns about entering an illiquid asset class during a “The size and resources of the GP is always time of market volatility. By keeping the process internal, it also removes the time lag, bureaucracy an issue,” says Chin Chin Teoh, head of Asia at and fees that are features of an intermediated auction. Greenpark Capital. “Larger international brand “They have done it in other parts of the world, but this is the first time in Asia,” says one source names have seen these transactions before and familiar with the situation. “It works better with a large diversified LP base. Many LPs see it as a with larger funds, they tend to be more cookie- value-added service, even though they don’t invest in the fund with the idea of getting out early.” cutter type transactions. Smaller regional funds,

Number 34 | Volume 25 | September 11 2012 | avcj.com 7 Cover Story [email protected]

obligations to existing investors – in some cases in emerging markets: LP interests in mid-size deals LGT has completed so far this year were limited partner agreements award right of first funds. Teoh argues that it is important to convey not intermediated: one came through a GP in refusal to another party should secondary stakes a consistent approach to investors, noting that which LGT was already invested; the other was become available – or they just want to play different segments of the asset class involve introduced by a friendly third party and no favorites. A GP would much rather do business different risk-return profiles. She also has a potential rival bidders were involved. with an LP that is friendly, and most likely an different take on GPs targeting fund-of-fund LPs Again, the fund-of-funds’ primary relationships existing investor in the fund, than a group they with a view to securing primary commitments. come to the fore. Some industry participants don’t know at all. “Attitudes may be different but dealing with have invested substantial sums in Asia over more The other issue is fundraising. According to a fund that has a lot of primary money and a than a decade and have large teams on the AVCJ Research, private equity firms attracted smaller pocket of secondary money can make it ground working with GPs. According to Howarth, $22.3 billion in capital commitments during the harder to access LPs further up the chain,” Teoh it is rare for Partners Group to be dealing with a first half of 2012, the lowest level since 2009. says. fund manager that it hasn’t already met. Fewer than 100 funds achieved a close compared “We are very interested in introducing GPs The secondaries specialists, for their part, to nearly 400 in 2011 as a whole. In the likes to our LPs because we don’t see a conflict. can also claim to have carved out proprietary of South Korea, Japan and Australia, GPs are Fund-of-funds can be more defensive with these channels. China Investment Corporation (CIC) reaching out to foreign investors for the first time relationships because they don’t want to be dis- has a separate account within Lexington’s most as domestic LPs withdraw from the asset class. intermediated.” recent $7 billion fund and it is expected to serve In the current climate, an institution that as a magnet for larger transactions, effectively wants to forge a long-term relationship with a Best way in? expanding the deal pipeline. PE firm and participate in future funds is worth In assessing the merits of secondary strategies, Greenpark, meanwhile, last year teamed up its weight in gold. This appears to offer an edge deal access is a critical issue. If an LP is selling 50 with International Finance Corporation (IFC) to the likes of Partners Group, HarbourVest positions in funds around the world and an Asian to create a $500 million emerging markets Partners, Pantheon and LGT Capital Partners – GP is just one of them, the first they might hear of secondaries fund. IFC has 180 GP relationships that offer secondaries as part of a package that it is when the intermediary running the auction and the idea is that Greenpark will have access includes primary fund-of-funds commitments gets in touch to say that a group of potential to a wealth of information on these managers and then get the first call whenever an LP is looking to exit. Teoh says the Greenpark expects “On some deals, our team has been more to see in excess of $3 billion in emerging markets secondaries this year – most of it from mid-cap, attractive and displaced secondary-only players late-stage positions. “If you look at most emerging markets firms, because we have a primaries platform” – Tim Flower the fund sizes are sub-$1 billion and so the average LP interest is smaller,” she adds. “These – over secondary specialists such as Greenpark, investors wants to conduct a due diligence call. tend to be less intermediated so there is less Lexington Partners, Coller Capital and Paul In some cases, GPs are asked to provide pre- competition.” Capital. approval lists of LPs with whom they are willing “It has to been helpful to have a diverse to do business. Choose your strategy platform in Asia,” says Tim Flower, a principal There are a handful of large buyout funds As Western institutional investors increase their with HarbourVest in Hong Kong. “On some with broad LP bases – large European and exposure to Asian private equity, and as the funds deals, our team has been more attractive and North American institutions that often use the they invest in mature, creating more secondary displaced secondary-only players because we secondary market – that are routinely available market supply, processes are likely to become have a primaries platform. In other cases, GPs to buy and pricing is easy because they are so more streamlined. The cookie-cutter approach have refused consent because they didn’t want a widely known. The group includes TPG Asia V, that exists at the top end among the large pan- secondaries specialist and then called up us.” KKR Asian Fund, CVC Capital Partners Asia Pacific regional players is already filtering down into the A number of secondaries specialists have II and III, Pacific Equity Partners Fund IV, and leading country managers, and this will continue. for some years included pockets in their main several vehicles operated by The Carlyle Group. However, this doesn’t mean the market as a funds for primary investments. It is not unusual Reaching deeper into the GP community whole will suddenly become less fragmented. for these players to appear on the LP roster for can mean a departure from the Western-style There will still be an unruly mid-market an Asian GP with a commitment of around $5 intermediated auctions. Interests in smaller funds populated by future heavyweights and long- million to a $2 billion vehicle. with fewer seasoned LPs might trade relatively term makeweights, and secondary investors will Building a relationship with the private equity rarely and the GP is often informed early on and identify a range of opportunities, from pools of firm isn’t the only consideration. Serving as an involved in the search for replacement capital. LP interests to direct acquisitions of GP portfolios. LP means the secondary investor receives the “Generally speaking, you find more Industry participants must decide whether they quarterly reports and can attend the annual proprietary deals in Asia because it’s more want to cover it all or just certain segments. general meeting. These sources of information informal and the big secondary houses are only “It does come back to the point that there is are vital when valuing the portfolio if LP interests just setting up shop here,” says Doug Coulter, less intermediation in Asia,” says Jason Sambanju, subsequently come to market, although it’s head of Asian private equity at LGT Capital managing director and co-head of Asian unclear how large a primary stake is required to Partners . Even in a pool auction in Asia you operations at Paul Capital, which targets direct get a GP’s full attention. might only have 5-8 players at most.” secondaries in particular. “You really have to think Greenpark, however, retains a particular focus He notes that two of the Asian secondary about deals in a broader sense here.”

8 avcj.com | September 11 2012 | Volume 25 | Number 34 Customized Research Report Asian Private Equity Data Made Simple

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avcj.com Focus [email protected] Chinese courts threaten PE protection Private equity firms routinely use value adjustment mechanisms to incentivize entrepreneurs and offer down-side protection. Two Chinese court rulings have now called them into question

Not all publicity is good publicity. and the Court of Appeal ruled the investment tells AVCJ. “However, from the enforcement Previously just one of China’s many mid-cap contract invalid, with the former declaring that perspective, a shareholder agreement and a private equity players, Suzhou Industrial Park any company issuing shares with preferential statutorily provided structure are somewhat Haifu Investment now finds itself in the spotlight rights is in violation of Chinese Company Law. different species.” for all the wrong reasons. The PE firm took its The case is now pending Supreme Court portfolio company Gansu Shiheng to court, adjudication. Debt for equity? seeking compensation after profit targets weren’t According to James Wang, a partner at Han How, then, should private equity investors deal met, only for a judge to rule the claim invalid. Kun Law Offices, VAMs are increasingly popular in with Chinese entrepreneurs without the luxury of It is the first time a Chinese court has China, given that growth in the country’s capital a VAM? One option is to structure the transaction expressed an opinion on the net profit guarantee markets hasn’t been matched by advances as a loan rather than an equity sale. The debt that underpins many private equity and venture in investor protection and transparency. instrument could then convert to equity if capital investment agreements. By refusing to Foreign private equity funds, in particular, the portfolio company reaches the agreed enforce the clause, a key element of down-side may rely heavily on VAMs to counterbalance development targets. protection is now under threat. The Court of Appeal’s ruling in the Haifu- “The court case has significant implications,” Gansu case appears to advocate such an Gary Rieschel, founder of Qiming Venture “Without these terms, approach. Although the court held the net profit Partners, tells AVCJ. “If entrepreneurs know that provision as invalid, it said that because Haifu has the letters they signed offering shares or cash it’s hard for private neither partici¬pated in Shiheng’s operations to investors in the event of non-performance equity players to close nor assumed any risk, most of the capital it are invalid, then investors can no longer have provided should be categorized as a loan. On protection in that regard and the discussions on deals in China” – Frank Han these grounds, Haifu may recall its principal plus price will become fallacious.” interest for a total consideration in excess of A net profit guarantee is a variety of the value RMB18.8 million. adjustment mechanism (VAM) often used by the informational disadvantage that comes While a debt structure makes sense in terms private equity players to incentivize company from limited experience dealing with local of protection, private equity players are skeptical founders to reach specific growth targets. In entrepreneurs. of such arrangement from a profitability angle. addition to revenue and net profit guarantees, In addition, a contractual agreement – Loans are unlikely to generate the kind of returns VAMs include the timing or issue price of an IPO, whether it provides for monetary compensation, PE investors require from a long-term illiquid as well as various operational milestones such as share adjustment or repurchase arrangements commitment. the realization of a strategic collaboration, a new – may act as a short-term solution when private “The loan structure is a solution investors may product launch or a horizontal acquisition. equity investors and entrepreneurs come up with look at, but how long is the loan outstanding different valuations for a business. and can the investor force conversion at the Root of the problem “I’d say 90% of the reasons for having agreed price? All these questions will make the The Haifu-Gansu Shiheng dispute dates back to these VAMs, or gambling agreements, are that discussion more complicated,” says Qiming’s 2007. The PE firm agreed to pay RMB20 million sellers and buyers cannot settle on price and Rieschel. “What happens is that the PE firms risk ($3.1 million) for a 3.85% stake in the northwest these terms can help them reach temporary becoming banks, with loans instead of equity China-based non-ferrous metals manufacturer. agreements,” says Frank Han, executive director of and no board seat or influence on the company.” A VAM was included in the contract: If Gansu Bohai Industrial Investment Fund Management. In the circumstances, all PE players can do Shiheng failed to achieve a net profit of RMB30 “Without these terms, it’s very hard for private is to hope entrepreneurs honor agreements. million in 2008, Haifu could claim compensation equity players to close deals in China.” Reconciling with a CEO or founder is eminently equivalent to its initial investment plus a multiple Although investors are trying to replicate preferable to seeing him in court, especially of the amount by which the company fell short international practices in China, the country’s when recent case history suggests that the law of the target. regulatory system suffers due to its inflexibility. doesn’t stand on the side of the investor. Based on the agreed calculation, had Gansu A typical minority investment in a mature “I think these kinds of gambling agreements Shiheng made RMB10 million in 2008, it would market, for example, might involve the issuance will continue because people in China cannot have been obliged to return RMB13.3 million of preferred shares and ratchet clauses. Under compromise on price anyway,” says Bohai’s to Haifu. As it turned out, the company posted Chinese law this isn’t permitted. Han. “But from now on, private equity investors negligible income for the year, so the investor “In China, investors would have to look for should remind themselves to conduct better due demanded virtually its entire principal. protection through a contractual arrangement diligence, as well as offering a more reasonable When Gansu refused, Haifu sought legal with founders and other shareholders,” Yingxi price in the first place in order to protect recourse. However, both the First Instance Court Fu-Tomlinson, a partner at legal firm Kaye Scholer, themselves.”

10 avcj.com | September 11 2012 | Volume 25 | Number 34 Funds [email protected] Century Bridge in China fund debut

Raising a China-focused first-time Management, Merseyside , Quilvest and effort raising money but invest, and once fund is rarely easy, a Century Bridge can attest. and Deutsche Finance Group. Placement agents we invest all the money we will go and raise a Tom Delatour, CEO of the real estate private Avec Capital and XT Capital Partners led the second fund.” equity firm, came to China in 2006, assembled a fundraising on behalf of the GP. The vehicle will focus on build-to-sell, middle- team of investment professionals, and launched Century Bridge is not the only foreign private income and residential real estate projects a fund in spring 2010. The final close came last equity firm that believes in Chinese real estate. in tier-two cities. With China’s urbanization week at $170 million, less than Last year, property market and infrastructure drive showing no signs of half the $400 million originally investment reached $6.75 billion, slowing, there should be no shortage of willing targeted. higher even than the $4.55 mid-market buyers. According to McKinsey & “This is a very difficult market billion and $3.95 billion seen Company, the country’s urban population by to raise money as a lot of pension in 2007 and 2008, respectively, more than 350 million by 2025. funds and endowments are before the financial crisis. In April, Delatour adds that all investments from the having their own problems SOTAN China Real Estate I, the fund will be done via joint ventures. Last year, the after the global financial crisis,” $400 million fund co-managed private equity player made its first exit in China, Delatour tells AVCJ. “There is also Century Bridge targets tier two by Hong Kong-based real estate selling its stake in a $125 million joint venture a huge misunderstanding in that private equity firm Tan-EU Capital, with Jia Heng Real Estate. The joint venture – some foreign investors consider the risks of doing made its debt investment with the acquisition of which was partly funded by Century Bridge’s business here to be much greater than they really a 102,000 square-meter site in Tianjin. balance sheet – built 1,200 residential units in 11 are.” “As the government has tightened bank high-rise towers in Xi’an, Shanxi province. Nonetheless, the first-time vehicle – Century lending and restricted trust companies to “For foreign investors, it is always wise to do Bridge China Real Estate Fund – has attracted provide capital to developers in the last couple business in China by partnering with developers a number of pension funds, endowments and of years, this creates a greater opportunity for who have good reputation, experiences and fund-of-funds as LPs. These include Church foreign direct investments,” Delatour says. “We knowledge about how to do business in a Pension Fund, Metropolitan Real Estate Equity believe we should not spend any more time particular city,” Delatour says. State banks launch Sino-French fund

The role of Chinese PE firms in bank launched the $5 billion China-Africa Cathay Capital Fund II managed by the same outbound investment is poorly defined: In the Development Fund to invest in African projects team,” Duan adds. “In the coming future, we will absence of clear guidelines, participants must developed by Chinese enterprises. It also backed co-invest into companies by channeling capital win approval from every single regulator. One Mandarin Capital, which closed its maiden fund from both funds at the same time.” way to avoid the red tape is by partnering with in the same year at EUR327.75 million, alongside In the second quarter of 2012, China’s a government-backed entity, which usually has the Export-Import Bank of China. outbound direct investment reached $24 billion, little problem getting the green light for deals. “CDB and CDC Entreprises up 67% year-on-year, according Cathay Capital, a Sino-French private equity started negotiations about to a research published by firm, has been appointed to manage a EUR150 two years ago and they were another Sino-European PE firm, million ($189 million) joint venture fund between searching for a GP to manage A Capital. Investment in Europe, China Development Bank (CDB) and French their joint-investments,” Lanchun which accounts for 48% of total state-owned bank Caisse des Dépôts (CDC) Duan, executive director of deals by value, surged 95%. to invest in Chinese and French small- and Cathay Capital, tells AVCJ. “We Duan observes that, while more medium-sized enterprises. CDB Capital and CDC were mandated largely based Chinese companies want to Enterprises, will each contribute EUR75 million. on our strong track record of CDB seeks outbound deals expand overseas, they need PE “The launch of this fund materializes the investment over the last six years players with local and overseas closeness between our two institutions,” says and our close ties with CDC, which has been our expertise to handle operational matters. Xuguang Zhang, president and executive LPs since inception.” “Having established teams in both China director of CDB Capital. “We have great ambitions Cathay’s EUR70 million maiden cross-border and France, we have equal understandings of for this partnership and are confident of its fund is now fully deployed and in May 2011 it both markets,” Duan says. “While in China we are success, given the respective qualities of French held a first close on a second fund at EUR125 a Chinese manager; in France, local companies and Chinese companies.” million. A final close of EUR250 million is are also more likely to share their advanced This is not CDB’s first commitment expected in November. technologies with us, rather than other foreign to outbound funds. In 2007, the state- “The Sino-French Fund is a parallel fund of investors who they don’t trust.”

Number 34 | Volume 25 | September 11 2012 | avcj.com 11 Private Equity 13-16 Nov Private Equity 13-16 Nov AVCJ & Venture Grand Hyatt AVCJ & Venture Grand Hyatt Forum 2012 Hong Kong Forum 2012 Hong Kong 1 week left to 1 week left to SAVE USD300 SAVE USD300 Book now Book now 25th Annual avcjforum.com 25th Annual avcjforum.com GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY

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RegistRation enquiRies: sponsoRship enquiRies: RegistRation enquiRies: sponsoRship enquiRies: Anil Nathani Darryl Mag For more information: Anil Nathani Darryl Mag For more information: t: +852 3411 4938 t: +852 3411 4919 avcjforum.com t: +852 3411 4938 t: +852 3411 4919 avcjforum.com e: [email protected] e: [email protected] e: [email protected] e: [email protected] Private Equity 13-16 Nov AVCJ & Venture Grand Hyatt Forum 2012 Hong Kong 1 week left to SAVE USD300 Book now 25th Annual avcjforum.com GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY

250+ institutional investors attending, including: Abu Dhabi Investment Authority LGT Capital Partners Adams Street Partners MFC Foundation Alberta Government Hong Kong Office Mitsubishi Corporation AlpInvest Partners Mitsui & Co Ltd Annie E. Casey Foundation MLC Asia Alternatives Nan Fung Group ATP Private Equity Partners New York Life Capital Partners AustSafe Super Novo A/S Axiom Asia Private Capital Ontario Teachers’ Pension Plan Blackrock Private Equity Partners OPTrust Private Markets Group BOHAI Industrial Investment Fund Management OU Endowment Management Co Ltd Pantheon Ventures Canada Pension Plan Investment Board Paul Capital Capital Dynamics Ping An Asset Management Company Limited CCB International Asset Management Ltd PSP Investments China Resources Capital Robert Wood Johnson Foundation Cogent Partners Stanford Management Company Coller Capital State of Wisconsin Investment Board Committed Advisors StepStone Group Conrad N. Hilton Foundation Suisse Re Private Equity Partners Etera Mutual Pension Insurance Company Tapiola Mutual Pension Insurance Company First Swedish National Pension Fund Teacher Retirement System of Texas Ford Foundation Teachers’ Retirement System of the State of Illinois Future Fund The California Endowment GE Asset Management The Endowment Office Greenpark Capital The Grosvenor Estate Hamilton Lane The Guardian Life Insurance Company of America Harald Quandt Holding GmbH The Johnson Company HarbourVest Partners, LLC Tokio Marine Asset Management I.B.M. Retirement Fund Unigestion Ilmarinen Mutual Pension Insurance Company United Overseas Bank Limited International Finance Corporation Virginia Tech Foundation Johns Hopkins University Williams College Lexington Partners And many more to come…

RegistRation enquiRies: sponsoRship enquiRies: Anil Nathani Darryl Mag For more information: t: +852 3411 4938 t: +852 3411 4919 avcjforum.com e: [email protected] e: [email protected] Focus [email protected] Star potential: Celebrities turn to VC Chinese basketball star Yao Ming recently upped his involvement in private equity, prompting speculation that other Asian celebrities will follow suit. Can they be successful?

What works in the US doesn’t which focused on technology businesses. From profile and any investments they wished to make. necessarily work in Asia – it’s the golden rule of that perspective, celebrity investing makes By assuming greater command of their careers – investment in the region and industry veterans perfect sense and is a natural progression,” Jordan and as result, their investments – these individuals have countless war stories that attest to its Green, chairman of the Australian Association of regard celebrity status as one facet of them, veracity. Angel Investors, tells AVCJ. instead of the total definition of who they are. As such, more than a few eyebrows were Of course, some celebrities are more suited raised when Yao Ming, China’s former NBA star, Cultivating the fanbase to venture capital than others. Yao Ming is a announced last month that he had invested in In previous generations, celebrities opened particularly suitable candidate because, as a two private equity funds. The ex-Houston Rockets restaurants, opened their own sports stores, or sports star, there’s a degree of political neutrality player has backed D&F Capital, China’s first-ever launched their own perfumes and jewelry lines: surrounding him. sports-focused private equity fund, as well as They got involved in businesses where their “Everyone on every side of politics is okay taking control of Hongyuan Equity Investment celebrity status was inherently of value, which with national sporting heroes,” says Green. “The Fund alongside a team of investors. gave them a way to actively contribute to the problem with singers is that all too often they’re American celebrities are no stranger to the success of the enterprise. expressing a point of view that can create world of investments. , the lead singer What’s happening now – a number of political issues, so if they get into business, it’s of rock band , is managing director and celebrities have invested in social media a lot harder for them to be investors, because co-founder of entertainment and TMT-focused platforms, for example video-sharing app Viddy, they’ll be contaminating the business with their private equity firm Elevation Partners, while which pop singer Shakira invested in earlier this own profile. Dancers, meanwhile, are strongly rapper MC Hammer has invested in a number of year – may be another stage in the evolution of associated with social rebellion.” startups, including search engine Wiredoo and that trend. In investing in these networks, which In Asia, the high profile of a number of video sharing site DanceJam. Hollywood actor share characteristics with celebrity “fanbases,” successful business people – such as Li Ka-shing Ashton Kutcher, meanwhile, has done numerous famous people are participating in a business and Stanley Ho – also lends itself well to making successful deals over the past few years, area that they understand. As a result, they can angel investments, as they can share substantial including his backing of Skype in 2009, two years motivate users accordingly. expertise and industry networks as well as offering endorsement. “They can double or triple their equity stake Secrets of their success If the consensus is that we’ll see more celebrities because of their name, and because they’ll turning their hand to investment, what are their chances of success? Though they have a clear endorse the company” – Richard Robinson advantage when it comes to deal origination – especially in Asia, where rather than being before the site was sold to Microsoft for $8 billion. “They can double or triple their equity located around a hub such as Silicon Valley, Even in Europe, the likes of Cherie Blair – wife stake because of their name, and because opportunities are thinly dispersed across vast of former UK Prime Minister Tony Blair – launched they’ll endorse the company,” explains Richard geographies – what it ultimately takes to be a private healthcare fund with a target of GBP75 Robinson, an in China and adviser successful in venture capital is the same as million in January. to companies looking to raise seed funding. for any other early-stage investor. That means In Asia, however, the celebrity investing “They give operational expertise in terms of backing a business they understand, adding culture is a much newer phenomenon, not least promotion – they know how to promote stuff. value to that business, and being prepared to fail. because of the more nascent state of the venture [American reality TV star] Kim Kardashian is One way to mitigate failure is through capital industry and the as-yet-unproven returns. probably one of the best self-promoters in the diversification, according to Anand RP, an angel Most high-profile figures would rather put their world and look what she’s done with her shoe investor in India and an investment director capital into lucrative property transactions than company.” at fund-of-funds Squadron Capital, which is leveraging their personal brands in more public This is in part a function of celebrities something he believes many Asian investors are VC-style investments. becoming more actively involved in managing yet to learn. Some industry participants, though, believe their commercial interests. The traditional “The typical mistake that people in Asia celebrities lend themselves particularly well to ambit of a celebrity was whatever sphere that typically make is to do two $50,000 deals. They the current focus of venture capital. made them famous in the first place: Basketball should actually be doing ten $10,000 deals, and if “The big fad at the moment is around mobile players played basketball; football players played you have an additional $50,000, keep that for the apps and web apps – essentially retail businesses, football; actors acted, and singers sung, and their best two companies, so then you can re-up and which is different to previous eras of investment, management companies took care of their brand make even more multiples on that money.”

14 avcj.com | September 11 2012 | Volume 25 | Number 34 LP interview [email protected] Allstate branches out Unencumbered by the volatility that can restrict non-captive LPs, Allstate alters its PE portfolio to reflect fundamental changes in the market. It is scaling back on buyouts and scaling up on Asia

In a sense, Allstate’s private equity such as mezzanine, distress and turnaround The partnerships have two purposes. First, group can be characterized as a bellwether LP. equity. for investments in areas that portfolio managers A growing part of Allstate Investments, which “That’s different to the profile of managers we don’t see as critical to the mainframe portfolio manages some $100 billion for insurance and were backing in the up market,” Keehn remarks. construct but still warrant some exposure. Keehn pension entities, the group is responsible “And even in the buyout category, the players we cites the example of venture capital. Allstate has for a diversified portfolio of more than $3.3 favor now are those who have demonstrated a kept a relatively low allocation to this asset class billion in exposure across 150 partnerships and consistent ability to unhinge the revenues – and for the last decade. However, in order to maintain meaningful investments globally. certainly the cash flow – of a business from the this small presence in the fast-moving world of Given that allocations to the asset class are broader economic environment it exists in.” VC, a decision was made to buy expertise rather ultimately funded exclusively by individuals Allstate’s appetite for alternatives generally than expend resources to build it in-house. writing monthly checks for Allstate insurance is constrained by the fact that it is a listed Allstate’s other, and more important, use products, institutional capital flows have never insurance company. Although portfolio for funds-of-funds is to spearhead investments been a factor. As such, the firm has been in areas where it wants to build out able to stay consistently engaged in the a presence over time, notably ex-US private equity business since the 1960s, Allstate’s alternatives exposure, 2011 markets. If the appropriate fund can be regardless of tough times. Private Real Hedge Tax found, it can provide an ideal way to According to Peter Keehn, global head equity/debt estate credit aggregate important local knowledge of private equity for Allstate, adjustments in fairly short order. That is a critical in strategy are therefore a real signal of Total $1,896m $1,099m $1,142m $560m differentiator when the time comes for fundamentally changed conditions. No. of managers 94 45 13 9 Allstate to choose local managers on “Because we’re a captive fund, as we their own bat. think through asset allocation in general No. of funds 154 92 78 17 – how much to privates versus publics, Largest exposure $42 $184 $79 $58 First Europe, now Asia? how much to stocks versus bonds, how to single fund This approach proved very effective in much to alternatives – we can exercise the firm’s earlier foray into Europe. “We Income $149m $98m $12m ($12m) a lot more freedom around portfolio were very open and specific with our construction, on optimizing it without Source: AVCJ Research European fund-of-funds partner from the constraints of needing to match our the outset, back in 2005,” Keehn recalls. investing activity to where we’ve been successful managers appreciate that alternatives have “We told them we anticipated Europe would be raising third-party money,” Keehn tells AVCJ. historically shown good returns, the associated a building piece of our business, so we wanted “Finding we have a lot less capital to invest risk means that asset allocation models restrict them to manage money for us as a first step. And because the people who backed us last time exposure. This is in stark contrast to the likes of we made it clear that tuition was integral to the didn’t back us this time isn’t an issue - if we’re out endowments, foundations and even insurers that deal; meaning we’d ask a lot of questions, seek a of money for PE, it’s because we’ve chosen to are mutuals and not publicly traded. lot of introductions and so on.” allocate somewhere else.” But this conservative bias delivers real Allstate went as far as to say that it would defensive advantages in difficult times, for probably end up opening an office in London, Paradigm shifts example, in limiting the downside fallout from at which point the partner’s services would Two notable shifts have resulted. First, the denominator effect. As many LPs with high no longer be required. This is exactly what geographically, Allstate will become less reliant exposure to illiquid alternatives were taken out of happened and now the firm has its own team on the US (although for obvious reasons, dollar- the market completely when the global financial operating in Europe. denominated liabilities among them, it will crisis hit and denominators plunged in advance A couple of similar arrangements with fund- remain the dominant slice). Already intentionally of numerators, Allstate was largely unharmed. Its of-funds in Asia are already in place, and Keehn under-allocated to Europe, the firm has been asset base shifted under the stresses of the crisis, says an eventual upgrade to a formal operation in gradually broadening its exposure to emerging but the conservative allocation to private equity the region is very possible. markets since 2006, Asia and Latin America being meant it was manageable. “As Asia becomes a much more important the most prominent examples. In terms of actually deploying capital, Allstate part of the global economy – and therefore a Second, Allstate is moving away from doesn’t use gatekeepers; that kind of work is much bigger piece of the Allstate portfolio – buyouts, though again, these will remain the done in-house. But the firm does partner with these local resources are proving very helpful largest single component of the PE portfolio. As funds-of-funds, despite similarities between as we make our own direct commitments there the firm sees things at present, other strategies these and Allstate that might make this look odd and evaluate the potential benefits of a local may be better fits for low growth conditions, at first glance. presence.”

Number 34 | Volume 25 | September 11 2012 | avcj.com 15 Private Equity & Venture Forum Europe 2012 11 October 2012, No.4 Hamilton Place, London

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjeurope.com Asia Calling: Finding growth in a global landscape of volatility Distinguished global speakers include: Joseph Y. Bae Nicholas Bloy Managing Partner Managing Partner KKR ASIA NAVIS CAPITAL PARTNERS

Volkert Doeksen Roy Kuan Chairman and Managing Partner Chief Executive Officer CVC CAPITAL PARTNERS ALPINVEST PARTNERS Shankar Narayanan David G Pierce Managing Director Chief Executive Officer THE CARLYLE GROUP SQUADRON CAPITAL

Simon Pillar Mukund Rajan Managing Director Managing Partner PACIFIC EQUITY PARTNERS TATA OPPORTUNITIES FUND

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