Margins for Success Piau-Voon Wang, Co-CIO of China’S Noah Holdings India’S Nbfcs Deliver Returns by Going Beyond Banks' Comfort Zones Page 7 Page 15

Asia’s Private Equity News Source avcj.com May 10 2016 Volume 29 Number 17

EDITOR’S VIEWPOINT Have China take-privates spiralled out of control? Page 4

NEWS Affinity, Baring Asia, BlackRock, CDIB, CVC, DCM, IFC, IL&FS, JBIC, Lenovo, Mayfield, NewQuest, Samara, Sequoia, SBCVC, Temasek Page 5

DEAL OF THE WEEK Hotung, CDIB lead round for Taiwan-based ACT Page 12 QIC eyes Asian demand for Australian beef Page 13

INDUSTRY Q&A Margins for success Piau-Voon Wang, co-CIO of China’s Noah Holdings India’s NBFCs deliver returns by going beyond banks' comfort zones Page 7 Page 15

FOCUS DEAL OF THE WEEK

Holes in cyberspace A cut above the rest Asia plays catch-up on high-tech security Page 11 Farfetch brings boutique fashion online Page 12 29TH ANNUAL

15-17 November 2016 Four Seasons Hotel Hong Kong REGISTRATION Book by 27 May and SAVE US$1,100

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1,000+ 170 35 525 330 Participants Speakers Countries Companies LPs

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Malaysia & Singapore 12%

TOP 10 ATTENDING Other Australia COUNTRIES 2% 2%

& Venture Forum Join your peers avcjforum.com #avcjforum

The AVCJ Forum brings together Tuesday over 1,000 of the world’s leading 15 November 2016 GPs, LPs and other professionals PE LEADERS’ SUMMIT Wednesday for three days of quality 16 November 2016 discussions, speeches and VENTURE CAPITAL SUMMIT INVESTMENT networking. These perspectives SUMMIT (DAY I) LIMITED PARTNERS’ come to life at the AVCJ Private SUMMIT Thursday Equity & Venture Forum, 17 November 2016 scheduled for November 15-17 For more information INVESTMENT in Hong Kong. visit avcjforum.com SUMMIT (DAY II)

Europe U.K. 4% China Hong Kong 4% 10% 46% USA & Canada India 12% U.A.E. Japan & 1% 3% South Korea 4%

Malaysia & Singapore 12% Top 10 attending Other Australia countries 2% 2%

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29TH ANNUAL and save up to Brochure available, The 29th Annual REGISTER Partners expected, make sure you register for AVCJ Private Equity & Venture NOW! Forum is the largest and most influential gathering of private equity and download now at venture professionals in Asia. avcjforum.com 15-17 November 2016 3 days of unrivalled networking opportunities. NOW OPEN! Four Seasons Hotel, Hong Kong Tuesday Wednesday 15 November 2016 16 November 2016 US$1,100 PE LEADERS’ INVESTMENT SUMMIT SUMMIT (DAY I) VENTURE CAPITAL Thursday SUMMIT 17 November 2016 (UNTIL 27 MAY ONLY) LIMITED PARTNERS’ INVESTMENT SUMMIT SUMMIT (DAY II) 2015 Forum key statistics: 2016 Sponsors 1,000+ 170 35 525 330 Participants Speakers Countries Companies LPs

Europe U.K. 4% China Hong Kong The 29th Annual AVCJ Private Equity 4% 10% 46% USA & Lead Sponsors Asia Series Sponsor Canada India 12% U.A.E. Japan & 1% 3% South Korea 4%

Malaysia & Singapore 12%

TOP 10 ATTENDING Other Australia COUNTRIES 2% 2%

& Venture Forum Join your peers avcjforum.com #avcjforum

The AVCJ Forum brings together Tuesday over 1,000 of the world’s leading 15 November 2016 GPs, LPs and other professionals PE LEADERS’ SUMMIT Wednesday Co-Sponsors for three days of quality 16 November 2016 discussions, speeches and VENTURE CAPITAL SUMMIT INVESTMENT networking. These perspectives SUMMIT (DAY I) LIMITED PARTNERS’ come to life at the AVCJ Private SUMMIT Thursday Equity & Venture Forum, 17 November 2016 scheduled for November 15-17 For more information INVESTMENT in Hong Kong. visit avcjforum.com SUMMIT (DAY II) Legal Sponsor LP Summit Sponsors

Europe PE Leaders’ Summit Sponsors U.K. 4% China Hong Kong 4% 10% 46% USA & Canada U.A.E.India Japan & 12% VC Summit Sponsors VC Summit Legal Sponsor 1% 3% South Korea 4%

Malaysia & Singapore Awards Sponsors Exhibitors 12% Top 10 attending Other Australia countries 2% 2% Registration enquiries: Call Anil Nathani on +852 2158 9636 or email to [email protected] Join your peers Enquiry Sponsorship enquiries: Call Darryl Mag on +852 2158 9639 or email to [email protected] avcjforum.com #avcjforum EDITOR’S VIEWPOINT [email protected]

Managing Editor Tim Burroughs (852) 2158 9661 Dangerous demand? Associate Editor Winnie Liu (852) 2158 9663 Staff Writer Holden Mann (852) 2158 9646 TAKE-PRIVATE DEALS INVOLVING US- artillery brought into the fray: on one side stand Justin Niessner (852) 2158 9678 listed Chinese companies used to be relatively the likes of Sequoia Capital, Cathay Capital and Design straightforward, and in some respects they still Shenzhen Ping An Decheng Investment; on the Edith Leung, Mansfield Hor are. A founder-CEO looks at the valuation his other, Ontario Teachers’ Pension Plan, Legend Events business has achieved in the US, examines where Capital and China Life. George Sengulovski, comparable companies are trading in China, China International Capital Corp. (CICC) also Jessie Chan, Jonathon Cohen, factors in the compliance costs of a US listing, partnered with a strategic player to counter Sarah Doyle, and asks himself whether it is worth the effort. a buyout bid for Sinovac Biotech submitted Amelie Poon, Fiona Keung, At some point in this process, private equity gets by the company chairman and SAIF Partners. Jovial Chung, involved, prodding the founder in the direction Meanwhile, in the cases of recruitment portal Marketing of a take-private with offers of financial support. Zhaopin and auto listings platform Autohome Agrina Sandri, Priscilla Chu, They submit an offer, perhaps roping in third parties (CDH Investments and Ping An Yasna Mostofi any significant existing investors that want Insurance Group, respectively) made the first to take part in the buyout; and if the founder move and management responded by working Research has a controlling stake in the business, getting with private equity to try and put together a Helen Lee, Herbert Yum, Jason Chong, shareholder approval is rudimentary in most better deal. Kaho Mak, Tim Wong, jurisdictions. Completion takes time, but As to where all this might end – the public assuming shareholder lawsuits can be handled, markets slowdown that started in mid-2015 Sales financing is in place, and there are no challenging did not bring take-private activity to a standstill Anil Nathani, tax ramifications to dismantling the corporate – the regulator offered a hint last week. While Darryl Mag, Debbie Koo, Nathan Ho, Samuel Lau, structure, those involved can navigate the scotching reports of a suspension in listings by Pauline Chen process with a degree of confidence. companies previously taken-private in the US, a AVCJ has records of around 80 take-privates China Securities Regulatory Commission (CSRC) Subscriptions since 2010, many but not all of which featured spokesman said the potential market impact of Jade Chan, Prudence Lau, private equity. Over half were launched in 2015. IPOs, M&A and restructurings of this nature. He Sally Yip These could be described as the post-Focus pinpointed the valuation gap between domestic Publishing Director Media wave, in acknowledgement of the $3.7 and overseas markets and investors speculating Allen Lee billion privatization of the outdoor advertising on shell companies. business that not only put China take-privates The inference is reasonably clear. The in the big league dollar-wise, but also marked privatization-domestic re-listing thesis is no Hong Kong Headquarter out a path to liquidity. Thirty months after the longer the preserve of sophisticated capital Suite 1602-6 privatization closed, Focus Media re-listed in providers: from the 36 parties connected with Grand Millennium Plaza 181 Queen’s Road Shenzhen through a reverse merger, giving a Qihoo’s privatization to the 36 investors that Central Hong Kong string of PE investors a substantial gain (most of bought shares in Focus Media several months T. (852) 2158 9700 it on paper). before the reverse merger was completed, F. (852) 2158 9701 participation is proliferating. It is unclear who E. [email protected] This success has given rise to even larger URL. avcj.com deals and even more demand to participate. these new entrants are or how much they really Transactions are no longer the work of just one know about what they are buying. Beijing Representative Office or two private equity sponsors in conjunction The take-private opportunity cannot last No.1-2-(2)-B-A554, 1st Building, No.66 Nanshatan, with a founder; in some deals, international forever, but as long as it does, the government Chaoyang District, Beijing, GPs have been pushed to one side by local wants to minimize potential damage to the People’s Republic of China funds, insurance companies, sovereign wealth market and to retail investors. Closer regulatory T. (86) 10 5869 6203 F. (86) 10 5869 6205 funds, and high net worth individuals – in short, scrutiny is therefore likely to make it harder for E. [email protected] whatever combination of pricing, flexibility on companies to re-enter the public domain via the terms, and regulatory leverage works best. A-share market. This doesn’t mean the door has In these circumstances it is perhaps only closed, rather that only quality companies with The Publisher reserves all rights herein. Reproduction in whole or logical that investors compete for deals. When quality backers will be allowed in. in part is permitted only with the written consent of AVCJ Group Limited. the founder and CEO of iKang Healthcare Group ISSN 1817-1648 Copyright © 2016 teamed up with FountainVest Partners on a bid last year, a consortium featuring industry rival Meinian Onehealth responded by tabling Tim Burroughs A Mergermarket Group company a higher offer. This led to a protracted and still Managing Editor unresolved battle with more and more heavy Asian Venture Capital Journal

4 avcj.com | May 10 2016 | Volume 29 | Number 17 NEWS

GLOBAL CVC exits China education the process of raising a larger round expected to business EIC be worth up to $700 million. BlackRock closes $630m CVC Capital Partners has sold its stake in CSRC to tighten rules on Education International Corporation (EIC), a global buyout fund China-based business that helps students enroll domestic PE fundraising BlackRock has raised more than $630 million for in universities overseas, to a consortium that The China Securities Regulatory Commission a direct co-investment buyout fund. Investors includes the company founder. (CSRC) will take further steps to regulate the included public and private pension funds, The sale generated RMB4.5 billion ($692 domestic private fund industry in response insurers and foundations in North American and million) for the PE firm, according to a source to an acceleration in illegal fundraising Europe. The BlackRock Private Opportunities familiar with the situation. CVC invested in EIC in activities. All managers are required to disclose Fund III will build a portfolio diversified by 2013, reportedly paying around $200 million for a fund information to the Asset Management geography, strategy and industry sector. Association of China (AMAC). The new rules include a definition of investors qualified to Mayfield raises $525m participate in funds as well as measures to across two global funds tighten control over different private fund assets. US-based venture capital firm Mayfield has DCM China co-founder raised $525 million in capital across two global investment funds. The firm will deploy $400 Ruby Lu joins H Capital million in early stage-focused vehicle Mayfield Ruby Lu, co-founder and general partner at DCM XV; Mayfield plans to invest in about 30 China, has joined H Capital, a China-focused companies, as with its other global funds. The venture capital firm founded by Xiaohong Chen, remaining $125 million is reserved for Mayfield ex-China managing partner at Tiger Global Select, which will target follow-on investments in Management. Lu started DCM Ventures’ China existing portfolio companies. majority stake comprising shares held by minority operation in conjunction with Hurst Lin. investor Actis Capital and Joe Li, the company’s founder and chairman. The buyer consortium is Sequoia backs rival take- AUSTRALASIA led by NLD Investment, a China-based private equity fund. Li and other members of the private bid for Zhaopin Tegel gains on trading management team are working in partnership Chinese recruitment platform Zhaopin, which is with NLD. CVC was previously reported to be already the target of a $1.1 billion take-private debut after $205m IPO looking at a Hong Kong listing for EIC. bid, has received a competing offer from a Shares in Affinity Equity Partners-owned Tegel EIC is China’s largest provider of overseas consortium including Sequoia Capital and Group Holdings closed up 5.2% on the first day educational counselling services, with a 13% company management. The new proposal of of trading in New Zealand following the poultry market share. The company has placed more $17.75 per share represents a 1.4% increase on producer’s NZ$298 million ($205 million) IPO. than 120,000 students in overseas education the prior offer made by CDH Investments and Tegel sold 192.8 million shares at NZ$1.55 apiece institutions, with 18,500 enrollments in 2014 Shanghai Goliath Investment Management. through a dual offering in New Zealand and alone. It also provides test preparation services. Australia, including 9.7 million existing shares. Following CVC’s investment, Isa Wong, formerly SBCVC, New Horizon back Affinity held an 87.4% interest in Tegel ahead of of Pearson, was brought in as CEO. In addition, the IPO, while ICG had 9.2%. EIC acquired New Pathway, a US-focused test China fashion site preparation and college counselling specialist. SBCVC and New Horizon Capital have led a RMB1 billion ($119 million) Series C round for GREATER CHINA Chuchujie, a Chinese mobile e-commerce ($120 million) in a Series A round of funding. Leo platform. Stone VC and Eastern Bell Venture Lenovo launches $500m Group, a Shenzhen-listed machinery maker, led Capital also participated. Chuchujie started the round with a RMB350 million contribution as a shopping guide platform that provided corporate VC fund in exchange for an 11.74% stake. Other investors information on e-commerce deals, but then Chinese PC maker Lenovo Group has launched included Source Code Capital and Plum Ventures. changed strategy to sell clothing directly. a $500 million corporate VC fund to invest in technology start-ups. It will invest in areas such CDIB Capital invests $45m as cloud computing and big data, artificial NORTH ASIA intelligence, and robot, internet and consumer. in Best Logistics CDIB Capital has committed $45 million to Best JBIC to invest in KKR Electric car maker Chehejia Logistics Technologies, a China-based IT-driven integrated logistics and supply chain business Americas fund raises $120m part-owned by Alibaba Group. The company has The Japan Bank for International Cooperation Chehejia, a Chinese manufacturer of smart previously received several rounds of funding (JBIC) has made an LP commitment to KKR’s electric vehicles, has raised RMB780 million from financial and strategic investors, and was in latest North American fund. The size of the

Number 17 | Volume 29 | May 10 2016 | avcj.com 5 NEWS

investment was not disclosed. KKR Americas Baring Asia buys 35% stake bought a majority stake in online jewelry retailer Fund XII is expected to hit the hard cap of $12 Caratlane, providing an exit for its backer Tiger billion, not including the GP contribution. in Telus Global Management. Tiger has committed over Baring Private Equity Asia has agreed to buy a $50 million to Caratlane over several rounds. GEPS seeks offshore 35% stake in Telus International, the business process outsourcing (BPO) arm of Canadian IFC to commit $40m to secondaries managers telecom company Telus, at a post-deal valuation South Korea’s Government Pension Investment of C$1.2 billion ($930 million). India’s Repco Service (GEPS) is looking to make two Telus will retain a 65% stake in Telus The International Finance Corporation (IFC commitments – of $50 million apiece – to International. The parent intends to maintain will commit up to INR2.7 billion ($40 million) overseas GPs operating co-mingled global a long-term ownership position and does not to Indian home finance-focused non-banking secondaries funds. Eligible managers must have plan any change in the support it provides its financial company (NBFC) Repco Home Finance. been in business for at least two years and have a subsidiary, such as facilities, network and IT It will use the new capital to provide loans to track record of investing $500 million or more in support. Proceeds of the investment, which Telus low-income individuals seeking to buy, build or private equity secondaries assets. reported to be about C$600 million – including improve their homes. $425 million in incremental bank financing – AID in $13m round for Snapdeal buys Nexus- home rental site backed TargetingMantra AID Partners and Cool Japan Fund have Indian e-commerce giant Snapdeal has bought contributed to a JPY1.4 billion ($13 million) round e-commerce personalization and analytics for Japan’s Hyakusenrenma, an online vacation service TargetingMantra for an undisclosed rentals platform. Domestic railway operator Keio amount. TargetingMantra, a product of the Corporation also participated in the investment. 500 Startups accelerator program in California, creates technology tools to analyze online shoppers’ buying habits to predict their tastes SOUTH ASIA and recommend products to them via email. DFJ sells India assets to MSDF to invest $50m in will be used to support the parent’s long-term NewQuest broadband network expansion strategy. Indian start-ups Direct secondaries specialist NewQuest Capital “We believe that the company is in a great The Michael and Susan Dell Foundation (MSDF) Partners has acquired the majority of Draper position to build on its past successes and has committed to invest $50 million in Indian Fisher Jurvetson’s (DFJ) India portfolio. The sale establish its position as a leading international start-ups over the next three years. The move involves holdings in between eight and 10 player in the space,” said Jean Eric Salata, CEO of represents an expansion of focus for the US- companies, including Bharat Light & Power, Baring Asia. “We aim to leverage our footprint and based philanthropic organization, which typically Attero Recycling, Canvera Digital Technologies, cross-border capabilities to further enhance Telus makes direct investments in education, skills and travel portal Cleartrip, among others. International’s client portfolio and help expand its development and financial inclusion initiatives. market presence.” IFC leads $60m round for Telus International, founded in 2006, provides Samara recruits partner customer service, IT and business support Lenskart services. It employs 22,000 people around the from Levi Strauss The International Finance Corporation (IFC) has world, with nearly half working in the Philippines. Samara Capital has named Sanjay Purohit, the led a INR4 billion ($60 million) Series D round managing director for India at Levi Strauss, of funding for Indian online eyewear retailer as a partner. He will eventually lead the GP’s Lenskart. Other investors in the round included IL&FS pushes back deadline consumer and retail practice. Adveq Management and existing backers TPG Growth and IDG Ventures. on latest fund IL&FS Investment Managers (IIML) has pushed SOUTHEAST ASIA Mobikwik raises $50m in back the deadline on its growth fund, with final close now expected in the first half of 2016. The TIH buys $46m portfolio Series C funding fund, Tara India Fund IV, launched in 2011 with India-based mobile wallet developer Mobikwik a target of $300 million, though the target was from Temasek unit has raised $50 million in a Series C round of later reduced to $75 million. IIML reported a first Singapore-listed PE firm TIH has purchased a funding led by Japanese internet company close of $40 million last year. majority stake in a resources and healthcare- GMO, Taiwan’s MediaTek, and existing backer focused portfolio from a unit of Temasek Sequoia Capital. The company partners with Titan buys Tiger-backed Holdings for S$62 million ($45.8 million). The retailers to provide digital payment services for portfolio includes interests in PE funds managed use both online and offline, and claims a network Caratlane by the International Finance Corporation (IFC) comprising 30 million users and 75,000 retailers Indian jeweler and watchmaker Titan has and Australia’s Pacific Road Capital.

6 avcj.com | May 10 2016 | Volume 29 | Number 17 COVER STORY [email protected] Lending a hand Momentum is building among India’s non-banking finance companies, and PE, government and regulators see promise in the power to reach untapped markets. Success will require the support of all three parties

EARLIER THIS YEAR, SANDEEP ANEJA, INR5 trillion in 2010 to INR12 trillion in 2015. This have more control over the terms of the founder of education-focused Indian GP Kaizen, rapid growth is expected to persist, since NBFC financing. Thus, though the cost of a particular was faced with an important decision. He had credit is just 13% of GDP in India, compared with deal may be higher for an NBFC than it would be passed on Varthana before, when the non- 26% for Malaysia, 33% for China and 74% for for a bank, the NBFC can derive a better return banking finance company (NBFC) – which lends Japan. than a bank could – particularly given that a bank to many small private schools that are not served This expansion of NBFCs as an element of would not have picked up the deal in the first by India’s traditional banks – was raising its Series India’s credit sector has been attributed to several place. A round in 2014. Back then Kaizen concluded strengths of the model, compared to traditional The small and medium enterprise (SME) the company was not mature enough; but what banks. One major difference is the lower market segment can also be targeted by sector- about now? investment required to build new branches. specific NBFCs, a more recent development Aneja decided to take the plunge, co-leading Banks, which typically offer a wider range of in India’s financial sector. These institutions the INR930 million ($14 million) Series B round products than NBFCs, have correspondingly are set up to pursue more narrowly focused with Zephyr Peacock India. He was not only greater infrastructure requirements, making opportunities, usually by leveraging the founders’ convinced by Varthana’s track record, but also it less economical to set up offices in some expertise in particular areas to identify borrowers encouraged by the founders’ expertise; their geographies than in others. that have been overlooked by banks and even by background in education gave the company an “I’ve seen NBFC branches that are literally other NBFCs. edge over other, non-specialized lenders. “Varthana will always be distinguished from PE investment in India NBFCs a generalist NBFC lending to schools, because it understands the education sector really well,” 1,200 says Aneja. “The credit process of Varthana is not 1,000 dependent entirely on understanding the values of the non-performing assets, or the loan to book 800 ratio, but it is dependent much more on the 600 quality of education.” US$ million 400 Kaizen’s Varthana investment is one example of the many approaches that private equity firms 200 have taken to India’s NBFC industry. Strategies 0 have evolved along with NBFCs themselves, 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 with early generalist participants being joined later by more narrowly focused lenders and ure esearh investors. Industry participants says this segment of financial services can deliver considerable opportunities for investors able to keep pace four walls, no air-conditioning, two tables, two Varthana is one example of this phenomenon: with its development. computers and that is it,” says Bhavik Haithi, the company, launched by former teacher Steve managing director at Alvarez & Marsal. “A bank Hardgrave and banking veteran Brajesh Mitra, Rising star branch can’t operate without construction and assesses a potential borrower’s chances for NBFCs have become an increasingly prominent infrastructure, and NBFCs can save those costs repayment based on the strength of its business. part of India’s financial sector. A report by the and pass them on.” This approach is seen as more effective than a Boston Consulting Group (BCG) published last Some unique features of India’s market have purely financial form of appraisal, partly because year shows that the NBFC share of the overall also contributed to the NBFC growth story. For the borrowers often do not have an extensive credit sector rose from 10% in 2005 to 13% in one thing, the rapid growth of the country’s credit history and partly because it sees the 2015. This increase in market share is even more economy has created a steady stream of lending success of the underlying business as a better pronounced for narrower segments such as opportunities among large companies; with indicator of creditworthiness. home finance, where NBFCs went from 26% to India’s banks focusing on these businesses, Avanse Financial Services, another education- 38% between 2009 and 2015, and commercial smaller companies have had a harder time focused NBFC that provides loans to students vehicle loans, with growth from 42% in 2013 to attracting financing. pursuing higher education, follows a similar 46% in 2015. This creates a space into which NBFCs can approach. The company, which is backed by the Overall, loans from NBFCs have more than step, and since their customers have fewer International Finance Corporation (IFC), examines doubled over the past five years, increasing from options than most credit seekers, the institutions borrowers based primarily on their past academic

Number 17 | Volume 29 | May 10 2016 | avcj.com 7 COVER STORY [email protected]

performance and their likelihood of graduating product,” says Dhanpal Jhaveri, managing partner Other development-oriented investors and finding a job. for private equity at Everstone. “Given that these are attracted to the sector-specific approach “The biggest mitigating factor to risk, and would be specialized, custom solution-based among NBFCs. For example, while Kaizen the biggest likelihood of them getting their loan programs, borrowers would find it easier had no involvement in NBFCs before its money back, is if the student gets a job,” says to come to an NBFC like ours than to go to a investment in Varthana, the GP is now looking Kaizen’s Aneja. “It is not as if they drag the parents’ traditional banker.” for additional lending institutions that share its property down into a sale and find a buyer. That’s The GP also benefited from a looser focus on education. IFC, which promotes the a long drawn-out process; you may have covered regulatory environment allowing 100% foreign development goals of its parent, the World Bank, your principal but the cost itself is prohibitive for ownership in NBFCs, unlike traditional banks. This has also committed to more narrowly focused a lot of NBFCs.” allowed Everstone to bring in additional partners institutions; not only student lender Avanse, but such as specialist emerging markets investor also home finance provider Repco. PE approaches Ashmore Group and Goldman Sachs. These financial inclusion and development The ability of NBFCs to identify and assess While the financial returns provided by goals are shared by India’s government and lending opportunities in underserved NBFCs were an attractive enough reason for their regulators, which have also shown interest in populations is one factor in their appeal to early PE backers, as the industry has developed promoting NBFCs as alternatives to the country’s private equity. Their potential for high returns, in newer models are drawing in groups that were banks. First and foremost, the advantage of these spite of higher financing costs, is another. NBFCs’ previously inactive in the industry. For example, institutions in catering to SME borrowers passed average return on equity (ROE) has beaten that of CDC Group, the UK development finance over by the banks holds out the potential to the banks in all but two of the last 10 years, and institution, has shown a growing interest in improve employment and development in the the average ROE for NBFCs over the same period NBFCs over the last several years. country’s rural areas and lower-tier cities. was 15.7% compared to 14.1% for banks. CDC already had exposure to the industry Another impetus for the government and As a result, investors have piled in, committing through its fund commitments, but began RBI to promote NBFCs is to relieve pressure nearly $3 billion in Indian NBFCs over the last 10 to pursue direct deals in 2013 as a means of on traditional banks, whose volume of years. The level of investment has grown steadily promoting its financial inclusion goals for India. nonperforming assets is reaching worrying in that time, despite periodic spikes – the last in 2015, when total commitments reached almost $1.1 billion, about double the investments in the “I don’t see how NBFCs’ share is ever going to previous two years combined. That jump was the result of several larger- come down in the Indian context, considering than-normal deals, including Bain Capital’s INR13 how relevant they are at this point in time and billion commitment to L&T Finance Partners, the financial services unit of domestic conglomerate what is the situation of Indian banks, more Larsen & Toubro, and a INR16 billion investment – Sanjeev Krishan in microfinance institution (MFI) Bandhan importantly” Financial Services by IFC and GIC. These deals could be seen to represent the two poles in NBFC The move was in part driven by confidence in heights. NBFCs can provide an avenue for investing, but the space is even more complex. the Reserve Bank of India’s (RBI) response to the borrowing that would otherwise fall either on the While some stick to straightforward equity global financial crisis, which involved putting already overstressed banks or on the unregulated investments, others set up their own institutions. in place stronger nationwide regulations such shadow lending sector. KKR, for example, has two NBFCs in India: as interest rate caps and limits on loans per “I don’t see how NBFCs’ share is ever going to a structured credit provider founded in 2009 borrower. come down in the Indian context, considering that focuses on entrepreneurs, and a real CDC has committed capital to several MFIs, how relevant they are at this point in time estate-focused company set up last year with selecting Janalakshmi Financial Services, Equitas, and given the situation of Indian banks, more GIC Private as a lead investor. Pan-Asian special Ujjivan and Utkarsh for their resilience in the new importantly,” says Sanjeev Krishan, executive situations investor Clearwater Capital Partners environment. MFIs provide financial services to director for private equity at PwC. “I think the has been involved in the space even longer; its low-income populations – typically loans of up government has been doing a whole lot to NBFC, recently renamed to Altico Capital India, to INR20,000 to start a business – although a encourage the sector, and I think they’re very was founded in 2004 and is targeted at real number have applied for NBFC status in order to cognizant of that.” estate project finance. It raised a $300 million gain access to funding from banks. This combination of policy support and round of funding last year, led by Clearwater. “We felt like they were very focused on low credit penetration – overall and for NBFCs Everstone Capital is one of the most recent helping that bottom half of the pyramid and in particular –should sustain the momentum entrants to the space, creating IndoStar Capital the financially excluded, but they were quick to already present in the industry. BCJ projects a Finance in 2011. IndoStar provides financing adapt in order to be profitable in the new regime, constant annual growth rate of 20-27% through to corporate customer, aiming to meet unique meaning they diversified their product space,” the next four years, with NBFC credit reaching as or unusual needs that would not be met by says Maria Largey, director of financial institutions much as INR39 trillion by 2020 – 33% of India’s financial products provided by traditional banks. at CDC. “Equitas, for example, very quickly went GDP. “There were different types of end users for into affordable housing and vehicle finance. which loans would be required, which a typical They also increased or improved their operating Evolution to come bank may not have considered because, typically, expense ratios by making more efficient As NBFCs continue to expand their share of banks would have a very cookie-cutter lending processes and systems.” the market, industry players expect continued

8 avcj.com | May 10 2016 | Volume 29 | Number 17 COVER STORY [email protected]

savings accounts. Several PE-backed institutions eturn on equity s vs ans have received approval for these licenses, 20 including Kedaara-backed Au Financiers and CDC-backed Ujjivan. Additional regulatory moves desired by PE investors include the removal of restrictions on 15.7

15 partly foreign-owned NBFCs, which are currently 14.1 subject to a cap on the number of subsidiaries they can open and higher capital requirements to do so than fully foreign-owned institutions. 10 Regulators could also streamline the licensing 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 process to allow faster entry into the market. NBFCs 10-year average (NBFCs) Banks 10-year average (banks) These measures would represent minor ource oston onsultin roup improvements to an already investor-friendly environment. Most private equity firms active in the space are happy with how it has developed evolution of their business models. The sector- where they can lend large checks and larger and look forward to further relaxation of the focused approach pursued by the likes of amounts,” says Everstone’s Jhaveri. “So they leave regulatory norms as the industry, and its Varthana is seen as having great potential as a lot of such business to NBFCs, which are willing participants, become more sophisticated. more entrepreneurs from a wider variety of to sit with the borrower and agree a proper “When we were looking at making direct backgrounds are drawn to high returns available. EMI-based borrowing program – a lot of it will be investments, one big confidence booster we These institutions need not necessarily be within the trucking community.” got was that the regulator seemed invested in independent – Shriram Commercial Vehicle It also hoped that government support making sure that the sector worked,” says CDC’s Finance, part of the Shriram conglomerate, was for the industry will remain strong as the Largey. “Similarly now, we are very encouraged set up to lend specifically to owners of small contribution of NBFCs to economic development by the continued commitment toward financial freight companies with fleets of only a few in multiple sectors becomes clearer. Current inclusion and NBFCs. We think that the regulator vehicles. measures aimed at NBFCs include the creation of will do what it can in their power to help “A typical bank will find that extremely payment bank licenses, which allow the holders continue to support the segment, and that cumbersome; they’d rather chase a bigger fish to offer limited banking services and small definitely gives us confidence.”

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THE FINANCIAL INTELLIGENCE PLATFORM FOCUS News [email protected] Security in numbers An unbalanced global cybersecurity market – currently weighted heavily toward the US – is slowly finding Research its feet in Asia. But opportunities in the expected boom may not be intuitive to newcomers

WHEN IT COMES TO IDENTIFYING angels making relatively small investments into technical jargon and a product offering that emerging investment segments that have cybersecurity because ‘cyber is hot’”, says Steven solves a specific problem in a unique manner. long-term credibility, there are few indicators Morgan, founder and CEO of Cybersecurity “You have to look at what specific aspect of as convincing as the opening of a dedicated, Ventures, a market intelligence researcher the overall space is hard to crack, and it is security sector-focused school. This scenario is unfolding focused on start-ups and emerging companies in a collaborative environment,” says Shivani in Singapore where telecommunications giant in the sector. “The investor knows cyber is a Bhasin Sachdeva, managing director and CEO at Publications Singtel has unveiled plans for a 10,000-square- big growing market and they want in, so they India Alternatives. “Data proliferation is occurring foot cybersecurity training facility. The Cyber fund the very smallest ventures which carry like never before and document sharing in an Security Institute (CSI), said to be the first the greatest risk and tend to have first-time external environment is growing at a scorching of its kind in Asia Pacific, follows a $120 entrepreneurs going to market.” pace across all different kinds of devices. A lot of million government commitment to info- Notable Asian success stories in this space security solutions just provide a firewall or require communications training with an emphasis on have included Trend Micro, FFRI, i-Sprint implementation by the end user, which increases cybersecurity. Innovations, Ahnlab and Qihoo 360 Technology, vulnerability to data theft.” “Based on our engagements with companies which is currently subject to a $9.3 billion take- in Singapore, more than 85% do not have robust private bid. The region remains at a disadvantage Outside the box Analysis cyber response plans nor the opportunity to Ambitions beyond the firewall represent conduct realistic drills to test and sharpen such the innovative bent that drives tech-related plans,” says Bill Chang, CEO of group enterprise “The higher walls fields such as cybersecurity. But at this stage, at Singtel. “This lack of cyber preparedness is the traditional approach of building a two- worsened by the severe global shortfall of trained you build, the higher dimensional defense around company data still cybersecurity experts, which Forbes puts at dominates cybersecurity discussions despite around one million in 2016.” ladders the bad actors the promising path forward suggested by more This sense of urgency is supported by a will bring in” – Sanjay Aurora nuanced, customer-specific systems. Market & Markets forecast that cybersecurity “Most resources, technology and people are spending will reach up to $170 billion in still focused on saving the perimeter, whereas You Hunt 2020, while Lloyd’s of London estimates that at the early-stage level, however, due to a lack of actually the battle is really inside the network,” cybercrime is currently costing corporations an established ecosystem. This points to cross- says Sanjay Aurora, managing director of the as much as $400 billion a year. For venture border relations as a potential hallmark of more Asia Pacific division for cybersecurity technology capitalists, however, these trends entail a severe prospective cybersecurity start-ups. provider Darktrace. “The speed at which attacks I bias toward the US, where more than 80% of “There are some Asia Pacific companies are happening and the speed at which things research, commentary and insight, from many dollar funding for private cybersecurity start-ups that have set up a US office in Silicon Valley are moving, it is just not possible to keep up to is invested, according to CB Insights. specifically to be near VCs, which dramatically date with rules and signatures. The higher walls - Singapore’s latest push to embrace the increases their chances of funding - simply you build, the higher ladders the bad actors will important to you and your work. sector, though advanced by Asian standards, because they are local and will be able to have bring in.” must therefore be considered part of a relatively many more meetings and speed along the This perspective is perhaps the bedrock of late response to a global, US-led groundswell process,” adds Morgan. cybersecurity’s long-term appeal to venture of investment support. As CSI fuels a wave of A recent $12 million Series B investment capital. But although the endless arms race cybersecurity start-ups in Asia Pacific, VCs hoping for US-India firm Seclore helps illustrate the between companies and criminal hackers will paid-for publishers and contributors, providing tools to access and to identify viable targets must recognize the advantages of a Silicon Valley-connected profile invite tech start-ups to develop innovate new pitfalls among the possibilities and a new range when combined with Asian growth potential products, the marketability of the space remains understand the latest news and insight. of diligence parameters. – especially in the intense data traffic context mostly in the domain of insuring against human of India’s outsourcing market. Investors in the error and the natural challenges of managing Hot or not? round included Ventureast, Sistema Asia Fund bigger, more heavily circulated datasets. VC cybersecurity investment strategies will focus Advisors and Helion Resources, which cited the “Cybercrime makes an interesting story, on familiar variables related to management importance of an established customer base in a but the bigger push that we’re excited about pedigree, competitive landscape and total field where product validation through technical is that businesses will continue to work in a We Gather addressable market. But for uninitiated investors, due diligence can be difficult. collaborative environment and therefore the the sector’s unique technical adaption and India Alternatives also participated in the need for security in that environment is here to customer engagement value propositions are Seclore deal and noted key differentiators in stay,” adds India Alternatives’ Sachdeva. “If there’s complicating factors. the cybersecurity space, including a company’s one thing we’re betting on, it’s the fact that “Where I see mistakes amongst investors are ability to engage clients without complex businesses will continue to collaborate.”

THE FINANCIAL INTELLIGENCE PLATFORM Number 17 | Volume 29 | May 10 2016 | avcj.com 11 DEAL OF THE WEEK [email protected] Farfetch carves luxury niche in Asia

AMAZON AND ALIBABA GROUP DOMINATE Last week, the fashion site raised a $110 customer services, online payment systems. e-commerce in the US and China, respectively, million Series F round led by Temasek Holdings, [Farfetch] has spent hundreds of millions of but neither has achieved meaningful expansion China-based IDG Capital Partners and France’s dollars on this; late comers will have to double into the luxury apparel market globally. Richard Eurazeo, with participation from existing investor the cost to build that scale.” Chen doesn’t think they will. Vitruvian Partners. It took the total investment in In addition to the main site, omni-channel “Luxury brands don’t like Amazon and Alibaba Farfetch to more than $305 million and valued Farfetch Black & White has been introduced to – they see them as mass market and don’t want the business at $1.5 billion. allow brands to use Farfetch’s to be part of it,” says Chen, a venture partner Ceyuan was an angel investor e-commerce platform on their at China-based Ceyuan Ventures. “The luxury in the company, while other own sites. Last May, it gained a market is only about 10% of the mass market, so shareholders include Advent physical presence after acquiring it doesn’t make sense to have many online luxury Ventures Partners, Index ventures, London-based boutique Browns. malls. Basically, it is one winner takes all.” e.Ventures and DST Global. There are plans to develop an Ceyuan is backing UK-based high-end The bulk of new funding online-to-offline business model e-commerce marketplace Farfetch to be that will support Farfetch’s global Farfetch: Best of the boutique and expand into new verticals winner. The seven-year-old company has expansion plans, with a particular such as skincare and jewelry – transformed online retail in Europe, helping focus on Asia, which accounts for 26% of sales. but it will all be high-end. little-known boutique stores in Italy access China alone contributes 12%, and the company Asked whether Farfetch is a likely acquisition customers overseas. Farfetch now operates in only launched in the country two years ago. Its target for the Alibaba, Chen demurs: “Luxury nine languages, working with more than 400 share could rise to 35% over the next 3-5 years. brands won’t like it because it’s a mass market independent boutiques and global fashion “It will take a while for other players to build player,” Chen adds. “One of the luxury groups brands from over 37 countries. Sales reached traffic on a global level,” says Chen, referring could do it but they are always fighting amongst $500 million last year, with Farfetch taking a 30% not only to Alibaba and Amazon but also new themselves, so an acquisition would impact our commission on each deal, much higher than players out of Europe. “It’s very complex – you sales of other brands. An acquisition would not mass market players. have to come up with global logistics networks, be easy.” VCs back ACT’s customized cancer care model

THE CONTRIBUTION OF GENETICS TO information that is used to draw up a list of a $12.5 million Series B round of funding for cancer treatment is all about scope and scale. treatments, which are either already approved the company. Other participants included The more genes are tested, the greater number by the US Food & Drug Administration (FDA) or Eminent II VC, Hua Nan Venture Capital, President of therapeutic options can be drawn from the clinical drugs from academic research. International Development and UMC Capital. The data and used to create treatment programs. The idea is that doctors can devise fully company previously received $8 million last year. However, many hospitals will only provide personalized programs, based not only on With its service currently being trialed by personal genomic testing for a how developed the cancer – three hospitals in Taiwan, ACT has spent the last few cancer-related genes, so their prevention, early detection or year upgrading its laboratory to international options are limited. disease monitoring – but also standard. Last month it was accredited by the “Normally a hospital will test how individual patients are likely College of American Pathologists (CAP), which one or two genes from a cancer to respond to different drugs. certifies laboratories that meet regulatory patient. Doctors do this because “We provide more possibilities requirements. Only five oncology-testing they just want to confirm that for cancer treatments” Wu says. laboratories in Asia have achieved this status. they can give certain drugs to a Genomics: Personalized data “For example, therapies used The next step is expansion into the rapidly patient. That’s not our objective. to treat breast cancer might be growing Asia testing market, with a particular We want to provide as many treatment options suitable to treat lung cancer too. We provide focus on Japan, Singapore, Malaysia, Thailand and as we can through broader genomic testing,” says comprehensive analytical reports to doctors, not Hong Kong. Wu notes that the VC environment Angus Wu, an associate director at Taiwan-based just DNA sequencing data. That’s why doctors has become more active in Taiwan, especially for ACT Genomics. see our reports as valuable and are willing to pay biotechnology investments, and so ACT expects Founded in 2014, ACT uses a sequencing a premium for the service.” to receive more funding. and multiplex molecular testing platform to ACT’s model has not yet reached “We are the only company providing such screen for more than 400 cancer-related genes commercialization, but VC investors are information to cancer treatment specialists in in tumor samples collected from patients. These impressed. Last week, existing backer Hotung Asia. We expect that most of our revenue will be tests generate genomic profiling and molecular Group and new investor CDIB Capital co-led generated from hospitals in the future,” he says.

12 avcj.com | May 10 2016 | Volume 29 | Number 17 DEAL OF THE WEEK [email protected] QIC plots Asia beef supply chain

BETWEEN 2003 AND 2014, PER CAPITA NAP is one of Australia’s largest cattle station government said it would not approve the deal. meat consumption in China increased by 11 operators with 13 stations and one feedlot set in Simpson argues that QIC, as a government- kilograms. Stepping up from the current annual 5.8 million hectares of land. Its 178,000 head of owned institution, is uniquely positioned to serve intake of 57 kg to Taiwan’s level of 74 kg will cattle are grass fed and grain finished for sale to as a bridge in these transactions. It wants to work require an additional 94 million tons of corn and Australian meat processors who distribute beef with foreign investors – who would participate soybeans for feedstock and 15 million hectares products domestically and internationally. as co-investors (it brought the UK-based Pension of land. Needless to say, imports are likely to play Some of this already finds its way to China. Protection Fund into the NAP deal) or off-take an ever larger role as Beijing looks to satisfy local Beef imports from Australia reached 148,222 partners – and use its operational expertise to appetites, in quantity and quality terms. tons in 2015, up from just 32,906 tons in 2012, help drive value. This goes a long way to explaining the spike according to Meat & Livestock QIC is also willing to be in beef exports from Australia to China, and by Australia. It is now the fourth- patient, treating NAP as a 10-15 extension, QIC’s decision to buy an 80% stake in largest buyer of Australian beef year investment that can deliver a cattle station operator North Australian Pastoral after the US, Japan and Korea. 10-14% return, which means it is Company (NAP) in a deal worth around A$400 The Asia protein thesis unsuited to the traditional private million ($295 million). has underpinned a string of equity model. “Asia is going to account for 47% of global private equity investments in “Our CIO was looking at the beef imports by 2024. The supply chains to get Australia, from wholesalers to Quality beef: Wanted in China food theme and all he could fresh product up into Asia haven’t been built yet processors to farm operators. find were sale and leaseback and that’s part of the investment thesis – that we There is also considerable strategic interest out opportunities for agricultural land,” Simpson adds. and others can help grow these supply chains of China in these assets, but the sensitivities “He wanted an operational approach with a PE so we can get fresh beef in particular to where tied to large-scale sales can be problematic – philosophy, so we authored the theme. We like the demand is, whether that is Japan, the US as recently evidenced by a Shanghai Pengxin foods that are more complicated to produce like or China,” says Marcus Simpson, head of global Group-led consortium’s decision to withdraw beef, aquaculture and lamb, and which involve a private equity at QIC. from an acquisition of S. Kidman & Co. when the longer cycle to replenish stocks.”

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avcj.com PIAU-VOON WANG | INDUSTRY Q&A [email protected] Targeting the white space Piau-Voon Wang, formerly of Adams Street Partners, is now co-CIO of Chinese wealth manager Noah Holdings. He explains why helping Chinese investors go overseas could be the biggest PE opportunity of the decade

Q: What does your recruitment strategy, and among the various The international side is much mainstream. It is a bigger part mean for Noah’s operations in wealth management groups, less developed than Gopher’s of investors’ portfolios and so Hong Kong? Noah is deemed to be their first onshore business, but we are information is more readily A: The offshore operation was choice. We have all the necessary going down the same path – available. When that asymmetry established in 2012, so this is a licenses in Hong Kong, which are starting with flagship fund-of- goes away, people ask why they continuation of an established very transparent. What I think we funds and then broadening the need a fund-of-funds when they strategy, strengthening the need to develop further is the offering to include thematic could do it themselves. China investment capabilities in Hong second tier, the smaller names is a totally new fundraising Kong. Any investment outside that may not be as aware of channel, so the asymmetry of China will be done from the strategic importance of the still exists. While some groups Hong Kong. The business will Chinese distribution channel. have been investing actively be driven by high net worth within China, there is a bridge clients to begin with, but Noah Q: How will Noah build up that between understanding the is establishing an institutional exposure in the second tier? asset class domestically and primary business and already has A: The only way you can unearth understanding it globally. It some clients in China. small and mid-market funds is is one of few white spaces by having people on the ground. left in the asset management Q: How did the Noah go from We can invest in the big guys industry and probably the being purely domestic to out of Hong Kong because they biggest opportunity for private international as well? are going all over the world “The only way equity over the next 10 years. A: The renminbi funds business has fundraising, but if we want Clearly the industry will evolve seen its ups and downs, but it to access smaller managers, you can unearth into customized accounts, is clearly the mainstream now. and get into secondary and co-investment and direct While US dollar funds have a co-investment we have to be small and mid- investment over time, but the role to play, the predominant on the ground, studying various market funds is best entry point at the moment currency of choice for doing options. The US and Europe in my view is fund-of-funds. deals in China is renminbi, and could be the initial areas of focus by having people rightfully so. Noah started 12 where we could hire people Q: How does Noah’s approach years ago so it has grown up directly. Our group president is on the ground” to clients in China differ from with the local private equity leading that effort to explore the that of international firms? industry. Several years ago clients possibility of expanding Noah’s fund-of-funds, secondaries and A: International firms have the started developing an appetite footprints to the US or European co-investment. advantage of being global for investing offshore because countries. organizations with longer they had built up experience of Q: It is often said that the histories and thus more the asset class in China but they Q: Once Noah has established a traditional fund-of-funds established knowhow. Among didn’t want to invest in China relationship with an offshore model has no future globally. the local players, the marketing only. Noah started offering some fund manager, how can clients Are things different in China? and hand-holding is different, a offshore products and it’s still get exposure to the fund? A: When I joined the industry in lot tighter. The international firms mainly the usual suspects, the A: Noah is a distribution business 1999 there was only a handful can lean on the resources of local big flagship funds. We are not and then there is Gopher Asset of fund-of-funds worldwide. firms to get that understanding going to introduce clients to Management, the subsidiary You needed a layer like that and in return provide brand start-up funds right away. in which the fund-of-funds because of the information names and resources overseas. business sits. [Wang is a partner asymmetry: private equity as an What I hope to establish in Noah Q: What kind of access do you at Gopher in addition to being asset class is only transparent to could be the best of both worlds. have to international funds? co-CIO of Noah’s international its stakeholders; information is We have the resources on the A: One of the attractions for me was arm]. When we look at a fund, it not freely available to the public ground – we can do the hand- that Noah has no access issues could go into the fund-of-funds and rightly so. The middleman holding, solve regulatory issues, when it comes to the brand and it could also go into the could be a fund-of-funds, with we have all the necessary licenses. name firms. The largest GPs Noah distribution network as a full discretion, or it could be an At the same time I also hope to have figured out it is important single fund, so clients can choose advisor. Over the last 20 years establish credible teams with to establish a China distribution how they want to have exposure. PE has become increasingly international track records.

Number 17 | Volume 29 | May 10 2016 | avcj.com 15 6th Annual Private Equity & Venture Forum Singapore 2016 20-21 July • Four Seasons Hotel, Singapore GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY Early Bird Rate expires on Friday, 10 June 2016 BOOK NOW and SAVE US$200 Finding viable investments in volatile times

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