Safe Hands? Private Equity Targets Emerging Asia’S Succession Planning Opportunity Page 19

Asia’s Private Equity News Source avcj.com November 04 2014 Volume 27 Number 41

Safe hands? Private equity targets emerging Asia’s succession planning opportunity Page 19

PE returns: On target? Page 11 Names: A brand issue Page 29 VC pioneer Tim Draper Page 39

CONFERENCE SPECIAL ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM HONG KONG 2014 Anything is possible if you work with the right partner

Unlocking liquidity for private equity investors www.collercapital.com London, New York, Hong Kong CONTENTS

EDITOR’S VIEWPOINT 31 Eastern perspective: Feng shui masters rate private equity firms’ Chinese names 05 Asian PE will continue to grow in asset terms, but slower and in multiple directions 33 Western perspective: How branding consultants help find the magic formula NEWS 07 Carlyle, China Life, DCM, Evercore, Hony, TECHNOLOGY J-Star, SoftBank, PEP, Warburg Pincus The Palo Alto prescription PERFORMANCE 35 Asia’s innovation hubs are aspiring to become the next Silicon Valley, but some Under pressure are more global than others 11 To varying degrees unimpressed by Asian PE performance, LPs are asking more of 38 Venture capitalists want government to their managers on the operations side facilitate start-up development, not try and pick winners directly SUCCESSION PLANNING Family ties INDUSTRY INTERVIEWS 19 Private equity investors eye buyout opportunities as emerging Asia’s aging 16 Olver Gottschalg of HEC School of founders struggle to find credible heirs Managment talks PE performance 21 Case study: Mekong Capital and Vietnam’s 27 Howard Marks of Oaktree Capital AA Corporation Management on risk and reward 25 Case study: Bain Capital and Dominos Japan 39 Tim Draper of Draper Associates on exporting the Silicon Valley model BRANDING What’s in a name? 29 PE firms attach increasing importance to finding the right name. This is no easy task when operating in multiple markets

Number 41 | Volume 27 | November 04 2014 | avcj.com 3 De-risk your transaction with the market leaders in M&A insurance solutions

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LONDON I MELBOURNE I SYDNEY EDITOR’S VIEWPOINT De-risk your transaction [email protected] Managing Editor Tim Burroughs (852) 3411 4909 Staff Writers Andrew Woodman (852) 3411 4852 with the market leaders in Winnie Liu (852) 3411 4907 Onwards and Creative Director Dicky Tang Designers Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow M&A insurance solutions Senior Research Manager upwards Helen Lee Research Associates Herbert Yum, Isas Chu, ONE OF THE HOTTEST TOPICS IN LAST their brands out. Jason Chong, Kaho Mak year’s AVCJ Forum was whether the Asian private In terms of investments, naysayers having Circulation Manager equity and venture capital industry can remain been predicting, for years, that with no financial Sally Yip on its growth trajectory. The region’s assets under crisis and China’s growth slowing, the golden age Circulation Administrator Prudence Lau management have expanded 12-fold in the last of Asian private equity is over. This may be partly Subscription Sales Executive 20 years. While there is no doubt the industry true but it should be remembered that capital Jade Chan can also drive a market. Bring together some of will continue to get bigger, the nature of the Manager, Delegate Sales growth is likely to alter course – in terms funds, the smartest people in the financial world and Pauline Chen investments and people. tie compensation to their ability to make money Risk Capital Advisors (RCA) is the market leader in advising on and structuring insurance solutions for Director, Business Development Private equity has graduated from its for investors and you will see results. Investment Darryl Mag transaction risks. With a wealth of experience across Asia-Pacific and an impressive track record of position as head of the alternatives asset class to cycles will continue to give and take away, but Manager, Business Development successful transactions, RCA provides expert, commercial advice on a range of transaction risk strategies spearheading wider private market investment Alibaba Group’s IPO and the Oriental Brewery Anil Nathani, Samuel Lau strategies. Just a few years ago, most private trade sale are proof that multi-billion dollar exits and insurance-based solutions. Sales Coordinator equity firms had a focused approach with small are still possible in today’s market. Debbie Koo adjustments based on the size of their current Private equity is – and always will be – a As the largest team in Asia-Pacific, the RCA team has a combined 60+ years of Private Equity, M&A and funds. This was true for both buyout funds and relationship business, with people the most Conference Managers Jonathon Cohen, Sarah Doyle, insurance experience, and is the preferred advisor to structure transaction risk insurance solutions. venture capital players. important asset. As many of the founding fathers Conference Administrator Today the landscape looks very different. Most give up day-to-day duties to pave the way for a Amelie Poon of the global firms with a presence in Asia have younger generation, we may see a short-term Conference Coordinator In the past 5 years, the RCA team has successfully advised on and closed more than 450 transactions, Fiona Keung, Jovial Chung making RCA the most experienced team in the Asia Pacific region. diversified their offerings. Buyout strategies were decline in the number of so-called “personalities.” altered to accommodate growth capital years But the void will eventually be filled as other Publishing Director ago, but firms are now expanding up and down investment professionals rise to “rock star” status. Allen Lee The transaction risks we provide advice on include: the capital structure. Distress, mezzanine and And with the industry expanding its focus, there Managing Director Warranties & Indemnities structured credit strategies are in place and in will be more people filling the space. Jonathon Whiteley Tax some cases real estate too. Several global players As somebody who has observed the industry no longer describe themselves as “private equity grow from a small part of the region’s financial Litigation firms,” preferring something along the lines of services sector to the behemoth it is today, Asian Prospectus Liability Incisive Media “private markets investor.” private equity will find ways to grow. Unit 1401 Devon House, Taikoo Place Environmental As for venture firms, they have diversified 979 King’s Road, Quarry Bay, Hong Kong Contingent Liabilities their funds to include larger growth capital deals T. (852) 3411-4900 as well as seed-stage investments. Most remain F. (852) 3411-4999 E. [email protected] focused on specific markets, although Sino-US Allen Lee URL. avcj.com strategies are popular in some quarters, while a Publishing Director Beijing Representative Office few of the bigger US firms have been franchising Asian Venture Capital Journal No.1-2-(2)-B-A554, 1st Building, No.66 Nanshatan, For more on how RCA can help contact Rick Glover on +61 401 123 235, Chaoyang District, Beijing, People’s Republic of China Private equity funds under management in Asia T. (86) 10 5869 6203 [email protected] or visit riskcapital.com.au F. (86) 10 5869 6205 600,000 E. [email protected] 500,000 400,000 The Publisher reserves all rights herein. Reproduction in whole or 300,000 in part is permitted only with the written consent of AVCJ Group Limited. US$ million 200,000 ISSN 1817-1648 Copyright © 2014 100,000 0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD Source: AVCJ Research LONDON I MELBOURNE I SYDNEY

Number 41 | Volume 27 | November 04 2014 | avcj.com 5 Premier buy-side executive search

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GLOBAL Hony seeks healthcare, COFCO plans IPO for PE- restaurant buyouts backed businesses Warburg Pincus raises $4b China-focused GP Hony Capital is seeing more Chinese agricultural conglomerate COFCO buyout opportunities involving healthcare and Corporation is looking to list some of its assets, global energy fund restaurant chains and it has created two sector- including Noble Group’s agribusiness unit and Warburg Pincus has closed its first dedicated focused operational teams to consolidate these Dutch grain trader Nidera Holdings, both of energy fund at the hard cap of $4 billion, industries. which were acquired with PE support. comfortably exceeding the $3 billion target. The Speaking at his firm’s annual general meeting new vehicle, which launched in November 2013 in Shanghai, Hony CEO John Zhao noted that DCM leads $30m Series B and reached a first close in May 2014, will be a the government is deepening industry reforms companion fund to the $11.2 billion Warburg in order to open up the domestic market and for gay social app Pincus Private Equity XI. encourage DCM has led a $30 million Series B round of innovation. As funding for Blued, a Chinese gay dating app. The such, Hony’s transaction values the company at $300 million. ASIA PACIFIC approach - Earlier this year, the firm received RMB10 million previously ($1.6 million) in Series A funding from Crystal Evercore adds to Asia characterized Stream. private funds group by minority stakes, local Mobile marketing firm Boutique investment bank Evercore has hired Ian markets and Bell from Credit Suisse to head up distribution manufacturing Lomark raises $30m and origination for its private funds group in Asia businesses - is A group of VC investors – DFJ DragonFund, KPCB, Pacific. Bell, who was previously responsible for increasingly ABC Capital and Shenzhen Fortune Venture Credit Suisse’s institutional investor coverage in focused on Capital – have committed $30 million in Series B the region, is based in Hong Kong. services, cross-border strategies and buyouts. funding to Lomark, a Chinese mobile advertising The two sector-focused teams will contribute firm. The company previously raised a Series A to the due diligence process and offer post- round of undisclosed size from DFJ. AUSTRALASIA investment operational services for this new wave of buyouts. The healthcare team, BVCF-backed Jaguar Animal PEP makes another partial known as Grand Accordia Healthcare, is led by Xiaopeng Zhao, formerly vice principal of Beijing Health targets US IPO exit from Veda Group University’s Cancer Hospital. Jaguar Animal Health, a veterinary drugs Pacific Equity Partners (PEP) has generated The PE firm’s cross-border ambitions are now developer backed by China-focused healthcare around A$218 million ($192 million) through a focused on bringing companies into China. “Last investor BVCF, is looking to raise as much as $54 partial exit from Australia-listed credit-checking year we were still talking about helping Chinese million through a NASDAQ IPO. The company firm Veda Group. It still holds 19.6% stake of the companies expand overseas. However, they plans to sell 5 million shares - not including the business. The PE firm offloaded 100 million shares weren’t as welcomed as we thought. Now we overallotment option - at $7-9 apiece. BVCF’s via an underwritten block trade sale. are only focused on acquiring the best brands holding will be diluted to 15.6% from 31.3%. overseas and expanding them in China,” Zhao PE firms settle with Asahi said. Photo-sharing app Blink over Independent Liquor secures $20m round Pacific Equity Partners (PEP) and Unitas Capital provides cloud-based workplace management Blink, a Chinese photo sharing and messaging have agreed a private settlement with Asahi software designed to increase productivity and mobile app, has raised $20 million in Series A over the sale of Independent Liquor that improve communication between business units. funding from Tencent Holdings, Sequoia Capital, means the dispute will not proceed to trial. The H Capital, ZhenFund and Innovation Works. judge adjourned the case for a week to allow Rather than center around a text-based online the parties to formalize a deal. Asahi bought GREATER CHINA chat function, a camera is activated as soon as Independent Liquor from the PE firms in 2011 the app opens. Users can take photos and then but then sought damages, claiming that earnings China Life to boost add text by drawing on the image. had been overstated. alternatives exposure Cycle Capital to enter China Tamarisc leads Series A China Life has mandated one of its investment subsidiaries to deploy up to RMB150 billion cleantech market round for Serraview ($24.5 billion) of insurance funds into alternative Canada-based cleantech investor Cycle Capital Australian software-as-a-service (SaaS) start-up asset classes over the next year. If the mandate Management (CCM) will help set up a venture Serraview has raised a Series A round of funding awarded to China Life Investment Holding is capital fund in Qingdao as part of an investment from US-based venture capital firm Tamarisc as it fully exercised, it would take the insurer’s overall partnership with the eastern China city. The looks to expand into US markets. The company alternatives allocation past 10%. fund will be run by Qingdao City Construction

Number 41 | Volume 27 | November 04 2014 | avcj.com 7 NEWS

Investment Group with input from CCM. The SoftBank injects $627m Angels, FundersClub, Basset Investment Group Canadian firm will also invest in local cleantech and Triangle Growth Partners. The company’s enterprises. into India’s Snapdeal previous round was worth $3 million. Japanese tech giant SoftBank Group has agreed to invest $627 million in Indian e-commerce site Adlabs Imagica raises $8m NORTH ASIA Snapdeal, bringing the start-up’s total funding to more than $1 billion. The investment - made via from NYLIM, Jacob Ballas Carlyle crosses $600m SoftBank unit SoftBank Internet and Media (SIMI) Indian theme park operator Adlabs - represents the the biggest e-commerce deal Entertainment has raised INR500 million ($8.18 threshold on Japan fund in the country since the $1 billion round raised million) in a pre-IPO round of investment from The Carlyle Group has crossed the halfway by Snapdeal rival Flipkart in July. AVCJ Research NYLIM Jacob Ballas India, a vehicle co-owned mark on its third Japan buyout fund, with data show that - including this latest round - by New York Life Insurance Company and Jacob approximately $600 million raised predominantly Snapdeal has now raised about $1.6 billion from Ballas Capital. The company owns theme park from domestic investors. The private equity firm VC backers. brand Adlabs Imagica. is seeking around $1 billion for the vehicle. David Rubenstein, co-CEO of Carlyle, said they are now NRI investors sue ICICI in the process of raising capital outside of Japan. Venture for damages SCPE leads deal for Korean ICICI Venture is being sued by a group of 69 non- resident Indian investors who are seeking $103 packaging business million in damages from over alleged losses from Standard Chartered Private Equity (SCPE) is a property fund run by the GP. They claim that, as participating in the KRW415 billion ($396 million) of March this year, only one of the 13 Indian real acquisition of South Korean conglomerate estate projects backed by Dynamic India Fund III Hyosung Corporation’s packaging business. . had been completed in the nine years since the it The identities of other investors have not been launched. ICICI Venture denied the allegations. disclosed. Snapdeal was launched in 2010 and currently claims 25 million registered users and more than Creador offloads more of J-Star secures 5x exit from 50,000 business sellers. It will use the new capital to expand its operations and help compete with Repco Home Finance healthcare firm HCM market rivals. Creador has made another partial exit from India’s Japanese mid-market buyout firm J-Star has SoftBank become Snapdeal’s largest investor, Repco Home Finance (RHF), bringing its stake in exited Tokyo-based healthcare service provider with Nikesh Arora, CEO of SIMI, joining the the company to just under 2%. The GP sold just HCM Corporation to Alshok Group at an company’s board. This is the Japanese firm’s under 400,000 shares at INR470.07 apiece - or enterprise value of JPY8.88 billion ($78.7 million), second Snapdeal investment. Last year it 0.6% - for INR187.8 million ($3 million). generating a 5x cash multiple and a 60% IRR. participated in a consortium that committed J-Star - which held a 56.9% stake in HCM - invest $74 million last year. The deal also marks the start $30 million in the company in May 2011. of an India spending spree for SoftBank, which SOUTHEAST ASIA previously said it would inject $10 billion in the SOUTH ASIA country’s most promising tech start-ups. Jynwel targets oil producer Salamander Energy SoftBank leads $210m Mandala commits $24m to Salamander Energy, an Asia-focused oil and cold chain business gas exploration and production company, has round forTaxi-booking app received a buyout offer from Jynwel Capital, India taxi-booking app Ola has raised $210 Mandala Capital has acquired a 30% stake in the a Hong Kong-based PE firm controlled by million in a Series D round of funding led by cold chain unit of Indian express distribution and Malaysian businessman Jho Low. Jynwel is SoftBank. Existing investors Tiger Global, Matrix supply chain solutions provider Gati for INR1.5 leading a consortium in partnership with CEPSA, Partners India and Steadview Capital also billion ($24.4 million). The new funding will a Spanish oil and gas company. participated. enable the cold chain unit - known as Gati Kausar - to build a nationwide network of warehouses Catcha launches VC unit for Warburg Pincus backs over the next three years, offering integrated cold chain logistics and supply chain management. Southeast Asia TMT deals Laurus Labs, Fidelity exits Southeast Asia-focused media company Catcha Warburg Pincus has paid INR5.5 billion ($89.6 Sequoia leads $8m round Group has launched a venture capital unit that million) for a minority stake in Indian drug will invest in new media, technology and mobile maker Laurus Labs, triggering a partial exit for for Zoomcar businesses throughout the region. Catcha Fidelity Growth Partners India. AVCJ data show Sequoia Capital has led an $8 million round of Ventures has a remit to commit $50-100 million that Fidelity, invested INR2 billion in company in funding for Zoomcar, an Indian car-rental start- to selected companies over the next three to five February 2012. up, alongside existing investors including Empire years. It will focus on growth-stage companies.

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Beijing / Hong Kong: Sammy Lai (黎大汉), [email protected] Shanghai: David Lu (吕海歌), [email protected] Shanghai: Simon Tsang (曾伟昌), [email protected] PERFORMANCE [email protected] Special measures Asian private equity has, by some accounts, failed to meet LP expectations in terms of risk-adjusted returns. With GPs under pressure to show they can be company builders, is specialization the inevitable end game?

CHINA ACCOUNTS FOR ONE IN FIVE OF THE world’s population and one in three of its deaths Regional private equity performance by IRR from lung cancer. Aequus Capital Partners wants 40 to help do something about it. The newly-formed Asia PE performance PE firm is looking to invest in companies with 30 technologies focused on early-stage diagnosis and treatment of cancer. % 20 It is part of a strategy that will leverage government efforts to drive private sector 10 participation in Chinese healthcare. In many cases, the technologies will be established 0 overseas and Aequus will roll them out locally. 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 The PE firm may also invest in the diagnostic and 35 Europe PE performance check-up centers that use these technologies. It 30 wants to raise a $200 million pan-regional fund, 25 most of which will be deployed in China. 20

“The capital requirement is in our sweet spot % 15 and the government is very open to driving 10 specialized care away from public hospitals 5 and providing access even at tier-two city level 0 through these clinics,” Amit Kakar, co-founder of -5 Aequus, says of the check-up center opportunity. 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 A total of 742 funds in Asia have been 25 successfully raised since 2006 with healthcare North America PE performance 20 forming part of the remit, according to AVCJ Research. Funds claiming to be healthcare only 15 number 88, although it includes several that % 10 have seen some strategy drift. Nearly half are 5 affiliated to corporations, governments and 0 financial institutions. Only 22 truly independent -5 funds have been raised in the last three years, and half of those were renminbi-denominated 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 vehicles. First quartile Median Third quartile But Aequus could be part of a new breed of Source: Preqin GP. It is very much mid-market. It is a spin-out from a larger platform – Kakar used to lead Asia healthcare investments for Avenue Capital, while Consequently, there is now greater scrutiny of Asia has an issue with continuity and keeping his two co-founders previously worked at CLSA how managers add value to portfolio companies. talented teams together.” Capital Partners and medical devices-focused GP Even without this pressure, tougher She adds that certain markets in Asia haven’t Dinova Capital. It is also a sector specialist. macroeconomic and exit environments in certain lived up to expectations over the past few years Whether the transition involves larger markets are challenging the historical notion that and trail distributions in the US and Europe. There firms building up silos of expertise in certain a growth investment will see stellar growth. Now may be more exits to come from these markets, industry verticals or smaller players emerging more than ever, portfolio companies need deep so “we are getting to the moment of truth.” These to target particular niches, PE investors in Asia expertise in addition to capital. sentiments are echoed by other LPs, though with are finding their sweet spots. This is part natural “The market is more penetrated and prices varying degrees of earnestness. evolution and part necessity. Specialization is reflect the level of competition and capital, so it a well-trodden path by Western GPs, but Asian is more a case of what you do with companies,” Damage assessment managers are also responding to particular says Katja Salovaara, senior portfolio manager As to the root cause of these performance concerns about performance. A general for private equity at Finland-based pension concerns, industry participants identify two observation by LPs over the last two years is insurance system Ilmarinen. “We are a looking for issues. First, Asia has struggled with a public that Asia hasn’t delivered the returns expected. investment skill and value-add, but I also think markets downturn. While US and European stock

Number 41 | Volume 27 | November 04 2014 | avcj.com 11 Your Trusted Advisor for Commercial Due Diligence

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indices are close to record highs, facilitating investing looked like a sweet spot in China and return from the region has surpassed North strong distributions to LPs, emerging markets India – you could ride the macro tailwinds of America only once over the next six vintages, have seen a sell-off in recent years. Exits are not growth, find some good companies, and get while top quartile managers have beaten North easy and money isn’t coming out. Second, the multiple arbitrage. There was a wave of easy America’s top quartile on two occasions. region is still dealing with the consequences of money, but that was the early days. A lot of “At the start of any market you get its own growing pains: the surge of interest in investors plowed money in and some have been supernormal returns because you have naivety Asia ahead of the global financial crisis led to quite disappointed.” and a smaller number of players. Then capital imprudent allocations to inexperienced GPs and Preqin tracks all sub-sets of private equity floods in, new players emerge, prices are bid up, inefficient deployment of capital. across Asia, Europe and North America. The data, and if you have any problem in the system – as Having raised $55.8 billion over the three which cover vintage performance in net IRR you could argue we’ve had with the paucity of years to 2005, Asia-focused managers raised terms from 1997 through 2011, are instructive in IPOs and the impact on exits in places like China $174 billion over the next three. Between 2006 underscoring the differences between then and and to some degree India – returns moderate and 2011, $433.5 billion was invested in Asia by now. For 1999 through 2003, the median returns down to a median position,” says John Morrison, single country, regional and global GPs, with the generated by Asian funds were better than of managing director at Munich Private Equity latter years witnessing an explosion in activity their European and North American counterparts Partners (MPEP). from newly-raised renminbi funds. Since 2008, in all but one vintage. In 2001, even third quartile the region has seen less than $300 billion in managers produced a net IRR of 20.3%, while the Allocation implications exits. top quartile reached 38.4%. So what does this mean for LP allocations to “Way too much money has flown into Asia Over the course of these few years, China- Asian private equity? For those that seek to in the last few years and if you look at funds focused managers such as CDH Investments construct diversified portfolios, the answer is that had performance when they were at $100 were prolific. They restructured companies not much. Asia has to feature to some extent million suddenly were managing $1-2 billion, it’s not surprising it’s not surprising there are some Private equity returns by region negative surprises,” says Thomas Kubr, executive chairman at Capital Dynamics. 30 Cambridge Associates has the net IRR All funds accruing to LPs from all Asia-focused PE and VC funds at 13.3% on a 10-year basis, trailing buyout 20 funds from Australia, Western Europe and North Your Trusted Advisor for America. On a five-year basis, Asia beats Western Europe but trails the other two markets and then 10 Net IRR to LPs (%) LPs Net IRR to ranks second after North America by three-year returns. On a one-year basis, Australian funds lead Commercial Due Diligence 0 the way with a net IRR of 25.9%, followed by Asia 1-year 3-year 5-year 10-year on 24.8%. 50 L.E.K. assists Private Equity to identify, invest in, develop and sell businesses in China, “On the face of it, Asia PE and VC has just Top quartile funds about kept pace with returns from buyout 40 Asia-Pacific and around the world. strategies in Australia, Western Europe and North 30 America. This may suggest that, if additional In the past ten years, L.E.K. has worked with Private Equity investors to evaluate over risk was imputed to Asian investments, there 20 Net IRR to LPs (%) LPs Net IRR to 200 different opportunities in Greater China and 3,000 worldwide. We have also has not been additional return over that of other geographies to compensate for that risk,” 10 undertaken a large number of projects focused on growth and performance says Vish Ramaswami, managing director for 0 improvement to maximize the value of portfolio companies. investment research at Cambridge Associates. 1-year 3-year 5-year 10-year Strip out all but the top quartile funds, Asia ex-Australia PE & VC Australia buyouts Western Europe buyouts North America buyouts though, and the picture changes. On a five, three Source: Cambridge Associates Time and again, L.E.K. has demonstrated the ability to bring China and global experience and one-year basis, the region outperforms to give our clients the edge. Western Europe and North America, with a one-year net IRR of 46.9%. Given the nascent offshore, doing most of the work pre- and many of these groups consider themselves state of the market, a sizeable difference in investment, and then filed for IPOs in Hong underweight on the region. For those chasing performance between good and poor funds is Kong almost as soon as the money went in. pure alpha, irrespective of manager location, Asia perhaps unsurprising, but it does emphasize the IRRs were robust. However, regulatory reforms could fall in the pecking order. L.E.K. CONSULTING importance of manager selection. encouraging Chinese companies to go public Yet Ilmarien has no specific geographic One of the implied criticisms of the phase domestically and a listings logjam created by the allocation, preferring to follow the best during which everyone piled into the market volume of PE firms pursuing pre-IPO strategies opportunities, and Salovaara expects Asia to SEE MORE AT LEK.COM is they were not discerning enough. “If your made the exit process more complicated and feature more prominently over the next five investment thesis is too macro-oriented and time-consuming. years. The group, which is in the process of you under appreciate the importance of the GP, Any risk-adjusted premium generated by Asia increasing its global private equity allocation Beijing . Boston . Chennai . Chicago . London . Los Angeles . Melbourne . Milan . Mumbai . Munich you are going to get stuck,” says Donald Pascal, began to erode from around 2006 – also the year from 5% to 8%, first backed an Asia-based GP in New Delhi . New York . Paris . San Francisco . São Paulo . Seoul . Shanghai . Singapore . Sydney . Tokyo . Wroclaw president of Commonfund Capital. “Growth when fundraising really took off. The median 2007 and has proceeded with caution.

Number 41 | Volume 27 | November 04 2014 | avcj.com 13 PERFORMANCE [email protected]

“Our approach is bottom-up in the sense regional managers. The implication is that these consumer demand for high quality and safe food that we focus on finding the right managers,” GPs are better positioned to deliver in the current products. Building on a vertically-integrated Salovaara adds. market conditions. farming thesis first developed for China Modern MPEP considers itself to be comparatively “LPs first entered the market with pan- Dairy eight years ago, the private equity firm has overweight on Asia for a Europe-headquartered regional managers but then they wanted to be set up a dairy farm venture and partnered with investor but has no plans to alter its allocation. more specific in looking for alpha generation and local players on pork and poultry production. The long-term opportunity presented by the went with the single country guys, particularly By a similar token, CDH and Hony Capital, the region remains attractive. This is not a pure in India and China,” English says. “Now, though, largest Chinese managers, have to some extent GDP growth play; expectations of a growing people are seeing healthy returns coming out of moved on from the transactions through which acceptance of private equity in Asia, particularly the pan-Asian managers. Given their experience, they made their name. in terms of how businesses can be improved and management enhanced, are more important. Regional private equity performance by net multiple Put another way, reservations about performance have not destroyed LP confidence 40 Asia PE performance in Asian GPs, but investors are developing more nuanced approaches as to how and through 30 whom they want exposure to the region. 20

There was a window in which Chinese Multiple companies could be quickly flipped into IPOs 10 but it has closed; the public markets are selective and exit multiples less heady. Perhaps more 0 importantly, the general investment environment 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 in emerging Asia has changed. Economic 2.5 conditions in China and India are challenging Europe PE performance and entrepreneurs are now looking for expertise in addition to capital. 2.0 “If you don’t have a different set of skills 1.5

around operational capabilities and a more Multiple value-added governance model, you are not 1.0 going to get the PE-type returns you want,” one fund manager observes. “There is going to be 0.5 a lot more discipline about which GPs to back. 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 LPs are going to ask tougher questions about 2.5 what you do in terms of value-add. You can’t just North America PE performance opportunistically arbitrage the public markets.” Asked how this line of questioning works in 2.0 practice, Jonathan English, managing director 1.5 at Portfolio Advisors, offers a selection of Multiple checkpoints designed to differentiate between 1.0 those capable of executing operational change and those paying lip service to the strategy in 0.5 order to raise a fund. 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 The central question is whether the manager’s professional background fit the First quartile Median Third quartile investment remit. If operational professionals Source: Preqin have joined the roster, are they young tykes or experienced gray hairs? The latter are more likely to be taken seriously by entrepreneurs but at the networks and know-how in accessing global Hony has created two sector-focused teams same time it is not unknown for these people to markets and M&A activity, they may be better to work on buyout opportunities in healthcare depart after a couple of years, leading to another suited to delivering returns when other capital and restaurants. The healthcare group is led by strategic repositioning. This is not black-and- markets slow down. As a result, you have the former vice principal of Beijing University’s white assessment and it requires step-by-step seen more support for these managers from a cancer hospital with 10 healthcare professionals analysis of case studies. fundraising perspective.” working underneath him. A first investment In the eyes of some LPs, many of these came several weeks ago with the purchase of Big means better? qualities are not possessed by pan-regional Shanghai Yangsi Hospital, the largest privately- Alluding to the upturn in performance recorded managers alone, but rather any private equity owned hospital in Shanghai. This will serve as a by Cambridge Associates’ one-year returns, firm with the resources to build up silos of platform for the acquisition of 10-15 hospitals in English notes that he has seen a tremendous expertise in certain verticals. For example, the next three years. amount of distribution and exit activity in Asia three of KKR’s last four deals in China have MPEP is among those backing the over the last 20 months, most of it from the pan- been predicated on meeting growing Chinese transformative powers of the larger manager

14 avcj.com | November 04 2014 | Volume 27 | Number 41 PERFORMANCE [email protected]

in Asia, having decided three years ago that it because fund sizes, and therefore equity checks, I still need to put money to work, I might back a would shift focus from the smaller end of the are getting larger. If these executives are seeing specialist,” he says. “But if I’m making 2-3 bets in market to larger size funds. plenty of deals that no longer fit the firm’s remit, Asia each year, my risk-adjusted bet is probably Exits featuring strongly in the LP’s thinking. there is a natural inclination to launch something safer with a generalist even if they don’t have First, if IPOs were going to remain a key exit route mid-market and more focused. 15 PhDs evaluating healthcare opportunities. for Asian GPs, MPEP believed that public market There are also managers who start If healthcare is overpriced or extremely investors would respond best to candidates out agnostic but gradually become more competitive, my generalist can look elsewhere.” from either end of the spectrum: VC-backed tech concentrated. QIC, an asset manager owned companies and larger, more mature businesses by the Queensland government in Australia, Needs more discipline with strong corporate governance. Second, gravitates towards funds of $300-500 million Nevertheless, specialization is expected to when multinationals examine M&A options they and has not participated in a fund larger than continue to take root in Asia, among the large tend to go after one of the two top players in $1.1 billion in Asia. Some form of specialization, regional players and the smaller independents. particular market. Bigger funds were seen as whether defined by sector or transaction type, is In this respect, the evolutionary path is seen as more likely backers of these top companies. a given. no different from that of the US or Europe. Using “Another part of the equation is we do believe “If I look across a sample of our Asian our a nine-inning baseball analogy, Commonfund’s this level of operational change and real impact managers, one was generalist last fund but has Pascal says that Asia is still on its second or third in the portfolio companies will come over time, inning, and maturing on a reasonably predictable although maybe not in the same form as Europe course. He estimates that the region’s managers or America,” says MPEP’s Morrison. “And it will be “In the US and Europe could progress at a faster rate than the US more towards the larger, more professionally run pioneers, adopting 4-5 years’ worth of industry businesses. It will still be proportionally harder to you see a lot of GPs best practices from other markets for every 2-3 do that in smaller companies.” that focus solely on years that passes. With this in mind, MPEP is an LP in Hony’s But will specialization help Asian private most recent fund, which closed at $2.36 billion in one sector. We now equity deliver the risk-adjusted returns LPs 2012. However, it is also backing BVCF, a China life want to see? Doug Coulter, head of Asia private sciences-focused GP currently investing its $200 see this sector focus equity at LGT Capital Partners is skeptical. He million third fund. This represents a nod to the starting to emerge has yet to see any evidence that specialist funds expected rise of specialist managers in Asia and outperform in the region, but at the same the role they can play in a differentiated portfolio. in Asia, particularly time, take all the outperformers as a group and it’s a mixed bag in terms of size, strategy and An evolving concept for healthcare and geography. As recently as three years ago, Asia growth consumer” – Pamela Fung With this in mind, it might be argued the managers would reject the notion of sector evolution of the asset class in Asia should not specialization on the grounds that they would be seen as a graduation from passive to active, miss out on a huge amount of potential now narrowed down to two sectors and is 60% or from stock flipping to company building, but deal flow. The more challenging fundraising of the way through investing the fund. Another is from a frontier environment to a professional environment prompted a change in strategy. purely focused on one sector, while a third is a bit environment. LPs want to be presented a Thinking more about marketing than reality, more agnostic but has other deep resources on framework of discipline, governance and GPs emerged claiming to be specialists in the the operational side and their ability to analyze transparency through which they can trace financial services, consumer and industrial markets. There is enough specialization available consistent performance across deal sourcing, sectors – a broad enough focus to cover the to find what we want,” says Marcus Simpson, structuring, value creation and exit. majority of deals available. While these players head of global private equity at QIC. “While no clear evidence that good still exist, genuine specialists are also in the The advantages of specialist managers are governance, transparency and institutionalization market. clear – sophisticated industry knowledge, ability has been correlated to better returns in Asia, a “In the last 24 months quite a few healthcare- to add value, familiarity with potential partners lack of governance and institutionalization has focused funds have emerged in Asia, as one and acquirers – but in an Asian context, so are often led to subpar returns,” Coulter says. example of sector specialization. In the US and the potential drawbacks. Chief among them is Mounir Guen, CEO of placement agent Europe you see a lot of GPs that focus solely whether these GPs are able to generate enough MVision, is more bullish. He describes the ideal on one sector. We now see this sector focus deal flow in their formative years to keep their scenario as a GP that packages every deal into a starting to emerge in Asia, particularly for the team of experts in place and build scale. Without 250-page report, detailing every aspect of their healthcare and consumer sectors,” says Pamela a core base of LPs that are sufficiently convinced work on a company. He says such approaches are Fung, principal at Morgan Stanley Alternative to overcome these reservations and back a increasingly adopted by local managers in Asia. Investment Management. specialist manager even though they have yet to “Institutionalization is very important. A GP Some of these are spin-outs from established see a large number of such funds perform in Asia, must understand the power of their firm is to platforms. Kakar will be joined at Aequus by it can be difficult to get traction. be able to synthesize and capture their DNA,” he members of his healthcare team from Avenue Vincent Ng, a partner at placement agent explains. “It is evolutionary. As markets develop, Capital, which is expected to focus more on Atlantic Pacific Capital, suggests there is not a GPs understand how to formulate and structure special situations for its next Asia fund. There are lack of supply of specialist funds, but a lack of their businesses. If you can take that discipline similarities between this and other situations in demand. and put it on top of what is happening in Asia, which executives have departed regional firms “If I have a portfolio of 16 generalist GPs and you can have very successful results.”

Number 41 | Volume 27 | November 04 2014 | avcj.com 15 INDUSTRY Q&A | OLIVER GOLTSCHALG [email protected] Still top quartile? Oliver Gottschalg, professor at HEC School of Management and head of research at PERACS, a quantitative analytics provider to the PE industry, explains why IRR is not the best judge of performance

Q: You have developed a the same but it’s an imperfect values or allows moderate value performance assessment performance measure because it appreciation while everything system – PERACS – to replace ignores the time factor. else is depreciating. IRR. What is wrong with IRR? A: IRR is polluted by two things. Q: You are also critical of IRR Q: How does the PERACS First, was the manager lucky being compared against multiple address the public or unlucky in catching a good public market index market comparison problem? macro environment? If you performance… A: For the normal multiple, you catch the upswing then the A: Assessing PE relative to the calculate the stream of cash IRR will be very large because public markets is the right flows, and the multiple is you were operating during a thought but you have to distributions over contributions. boom period and got the sector approach it with the appropriate We do the same thing but right. Second, if you have a very methodology. What people take into account the present early, very successful exit it just usually do is take the long-term value of the distributions biases the IRR. If a manager has IRR on PE and compare it to Q: What other factors come into against the MSCI Global Index a bunch of winners in the early long-term buy and hold on play? as our standard proxy for LPs’ 2000s, IRR might be high, but the stock market. That’s overly A: First, the performance of a sector. opportunity cost. We discount there may not be more winners simplistic. Not only do you fail If you want to be more exact, the returns available on the in the late 2000s because with to capture any difference in risk, don’t compare performance index at specific times during the the first bunch the manager but you also ignore the specific against the entire public market, period under analysis, matching got lucky with some quick hits timing of investments in private but the specific sector in which the timing of each cash flow. It in a strong external market equity. Say you invest in a PE the private equity fund is gives you a present value of all environment. This dynamic fund, your capital is drawn in investing. It is the same when contributions and distributions pollutes the persistence 2003 and you get double your looking at the use of debt. If you and through this you get a ratio mechanism and therefore the money back in 2006. That’s fine, have completed a buyout in the in net present value terms of likelihood of finding a winner in but you have to see what the retail sector then you need to money out and money in. the next cycle. A cash in-cash out stock markets are doing over calculate the difference between multiple isn’t a good measure the same period of time. If you the debt on your deal and Q: Instead of IRRs and multiples, of performance persistence would otherwise have been long the average debt of the retail you document the persistence either. You might have two GPs on the stock market, there is an sector index constituents. Then of five other indicators – with very different longevity in opportunity cost to PE. You have there is the impact of different alpha, holding period, loss their deals because of different to take into account not only economic climates. In a boom ratio and return dispersion. approaches to how they dividends, but more importantly, period everyone does well and Performance persists when transform businesses. If both dollar appreciation. If the stock so private equity adds little in measured in alpha (i.e. the double their money but one index doubled over those terms of performance. However, annual return achieved minus takes three years and the other three years, you haven’t gained during a downturn private equity the impact of extenuating takes six years the multiple looks anything in relative terms. generates alpha that protects circumstances, such as the return that could have been earned on the stock Extenuating circumstances excluded: Indentifying PE alpha market, timing and the use of leverage). Why is persistence in the other factors important? A: The holding period is a manifestation of the GP’s strategy. Some guys roll up their sleeves and do very long Stock market Timing Sector Leverage Adjusted stock Alpha* Return from the transformation deals; others return e ect e ect e ect market return private equity spot relatively quick turnaround investment opportunities. If holding periods Source: Golding Capital Partners *Alpha is the excess return of a private equity investment above a comparable investment in shares persist, it indicates consistency in the type of deals a manager does

16 avcj.com | November 04 2014 | Volume 27 | Number 41 OLIVER GOLTSCHALG | INDUSTRY Q&A [email protected]

and therefore makes it easier to look at past performance and get A tale of two managers: Qualitative analysis vs IRR analysis an idea of future performance. With loss ratio and performance Fund manager A dispersion, again it is a question of discipline. Is a manager taking Formation: 1998 Period 1 Period 2 Period 3 the venture capital approach Fund volume: EUR800m Alpha 1.4% and doing two deals that are 0.5% 1.0% (ø 1.0%) ø home runs while another six are Strategy: EU buyouts lost? That would be one profile. Holding 4 years 4.5 years 5 years period ø Alternatively, a GP could do eight Fund I (1999): 25% (ø 4.5 years) 8.7% deals and each one is 2x. A low Fund II (2002): 30% 6.9% 7.5% loss ratio and minimal returns Loss ratio ø Fund III (2005): 21% (ø 7.5%) dispersion point to a stable GP. 0.7 Fund IV (2010): 18% Return 0.6 0.5 dispersion ø Q: What about the impact Gross IRR: 23% (ø 0.6) of significant economic 98 99 00 01 02 03 04 05 06 07 08 09 change? In emerging Asia the opportunity set might be very different from five years Fund manager B ago, and this would have implications for performance Formation: 1999 Period 1 Period 2 Period 3 assessment 9.1% Higher alpha Fund volume: EUR500m Alpha 8.2% 8.8% A: This is a big caveat. All the ø Strategy: EU buyouts (ø 8.7%) persistence research has been Holding Lower holding period done in relatively stable markets 2.5 years 3.5 years 4 years period ø in Europe and North America. Fund I (2000): 23% (ø 3.3 years) You would expect persistence to Fund II (2003): 31% Lower loss ratio Loss ratio 3.2% 2.4% 2.9% be lower in Asia. You have to be Fund III (2007): 22% (ø 2.8%) ø very careful applying this logic. Fund IV (2009): 17% Lower return dispersion The objective is to match the Return dispersion 0.2 0.3 0.2 indicator of past performance Gross IRR: 23% (ø 0.2) ø with an understanding of 98 99 00 01 02 03 04 05 06 07 08 09 how value has been created

– and that is the much more Source: Golding Capital Partners substantive component of what we do with PERACS. We measure alpha: you start with A: The more sophisticated LPs are and don’t want to change? Q: How many GP clients do you the PERACS multiple, which already doing it, but perhaps A: It is really challenging to go have? tells you by how the capital has only after 10 weeks of initial against the received wisdom of A: We have a good double-digit grown after market swings, and due diligence work. We allow the entire industry. Many people number of GP clients. Managers then the PERACS alpha looks at people to look at these issues have been using the potentially using PERACS have between this growth on an annual basis. very early on in the process. This biased IRR measure for a long them raised more than $65 But then we do lots of things allows LPs to do a first screening, time and there is a large amount billion over the past two years. that illustrate value creation so before starting due diligence, of inertia. Even if you convince The client base is split between the LP has enough data points and decide whether or not a them that there is a better North America and Europe to say, ‘This is how they did it. fund is worth their attention.’ If approach, they still have board and initially there was a bias Now let me match it with my an LP has scare resources and members or other constituents towards the larger groups, simply understanding of what the world it looking at 1,000 funds or so, who want to continue doing because that is where we started will look like in the future and we a first screening can be very things in a particular way. My with the marketing. If the biggest will have enough information valuable. At the same time, at business card should really PE firms feel PERACS has value to decide whether or not we the other end of the spectrum, say chief evangelist. The good then we have a better chance want to back these guys.’ It is a small family office might treat news is that investors who bet of going against IRR. Now we all about reaching a qualitative this analysis not only as a first on these measures have a real are entering the middle market understanding of the relative screening but also as a pretty advantage in the marketplace. segments in North America and strengths and weaknesses of a good final decision-making tool My back-testing demonstrates Europe, and we have recruited G P. that replaces in house efforts. there might be 300-400 basis our first client specializing in points in performance to be emerging markets. We have yet Q: Aren’t some LPs already doing Q: How do you deal with LPs that gained by switching to the to get our first Asian client but I this kind of analysis? are accustomed to using IRR smarter measures. don’t think it will be long.

Number 41 | Volume 27 | November 04 2014 | avcj.com 17 www.linkedin.com/company/jersey-finance @jerseyfinance www.youtube.com/jerseyfinance

Jersey for Private Equity

Jersey is a jurisdiction of choice for private equity and has attracted a significant number of venture capital, private equity, mezzanine, real estate and hedge funds. The net asset value of private equity funds under administration in Jersey stands at £43 billion*. Clients have access to the breadth and depth of expertise in fund administration, asset servicing, tax advice, accounting and legal support from Jersey firms, who deliver structured products and specialist vehicles that meet diverse financial and investment objectives.

To learn more about Jersey’s private equity offering, please visit www.jerseyfinance.je

*Figure as at June 2014 - Financial Services Industry Quarterly Report

A DATE FOR YOUR DIARY

OF A WORLD OPPORTUNITYLONDON WEDNESDAY, 19TH JERSEY FINANCE ASIA ROADSHOWMARCH 2014

To book your place, visit: 17-18 November 19 November jsy.fi/JFLfundsbooking201420 November

Hong Kong Kuala LumpurFor furtherSingapore information, visit: jsy.fi/JFLfundsevent2014

For further information please visit: http://www.jerseyfinance.je/jersey-finance-roadshow-2014 www.linkedin.com/company/jersey-finance @jerseyfinance www.youtube.com/jerseyfinance SUCCESSION PLANNING [email protected] A matter of legacy Long a feature of the developed markets private equity, succession planning opportunities are beginning to pop up in emerging Asia. Regardless of geography, convincing a founder to sell his business is a challenge

Jersey for Private Equity OVER THE COURSE OF THREE DECADES, companies. Aged entrepreneurs are willing to sell more enticing opportunities elsewhere; running Chinese meat snacks producer Guizhou their businesses because of succession issues,” a business is hard. Chinese companies are no Yonghong – best known for the popular Niutou John Zhao, CEO of Hony Capital, said last week longer able to ride a wave of macroeconomic Jersey is a jurisdiction of choice for private equity and has attracted a significant number of jerky brand – has grown from a small rural – but it remains to be seen if it can be properly growth. The typical mid-market consumer venture capital, private equity, mezzanine, real estate and hedge funds. The net asset value of operation to be one of the leading players in addressed. And while studying patterns in more business targeted by Lunar is likely suffering from private equity funds under administration in Jersey stands at £43 billion*. Clients have access its market. The three founders, who set up the mature markets is logical and potentially helpful, margin squeeze as rising labor and input costs to the breadth and depth of expertise in fund administration, asset servicing, tax advice, company in 1984, are now in their 70s and it also underlines how sensitive and bespoke are no longer counterbalanced by sales growth. considering retirement. However, they are unable these situations tend to be. Professional management is required to eke out accounting and legal support from Jersey firms, who deliver structured products and specialist to keep the business in the family. Demographics are one of the major causes efficiencies. vehicles that meet diverse financial and investment objectives. It is an increasingly common dilemma for of succession planning challenges in China. “Most of these kids have been educated in Chinese entrepreneurs of this generation. Many While the lack of an heir apparent is an issue Europe or North America and have decided To learn more about Jersey’s private equity offering, please visit www.jerseyfinance.je have become rich enough to send their children to be educated overseas, but on return these Asian business families succession survey 2013 *Figure as at June 2014 - Financial Services Industry Quarterly Report youngsters express no interest in succeeding their father or mother as CEO. Property Is business family management succession The business family believes that the next development and financial services in Shanghai important to you? generation will be able to take over the business have more appeal than factory management in relatively remote provinces like Guizhou. Yonghong’s founders examined their options. An IPO was quickly crossed off the list and the prospect of allowing the business to be swallowed up by a local competitor was unappetizing. This left option three: partnering with Lunar Capital, a local consumer-focused private equity firm that said it could give the founders liquidity and protect their brand. The GP Yes Neutral No bought a majority stake in the business last year Source: Deloitte for $50 million. “The pitch – far from being a financial pitch – was a solution for how they maintain their that affects family businesses worldwide, the they are not up for the hard work of running legacy and how the business can keep going,” situation is especially acute in China where the a consumer products business,” says Sulger. says Derek Sulger, founder and CEO of Lunar. one-child policy has ensure that the pool of next “You are no longer talking about an industry “Succession issues are the source of many deals generation CEOs is even smaller. with 300% growth in a year. Instead it is full of in our pipeline. It is an enormous opportunity in Younger generation talent that might be competitors, both regional and national. You China that strategic players are taking advantage available is not only disinterested because of have to be good at what are doing to survive.” of, but private equity, which mostly focuses on But the issue goes beyond just a lack of minority deals, is not.” credible successors. There has also been a shift in A DATE “It is an enormous how entrepreneurs view exits. Three years ago, FOR YOUR A scale opportunity retiring might not have been a priority for many DIARY Succession planning is a well-established source opportunity in China founders; rather, they were thinking about the of private equity deal flow in developed markets riches to be obtained by selling a minority stake but in Asia’s emerging economies it is only just that strategic players in their business at a valuation of 30-40x forward coming to the fore. This is particularly the case are taking advantage earnings via the IPO market. OF in a country like China where the first wave of That window is now closed. The 12-month ORLD PPORTUNITYLONDON A W O entrepreneurs who set up shop in the late 1980s of, but private equity, embargo imposed on mainland share offerings WEDNESDAY, 19TH and 1990s, when the country’s economic reforms created a huge backlog of companies waiting JERSEY FINANCE ASIA ROADSHOWMARCH 2014 began to take hold, are now those graying which mostly focuses to list, and the regulators are scrutinizing IPO To book your place, visit: founders looking to retire. candidates much more closely than before. 17-18 November 19 November 20 November on minority deals, is jsy.fi/JFLfundsbooking2014 The opportunity could substantially alter David Shen, managing director at Olympus Hong Kong Kuala LumpurFor furtherSingapore information, visit: Chinese private equity – “We are now going to not” – Derek Sulger Capital, notes that even if a founder managers to jsy.fi/JFLfundsevent2014 do more buyout deals, in particular for private jump the queue and list within three years, his For further information please visit: http://www.jerseyfinance.je/jersey-finance-roadshow-2014 Number 41 | Volume 27 | November 04 2014 | avcj.com 19

SUCCESSION PLANNING [email protected]

holding will still be locked up for another three succession was important while a further 81% passed on the next generation. This is more years. During this period the founder must meet said they believed the next generation would prevalent in developed markets such as Japan shareholders’ performance expectations. take over, versus 6% that said no. where entrepreneurs fear their family wealth “GDP in China is slowing down to 7-8%, so However, there is also an acceptance that the could be diminished by the country’s onerous growing at 30% a year is not a given,” says Shen. desired succession may not come to pass. Nearly inheritance tax laws. “So you have got to put in a lot more effort. As a one third of respondents said they expected “If you die in Japan and you own a lot of stock, result, a lot more entrepreneurs are receptive to management of the family business to transfer not only is it quite difficult to transfer it to your proposals from sponsors like us.” to a non-family member, while 26% anticipated children, but you have to think about how they monetizing their businesses via an IPO or an are going to get liquidity,” says David Gross-Loh, Common features acquisition. One of the major push factors, cited managing director with Bain Capital in Tokyo. China, by virtue of its size, may represent the by 65% of first-generation family business, was “Even if they are going to continue working and largest opportunity, but it is not the only one. lack of family talent to take over. do something else, they need to figure out a way Succession- planning issues permeate the region “What is happening is that the next to solve that.” and, China’s unique demographics situation apart generation is either too comfortable, or they are Richard Folsom, a co-founder and – similar factors are driving founder-owners to too happy doing something like investing in real representative director with Japanese mid- seek an exit route. estate,” says Karam Butalia, co-founder and CEO market buyout firm Advantage Partners, adds A recent Asia-wide survey carried out by of Southeast Asia-focused GP KV Asia. “What the that while succession opportunities are a well- Deloitte in conjunction with the Singapore parents have been doing is really hard work in established feature of the domestic market, they Management University’s (SMU) Business Families comparison, so inevitably there is no succession.” are also growing in number. He estimates that Institute shows that family-owned companies In some cases, succession opportunities of the deals his firm has closed in its near 20- are still overwhelmingly in favor passing control are not so much triggered by legacy issues year history, around 40% have been succession on to next generation. According to the study, as a founder’s desire to free up the wealth solutions; however, in the past two years it has 89% of businesses said family management accumulated over the years so it can be easily been closer to 80%. It is not just a function of more founders looking to transition out of their businesses, but also that they are increasingly willing to Case study: Mekong Capital work with private equity. They have a better understanding of the asset class and recognize the advantages of selling to a financial investor and AA Corporation over a trade buyer. “Generally, strategics are regarded with skepticism by founder-owners,” etting up Vietnam-based interior design business AA Corporation in 1994, Nguyen Quoc says Folsom. “There is the fear of being absorbed SKhanh hoped to demonstrate that by leveraging his skills and experience as a designer, he by a competitor as they have an emotional could also become a successful business owner. But Kanh underestimated the size of the task. attachment to the business and a pride in the By 2006, with the business really starting to grow and annual revenues reaching $8 million, he brand and product they have created.” found himself stretched. His abilities were not enough to see the business through to the next The reality of being acquired by a larger stage. Khanh sold the business to Mekong Capital, which put in place a professional management competitor that offers similar products is team. redundancies designed to remove overlaps. In “Khanh wasn’t operationally minded. He was a designer and an architect by nature and he these situations there is a reasonable chance soon realized he was the bottleneck to the company’s growth,” recalls Chad Ovel, partner with the that the brand will not survive. Giving the Mekong and a former CEO of AA Corporation. “So he generated the idea that he should step aside Australian perspective, Richard Burrows, a and take a chairman role, he found me, and recruited me into the CEO role.” director with Wolseley Private Equity, notes that, As a result of this decision, AA Corporation was able to increase its top line revenues nearly 10- in building their businesses, founders usually fold over the course of Mekong’s six-year holding period. However, the process of handing over spend a lot of time battling larger industry control was a gradual process. Even if Khanh was ready to exit, his personality and leadership was players. As such, they don’t like selling to them. deeply ingrained in corporate culture. There are similar concerns among Chinese “It was all about converting the culture of the company,” says Ovel. “For the employees it was founders, but their lack of familiarity with PE historically all about loyalty to the founder as an individual – that is what got them out of bed in can be an obstacle. Prospective investors must the morning, what motivated their performance.” therefore create an attractive succession solution. Prior to Mekong coming in, all performance-based compensation was essentially linked to “Legacy is important and they don’t want a the Khanh’s personal assessment of the employee. This was the private equity firm’s first big financial buyer who will turn up and slash and challenge: restructuring performance evaluation and democratizing the bonus system so it was burn,” says Olympus’ Shen. “And at the same time tied to quantifiable performance targets. they don’t want to sell to a strategic, so they are The next job was to change the way employees thought about the company. The cult of the stuck in a way. This is where – if you can bring a founder had to be replaced by the cult of the company – which meant staff had to start believing well-crafted proposition and message – they are in what they were doing, as opposed to what Khanh thought of what they were doing. willing to listen.” “It took two years to achieve this and during that period he took the CEO title and I took the deputy CEO title,” says Ovel. “Once we felt the employees were willing to shift their thinking – to Pitching an opportunity respond to anyone in senior management not just the founder – then I was promoted to CEO.” Accessing these founders requires a pro-active approach. Lunar’s Sulger describe a process by

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clearygottlieb.com SUCCESSION PLANNING [email protected]

which his firm will identify a favored consumer was approaching 70, had decided that, for the better incentivized to support the GP’s efforts sub-sector and then narrow down the pool of company to achieve the next level of growth, he and ensure a smooth transition. However, Lunar targets to those that can be pitched. From the needed to pass control to outside professional insists the founder gives up all decision-making start of negotiations, the GP emphasizes how it management, rather than a family member. powers. can bring in a strong management and transition Advantage felt Komeda had the potential to Olympus’ Shen echoes the importance of the the old-fashioned founder-led business into a expand its 300 locations to 800-1,000, but this founder staying involved, but he is less insistent modern and professionalized organization. would require additional infrastructure in terms on control. “We view buyouts a little more “We always discuss our ability to make of management and operational systems and cautiously because there is a reason why the decisions because a lot of times legacy founders controls. The founder retained a 10% stake in entrepreneur is important to the business,” Shen says. “If all of a sudden you take him out there is a potential risk.” With over 30 years of experience in Asia, Cleary Gottlieb “We often know the people who know the Steen & Hamilton LLP has handled some of the largest Family feuds NEW YORK founder or his team. That provides a reference Founders are not the only stakeholders to and most innovative transactions in the region, including consider when negotiating a transition. point for them to get comfortable with us” – Eugene Lai WASHINGTON private equity M&A and fund formation matters. Disputes over family involvement in a business are commonplace, although the nature of are in a bit of a trap,” says Sulger. “They have the business and stayed on as non-executive the problems vary by market. The issue is less PARIS Our Private Equity practice brings together leading family members and old employees involved. chairman for a year. He exited when Advantage pronounced in China, where most entrepreneurs lawyers across a range of geographies and practice We find that even with 100% control, they may sold its stake to MBK Partners in January 2013 for are first-generation, but it does come up. Lunar BRUSSELS areas — from fund formation to M&A and capital not have the will to direct 100% of the decision- JPY40 billion. looks to avoid situations where there is infighting making, and often welcome new outside However, not all deals go the same way. Bain’s between shareholders, content to wait patiently LONDON markets — working seamlessly in pursuit of our clients’ involvement to help make tough but necessary Gross-Loh says a lot of Japanese founders are on the sidelines for tensions to pass. goals. We help sponsors form and structure new funds decisions.” keen to exit straight away. They recognize they “This is a critical reason why we proactively MOSCOW Being proactive is also important because are no longer in control and worry about how target businesses – we never want to be in a focused on an array of industries and markets in Asia founders generally don’t publicize their and when they will sell that last piece in the position where we feel that we must rush a deal FRANKFURT and represent alternative investment funds in their willingness to sell. Even if they hire an advisor, it business – so many just decide to sell the whole and agree to some crazy things like continuing is often a small, informal process. For this reason thing. This was the intention when Advantage to employ relatives, or accommodating other transactional and regulatory matters, all with the goal COLOGNE Eugene Lai, managing director and co-managing bought Hokou Service, an assisted living facilities requests that add to the potential for nuisances of maximizing the success of our clients in the region. partner with Southeast Asia-focused GP Southern Capital highlights the value of local sourcing ROME networks. Who should succeed the current genration and take over the management of the family business? “We have to explain what kind of partner we MILAN will be. The ability to work well with the founder All-Star Firm for Investment Funds and his team is very important and that plays to Generation 1 HONG KONG the strengths of a local team.” he says “We often The Asian Lawyer, 2014 know people who know the founder or his team Generation 2 BEIJING and that provides a reference point for them to get comfortable with us.” Generation 3 “Well-resourced to handle large- Most GPs note that this process rarely delivers BUENOS AIRES Generation 4 immediate results. The objective is to get a foot scale transactions and coordinate in the door and then maintain the relationship SÃO PAULO over time, with a view to securing a deal 2-3 0 20 40 60 80 100 them across various jurisdictions” % years down the line. While mature markets are Family member Either family or non-family member Non-family member ABU DHABI Chambers Asia-Pacific, 2013 generally more accessible, networks are still vital. Source: Deloitte In any situation where deals come about via SEOUL closed process, a GP that is not visible doesn’t Investment Funds Client Service stand a chance. company, but the founder shelved his retirement or confusion,” says Sulger. “It flies in the face of the “It is on us to be able to get our story out plans because he was interested in the strategic whole reason they decide to do a deal with us in Firm of the Year there to the various people who act as advisors initiatives the GP had proposed. the first place.” Chambers and Partners, 2012 to founders so they can see the success stories “We closed the transaction, bought the However, in jurisdictions where families are and understand how we can work through company and he reinvested 20% and decided large and the businesses have longer histories, whatever issues and complexities there might to stay on as CEO for at least the next couple tensions can be harder to avoid. On several be,” says Advantage’s Folsom. “Hopefully we then of years,” says Folson. “We then augmented the occasions, KV Asia’s Butalia has walked away from move to the top of that short list of potential management team with a CFO and a COO.” deals where the founder agrees to sell and then it buyers.” In emerging markets, the consensus among turns out his children are the ones really running This was the case with Komeda Coffee, a GPs appears to be that the founder should the business. The GP wasn’t satisfied with the road side café chain in which the Japanese GP retain a stake. Keeping the founder on board children’s ability and sought to replace them, but acquired a 78% interest in 2008, paying JPY15 as a shareholder is a key part of Lunar’s value naturally the family resisted. billion (then $146 million). The founder, who proposition: if he retains a 20-40% stake, he is Oftentimes, the more mature the market, clearygottlieb.com

Number 41 | Volume 27 | November 04 2014 | avcj.com 23 Light. Fast. Flexible.

Your fund agreement works for you, not the other way around. A lot of law firms don’t get that. They come at fund formation from a tax mindset. They create agreements that are too long, too convoluted – and about as user-friendly as the IRS code.

That’s not us. Our fund team is more MBA than CPA. When an investment opportunity arises, you need to make decisions. Our agreements capture your business deal in a way which is easy to understand. They are written to give you clear guidance without complicating the issues. And to be interpreted without needing your lawyers and accountants.

Our competitors’ fund agreements average 112 pages. * Ours average 56. Your fund agreement is something you’ll live with for years to come. Let us save you significant time and money. Do yourself and your investors a favor. Go Cooley.

*Based on a review of various venture capital fund agreements drafted by our primary competitors conducted January 2014.

© 2014 Cooley LLP IFC - Tower 2, Level 35, Unit 3510, 8 Century Avenue, Pudong New Area, Shanghai, 200120, China +86 21 6030 0600 SUCCESSION PLANNING Light. Fast. Flexible. [email protected]

Your fund agreement works for you, not the other way around. A lot of law firms don’t get that. They come at fund formation the deeper more intractable the issues become. “Once ownership of a family business has gone from a tax mindset. They create agreements that are too into the second or third generation, ownership Case study: Bain Capital long, too convoluted – and about as user-friendly as might be dispersed among many family members and at that point it can become almost the IRS code. impossible to achieve a consensus about what and Dominos Japan to do,” says Advantage’s Folsom. “So, almost all of That’s not us. Our fund team is more MBA than CPA. the succession deals we have done have been rnesto Higa, the former CEO of Higa industries and the master franchisee for Domino’s Pizza in situations where the first generation founder- Ein Japan, is fairly unique among domestic founders in that he helped instigate a succession When an investment opportunity arises, you need to make owner has complete decision making capability.” plan where the beneficiary was a private equity firm. The way the deal came about speaks to the decisions. Our agreements capture your business deal in Bain’s Gross-Loh also describes encountering importance of having a strong network of contacts when seeking out such opportunities. a range of family issues in Japan. In some Higa had already part-exited the business to a Japanese strategic –Duskin Co, owner of the a way which is easy to understand. They are written to give instances a GP might even be forced to pick sides Mister Donut chain – and Daiwa SMBC Capital, a direct investment arm of Daiwa Securities you clear guidance without complicating the issues. And to be where a father is trying to kick out his children or Group. He wanted to sell his remaining 12% stake and step down as a CEO, but Duskin was not vice versa. Bain makes its excuses and leave. convinced it could take over the business. His only other option was to reach out to Bain Capital. interpreted without needing your lawyers and accountants. “The process of negotiating these deals is “We knew Ernie because he had a good relationship with Yuji Sugimoto, who was a managing complicated and time-consuming because you director in our Tokyo office and they had met from time to time,” recalls David Gross-Loh, a Our competitors’ fund agreements average 112 pages. * are dealing with a lot of emotional issues that managing director with Bain in Tokyo. are not driven by economic goals,” he says. “So Higa’s children were not involved in the business, so he saw it as a good time to make a Ours average 56. Your fund agreement is something you’ll live the deal processes goes through ups and downs transition and move on to something else. However, it wasn’t simply a matter of handing over with for years to come. Let us save you significant time and and there is a lot of uncertainty but that is what is the company, but also the Dominos Japan brand. The situation was potentially complex because necessary to unlock the opportunity.” taking on Higa Industries meant taking on certain caveats that came with being a master Go Cooley. money. Do yourself and your investors a favor. Even once these issues are ironed out, franchisee. problems can persist in the post-investment “The company hadn’t really opened new stores but the seller wanted to make sure there period. GPs across all markets describe scenarios was a commitment to open new stores,” says Gross-Loh. “This was partly to keep the business in which a founder has held a lot influence over growing but also because there was master franchise in place with Domino’s Pizza in the US and a his company, running it in almost a dictatorial requirement to grow the store count.” manner. As a result, the organization has suffered Fortunately, Bain had previously made investments in Dominos International in the US. from a lack of professional senior management Drawing on its track record in the industry, it was able to reassure Dominos in the US and secure and excess or redundant middle managers. an exit for Higa. Free of his responsibilities, Higa moved on to his next venture – as CEO of Reorganizing this inefficient structure is normally hamburger chain Wendy’s Japan. . top of a GP’s to-do list. “Most companies have too many employees,” says Lunar’s Sulger. “Rather than a core executive and suddenly there is a new sheriff in town.” opportunity is still in its nascent stages and the team of six or seven people, they have 30 middle No matter how much effort goes into aligning number and nature of deals will be influenced managers and they realize when they are in thick interests and securing a consensus before going by cultural and macroeconomic factors, as well of it that it can be exhausting dealing with the into a deal, there will be differences of opinion. as the individual entrepreneur’s familiarity with trials and tribulation of managing many people.” Southern Capital’s Lai stresses that there is no the asset class. But many of the parallels with There is also the issue of a founder – who magic bullet and being able to manage patterns developed markets are likely to hold because the might now be relegated to a position on the when disagreements arise is just one of the skill- same broad theme applies: success hinges on board – not being able to let go of his former sets GPs need if they are to successfully execute a building and maintaining relationships. power. Untangling an individual from an succession strategy. Lunar’s Sulger recounts a recent meeting organization he might have fashioned in his own “We don’t try to micro-manage or second- with the founder of baby wear company Yeehoo image is challenging, particularly if he effectively guess everything they do, there is a bit of give – another of the private equity firm’s portfolio controls supply chain relationships through long- and take,” says Lai. “In the worst-case scenario companies – in Palo Alto, California, where she standing personal ties, or he retains a natural we will have to change the CEO and that might now spends six months of the year. He remarks authority over staff. happen in 20-25% of cases.” that the woman who now attends meetings Chad Ovel , a partner with Mekong Capital in in her tennis shoes is far removed from the Vietnam, has seen a number of cases in which Moving forwards apprehensive individual he first met several years the founder, after giving up the reins, walks However, once the new management is in place, ago, so worried about giving up control. around the office asking people what is going the private equity investor can implement the “She still has concerns about the business – on because he is not yet confident in the new growth strategy that might have won the deal in why we hired that guy or fired that guy and that’s management team. the first place. One of the key reasons a founder natural. Overall she realizes her legacy is really “One of the big success factors is getting looks to partner with a PE firm is because it can being built upon,” says Sulger. “Whoever thought the founder and the new CEO – who typically provide the expertise and networks needed to the babywear brand she started in Guangzhou in is external – to truly speak with one voice to take the company to the next level. If all parties 1985 could grow to 2,000 stores and be acquired the organization.” says Ovel. “Employees will try can get behind this plan, interests become by a really well-known Italian luxury brand? I can’t and drive a wedge between them. For so many aligned: the business grows, the founder’s legacy think of a time a founder has experienced seller’s *Based on a review of various venture capital fund agreements drafted by our years they worked under one person and have is protected, and everyone profits. remorse – a week after closing they are normally primary competitors conducted January 2014. become accustomed to how he treated them, The emerging markets succession our biggest cheerleader.”

© 2014 Cooley LLP IFC - Tower 2, Level 35, Unit 3510, 8 Century Avenue, 25 Pudong New Area, Shanghai, 200120, China +86 21 6030 0600 Number 41 | Volume 27 | November 04 2014 | avcj.com Affinity Equity Partners is an independently owned private equity fund manager and currently advises and Velocity Leong Hup International Frequent Flyer manages over US$8 billlion of funds and assets, making Sole Investor Sole Investor it one of the largest independent financial sponsors in Investment in a leading Investment in a leading Australian airline loyalty poultry producer in this region. The Affinity team has executed transactions program South East Asia October 2014 September 2014 for values aggregating US$12 billion.

Beijing Sunlon Livestock Loen Entertainment Inc Kyobo Life Insurance PT Mitra Development Co Ltd Pinasthika Mustika

Sole Investor Sole Investor Lead Investor Lead Investor

Investment in the largest dairy Leveraged buyout of the Investment in the third largest Investment in the leading farming operation in Beijing largest vertically-integrated life insurer in Korea consumer automotive services music company in Korea group in Indonesia

October 2013 September 2013 September 2012 September 2012

Primo Group Tegel Foods Ltd Beijing Leader & Harvest Oriental Brewery Co Ltd Holdings Pty Ltd Electric Technologies

Lead Investor Lead Investor Lead Investor Joint Lead Investor

Leveraged buyout of Australia's Leveraged buyout of Buyout of the leading Leveraged buyout of the largest meat processor New Zealand's largest manufacturer of energy-saving second largest brewery poultry producer electrical equipment in China in South Korea October 2011 May 2011 October 2009 July 2009

Korea Digital Satellite Broadcasting

United Test and Korea Digital Satellite The FaceShop Korea Loscam Limited Assembly Center Ltd Broadcasting Joint Lead Investor Sole Investor Sole Investor Sole Investor

Leveraged buyout of a leading independent semi-conductor Investment in Korea’s only Leveraged buyout of a Leveraged buyout of a test and assembly service provider digital satellite TV leading cosmetics company leading returnable packaging listed on the Singapore Exchange broadcaster in Korea hire company in Australia

November 2007 August 2007 October 2005 August 2005

Himart Co Ltd Haitai Confectionery NS Electronics Bangkok Ltd Mando Climate & Foods Co Ltd, Korea Control Corp Lead Investor Joint Lead Investor Sole Investor Lead Investor

Leveraged buyout of Leveraged buyout of the Largest financial restructuring First leveraged buyout Korea’s largest consumer second largest confectionery and recapitalisation buyout in in Korea by financial electronics retailer company in Korea Thailand by a financial sponsor sponsors

April 2005 September 2001 February 2000 October 1999

www. affinityequity.com HOWARD MARKS | INDUSTRY Q&A [email protected]

Affinity Equity Partners is an independently owned private equity fund manager and currently advises and Velocity Leong Hup International Frequent Flyer manages over US$8 billlion of funds and assets, making Sole Investor Sole Investor The risk factor it one of the largest independent financial sponsors in Investment in a leading Investment in a leading Howard Marks, chairman of Oaktree Capital Management, gives his appraisal of the current investment and economic Australian airline loyalty poultry producer in this region. The Affinity team has executed transactions program South East Asia environments, and explains how his firm is developing its Asia strategyt October 2014 September 2014 for values aggregating US$12 billion.

Q: You have concerns about the dynamism to the Japanese been able to demonstrate its current excess liquidity and economy? In the 1990s the world successful application to private low levels of risk aversion, but seemed like a safe place, but this markets yet. at the same time you say the is an interesting example of how Beijing Sunlon Livestock Loen Entertainment Inc Kyobo Life Insurance PT Mitra Development Co Ltd Pinasthika Mustika investment environment is not markets work. The environment Q: Oaktree has a joint venture as dangerous as before the seemed so predictable that with non-performing loan Sole Investor Sole Investor Lead Investor Lead Investor financial crisis. Will it worsen? securities prices did exceptionally specialist China Cinda Asset A: It all starts with the fact that well, which eventually made Management. How significant Investment in the largest dairy Leveraged buyout of the Investment in the third largest Investment in the leading interest rates are so low that the market a dangerous place. an opportunity is this? farming operation in Beijing largest vertically-integrated life insurer in Korea consumer automotive services music company in Korea group in Indonesia people can’t make a decent Excess clarity is not a good thing, A: It’s a seat at the table. In every return in money market because it gets incorporated market there are distressed October 2013 September 2013 September 2012 September 2012 instruments or intermediate into excess asset prices. I think debts. In every market there are term treasuries. They have been today the world is a complex transactions that turn out to be forced up the risk curve to make and uncertain place, and yet risk too optimistic and have to be the kinds of returns they want premiums aren’t high. restructured. I believe they will or need. To some extent they “Things aren’t exist in China as well. Historically have had to surrender their Q: So, in an investment context, we have been involved in buying Primo Group Tegel Foods Ltd Beijing Leader & Harvest Oriental Brewery Co Ltd as bad as they Holdings Pty Ltd Electric Technologies characteristic risk aversion, and people seem overconfident… and restructuring things. It’s when this happens, markets A: Yes, and that’s a dangerous were pre-crisis, a good activity for us. Cinda Lead Investor Lead Investor Lead Investor Joint Lead Investor become more dangerous. combination for future prices. we believe will be one of the Warren Buffett says: “The less We’ve had what one of my but they are leading participants in that field Leveraged buyout of Australia's Leveraged buyout of Buyout of the leading Leveraged buyout of the largest meat processor New Zealand's largest manufacturer of energy-saving second largest brewery prudence with which others friends describes as an excess at a level at of endeavor, so we are very glad poultry producer electrical equipment in China in South Korea conduct their affairs, the greater of complacency incorporated to associate with them. Now October 2011 May 2011 October 2009 July 2009 the prudence with which we into securities prices. If things which caution is exactly how that area develops must conduct our own affairs.” then go bad and they hadn’t in China is yet to be seen. What Since the darkest days post- been anticipated to go bad then important” happens in bankruptcy in the Lehman there has been a strong by definition you can have a US, very simply, is the old owners Korea Digital Satellite Broadcasting recovery in prices and investor substantial correction. A: It doesn’t differ. The interesting are wiped out and the creditors psychology. Conditions aren’t question is whether our become the new owners. Will United Test and Korea Digital Satellite The FaceShop Korea Loscam Limited as bad as they were pre-crisis, Q: How does Oaktree behave in characteristic approach is that happen in China? Will the Assembly Center Ltd Broadcasting but they are at a level at which this kind of environment? applicable to Asia. When I think rule of law be dependable? I Joint Lead Investor Sole Investor Sole Investor Sole Investor caution is important. A: Since the economy is benign about Oaktree, what are we? don’t think these questions have there isn’t a lot of fear in the Credit: we invest mostly in debt. been answered yet, but we are Leveraged buyout of a leading independent semi-conductor Investment in Korea’s only Leveraged buyout of a Leveraged buyout of a Q: In terms of the macro streets. It is a hard time to find Value: we emphasize things that optimistic they will be answered. test and assembly service provider digital satellite TV leading cosmetics company leading returnable packaging environment, in 2012 you said bargains; they come when are demonstrably cheap in the listed on the Singapore Exchange broadcaster in Korea hire company in Australia you felt more uncertainty than people panic and don’t want here and now. Opportunistic: we Q: Elsewhere in emerging Asia November 2007 August 2007 October 2005 August 2005 ever before. What about now? to own securities and shrink don’t take a strategic approach people are offering structured A: The US economy is doing pretty from risk. There are very few to industries and companies debt to entrepreneurs who are well; Europe and China are compelling markets and when and countries, rather we buy the reluctant to give up equity. bumping along. The world has that’s the case you have to things that pop up as cheap. In Would you consider this? done a little better than I thought recognize it. The biggest mistake Asia it might be the case that A: We will look at it. For some of it would. On the other hand, the is when there are no bargains you have to take ownership of these funds, the approach is Himart Co Ltd Haitai Confectionery NS Electronics Bangkok Ltd Mando Climate world is still a very uncertain you behave like there are companies to get the big play much more long-term and & Foods Co Ltd, Korea Control Corp place. Will US economic growth bargains and buy things hand on the upside. We have tried strategic than what we would Lead Investor Joint Lead Investor Sole Investor Lead Investor recover to prior levels? What over fist, paying full prices. In a couple of forays into Asian normally do. To over-exaggerate is the outlook for European general, Oaktree’s mandate for private investing and have the difference: we date, they Leveraged buyout of Leveraged buyout of the Largest financial restructuring First leveraged buyout competitiveness and cohesion? the last three years has been done modestly well. We have get married. We have to decide Korea’s largest consumer second largest confectionery and recapitalisation buyout in in Korea by financial electronics retailer company in Korea Thailand by a financial sponsor sponsors It’s still an open question whether “move forward, but with caution.” an emerging markets team whether that activity is right for China will have a hard landing or managing public equities where us. If it is, then we have to tool April 2005 September 2001 February 2000 October 1999 a soft landing. Can Prime Minister Q: Does your Asia strategy differ we can take an opportunistic up with skilled people on the Abe’s policies re-introduce from your global strategy? approach, but we have not ground. www. affinityequity.com Number 41 | Volume 27 | November 04 2014 | avcj.com 27 Turning complexity into opportunity

Emerging from a period of economic volatility, you don’t need us to tell you how complex and competitive private equity has become. But you do need to work with people who understand your business and can keep you ahead of the game. That’s why KPMG has a dedicated Private Equity Group in Asia Pacific, organised with your needs in mind.

Just like you, we do more than deals. With skills across Audit, Tax and Advisory, and a network covering our member firms in Asia Pacific and around the world, we can tailor our services to suit you from effective tax structuring and strategic corporate intelligence right through to due diligence and cost optimisation, for value improvement after the transaction.

KPMG. Dedicated to Private Equity. Dedicated to your success.

For more information contact:

Asia Pacific PE Group Leader Korea Thailand Honson To Jin-Man Kim Bob Ellis +86 (10) 8508 7055 +82 (2) 2112 0786 +66 (2) 677 2118 [email protected] [email protected] [email protected]

Australia Malaysia Vietnam David Willis Chan Siew Mei John Ditty +61(2) 9346 6220 +60 (3) 7721 7063 +84 (8) 3821 9266 ext. 8100 [email protected] [email protected] [email protected]

China New Zealand David Xu Ian Thursfield +86 (10) 8508 7099 +64 (9) 367 5858 [email protected] [email protected]

Hong Kong Philippines Kenneth Pang Michael Guarin +852 2140 2838 +63 (2) 885 7000 ext. 347 [email protected] [email protected]

Indonesia Singapore David East Andrew Thompson +62 (21) 574 0877 +65 6213 2929 [email protected] [email protected]

Japan Taiwan Paul Ford Vincent Chang +81 (3) 5218 6784 +886 (2) 8101 6666 ext. 05185 [email protected] [email protected]

kpmg.com © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity.Member firms of the network independent are affiliated with International. any such have International KPMG does nor parties, third vis-à-vis firm member other any or International KPMG or bind obligate to authority any has firm member No services. client no provides authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and “cutting through complexity” are re gistered trademarks of International. BRANDING [email protected]

Turning complexity into opportunity A brand apart As private equity becomes more of a mainstream asset class, brand-consciousness kicks in. Finding a Emerging from a period of economic volatility, you don’t need us to tell you how complex and competitive private equity has become. But you do need to work with people who understand your business and suitable name can be a challenge, particularly when operating in multiple markets and languages can keep you ahead of the game. That’s why KPMG has a dedicated Private Equity Group in Asia Pacific, organised with your needs in mind. SIX MONTHS BEFORE ANNOUNCING a presence and win deals in target markets. immediate topics for discussion,” he explains. the spin-out from its parent, Axa Private Equity Branding strategies become much more critical Though relatively young in private equity Just like you, we do more than deals. With skills across Audit, Tax and Advisory, and a network covering formed a group comprising representatives from in times like these.” terms, Asia is part of this global evolution. But our member firms in Asia Pacific and around the world, we can tailor our services to suit you from the communications and corporate departments, Establishing a brand that is both credible there are also regional nuances on the naming effective tax structuring and strategic corporate intelligence right through to due diligence and cost senior management and two external PR and recognizable is also important from an side. Private equity firms are operating in markets optimisation, for value improvement after the transaction. agencies. Their task: to come up with a list of investor perspective. Private equity has moved in which local people might not only struggle to possible names for the newly-independent entity. into the mainstream as an asset class and this communicate in English but also lack familiarity There were two guiding criteria. First, institutionalization has several consequences. with Romanized character systems. Finding a KPMG. the name should start with the letter A, First, it invites greater regulatory scrutiny, name is often a multi-layer process that has Dedicated to Private Equity. Dedicated to your success. acknowledging the company’s heritage as part of which places firms in the public eye, stimulating to strike a balance between the needs and Axa Group. Second, from a linguistic perspective, greater awareness of image management. limitations of various stakeholder groups. it should be rooted in Europe. Second, it creates an industry dynamic in which In some respects, finding a Western name For more information contact: “Many large PE firms are from the US. We were large firms are becoming larger, introducing is no different for a firm in Asia than in Europe. born in France so we wanted to go for European products across multiple asset classes. A Leveraging the parent company’s name is a Asia Pacific PE Group Leader Korea Thailand languages. We considered Latin but then decided powerful, unified brand can be helpful in this classic strategy. Honson To Jin-Man Kim Bob Ellis to look at Francique, the language of Northern context. Third, the asset class is gradually moving Headland Capital Partners, which spun-out +86 (10) 8508 7055 +82 (2) 2112 0786 +66 (2) 677 2118 Europe. We wanted a name that had meaning from a pure institutional client base to one that from HSBC in 2011, was in a similar position to for ourselves – a name that said something of Ardian: the new name had to begin with H. “We [email protected] [email protected] [email protected] who we are,” explains Jérémie Delecourt, head wanted to retain the link with our former parent,”

of corporate & international development at the “Private equity is says Marcus Thompson, Headland’s CEO. “Starting Australia Malaysia Vietnam company now known as Ardian. with H also simplified the selection of names! If David Willis Chan Siew Mei John Ditty A list of 100 options was whittled down to growing globally, so we had tried to find a name starting with any of +61(2) 9346 6220 +60 (3) 7721 7063 +84 (8) 3821 9266 ext. 8100 ten and then a final three, from which senior we are seeing different the 26 letters, it would have made the process a [email protected] [email protected] [email protected] management selected their favorite. Ardian lot more challenging.” derives from the centuries-old word “hardjan” and Headland bought in a consulting firm, which behavior in terms embodies a sense of courage and code of honor. drew up a dozen options based on the attributes China New Zealand The name’s meaning was cross-checked in Arabic of branding and the 16 partners said they wanted to convey. This David Xu Ian Thursfield and Chinese, and as a final step, the firm ran their was followed by a vote and Headland was the marketing” – Matthew Stotts +86 (10) 8508 7099 +64 (9) 367 5858 choice past a couple of LPs. unanimous choice. The internal view was that the [email protected] [email protected] name projects a positive image of the firm – a A global game includes an element of retail participation. This rock outcrop extending into the sea, bathed in

Naming private equity firms used to be a in turn is likely to require broader and more pleasant weather. However, there is also a military Hong Kong Philippines reasonably straightforward process. Kohlberg, commercial marketing efforts. connotation: capturing a headland allows an Kenneth Pang Michael Guarin Kravis, Roberts & Co, as it was originally known, “More savvy firms are creating engaging army can seize a strategic advantage. +852 2140 2838 +63 (2) 885 7000 ext. 347 was named for its founders; The Carlyle Group’s brand names that resonate with potential “It’s a vantage point from which a general [email protected] [email protected] founders named their firm for the New York City audiences, provide a simple domain name, and is able to see what’s going on around him and hotel in which its formation was often discussed. invite further dialog – a continuing conversation plan accordingly. The same is true for private Others looked to nature – plants, rock formations that speaks to the company’s core value equity. We’re a long-term investor, and we want Indonesia Singapore and water features – in order to convey a sense proposition,” says Phil Davis, founder of corporate to see what’s going on around us and develop a David East Andrew Thompson of stability, growth and renewal. naming and branding firm Tungsten. vision of what sectors will be the best performers +62 (21) 574 0877 +65 6213 2929 However, as the Ardian process suggests, He previously worked with a US-based M&A before we invest in them,” Thompson says. [email protected] [email protected] times have changed, globally and in Asia. These firm that wanted a new name as part of efforts to Not all Asia spin-outs have followed the have become bigger, more public decisions for a re-positioning as a transaction advisor and also Ardian and Headland model. Affinity Equity bigger and more public asset class. to connect at a higher level with clients. Davis Partners and Unitas Capital were among the Japan Taiwan “Private equity is growing globally, so we are discovered the firm had four major partners, first generation managers that uncoupled Paul Ford Vincent Chang seeing different behavior in terms of branding and lived in a city with four major rivers, which from investment banks in the early 2000s. Their +81 (3) 5218 6784 +886 (2) 8101 6666 ext. 05185 and marketing,” says Matthew Stotts, founder connected everything and everyone in town. He names no longer have any relation to the former [email protected] [email protected] of Tenor Partners, which helps PE firms develop came up with the name FourBridges Capital. parents, UBS and J.P. Morgan. These differing marketing strategies. “Private capital markets “The word ‘bridges’ is a metaphor for approaches might be explained by the relevance have become much more competitive and so connecting customers and capital. The word ‘four’ of the name to the target market. HSBC has a PE and VC firms are under pressure to establish provided a backstory to the founders. Both create retail banking business and strong brand name

kpmg.com © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity.Member firms of the network independent are affiliated with International. any such have International KPMG does nor parties, third vis-à-vis firm member other any or International KPMG or bind obligate to authority any has firm member No services. client no provides authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and “cutting through complexity” are re gistered trademarks of International.

Number 41 | Volume 27 | November 04 2014 | avcj.com 29 INNOVATION... SOPHISTICATION... INTEGRATION...

Shearman & Sterling has an established presence with a 140-year legacy. It is one of the world’s leading international law firms known for its expertise in virtually every area of law relating to commercial and financial activity, from advice on investment funds, capital markets, corporate/mergers and acquisitions, project development and finance transactions through to representation in international arbitration and litigation.

With a long-standing commitment to Asia for over 30 years, we offer a sophisticated approach to deliver innovative and integrated strategic, tactical and technical advice to our clients. Our core practice areas include:

▪ Acquisition Finance ▪ Intellectual Property ▪ Privatizations ▪ Asset Management ▪ International Arbitration ▪ Project Development ▪ Banking & Finance ▪ Litigation & Dispute & Finance ▪ Capital Markets Resolution ▪ Regulatory & Compliance ▪ Direct Investment ▪ Mergers & Acquisitions ▪ Fund Formation ▪ Private Equity

ABU DHABI | BEIJING | BRUSSELS | FRANKFURT | HONG KONG | LONDON | MILAN | NEW YORK | PALO ALTO PARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC shearman.com BRANDING [email protected]

recognition throughout Asia. market presence, and for being differentiated Books and Five Classics – that illustrate the core Certain groups that remain captive also from other firms,” Tenor’s Stotts says. value and belief systems in Confucianism. John draw on the reputations of their parents. Intel When Qiming was founded in 2005, co- Zhao, CEO of Hony, took “Hong Yi” from a piece Capital and Google Ventures are obviously tech founder Gary Rieschel delegated responsibility of Chinese calligraphy displayed in the office of specialists; CITIC Capital, which targets state- for coming up with a Chinese name to his wife Legend Holdings CEO Chuanzhi Liu. Hong Yi is a owned enterprise (SOE) restructurings, relies on Yucca, a Hong Kong native. She organized Confucianism saying that implies people should the brand cache of its parent, CITIC Group, when a dinner to discuss options with friends and work hard to achieve, with a long-term vision. dealing with SOEs; and CICC Private Equity might finally proposed Qiming. “Qi” – which is often Most firms seek advice from a Fengshui be popular among IPO-hungry entrepreneurs found in the names of publishing companies master on a name. According to Yeetak Choi, because of its ties to China International Capital in Hong Kong – means to enlighten or inspire. a Hong Kong-based Fengshui master, a name Corp, a leading domestic brokerage. It has elements of scholarship and mentorship, should be balanced with the founders’ lives. For and when combined with other characters, can example, a person’s date of birth and the time at INNOVATION... Chinese challenges reflect innovation. which they were born can be cross-referenced In this context, finding an appropriate Chinese “Both our kids have Qi in their Chinese names, with the Wu Xing. If there is not strong balance name is also important. The first character of and we were joking this was our third child” across the five elements, a name will be Headland’s Chinese name is the same as that of Rieschel says. “There was also a feeling that it suggested that represents the missing element. HSBC. But the name in full – “Hui Rui,” meaning showed purpose and weight. And, while a very “We not only consult the Wu Xing, we also SOPHISTICATION... a combination of talents – was picked for its Chinese name, it is not too difficult for foreigners look into the pronunciation of the name and its applicability to the PE firm’s cause. Ardian was to pronounce. Finally, we chose the traditional underlying meaning, and whether it could bring told by a Chinese financial institution that characters because [co-founder] Duane Kuang good thoughts to people. If the words are good, its English name sounds like an animal that and I agreed that the aesthetics were better.” it sounds like a blessing when you call out the INTEGRATION... Feng shui masters rate private equity firms’ Chinese names Chinese names Lingling Mak Yeetak Choi Remarks 弘毅 (Hony) ★★★ ★★★★★ Both: Very positive.The name implies people should work hard to achieve, with a long-term vision 鼎暉 (CDH) ★★★★ ★★★★★ Choi: It's a good name, which implies the firm is sitting on the top of other players 方源 (FountainVest) ★★★★ Nil Mak: It will be a good name if the founder is missing water in Wuxing Choi: 源 is pronounced the same as another Chinese word meaning "the end" Shearman & Sterling has an established presence with a 140-year legacy. It 博裕 (Boyu) ★★★★★ ★★★★ Mak: The name means wide, in depth, plenty of things you need is one of the world’s leading international law firms known for its expertise in 新天域 (New Horizon) ★★★ ★★★★ Both: The name literaly translates as “new universe.” Not impressive virtually every area of law relating to commercial and financial activity, from 厚朴 (Hopu) ★★★ Nil Both: 厚means prosperous, but 朴means plain. The two words are not well-matched 嘉御 (Vision Knight) ★★★★★ Nil Mak: The name gives founders power to control the business advice on investment funds, capital markets, corporate/mergers and acquisitions, Choi: 御 is often associated with a Chinese emperor. They have power but they are always alone project development and finance transactions through to representation in 滙睿 (Headland) ★★★ ★★★★ Choi: It reminds me of a team of talents - but what about the business expecations? 骏麒 (Affinity) ★★★ ★★★★ Choi: 骏 is horse; 麒 is a mythical creature symbolizing prosperity. The name is not easy to understand international arbitration and litigation. 联宇 (Unitas) ★★★ ★★ Both: It means “big universe.” Not impressive 啓明 (Qiming) ★★★★ ★★★★ Both: The name looks common but the meaning is simple and straighforward 凯雷 (Carlyle) ★★★ Nil With a long-standing commitment to Asia for over 30 years, we offer a Both: Direct translations from the English. The names have no specific meaning in Chinese ★★ sophisticated approach to deliver innovative and integrated strategic, tactical 黑石 (Blackstone) Nil symbolizes happiness and good luck in the FountainVest’s name was not decided until name. We believe this could bring fortune to the and technical advice to our clients. Our core practice areas include: Chinese mythology. The animal now features in one month before the final close of its debut business,” says Choi. its Chinese name, “An Lin.” fund in 2012, after long debate. The team decided In perhaps the most striking endorsement For many of the local Chinese private it wanted a link with water, one of the five of a private equity firm’s Chinese name, the ▪ Acquisition Finance ▪ Intellectual Property ▪ Privatizations equity firms, the Chinese name came first and elements – known as the “Wu Xing” – in Chinese Fengshui master Vision Knight Capital consulted they wanted something of similar meaning or philosophy. There were several reasons for this. ended up investing in its fund. ▪ Asset Management ▪ International Arbitration ▪ Project Development pronunciation in English. This is the case for “One is that in China, water is often associated The firm, co-founded by former Alibaba ▪ Banking & Finance ▪ Litigation & Dispute & Finance Hony Capital and FountainVest Partners, as well with money and fortune. Water also quietly helps Group executive David Wei, is known as “Jia as VC players Ceyuan Ventures, Qiming Venture everything grow, a role that we see for ourselves Yu” in China. The “Jia” is taken from the Chinese ▪ Capital Markets Resolution ▪ Regulatory & Compliance Partners, and Banyan Capital. with companies we invest in,” Frank Tang, CEO name for Kerry Center, the Shanghai building “Smaller PE firms or the traditional VC firms of the PE firm, explains. “In addition, ‘fang yuan’ in which Vision Knight has its headquarters. “Yu” ▪ Direct Investment ▪ Mergers & Acquisitions might only have 15 LP relationships, 30 at the means source of water in the country of China. comes from neighboring building’s name. It is ▪ Fund Formation ▪ Private Equity most. That is manageable through face-to-face We then added ‘Vest’ to the English word a reminder that one should never forget one’s relationships and so the name isn’t so important ‘Fountain,’ a translation of our Chinese name, to birth place, while the combination of the two for LPs. But it is very important for the markets produce FountainVest.” characters means “better managing the horse” – a they invest in – for generating qualified deal flow, Elements of other PE firms’ names are taken metaphor for operational improvement. for attracting management teams, for increasing from Chinese classic works – known as the Four The English name Vision Knight bears no ABU DHABI | BEIJING | BRUSSELS | FRANKFURT | HONG KONG | LONDON | MILAN | NEW YORK | PALO ALTO PARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC

Number 41 | Volume 27 | November 04 2014 | avcj.com 31 shearman.com 03387_private_equity_A4.indd 1 03/11/2014 15:14 BRANDING [email protected]

relation to the Chinese; Wei just picked two the early years. J-Star was set up by members words he liked. FountainVest’s name has a similar of Jafco’s PE team and industry participants – basic meaning in both languages. Unlike Qiming Go West: What’s mistakenly but in jest – said the name meant or more recent creations such as Boyu Capital, they were “Jafco’s star team members.” the managers declined to use the pinyin versions in a name? One area in which Asia differs fundamentally of their Chinese names as their English names. wo months ago, London-based Isis Private from traditional Western practices is CDH Investments, which spun-out from CICC TEquity announced it would change its incorporating the founders’ names into the firm in 2002, was also reluctant to do this. The firm is name to avoid associations with the terrorist name. It has happened in only a handful of cases. known in Chinese as “Dinghui.” The “Ding” points activities of another ISIS – shorthand for From a Chinese perspective, this reluctance to the three-legged urns used to burn incense The Islamic State in Iraq and the Levant. It is is perhaps explained by the perception that in Chinese temples – a character that denotes an unfortunate and impossible-to-foresee prominent business people are easy targets in stability. “Hui” means the first ray of light before outcome for a firm originally named after an government crackdowns. the sun rises. It was devised in house, with a ancient Egyptian goddess. “It might be a cultural thing in the sense that Fengshui master confirming the name had the When looking for a replacement, Isis people value their privacy, particularly in the case right number of character strokes. might do well to avoid the realms of ancient of China’s princeling funds where there is a desire “At the time, there weren’t many home- myth and legend. Fund managers have to hide connections,” one Asia-based LP observes. grown PE firms in China. Some used the pinyin already snapped up virtually every Egyptian, However, he notes that using founders’ names version of their Chinese names and didn’t pick Greek and Roman deity in the pantheon. was characteristic of US private equity in the an English name,” explains Stuart Schonberger, Sanskrit and Latin are becoming popular 1970s, 1980s and 1990s. Now they prefer initials. managing director at CDH. “We rejected the almost by necessity. Another consideration that applies to all firms pinyin of Dinghui because it doesn’t sound Branding agencies are often called in regardless of geography is the need to create a good in English. The word ‘ding’ has negative to help out. Phil Davis, founder of US- sustainable PE franchise with a deep bench of connotations and it didn’t make sense to take based corporate naming and branding talent. Highlighting 1-2 founders in a firm’s name any risks with a creative name when no one firm Tungsten, says the naming processes does not send out the right message. Tungston’s knows who you are.” usually goes through five stages: discovery, Davis adds that it takes years to imbue a founder- concept, refine, winner and market. named firm with meaning, while removing or The stars align “We start by helping a company removing people can be problematic. There are a few examples in India’s private equity determine its ‘pivot pints’ – that singular No one wants a name to become community of firms tapping into local culture like attribute around which their services revolve. overcomplicated – not when operating in an their Chinese counterparts. Kalaari Capital, which This could be protecting, connecting, asset class that is increasingly globalized as well was known as Indo US Venture Partners until enhancing, or building. Once a client has a as institutionalized. A name that is short, simple 2012, found inspiration for its name in a form better sense of who they are as a company, and easy to pronounce or translate will inevitably of martial art. In North Asia, the vast majority of we can then determine the best naming have the most cross-border currency. Sino-US VC firms are named after the financial institutions strategy to convey that key benefit,” he says. firm Granite Global Ventures rebranded itself as from which they originated. In many cases, they After meeting with key stakeholders GGV in 2007 for this very reason. are still wholly captive; those that are not like the in the firm, a consultancy firm will reduce “If you have the opportunity to name your credibility the brand brings. the initial hundreds of candidates to 8-12 firm, you should think about the global market, It is perhaps surprising that Japan, where the that meet all the branding criteria. They your long-term strategy, and the types of kanji script is based on Chinese character sets, must convey the right message, have an companies you want to attract as well as current has not seen the same naming trends as China. available trademark and domain name, and and future LPs. All of these components should The separate phonetic alphabet – katakana – is provide a marketing platform. “There is a be factored in choosing a compelling name that one reason for this. It allows direct phonetic wide assortment of naming strategies for would be relevant with all of your audiences,” use of English or other languages. For example, consulting firms, such as coined or invented Tenor Partners’ Stotts says. Advantage Partners’ name is simply written in names, positive connotation names, At the same time, a private equity firm could Katakana, rather than using kanji. metaphors, and descriptive hybrid names,” take on almost any name and still attract capital Other firms refrain from using traditional Davis says. from LPs if there is strong performance. GPs are Japanese characters. When the group now Abstract and invented brand names in simply advised to avoid causing offense or taking known as J-Star was coming up with a name, one the PE space include Accel, Sigma Partners someone else’s name, and just try to convey partners suggested using something along the and Meritech Capital Partners. They are broad institutional qualities. Entrepreneurs, too, lines of “Japan Buyout” in Japanese characters – favored by trademark attorneys because are smart enough to look past the brand to the “Nippon Baiautto Toushi.” But Greg Hara, director of their un-established nature. However, people and processes that shape a firm. and president of the firm, thought this sounded significant time and investment is required “Over the last 5-10 years, we’ve seen people too stuffy, so looked for English name. to imbue with meaning, says Matthew being more creative, coming up with interesting “Most of the people we deal with understand Stotts, founder of Tenor Partners. and playful names for the new firms,” says Jeff basic English, so ‘they get that J’ stands for Japan Private equity firms that want to avoid Richards, who joined GGV in 2008 after spending and ‘Star,’” Hara explains. “Our model is solution the abstract or mechanical gravitate towards 13 years as an entrepreneur in the US and Asia. capital and our target companies have to shine nature. Sequoia Capital and Oaktree Capital “But ultimately, entrepreneurs want to work like stars. Companies might be small stars or large are cited as names that are grounded and with a firm that’s successful. Everybody loves stars but we want each one to shine.” approachable, yet convey growth. the name Amazon. But if Amazon were a terrible The firm had to endure some teasing in company, nobody would like the name.”

Number 41 | Volume 27 | November 04 2014 | avcj.com 33

03387_private_equity_A4.indd 1 03/11/2014 15:14 Guernsey (with a number also having offices and staff present).

Guernsey has administrators and custodians ranging from major international names, such as Northern Trust and State Street, to specialist independent private equity service providers.

global reach

Guernsey’s funds industry now manages and administers more than 1,000 funds valued at nearly half a trillion US dollars, with the net asset value of private equity funds increasing 123% over the last five years. Guernsey – A European fund Guernsey domiciled investment funds are distributed to all corners of the globe. centre with a difference The first Chinese currency focused bond fund, the Renminbi Bond Fund was established in Guernsey in 2007 by Stratton Street Capital LLP as an open-ended fund in a Protected Cell Company (PCC) structure. It By Fiona Le Poidevin, Chief Executive of Guernsey is listed on the Irish Stock Exchange. Finance – the promotional agency for the Island’s Quality of service in Guernsey is finance industry. evidenced by the fact that our providers now service $140 billion worth of open- ended funds which are domiciled in other jurisdictions where there may be local substance challenges. uring the last few years a large Europe, Guernsey provides a European section of the European private platform but one which is not actually Guernsey’s strong ethos of corporate equity community has been in the EU. Indeed, the National Private governance is also demonstrated through D its position as a centre for listed vehicles; focused on the European Union’s (EU’s) Placement (NPP) route is being favoured drive for increased regulation, principally by many as it means little or no change to the two largely go hand-in-hand as through the Alternative Investment Fund how things were done before AIFMD. companies are subject to and adhere to the Managers Directive (AIFMD). rules applicable to the various international For those managers with elements of EU stock exchanges on which they list. Speaking to promoters and investors and non-EU business, parallel structures further afield it is quickly apparent that can be utilised. It will be possible to place Guernsey acts as a gateway to list vehicles AIFMD has been less of a pressing non-EU business in a parallel or feeder on stock exchanges around the globe, issue however, when they discover that structure for which AIFMD compliance including, among many others, the local it means a growing compliance burden would neither be required nor necessary. Channel Islands Securities Exchange (CISE), and therefore increased costs then they exchanges in Frankfurt and Amsterdam, the are instantly more cautious about raising Guernsey also has a new opt-in regime Hong Kong Stock Exchange (HKEx) and the money from within Europe. which is fully AIFMD compliant for those London Stock Exchange (LSE). LSE figures who require it. show that there are more Guernsey entities listed on its markets than from any other the guernsey model The point is that Guernsey’s dual jurisdiction globally (ex-UK). Yet, rather than being part of the regulatory regime provides optionality problem, Guernsey is part of the solution that allows clients to be serviced in the conclusion because while the Island is in Europe manner most appropriate to their specific geographically, it is not in the EU and circumstances. Non-EU managers, including many from therefore, has not been required to Asia, are of the view that regulation is implement AIFMD. substance making it especially difficult to market funds into the EU. Guernsey offers a Guernsey has introduced a dual regulatory Guernsey has significant substance solution based in a European time zone regime whereby it is possible to continue already present within many existing with access to the EU market but without to distribute Guernsey funds into both EU structures and professionals with the administrative and cost burden of and non-EU countries. expertise in portfolio and risk AIFMD and from a jurisdiction which has management. Corporate governance is significant substance, high standards and The approach means managers and funds enhanced by having a significant pool of a global reach. with no connection to Europe can still use experienced non-executive directors. Guernsey’s continuing regulatory rules which are completely free from the requirements Global private equity houses Apax, and costs associated with AIFMD. Apollo, BC Partners, Coller Capital, HarbourVest, Pantheon and Permira have For managers wishing to market into their funds domiciled and serviced in

www.guernseyfinance.com | [email protected] | +44 (0) 1481 720071 Guernsey (with a number also having offices and staff present). TECHNOLOGY Guernsey has administrators and [email protected] custodians ranging from major international names, such as Northern Trust and State Street, to specialist independent private equity service providers. global reach Global mandates Guernsey’s funds industry now manages and administers more than 1,000 funds Innovation hubs have traditionally been defined by the size of their immediately addressable market. But valued at nearly half a trillion US dollars, with with better access to capital, information and technology, some Asian jurisdictions are going global the net asset value of private equity funds increasing 123% over the last five years. Guernsey – A European fund Guernsey domiciled investment funds are distributed to all corners of the globe. FLIPAGRAM IS A MOBILE APP THAT jurisdictions seeking to become an innovation was subsequently written off by many as a white allows users to convert photo sets into animated hub. It is a logical ambition for policymakers, but elephant, is said to be busier than ever before. centre with a difference The first Chinese currency focused bond slideshows set to music. Launched in 2013 by Los it remains to be seen how these places negotiate It is generally acknowledged that, in order fund, the Renminbi Bond Fund was Angeles-based Cheerful, Flipagram has featured the obstacles that stand between them and to become self-sustaining, a technology hub established in Guernsey in 2007 by Stratton among America’s top 10 photo and video iPhone lasting comparisons with Silicon Valley. must offer innovation, capital and liquidity. Tytus Street Capital LLP as an open-ended fund in apps for over a year. It was the most popular More pertinently, they are operating in an Michalski, managing director at seed investor a Protected Cell Company (PCC) structure. It download in the iOS App Store on New Year’s increasingly globalized start-up environment, Fresco Capital, says Hong Kong has plenty of By Fiona Le Poidevin, Chief Executive of Guernsey is listed on the Irish Stock Exchange. Day 2014 and retains a place in the top 100. which has implications for competitive edge. innovation and capital, although the latter For Hong Kong-based Mind Fund, Flipagram “If you have a good product with a good is a broad constituency and not all investors Finance – the promotional agency for the Island’s Quality of service in Guernsey is represents a substantial home run for its first customer benefit, that product can spread understand start-ups. finance industry. evidenced by the fact that our providers fund. The VC firm led the Series A round in around the world faster than it ever could before. “A healthy environment needs support now service $140 billion worth of open- Cheerful in 2012 and the saw Charles River It really matters less and less that someone has to systems to help start-ups from the earliest stages ended funds which are domiciled in other Ventures and Trinity Ventures come in for the be in Silicon Valley, but it is more likely that great through the growth stage,” Michalski adds. “There jurisdictions where there may be local Series B in 2013. When Mind Fund launched companies will come from technology hubs are areas where Hong Kong has done well, like substance challenges. Fund II, it was encouraged to stick to a US- because there are more innovative ideas floating having more than 30 co-working spaces which uring the last few years a large Europe, Guernsey provides a European Guernsey’s strong ethos of corporate centric strategy. But Adam Lindemann, the firm’s around,” says Tim Draper, founder of Draper helps to mitigate the challenge of high real section of the European private platform but one which is not actually managing partner, was looking closer to home. Associates and founding partner of DFJ. estate costs. But there also areas where Hong equity community has been in the EU. Indeed, the National Private governance is also demonstrated through D its position as a centre for listed vehicles; “I’d started to see activity in Hong Kong,” he Kong still needs to improve, such as encouraging focused on the European Union’s (EU’s) Placement (NPP) route is being favoured explains. “I decided this fund would focus much Support systems banks to support start-ups.” drive for increased regulation, principally by many as it means little or no change to the two largely go hand-in-hand as earlier – we are running an entrepreneur-in- One of Hong Kong’s initiatives reaches a climax According to sources familiar with the through the Alternative Investment Fund how things were done before AIFMD. companies are subject to and adhere to the Managers Directive (AIFMD). rules applicable to the various international residence program, rather than the previous next week with the unveiling of three winners situation, Hong Kong used several other tech For those managers with elements of EU stock exchanges on which they list. Series A stuff – and on Hong Kong companies of the 2014 StartmeupHK venture program. The hubs as reference points when reviewing its own Speaking to promoters and investors and non-EU business, parallel structures offering in the last few years. These included Guernsey acts as a gateway to list vehicles Singapore, which stands out as the market in Asia further afield it is quickly apparent that can be utilised. It will be possible to place Asia early-stage VC funding by major market AIFMD has been less of a pressing non-EU business in a parallel or feeder on stock exchanges around the globe, that has most actively sought to cultivate start- including, among many others, the local issue however, when they discover that structure for which AIFMD compliance 8,000 ups. Singapore has sought to emulate Silicon it means a growing compliance burden would neither be required nor necessary. Channel Islands Securities Exchange (CISE), Valley before but the latest wave of efforts is and therefore increased costs then they exchanges in Frankfurt and Amsterdam, the notable for its methodological approach. Hong Kong Stock Exchange (HKEx) and the 6,000 are instantly more cautious about raising Guernsey also has a new opt-in regime A number of early-stage financing programs London Stock Exchange (LSE). LSE figures money from within Europe. which is fully AIFMD compliant for those – often run as matching schemes with the show that there are more Guernsey entities who require it. 4,000 government contributing an equal amount of listed on its markets than from any other the guernsey model jurisdiction globally (ex-UK). capital to that raised from the private sector – The point is that Guernsey’s dual US$ million 2,000 were already in place but there was insufficient regulatory regime provides optionality Yet, rather than being part of the funding to get companies off the ground. As that allows clients to be serviced in the conclusion problem, Guernsey is part of the solution a result, incubation schemes were introduced. because while the Island is in Europe manner most appropriate to their specific 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014YTD Now the focus is on stimulating Series A stage geographically, it is not in the EU and circumstances. Non-EU managers, including many from Australia India Southeast Asia Other investors that can take companies from revenue therefore, has not been required to Asia, are of the view that regulation is Greater China Japan South Korea generative to profitable, essentially working with implement AIFMD. substance making it especially difficult to market funds into the EU. Guernsey offers a Source: AVCJ Research start-ups that graduate from the incubators. The objective is to create an ecosystem Guernsey has introduced a dual regulatory Guernsey has significant substance solution based in a European time zone regime whereby it is possible to continue already present within many existing with access to the EU market but without that is self-sustaining. While it might be argued to distribute Guernsey funds into both EU structures and professionals with the administrative and cost burden of that are global from day one. It is a strategic shift, government-supported program is open to that Singapore’s initiatives are still too young to and non-EU countries. expertise in portfolio and risk AIFMD and from a jurisdiction which has and the jury is still out, but I’m very bullish.” any entrepreneur with an innovative, scalable be properly assessed, Peng T. Ong, managing management. Corporate governance is significant substance, high standards and Lindemann adds that his decision was driven business ideas that can be built in Hong Kong. director at Monk’s Hill Ventures, claims there is The approach means managers and funds enhanced by having a significant pool of a global reach. by the emergence of top entrepreneurs in Hong The winners receive work space, professional now sufficient momentum in the market place. with no connection to Europe can still use experienced non-executive directors. Kong who are building companies that could services and mentorship over a 12-month period. “Even now if you turned off some of these Guernsey’s continuing regulatory rules which sell products anywhere. If this phenomenon It is part of a wider set of tech-friendly policy programs the marketplace would keep going. It are completely free from the requirements Global private equity houses Apax, achieves critical mass, it would be a welcome packages credited with helping fill up incubator is like an engine – you need to jump-start it with and costs associated with AIFMD. Apollo, BC Partners, Coller Capital, endorsement of the tech start-up credentials of a programs and co-working spaces over the the battery but once you’ve done that you can HarbourVest, Pantheon and Permira have market previously accused of neglecting them. last 12 months. Cyberport, a “creative digital turn off the battery and it keeps going,” he says. For managers wishing to market into their funds domiciled and serviced in Hong Kong is one of multiple Asian community” that opened in the early 2000s and Evidence of this could lie in the entrepreneurs

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TECHNOLOGY [email protected]

themselves. Silicon Valley is defined by a virtuous the US, it is possible to create multi-billion-dollar marketplace through which customers can use cycle of capital perhaps best exemplified by the businesses without venturing into new markets. crowdsourcing to solicit designs for websites, alumni of money-transfer service PayPal who Japan and South Korea, meanwhile, are T-shirts and logos and then pick their favorite, have gone on to set up, join or invest in a vast caught in the middle ground. Their domestic was founded in Melbourne in 2008. Initial array of VC firms and start-ups, including the likes economies are large enough to support start-ups marketing efforts were so US-centric – the of YouTube, Yelp, LinkedIn and Tesla Motors. that reach the billion-dollar mark, but the danger company branded with a +1 phone number Industry participants say they are seeing is that entrepreneurs will get comfortable and – that relatively few people were aware of similar, albeit smaller scale, movements in Hong neglect to look overseas early enough. They end the company’s origins. Backed by VC funding, Kong and Singapore. The dynamic is visible on a up with corporate cultures and technical systems 99designs has since expanded its global much larger scale in markets like China. that are not easily transferable or – even worse – footprint, entering Europe and South America. someone else takes their business model global. Most of Blackbird Ventures’ portfolio Domestic bulwarks “Quora supposedly got its idea from Naver companies are in Sydney and Melbourne, but A peculiar development noted by William Corporation’s Q&A service, which is dominant has also ventured further afield – to Brisbane, Bao Bean, investment partner of SOS Ventures in Korea,” says Bernard Moon, co-founder and Adelaide and Perth – driven by pockets of in China and managing director of the firm’s general partner at Sparklabs Global Ventures. local activity. “We are looking for businesses in accelerator program, is that second-generation entrepreneurs are the ones exiting their businesses and putting money back into the “It’s not only because of the cloud that you can system to support the a new generation of start- ups. Many of the first-generation entrepreneurs start a business anywhere; it is also inexpensive are still running their companies – and these to start a company” – Jessica Archibald groups are frequent buyers of businesses from the second generation. This has precipitated an explosion in angel “Korea should not be an idea generator for the Australia that tackle a global market from day investment over the last two years. When David US, it should be a leader. Entrepreneurs must look one and where customers don’t really know or Chen co-founded AngelVest in Shanghai seven abroad as soon as they can.” care that they are Australian,” says Rick Baker, years ago it comprised a handful of professionals For Hong Kong and Singapore, domestic managing director at Blackbird. “You can build with a passion for start-ups and a sense that markets have never been an option. Their value these businesses from anywhere in the world.” many Chinese entrepreneurs were not getting as start-up platforms is only as strong as their A recent investee is SafetyCulture, a software the mentorship they needed. The network now regional reach – into China and Southeast Asia, start-up based in Townsville in northeast numbers more than 80. respectively. At the same time, while there is Queensland. Despite the somewhat remote “The rise in angel investing in China has in logic in targeting proximate markets, these location, the founders have built up a base of part been driven by start-ups becoming more jurisdictions are not bound by it. StartmeupHK’s 200,000 users and more than 200 corporates, popular as an investment asset class; people have criteria state that candidates should be aiming including General Electric. However, Baker seen the money to be made from exits,” Chen to develop a business globally with the intent to accepts that SafetyCulture will have to set up says. “There is also a lack of domestic investment establish an Asian or Greater China office in Hong in other cities in order to access the resources opportunities compared to four years ago when Kong, not a China or Asia-specific business. required to scale the business. everyone was putting their money into real In this sense, entrepreneurs and start-ups estate and hoping to get a 100% return annually.” Global ambitions will still gravitate to technology hubs, albeit One of the reasons this rapid growth Empowered by cloud-based technologies and perhaps later in the corporate lifecycle than has is possible in China is scale. The start-up seamless communications, the 21st century historically been the case. environment is highly competitive but the start-up might target a particular geography but “As companies go beyond that initial product addressable market for new products and it could equally well forge a global path. development phase, they need to be well- services is huge. “It is not only because of the cloud that located in order to recruit sales people and The government has played a role in initiating you can start a company anywhere; it is also properly address financial, HR and management innovation – Patrick Loofbourrow, a partner inexpensive to start that company – getting an issues,” says Shane Chesson, a partner at with Cooley in Shanghai, notes the contribution idea and putting a website or an app together. Singapore-based Northstar Silicon Island. “A of subsidized premises, tax breaks and equity Costs have come down so it’s much easier to take seed investor may back a company with three investment programs in the nation’s seemingly that first step,” says Jessica Archibald, managing founders and less than 10 people overall, but one ubiquitous technology parks – but the market director at US-based VC fund-of-funds Top of the investments we are looking to do is more opportunity is an incentive in itself. Draper Tier Capital Partners. “Globalization and capital like 60 people. It’s not the sort of thing you want recalls DFJ struggling in the early days and losing efficiency have been a good leveler.” to run on a distributed basis.” money on deals, but it wasn’t long before the Skype is the most easily identifiable example A start-up might run its call center out of firm teamed up with search engine Baidu in what of this phenomenon – a company founded in the Philippines, locate its back office in Vietnam remains its most successful investment ever. Estonia by a Swede and a Dane. But it is also and retain an IT development team in India Yet Baidu is an interesting case study in the prevalent in Australia, a far-flung market, yet one – each one a decision based on cost-efficient context of what other technology hubs in the in which start-ups have leveraged their lower outsourcing. In order to attract top in-house region are trying to achieve. The company has costs, skills and native-level English language talent, the start-up requires a location that is grown to more than $80 billion in size on the ability to address international markets. reasonably affordable, geographically accessible, back of domestic growth. In China, like India and 99designs, an online graphic design has good immigration arrangements, and above

Number 41 | Volume 27 | November 04 2014 | avcj.com 37 TECHNOLOGY [email protected]

all is a place where people want to live. The appeal of Singapore and Hong Kong in this context is their status as global cities, offering The role of government rule of law, intellectual property protection, strong universities and multiculturalism. echnology start-ups were among the casualties in Australia’s austerity budget announced “That is why it would be hard to create a Tearlier this year, with several programs discontinued. They included the Innovation Investment Silicon Valley in a farming community in the US,” Fund (IIF), which sponsors venture capital funds, start-up grants program Commercialisation says Top Tier’s Archibald. “You might have a great Australia, and research institution National ICT Australia. idea but can you attract software engineers to Yasser El-Ansary, CEO of the Australian Private Equity & Venture Capital Association remains that area? It is easy to convince people to move frustrated by the government’s stated support for innovation but its failure to articulate the to Silicon Valley.” economics. Rick Baker, managing director at domestic VC firm Blackbird Ventures, says he Viki, a video streaming site characterized by disappointed at the cuts but disheartened by Australia’s attitude towards start-ups. community-generated subtitling, is by some “There is some quite good monetary support,” Baker explains. “The main one is the R&D tax distance Singapore’s most successful VC-backed credit. It is about the same cost or possibly a little cheaper to hire engineer in Australia versus the tech exit. The business was bought by Japanese US. With the R&D tax credit it becomes a lot cheaper.” e-commerce giant Rakuten paid $200 million last The issue of how much resources governments should put towards fostering innovation and year. Viki’s founders – who hail from Armenia and what form this takes is hotly debated in Asian start-up circles. While the authorities in Australia South Korea and met at business school in the and Hong Kong are described as “fairly light touch” in their approach, Singapore is more proactive, US – had no deep ties to Singapore. They set up with a raft of policies covering incubation to institutional funding. But how much is too much? there because the business was suited to Asia The consensus view is that as soon as governments start trying to pick winners directly, and Singapore was an attractive and convenient problems ensue. Its role should be that of initiator – if putting capital work, it should do so in a base, with local funding also available. largely passive way. Matching funds, where the GP identifies and executes an investment and the government puts in an equal sum, are good example of this. Australia’s IFF operated along these Education, education, education lines, as do programs in markets such as Korea and Singapore. The globalization of venture capital has been “For the most part it’s been good because the government hasn’t been overreaching. It has supported by an explosion in the amount been match-ups or start-up training or taking start-ups abroad,” Bernard Moon, co-founder and of information available on how start-up general partner at Sparklabs Global Ventures, says of the Korea experience. communities work. It is no longer necessary This begs the question how long such schemes will go on when the objective is to create a to network in Silicon Valley, Beijing or Mumbai self-sustaining ecosystem. Commenting on Singapore, Shane Chesson, a partner at Northstar to find out how companies are funded; Silicon Island, expects the government to become less involved on the financing side over time entrepreneurs everywhere now tend to go into and focus more on the infrastructure aspect: reasonable immigration legislation, affordable meetings much better informed. premises, and access to different networks. Meng Weng Wong, co-founder of Singapore-based This more widely dispersed knowledge base accelerator JFDI.Asia, adds he would like to see more top-down initiatives that make it easier to has also increasingly found its way into academic do business across Southeast Asia. programs – there is now a science to fostering These sentiments strike a chord with other investors in the region. “In the broader ecosystem, innovation, with processes and best practices the government can ensure that the regulatory environment is start-up friendly,” says Tytus becoming institutionalized. Michalski, managing director at Hong Kong-based Fresco Capital. “Many rules and regulations are Massachusetts Institute of Technology (MIT) well-meaning but they end up restricting or hurting start-ups. A balance needs to exist to ensure runs a regional entrepreneurship acceleration that regulations meant for large corporates are not simply copied for start-ups.” program that admits eight teams a year from locations all over the world. Singapore and South Korea are the only Asians in the to the innovation hub ethos. Blackbird’s Baker is still one of the most sought after professions current intake. Four series of workshops are says the best investment the government could on leaving school. Working at a multinational is held over a 24-month period during which make would be in education. He wants to see viewed as the first choice job.” existing ecosystems are analyzed, development science, information technology, coding and Mind Fund’s Lindemann expresses frustration frameworks are drawn up, and regions can share engineering firmly imprinted in school curricula at parents with “old fashioned” conservative experiences and best practice. and taught through university. values that prevent them from encouraging Draper University represents another Draper University’s efforts aside, a failure- their children to take risks in business. He entrepreneurship education program. Draper tolerant culture is the hardest thing to teach as it expects change but not overnight. Rather, says the university’s strength lies in a willingness cuts across numerous Asian cultural norms. In the attitudes will evolve for the same reasons that to subvert standard modes of instruction. US start-up community, failure is viewed in the start-up ecosystems emerge: once successful Students undergo survival training as well context of learning and using the experience to entrepreneurs put their expertise and capital as business training and there is a culture of reduce the chances of failure next time. In some back into the system as mentors for the next accepting failure. “At Draper University you can Asian markets, there just isn’t a next time. generation of companies. have a pile of team points based on something “Nobody wants to take as much risk as in the “We just need to tough it out for a little while extraordinary you’ve done, whether it succeeds US and this has to do with social values,” says longer to get those banner successes in Hong or fails,” he explains. Eddy Lee, principal at Fenox Venture Capital. Kong,” he says. “There are entrepreneurs and The importance of strong educational “Running a small business is often associated investors who have been around for the last few institutions that encourage entrepreneurship is with not having choices – not having the choice years and who are all focused on the same thing: emphasized by all industry participants as central to work for a large corporation, which in Japan let’s get some wins under our belt.”

38 avcj.com | November 04 2014 | Volume 27 | Number 41 TIM DRAPER | INDUSTRY Q&A [email protected] Voice of the valley A third-generation venture capitalist, Tim Draper is founder of Draper Associates and founding partner of DFJ. He explains the key ingredients for rolling out the Silicon Valley model at home and overseas

Q: How did the DFJ affiliate funded Skype, which was based governments attach the worse network start? in Estonia but started by a Swede the returns end up being. If they A: It started back when it was just and a Dane, and we helped get say they want to be a LP and me as Draper Associates. Oil Baidu going in China. We were they want you to set up an office prices had dropped to $6 a barrel the first venture capital firm ever somewhere, that light touch and the Alaska government to seed billion-dollar enterprises governance can be very helpful. wanted to develop a new in three continents – and we are If they say you can only invest in economy, so asked me to come close to doing it in a fourth. people who live in this city it can up and put together a fund – be very limiting. Most companies the Polaris Fund. It did well, but Q: So the first market you if they are any good are going to only because we invested half entered in Asia was China? be global and those constraints the money in Silicon Valley. We A: We first went into Asia with can limit the idea. backed Redgate, a Florida-based DFJ ePlanet, which was a company that was sold to AOL representative office in China. Q: You launched Draper for stock. Depending on where It was followed by what is now “The hub-and- University to provide crash they sold AOL it was either a Draper Dragon, another office spoke network courses in entrepreneurship. Is good fund or a miracle fund. The that was DFJ only, and then DFJ it possible to teach this? Alaska government didn’t offer Compass. Now we are down to was actually a A: I watched venture capital to re-up and we didn’t ask them. just Draper Dragon. It will be our evolve with my father and We felt we were on to bigger central brand in China. star network grandfather. People said to me and better things. But what I with everyone you can’t teach venture capital, learned was that venture capital Q: The original Alaska initiative but whenever anyone tells me didn’t have to be limited to one was government-driven. What connected to I can’t do something, I start or two regions, to Silicon Valley about the others? everyone else” thinking about how can do it. and Route 128 in Boston. We are looking for those 18-28 A: Most of the US groups were year-olds that have extraordinary Q: What happened next? private. Some of their money in Silicon Valley. We talked to all capabilities and vision. We A: I ran into a friend from Harvard might have come from various the stakeholders and tried to have created a 6-8 week course Business School who knew government entities, but create a forum in each place. A of study that is somewhat I’d done a small business generally they were privately successful entrepreneur from transformative to the way investment company (SBIC) and funded privately driven. We the region would address the they think. We teach in a way wanted to set up one for Utah. interviewed about 20 different audience and then we would that makes our students more That was Wasatch Ventures. After groups in New York before we have a networking session. We dynamic, worldly and prepared that it was rapid fire. We saw we decided which one we wanted wanted to get people thinking to be entrepreneurs. could create a hub-and-spoke to bring into the network. The that they could start their own network for venture capital and idea was that we pick a location businesses. Q: How do you achieve this? it would see much more deal with potential and work with A: We teach future instead of flow and be much more in tune a team that is building its own Q: How involved should history, we teach by team rather with what was going on around venture presence. governments become in by individual. We have survival the US. We did Pittsburgh, developing these ecosystems? training as well as activities Los Angeles, Denver, Chicago, Q: What does a location need? A: Government can be a really that are business and design- Houston – we had most of the A: A government that understands good cheerleader and create oriented. They learn about US covered and then we met competitive governance. A a business environment that finance, contracts, marketing, a couple of guys who wanted population base that is large is very friendly. When I started social media and crowd sourcing. to take it international. That led enough, and ideally good with a SBIC the US government Much of what we do no rational to DFJ ePlanet. Along the way technical universities and maybe levered my money 3:1, so I was school board would consider we noticed that the hub-and- a good business school as well. able to borrow $3 for every $1 I a good thing to pursue. That is spoke network was actually Most of the cities we went invested and put a lot of money where we have a real edge. We a star network with everyone into we were the first VC firm to work. I wouldn’t have been allow our students to try many connected to everyone else and so we had to teach the whole able to that in another way at new things. We encourage them learning from each other. We ecosystem model that was here the time. But the more strings to try and fail.

Number 41 | Volume 27 | November 04 2014 | avcj.com 39 Infrastructure. Apps. Answers.

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