From Brick to Click Lakhaney Discusses Emerging Markets China’S Traditional Retailers Respond to the E-Commerce Challenge Page 7 Page 15

Asia’s Private Equity News Source avcj.com October 08 2013 Volume 26 Number 38

Editor’s Viewpoint Nominations open for the AVCJ India Awards Page 3

News Apollo, China Media Capital, CDC, DRC, General Atlantic, GGV, GSR, ICG, Ignitioin, Integral, Macquarie, Matrix, Mavcap, Northstar, OPTrust, Qiming, SAIF, Temasek Page 4

Deal of the week J-Star completes buyout of serial private equity play Primagest Page 14

Industry Q&A The Abraaj Group’s Aman From brick to click Lakhaney discusses emerging markets China’s traditional retailers respond to the e-commerce challenge Page 7 Page 15

Focus Deal of the Week

Taking in the sights Clean bill of health VCs identify niches in Asia online travel Page 11 KKR announces buyout of Panasonic unit Page 14 INDIVIDUALLY, THEY OUTPERFORM. TOGETHER, THEY’RE OFF THE CHARTS.

ASIA EDGE Live from Hong Kong. Weekdays 11am SIN/HK

Managing Editor Tim Burroughs (852) 3411 4909 Staff Writers Andrew Woodman (852) 3411 4852 Mirzaan Jamwal (852) 3411 4821 Will buyouts boss Winnie Liu (852) 3411 4907 Creative Director Dicky Tang Designers Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow the 2013 India Senior Research Manager Helen Lee Research Manager Alfred Lam Research Associates Herbert Yum, Isas Chu, Awards? Jason Chong, Kaho Mak Circulation Manager Sally Yip Circulation Administrator Prudence Lau Manager, Delegate Sales India buyouts have crossed the also come into the reckoning for Private Equity Pauline Chen $1 billion threshold in only two years since Deal of the Year. Director, Business Development private equity first came to the country. Those Today we invite AVCJ readers to have their say. Darryl Mag years were, unsurprisingly, 2006 and 2007, the Nominations for the 4th annual India Awards are Manager, Business Development peak of the pre-global financial crisis boom, now open and will remain so until October 31. Anil Nathani, Samuel Lau when total PE investment reached $7.7 billion Submissions should relate to India investment, Sales Coordinator and then the all-time high of $17.9 billion. exit and fundraising activity between November Debbie Koo Nine months into 2013 and buyout deal flow 1, 2012 and October 31, 2013. The categories are Conference Managers is once again within touching distance of the listed below. Jonathon Cohen, Sarah Doyle, Zachary Reff $1 billion mark. India has seen 15 transactions For more details of the process, rules and Conference Administrator and the grand total is $954.7 million. Indeed, qualification criteria, or to make a nomination, Amelie Poon Conference Coordinator depending on how one classifies KKR’s $470 please go to www.avcjforum.com/awards. Fiona Keung, Jovial Chung million acquisition of Alliance Tire Group – the Alternatively, nominations can be submitted by INDIVIDUALLY, THEY Publishing Director company is international and was founded in email ([email protected]). Allen Lee Israel so AVCJ Research classifies it as coming The AVCJ Editorial Board will evaluate the Managing Director OUTPERFORM. from that jurisdiction, although others would entries and submit long lists to a select panel of Jonathon Whiteley beg to differ – this might already be India’s best industry judges. The judges will consider these buyout year on record. recommendations and final short lists will be TOGETHER, THEY’RE So far, the overall vintage has not proved drawn up in consultation with the AVCJ Editorial particularly stellar. Private equity firms have Board. deployed $6.2 billion (not including Alliance), The shortlists will be posted online for OFF THE CHARTS. lower than the full-year totals for each of the the entire private equity and venture capital Incisive Media Unit 1401 Devon House, Taikoo Place previous three years. It would take a busy final community to vote on from November 8 until 979 King’s Road, Quarry Bay, Hong Kong quarter to surpass the 2010 and 2011 figures, November 22. The AVCJ subscriber base has a T. (852) 3411-4900 although the $7.1 billion of 2012 is a realistic 50% say in the final result, with the judges and the F. (852) 3411-4999 ASIA EDGE E. [email protected] target. AVCJ Editorial Board each accounting for 25%. URL. avcj.com What this means is that the buyout The winners will be announced at a gala Live from Hong Kong. Beijing Representative Office concentration is unusually high – 15%, lower dinner in Mumbai on December 5, during the No.1-2-(2)-B-A554, 1st Building, Weekdays 11am SIN/HK No.66 Nanshatan, than the 19% of 2006 but well in excess of the AVCJ India Forum. Chaoyang District, Beijing, 6% posted in 2007 and anything since then. A People’s Republic of China T. (86) 10 5869 6203 few big deals make a lot of difference: Partners The 2013 India Awards categories: F. (86) 10 5869 6205 Group’s $270 million acquisition of business • Firm of the Year E. [email protected] process outsourcing firm CSS Corp; Baring Private • Private Equity Professional of the Year Equity Asia’s (BPEA) $262 million investment in • Exit of the Year Hexaware, which could pass $400 million once • Private Equity Deal of the Year The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of a mandatory tender offer kicks in, are the largest • Venture Capital Deal of the Year AVCJ Group Limited. buyouts in seven years. • Fundraising of the Year ISSN 1817-1648 Copyright © 2013 These transactions, alongside BPEA’s $260 million investment in Lafarge India – a growth deal but perhaps a sign of what is to come – will Tim Burroughs likely feature prominently in the 2013 AVCJ India Managing Editor ©2013 Bloomberg L.P. All rights reserved. 54914729 0813 Awards. A cluster of cleantech investments may Asian Venture Capital Journal

Number 38 | Volume 26 | October 08 2013 | avcj.com 3 News

ASIA PACIFIC Investors see bifurcation in VC-backed Forgame raises real assets exposure $206m in HK IPO Asia PE fundraising Investor appetite for real assets in Asia is strong, Forgame Holdings, a Chinese mobile game but infrastructure and real estate players speaking developer backed by several VC firms, saw its recovers to $9.5b in 3Q at the AVCJ Real Assets forum in Singapore noted stocks jump 32.4% to HK$67.50 ($8.7) a share Asia-focused private equity funds raised $9.5 that the nature of demand differs to the extent on its first day trading following its $206 million billion in the third quarter of 2013, up from the that a classic PE-style fund is in some cases no Hong Kong IPO. The Guangzhou-headquartered multi-year low of $5.2 billion in the previous longer the most appropriate option. firm’s backers include TA Associates, Qiming quarter, according to provisional data from AVCJ Grant Kelley, co-head of Asia Pacific at Apollo Venture Partners and Ignition Capital Partners. Research. The number was boosted by KKR Global Management, drew a distinction between Asian Fund II, which announced a final close of real estate and infrastructure in this context: while China Media Capital backs $6 billion in July, contributing $3 billion to the quarterly total - adding to the $3 billion first close Charm take-private that came last year. Hong Kong-based China Media Capital is backing management buyout of Charm Communications, CDC hires UTI Capital’s a US-listed Chinese advertising agency. The bid values the company at about $180 million. Murugappan A consortium, led by Charm’s chairman and CDC, the UK development finance institution, founder He Dang, and China Media Capital, has has hired Alagappan Murugappan as managing offered to acquire all outstanding shares that it director with its Asia funds team. Murugappan doesn’t already own for $4.70 apiece. was previously CEO with private equity firm UTI Capital. He will manage the team responsible for Baidu, VC-backed Qunar the organization’s fund investments across South Asia, as well as its pre-existing investments in the former is time-sensitive and government- files for $125m IPO China and Southeast Asia. independent, the latter often appears immune Qunar, a Chinese travel website majority-owned to cycles but is highly influenced by government by internet search giant Baidu, is looking to raise ICG adds Nyree Hu to Asia policy. “There is a prevailing view that real estate up to $125 million through an IPO in the US. is all about location, but it’s not. It is about timing,” GSR Ventures and GGV Capital still hold minority team he said. “The mindset is of a trader is essential for positions in the company but it is unclear Intermediate Capital Group (ICG) has hired Nyree real estate success. Infrastructure is much more whether they plan to use the offering as an Hu as Asia director with its 11-strong global about long-term gains.” opportunity to exit. distribution team. Hu joins ICG from CQS where Vijay Pattabhiraman, managing director and she was director of marketing for Asia. Prior to CIO for global real assets - Asia infrastructure at Temasek commits $100m that Hu held a number of senior sales positions at J.P. Morgan Asset Management, also highlighted UBS Wealth Management and Ecofin, the utilities the role that land prices play in these differing in China 21Vianet specialist investment management firm. outlooks. He estimates that land accounts for less Temasek Holdings has invested $100 million in than 5% of the overall cost of power projects, 21Vianet Group, a US-listed Chinese internet which means volatility has little impact on data center services provider, for about a 10% AUSTRALASIA returns. In real estate, the forces are reversed. stake. About 87% of the investment will be newly J.P. Morgan is increasingly looking a hybrid issued ordinary shares and the remainder will be Canada’s OPTrust opens projects that offer a combination of stable ordinary shares sold by existing shareholders. Sydney office infrastructure returns, with associated real estate providing additional upside. What remains at VC-backed 58.cm targets Canada’s OPSEU Pension Trust (OPTrust) issue is whether LPs are comfortable with these has opened an office in Sydney, to focus on kinds of blended returns. Andrew Yee, managing $150m US IPO infrastructure and private equity investment director and global head of infrastructure Chinese venture capital-backed local across Asia. It has relocated managing director principal finance at Standard Chartered Bank, marketplace website 58.com filed for its US IPO, Stan Kolenc and portfolio manager Morgan noted that although investors may want targeting up to $150 million. The company’s McCormick to Sydney from London. exposure to real estate and infrastructure, they VC investors include SAIF Partners, DCM and don’t necessarily want them together. Warburg Pincus. Founded in 2005, provides classified ads for flat rental, recruitment, second GREATER CHINA hand goods and cars. billion ($552 million) - its biggest investment in KKR buys 10% stake in China to date. Haier is selling 299.5 million shares IDG, Temasek-backed IGG at RMB11.29 each to KKR in a private placement, Qingdao Haier a 15% discount on the September 12 closing eyes $123m HK IPO KKR has acquired a 10% stake in Qingdao Haier, price, the last day before Haier suspended Singapore-based mobile game developer I Got a Chinese home appliance maker, for RMB3.38 trading prior to announcing the deal. Games (IGG), which is backed by IDG Technology

4 avcj.com | October 08 2013 | Volume 26 | Number 38 News

Venture Investment and Temasek Holdings, Northstar seeks $1b for company Fourcee Infrastructure Equipments, intends to raise as much as HK$950 million ($123 accusing executives of “extensive forgery and million) through an IPO in Hong Kong. IGG plans Southeast Asia fund willful deceit.” The investors want a Company Law to sell 327 million shares at HK$2.40-2.91 apiece. Northstar Group, the Singapore-based private Board-appointed administrator to take control of equity firm backed by TPG Capital, is looking Fourcee and investigate the company’s financial IDG, CreditEase to launch to raise around $1 billion for its fourth fund, affairs. They are also evaluating several litigation which will focus on Southeast Asia. According to options in India and other jurisdictions. financial innovation fund Reuters, Northstar is still finalizing details for the IDG Capital Partners and CreditEase, a Chinese new fund. Sources close to the firm previously TVS Capital Funds peer-to-peer (P2P) microcredit lender, have set told AVCJ that Northstar Equity Partners IV would up a financial innovation fund, targeting a first be roughly the same size as its predessor, which restructured close of $100 million. The vehicle - IDG CreditEase closed at $820 million in 2011. Separately, LP TVS Capital Funds, which manages the INR11 Financial Innovation Fund – will support online sources indicate that Northstar has indicated that billion ($178 million) TVS Shriram Growth financial technology start-ups. it will not exceed $1 billion. Fund, will merge with holding company TVS Northstar was founded by former Goldman Investments to simplify the corporate structure. Sachs banker Patrick Walujo (pictured) and The merged entity will be called TVS Capital NORTH ASIA Glenn Sugita in Indonesia in 2003. After the Funds. close of Fund III, it was announced that TPG - an DRC Capital exits Japan’s LP in Northstar’s early funds and a frequent co- Matrix backs hotel Casa to Ant Capital investor - would enter into a cross-shareholding reservation site Stayzilla DRC Capital has sold Japan’s Casa, a rent Matrix Partners India has acquired a significant guarantee provider formerly known as Rento minority stake in Stayzilla.com, a site which Go, to Ant Capital Partners and the firm’s allows users to research and reserve hotels at management. Casa provides the rent guarantee discounted rates in more than 750 Indian cities. insurance typically needed in Japan when someone rents a unit from a landlord. Macquarie, SBI invest $18m in Ashoka Concessions VC-backed Value HR sees PE funds managed by State Bank of India and shares double after IPO Australia’s Macquarie Group have invested INR1.1 VC-backed Value HR, a Japanese human billion ($17.9 million) in Ashoka Concessions resources benefits service provider, saw its stock (ACL), a toll road builder. The funding is the third more than double in value to JPY4035 ($41.5) arrangement with the firm. TPG is now believed tranche of a $150 million (INR 8.307 billion at the on its trading debut in Tokyo last Friday. The to own 10-20% of Northstar, while Northstar time) commitment made in August 2012. company sold 414,000 shares, including 245,000 owns less than 0.5% of TPG. new shares, at JPY2,000 apiece to raise JPY828 Speaking to AVCJ last year, Walujo said the ZoomCar raises $1m in million in its IPO. firm’s investment strategy hadn’t change much between Funds II and III despite the latter being seed round Kyoto University launches nearly three times the size of the former. Rather, New York-based Empire Angels has led a $1 the co-investment share would be scaled back. million seed round for Indian car rental service $60m venture fund “We have invested nearly $2 billion together ZoomCar. Funders Club, Basset Investment Japan’s Kyoto University has launched its second with our co-investors. About $700 million of Group and former US Securities and Exchange VC fund, a $60 million vehicle which will invest in that was from the funds we manage, meaning Commission (SEC) Commissioner Lady Barbara start-ups in Japan and the rest of Asia. The Kyoto we have provided more than $1.3 billion of co- Thomas Judge also took part in the round. University Venture Fund (KUVF) aims to support investment opportunities to our partners,” he said. the development of ideas by faculty, students, “Our strategy has evolved as our assets under and alumni, as well as anyone who wants to work management have grown and, going forward, SOUTHEAST ASIA with the institution to launch a business. Northstar-managed funds will represent a bigger share of our deals.” Mavcap to launch $200m Japan’s Integral backs TBI tech investment platform Group Malaysia Venture Capital Management (Mavcap) Japanese PE firm Integral Corp. has acquired part SOUTH ASIA plans to launch a $200 million investment of TBI Group, a restaurant chain operator with 78 fund platform fund later this year that will back outlets, as part of a management buyout. The PE investors seek action technology-based companies at home and financial terms of the deal were not disclosed. TBI abroad. As part of its third Outsource Partners was founded in 2003. It has additional business against Fourcee Program (OSP), Mavcap will allocate $100 million lines in real estate, advertising, travel and apparel General Atlantic and India Equity Partners are to funds run by four selected VC firms, each of with $75 million in revenue in 2012. pursuing legal action against their portfolio which will then raise a minimum of $25 million.

Number 38 | Volume 26 | October 08 2013 | avcj.com 5 AVCJ Indian Private Equity & Venture Capital Awards 2013 Nominations are open until October 31, 2013

the AVcJ indian Private equity & Venture capital Awards 2013 aims to recognise and honour firms and professionals who have raised the bar for the private equity and venture capital industry.

Tell us who you think deserves recognition. Submissions for nominations are open until october 31, 2013. Simply visit www.avcjindia.com/nominations and fill out the form. For enquiries, please contact [email protected]

Recognising excellence India Award categories in indian PRivate equity Firm of the year Private equity Professional of the year exit of the year Private equity deal of the year Venture capital deal of the year india Fundraising of the year

Sponsored by

AssociAte your brAnd with excellence: If you would like to be associated with recognising and rewarding excellence in the Indian private equity industry, award sponsorship opportunities are available. Please contact samuel lau on +852 3411 4963 or [email protected] AVCJ Indian Private Equity & Venture coVer story Capital Awards 2013 [email protected] Nominations are open until October 31, 2013 Asset-heavy to asset-light Facing competition from e-commerce platforms, China’s traditional oﬄ ine retailers are moving online – and the AVcJ indian Private equity & the ideal combination is a combination of the two. PE investors are seeking opportunity in the disruption Venture capital Awards 2013 sunIng applIance Is changIng the It all comes back to business model and interior, although this strategy presents costs and aims to recognise and honour firms way it does business. Having become China’s implied cost, and while consumption growth in challenges of its own. Another is to switch from largest electronics retailer on the back of a China remains comparatively robust, it is slower asset-heavy to asset-light retail by pushing into and professionals who have raised traditional bricks-and-mortar approach chain than before, which magnifi es the impact of the online market. store, the company is now adding click to its change. “We are seeing more private equity fi rms the bar for the private equity brick. increase their investment in online stores in Last month, Suning launched an open Cost pressures tier-one cities, while simultaneously increasing and venture capital industry. platform program underpinned by an online “There is no doubt that consumer demand investment in physical stores outside the tier-one and offl ine (O2O) link that integrates the entire is growing fast. But companies should adjust cities in order to establish brand across China,” retail process, from procurement to shipment to themselves from a hyper-growth environment says C.V. Ramachandran, Asia Head for advisory after-sales service. For shoppers, it means paying to a more rational growth environment. In fi rm AlixPartners. the same price, regardless of whether a product the old days, many businesses only thought Retail experience from across the globe can Tell us who you think deserves recognition. is bought online or in the store. about driving revenue growth. That ‘cowboy still be brought to bear, whether it is in-store Speaking at a recent conference, Jindong strategy’ won’t work anymore,” says Derek Sulger, operational improvements, pricing realignment Submissions for nominations are open until october 31, 2013. Zhang, co-founder of Suning, said the approach managing partner at Lunar Capital. “Companies to off set infl ation or better quality after-sales is a response to the next phase of evolution in have to think more about margins, costs, as well service. Indeed, it is not only emerging chain Simply visit www.avcjindia.com/nominations and fill out the form. China’s retail industry. as professional management.” stores in China that require assistance; a new “Pure B2C e-commerce players barely turn Chief among these cost concerns are opportunity set has opened up in helping profi table, while about 80% of online merchants real estate and labor – both have seen sharp turnaround established players that are For enquiries, please contact [email protected] who sell their products through B2C platform increases, particularly in the fi rst-tier market in struggling to cope with the changing retail are actually losing money. We believe an O2O China. The average hourly wage for an employee dynamic. integrated retailing model is the only way to of a foreign-invested enterprise was RMB55 last TPG Capital stepped to restructure Hong expand in the market substantially,” Zhang explained. China PE investment in consumer segments Recognising excellence Suning is one of the most aggressive India Award categories in indian PRivate equity traditional vendors trying to bite back at 1,500 50 e-commerce players eating its business. Last year, Firm of the year the electronic appliance market descended into 40 a price war when pure online retailer JD.com, 1,000 Private equity Professional of the year formerly known as 360Buy, off ered to cut its 30

gross margin to zero. Suning and Gome Electrical Deals 20 exit of the year Appliance in turn off ered to match or undercut US$ million 500 their rival’s prices. 10 Private equity deal of the year This multi-platform challenge is markedly Venture capital deal of the year diff erent from the competitive environment 0 0 in which these retailers emerged. Seven years 2008 2009 2010 2011 2012 2013 india Fundraising of the year ago, when Gome bought 501 stores from China Consumer products/services (deals) Retail/wholesale (deals) Travel/hospitality (deals) Paradise Electronic Retail, the third largest player Consumer products/services (US$m) Retail/wholesale (US$m) Travel/hospitality (US$m) in the market, making its network twice the size Source: AVCJ Research Sponsored by of Suning’s, it could justifi ably claim supremacy. Now it is about more than bricks and mortar. Private equity fi rms face a new reality year, compared to RMB30 in 2007, according Kong-listed Li-Ning last year, as the retailer faced as well. China retail investments used to be to government statistics. Property developers, pressure from Nike and Adidas at the top of the fairly straightforward: provide capital to help meanwhile, have pushed up rental prices market and from Anta and Peak Sports at the a business scale up, off er supply chain and eightfold in the last 10 years, making China one bottom, and with the entire domestic sportswear branding expertise to improve effi ciency and of the most expensive commercial property industry drowning in excess inventory. quality, and then take it public. Nearly a decade markets in the world. Store closures and inventory cuts narrowed AssociAte your brAnd with excellence: on, some of the creatures these PE fi rms created One option is to abandon expensive, and fi rst half net losses to RMB184 million ($30 If you would like to be associated with recognising and rewarding excellence in the are among the incumbents that dominate increasingly saturated, fi rst- and second-tier cities million), compared to a full-year defi cit of Indian private equity industry, award sponsorship opportunities are available. Please virtually every segment of retail. in favor and move deeper into the country’s RMB1.98 billion in 2012. Jin-Goon Kim, a partner contact samuel lau on +852 3411 4963 or [email protected] Number 38 | Volume 26 | October 08 2013 | avcj.com 7 Cover Story [email protected]

at TPG who was brought in as executive vice says John Yang, a partner at Excelsior Capital. be replaced by online businesses, for example chairman of Li-Ning, believed “the worst is Confronting the challenge presented by wedding shooting photo services, will carry on behind,” although the company has yet to prove online retail requires a deep understanding of regardless. it can follow this up with sustainable top-line where a portfolio company fits into the changing Many venture capital investors are watching growth. sector. the first and second categories with interest. In Kim’s high-level involvement suggests that Li- Taken on their own, the numbers are addition to eating into the market share of bricks Ning recognizes the contribution TPG can make astounding. As of July, China had 820 million and mortar retailers, e-commerce platforms in a turnaround situation and the PE firm is able internet users and 334 million 3G subscribers. are engaged in a fierce battle with each other. to wield influence that outweighs its minority Online shopping gross merchandise volume High valuations and uncertainty as to the future position. In other cases, where the founder’s reached RMB1.3 trillion ($190 million) in prospects of these firms, most of which have yet ownership position might be stronger and his 2012, according to Beijing-based consultancy to turn a profit, have prompted a number of VC firms to hold back. According to AVCJ Research, venture capital China B2C websites by share of gross merchandise volume, 2Q 2013 investment in the e-commerce space peaked at $4.15 billion in 2011, jumping from $915 million Tmall.com 50.6% the previous year. However, it slowed to $3.4 JD.com 17.5% billion in 2012, and only $383 million has been Tencent 5.6% deployed year-to-date. Suning 5.0% Tmall, a B2C site under Alibaba Group, Amazon China 2.2% Vipshop 2.0% JD.com and Suning.com are ranked as the top Gome 1.9% three e-commerce sites in the country, with Dangdang 1.8% Tmall claiming 50% of the market. AlixPartners’ Yihaodian 1.4% Ramachandran expects online sales to swell Vancl 0.7% Others 11.6% to 25% of total retail sales in the next 3-5 years, with the space “dominated by pure e-commerce Source: iResearch China players like Alibaba.” In other words, new entrants are unlikely to survive. This is in part the function of a market control more complete, a minority investor could iResearch, accounting for 6.2% of total retail that remains fragmented and defined by struggle to bring about desired changes. sales. It is expected to reach RMB3.6 trillion – or consumers who are motivated by price rather Lunar Capital’s Sulger notes that many of the 10.8% of total retail sales – by 2016. McKinsey than any sense of brand loyalty. It means that problems in China’s consumer sector are tied to & Company puts current US online shopping e-commerce sites are effectively buying market weak governance, not a drop in fundamental activity at $220 million, or 5% of total retail sales. share, building up scale in order to go public at demand for what companies are selling. This Apparel and footwear make up just over a the highest possible valuation, and this explains thinking influenced Lunar Capital’s decision to quarter of online sales in China, with computers, their notoriously high capital burn rate. focus on mid-market control transactions. communication and consumer electronics (3C) a VC backers won’t stick around forever so the “Companies often lack good professional few percentage points further back. longer the wait for an IPO the more questions managers and the ability to make timely strategic are asked about a company’s future. A handful decisions. Therefore, we believe that the more Mixed fortunes of the larger Chinese e-commerce firms – those control you have, the more ability you have help However, as David Wei, CEO of Vision Knight perceived as having sufficient scale to survive – make those decisions in real time, rather than Capital Partners, points out, an increase in online are expected to list, notably JD.com and Vancl, waiting to react to a problem,” Sulger explains. shopping doesn’t hurt traditional retailers across China’s largest online clothing retailer. JD.com’s “You also have a greater ability to bring in the board. He divides companies into four investors are indeed betting big, with Ontario professionals who can help address challenges as groups. First, those selling products that can be Teachers’ Pension Plan, Kingdom Holding and this market evolves.” digitalized will be replaced by online platforms, Tiger Global among those to put up a $700 However, control deals remain the exception as illustrated by HMV’s slide into bankruptcy. million round of funding late last year. to the rule in China. In cases where the retailer Second, retailers of standardized products, such Hurst Lin, a partner at DCM and formerly COO is large, listed and in needs of new direction, a as electronic appliances, will be “killed softly and of Sina Corporation, says he stopped investing in buyout isn’t necessarily feasible – Li-Ning, for slowly” by e-commerce. e-commerce players in 2010, after backing travel example, has a market capitalization of $1.2 “It will be a bloody fight among Gome, website Tuniu and Dangdang.com. billion, so a substantial amount of money, plus Suning and JD.com,” Wei said earlier this year. “The e-commerce sector development is owner support, would be required to assume “They will continue fighting in the next 3-5 years. actually very unhealthy now. It is packed with control. Both sides – traditional retail and online peers – companies engaged in price war in order to lure As for smaller companies, there is often a are losing money. Gome and Suning are losing more customers,” he explains. “We may consider residual discomfort in allowing a third-party margin, while JD.com can’t improve margin.” returning to this sector as long as business to take a majority position, especially if it is a Third, retailers offering non-standard products becomes more rationalized in the next 2-3 private equity firm with existing investments that can’t be sold online easily, such as furniture, years – when sites are no longer just competing in the sector. “Entrepreneurs will be cautions if will benefit from the growth of the internet on price, but emphasizing product quality and investors leaking their business strategies to their in terms of wider marketing reach. Finally, logistics services.” competitor if they sit in both companies’ boards,” retailers that provide offline services that can’t There is also a trend for online firms to open

8 avcj.com | October 08 2013 | Volume 26 | Number 38 coVer story [email protected]

offl ine physical shops, driven by a desire to don’t expect China to ultimately conform to the that span multiple brands across women’s shoes, escape the cutthroat competition of online pure- US model. fashion and cosmetics. Merchants will eff ectively plays, establish a brand name in the street, and “In the US, e-commerce is important but move horizontally along the value chain – off er more services. as a complementary to offl ine traditional claiming a larger share of the revenues as they go Meilele, an online furniture retailer, has retail. However in China, it will not be a – by designing products themselves and driving established about 260 stores that off er complementary; online players will become the the online marketing. Few will be able to execute customized services, coordinate product mainstream retailers,” Vision Knight’s Wei explains. this strategy in every segments so there will be shipments and supply after-sales services. “If you “It will be more important to be online.” numerous winners. are only selling products through e-commerce He off ers two pieces of evidence in support While brands were previously launched only sites, you will never scale up your business of his argument: on November 11, 2012, online in Tmall, the proliferation of platforms allows a to become a big player in the industry,” says sales reached RMB19.1 billion, exceeding the much wider reach. Yang believes these brands Yang Gao, CEO of Meilele. He adds that offl ine offl ine total for the fi rst time, a phenomenon now have suffi cient scope that they are attractive showrooms enhance a customer’s shopping that has yet to happen in the US; and during the to venture capital investors. experience. fourth quarter of 2012, Taobao’s sales revenue On the traditional retail side, private equity Of course, it helps that the company falls into was greater than that of Amazon and eBay players are looking to take regional brands Wei of Vision Knight’s third category – retailers combined, another fi rst. national through adding an online element to a off ering non-standard products that can’t be sold In this context, the e-commerce platform war predominantly offl ine proposition. Lunar’s Sulger online easily. Shoppers don’t necessarily want is far from over, which means the incumbents are compares selling a product through Tmall to to see cosmetics or clothing in a “consumption by no means guaranteed to retain their leading rolling it out in a new department store – the environment” before purchasing. positions for the long term. brand has an opportunity to gain traction with “Tmall is dominant now but I don’t think it will a new audience. However, success depends on The way forward remain dominator in the next few years. There emulating the model that Suning is investing so How, then, will offl ine and online elements will be more players coming out, even along much in: integration across platforms. become reconciled in China, if at all? Certainly, the lines of the platforms or online department “Few in China do that well,” Sulger adds. “Even the business model as it stands is markedly stores concept,” says Ray Yang, head of the globally this has been a challenge, although diff erent from the US. Of the top 10 retailers in consumer investing practice at Northern Light there are emerging benchmarks like Apple which the US, only one – Amazon – is an online pure Venture Capital. ensure that when you shop online, you see play. In China, eight of the top 10 are online-only, There is also expected to be more investment exactly the same products at the same price you according to iResearch. Industry participants in online brand owners, so-called “category killers” can buy in the stores.”

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8th annual edition 9th annual edition 8th annual edition Scan to find out more about the regional reports avcj.com contriButeD article Retail success in a digital world

In recent years the “China dream” became emerge as a key consumer purchase driver in China. reality for countless retailers as the country’s According to a recent PricewaterhouseCoopers underserved, billion-plus consumers acquired survey, 57% of respondents follow brands or a serious shopping habit. But while this new retailers on social media in China, compared to 38% generation of shoppers is buying more, they are in a global sample. also getting choosier as home grown and foreign Not surprisingly we are seeing a fl urry of activity brands from all corners of the world reach ever as retailers, e-commerce portals and even social deeper into the market. media companies adapt to this changing dynamic. With consumers spoilt for choice, living the An e-commerce strategy is increasingly a must retail dream is getting much harder. And now in rather than a nice to have. This means traditional an already crowded retail market there is a new retailers have to learn a variety of new skills – headache: the disruptive arrival of e-commerce as fulfi llment, distribution and digital marketing. a mainstream shopping habit. Companies need to retool for this Electronics is one sector that has been exposed to online new melting pot of competition where social media leads retail competition where 360Buy has been outpacing growth at behavior. traditional retailers Gome and Suning. To redress this Suning has Globally, online sales are transforming traditional retail and are not only moved to a portal but also integrated offl ine and online now the single largest single contributor to industry growth. In procurement, logistics and product management. Now sales can China, we are already seeing an unprecedented industry upheaval be generated from physical stores, websites and mobile platforms. as companies rush to either learn or acquire the skills necessary to Meanwhile, internet retailers have evolved from selling purely compete. While online represents just 5% of overall retail sales, online to also creating a physical presence. the market looks primed for growth. Another sign of how the retail landscape is evolving is the E-commerce has some favorable headwinds in China. There increasing presence of the social media giants. Tencent bought a is both a limited footprint of traditional bricks and mortar retail majority stake in 51Buy for an undisclosed amount, while in April while almost half the country’s 1.3 billion population now has this year Weibo sold an 18% stake to Alibaba for $586 million. internet access. According to consultancy Bain & Company, The stated aim was both companies would explore new business retail e-commerce in China will surpass the US this year. And models for social commerce. with e-commerce already approaching 20% in digitally advanced Amid all this maneuvering, this year has been one of mixed markets like South Korea, it’s easy to see why everyone is paying fortunes for major retailers in China. The country’s largest shoe attention. retailer Belle International was just one of a number of players to As the online and offl ine worlds collide, brands and retailers report slowing sales this year. China was the only major market in now must compete in an intense shopping scrum. which Nike reported a decline in sales last quarter. The textbook answer to serve this new market is the Omni- But at the same time Adidas bucked the trend after a successful channel strategy, which integrates bricks and mortar outlets expansion into woman’s clothing with a new Taiwanese pop singer with e-commerce to give an integrated and optimized shopping as brand ambassador. Japan’s Fast Retail, which owns the clothing experience. Social media is added to the mix, allowing interactive brand Uniqlo is also performing strongly and is the number one communication with customers. This is bound to appear like quite apparel retailer in Asia. It continues to expand aggressively in a leap for many companies, which explains why Omni-channel is China, opening 80-100 shops annually. One reason for its success often referred to as a “retailing revolution.” is its strength integrating its online and offl ine shopping channels, But it promises to be a disruptive change. Even if only some as well as deploying innovative social media interaction. retailers or brands get on board, the best practice and expectations The lesson to all retailers – offl ine or online – is they need amongst shoppers is quickly reset. to harness social media and build trust and engage customers. The process of integrating back-end of logistics, distribution Increasingly in China this is a tool not just to communicate but and establishing e-commerce operations is likely to be time- also directly drive transactions. Companies that gain traction here consuming and require considerable investment. What companies will also have a much better chance of keeping the China retail should do as a priority, however, is focus on the communications dream alive. challenges for this new digital shopping environment. For one, they need to maintain a profi le in a much larger, Richard Barton is managing partner at Newgate Communications - Hong converged offl ine and online world. It is also clear Omni-platforms Kong. Newgate specializes in fi nancial and corporate communications, will be driven by social media whether companies like it or not. The public aff airs and government relations. importance of getting this part of the communications strategy [email protected] right is now much greater as social media recommendations www.newgatecomms.com

10 avcj.com | October 08 2013 | Volume 26 | Number 38 Focus [email protected] Ticket to ride Online tourism is on the rise in emerging Asia and numerous venture-backed businesses are looking to hitch a ride on the consumer growth trend. The key is finding the right niche

“For most people in China, tourism Chinese cities and 45 foreign cities. In India, MakeMyTrip.com – which had has always involved people travelling in large At first glance competition in the space would received VC backing prior to its 2010 IPO – has packs with a guy walking ahead holding a flag, appear to be fierce, which a number of broadly made a number of strategic investments. In 2011, but that model is changing. China is shifting similar sites in operation. One month before it joined SAIF Partners in acquiring majority stake gear from an export and manufacturing driven Tujia’s latest round closed, two other vacation in Indian travel search engine IXigo for $18.5 economy to a consumption- based economy rental websites, Xiaozhu.com and Mayi.com, each million. It also bought Hotel Travel Group, the and travel is going to be a big part of the that,” received $10 million in VC backing. company behind hotel booking site Hoteltravel. says Juxin Foo, a partner with GGV Capital in However, GGV’s Foo maintains the market com, for $25 million in November last year. Shanghai, who describes an industry brimming is far from crowded. “The challenge is not with opportunity and ripe for disruption. competition,” he says. “The real challenge is At the margins The statistics speak for themselves. According knowing the market and educating the market, Like China, start-ups in India have found the to the China National Tourism Administration, getting the user to understand vacation rentals country’s large domestic market offers plenty of the number of outbound tourists reached 37.9 as a new way to travel.” scope to carve out a niche despite competition million in the first five months of 2013, up 17.3% Foo adds that the tourism space is still very from industry incumbents. Stayzilla.com, a hotel- year-on-year. Domestic travelers numbered nascent in China, with leisure accounting for just bookings site that recently funded by Matrix 998 million in the first quarter, an increase of 14.1%, while domestic tourism revenue reached RMB765.7 billion ($123.9 million). “There is an opportunity to become a huge This trend is replicated throughout the region. Four years ago, Asia Pacific overtook North differentiator – by working out a way to America to become the world’s largest aviation market, with around 647 million travelers taking work with these hotels it creates a barrier to flights within the region compared to 638 million competitors” – Tarun Davda in North America, International Air Transport Association (IATA) data show. In the first four months of 2013, Asia Pacific travel rose 6% year- 30% of the travel, compared to 70% in the US. Partners India, operates in a space seemingly on-year, the highest rate of any market. Consolidation is seen as inevitable and dominated by the likes of global online travel a number of established players are already firm Expedia yet has managed to find its feet. Space to rent making strategic investments in innovative travel “There are 4-5 entrenched peers, but they are In line with this growing opportunity, the region start-ups, in some cases alongside VC investors. focusing on perhaps the top 10 destinations and has seen a number of innovative venture capital- NASDAQ-listed Ctrip, China’s largest online travel hotels that are three stars or above because those backed businesses being set up, particularly in company, and HomeAway took part in a Series A have the tech infrastructure to create an online the online space. Working around the handful round for Tujia.com last year. inventory,” explains Tarun Davda, vice president of larger players that have emerged in the last China’s internet giants have also sought to with Matrix. “The opportunity for Stayzilla is decade, VCs continue to find opportunities, with move into the space. Baidu agreed to pay $306 where there was a lot of fragmentation, in the tier specialist travel booking and short-term rentals million for VC-backed booking site Qunar back in two and tier three cities.” emerging as particular sweet spots. 2011 and is in the process of taking the company By building up a network of one- and two-star China has seen a number a successful players public, while this year Alibaba Group has invested hotels outside the top destinations, the company in the latter category – operating under a similar in travel app ZLS365 and information site Qyer to claims to have tapped into as much as 70-80% of model to that established by US vacation rental complement its existing offering, Taobao Travel. India’s personal and business travel market. sites Airbnb and HomeAway, where users can Acquisitions have extended into other “It is challenging and it takes time to build the book anything from a single room to a beach markets too with HomeAway acquiring network,” Davda adds. “But that is where there is condo retreat. Singapore- based TravelMob, a vacation rentals an opportunity to become a huge differentiator – Tujia.com, which closed a Series B round of site backed by Jungle Ventures, Accel Partners, by working out a way to work with these hotels it financing led by GGV earlier this year, is typical New Zealand Venture Investment Fund and creates a barrier to competitors.” of the recent crop. The company – which claims Sparkbox Ventures, in July. GGV’s Foo echoes the sentiment that online to be China’s first online vacation homes rental “There will be some level of consolidation,” tourism market has the scale to allow for multiple service – offers vacationers an alternative to the Amit Anand, co-founder of Jungle Ventures, players especially if they can find a niche to fill. “At traditional hotel stay by allowing users to rent told AVCJ at the time. “Travel is a business where the moment it is anybody’s game,” he says. “The out their second homes on a short-term basis. It the margins are pretty thin but there is also market is big enough for more than one player; has a database of 400,000 rental properties in 65 phenomenal amount of volume in Asia.” three or four players is not that big.”

Number 38 | Volume 26 | October 08 2013 | avcj.com 11 26th AnnuAl

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Plus global economist Byron Wein vice Chairman BlACKStOnE AdvISOry PArtnErS lP Senior LP speakers already confirmed include: Wim Borgdoff Pak-Seng Lai Managing Partner Managing director & AlPInvESt PArtnErS Head of Asia AudA Jay Park Thomas Kubr Managing director Executive Chairman BlACKrOCK PrIvAtE CAPItAl dynAMICS EquIty PArtnErS Jeremy Coller Steve Byrom Executive Chairman & CIO Head of Private Equity COllEr CAPItAl FuturE Fund

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12-14 November 2013 Four Seasons Hotel, Hong Kong RegiSTeR NoW to assure your place at the largest and most influential gathering of top Asian focused private equity and venture capital industry professionals in the world today. Keynote speakers Steve Koltes Dwight Poler Co-sponsors Co-Founder & Managing director Managing Partner BAIn CAPItAl REGISTER CvC CAPItAl PArtnErS Thomas H Lee Christopher Flowers NOW at President Founder lEE EquIty PArtnErS JC FlOWErS & CO avcjforum.com

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Senior LP speakers already confirmed include: SOLICITORS AND INTERNATIONAL LAWYERS Wim Borgdoff Pak-Seng Lai Managing Partner Managing director & AlPInvESt PArtnErS Head of Asia AudA VC summit sponsors VC summit legal sponsor Awards sponsors Jay Park Thomas Kubr Managing director Executive Chairman BlACKrOCK PrIvAtE CAPItAl dynAMICS EquIty PArtnErS Jeremy Coller Steve Byrom Pe leaders’ summit sponsors Executive Chairman & CIO Head of Private Equity COllEr CAPItAl FuturE Fund

Nicole Musicco Jim Pittman vice President vice President, Private Equity OntArIO tEACHErS’ PSP InvEStMEntS PEnSIOn PlAn and many more… Contact us Contact us Registration: Pauline Chen Sponsorship: Darryl Mag T: +852 3411 4936 E: [email protected] avcjforum.com T: +852 3411 4919 E: [email protected] avcjforum.com deal of the week [email protected] J-Star buys ‘fourth hand’ Primagest

Primagest, a firm whose primary involved developing software and hardware used BancTec – a Texas-based BPO provider that had business is using optical character recognition for OCR and intelligent character recognition been acquired by New York buyout shop Welsh, (OCR) to turn documents in data, appears every (ICR). However, a greater portion of revenue now Carson, Anderson & Stowe in 1999 – and was bit the tech-savvy up and comer. However, it comes from business process outsourcing (BPO) trading under the name BancTec Japan. has been doing the same thing – in one form or services, work essential to paperwork-laden Following the JAFCO carve-out, the company another – for 45 years. organizations including financial institutions and listed on JASDAQ in 2006 before going private Set-up in Tokyo in 1968, Primagest – then local governments. once again three years later with a second MBO, known as Recognition Equipment Incorporated “Often clients will have many paper items – led by CEO Kiyohiro Miisho. – was one of first companies to such as insurance applications – The deal is both an opportunity to recapitalize sell large-sized OCR systems for that need to be scanned, so they the business, paying down debt held from converting printed information outsource the work to Primagest, the previous MBO, and a succession solution into machine-encoded text. which stores the information with many of the company’s top management Nearly half a century later, there and backs it up on the client’s seeking to exit the business and retire. has been significant change in database,” says a source familiar J-Star is said to be looking at a typical three- both the technology and the with the transaction. “Japan is year holding period, during which time the company’s ownership. very original-heavy country company – which recorded JPY11.6 billion in Last week Primagest was Primagest: original innovator and, while there is a move to revenue in 2012 – will look to maintain a steady acquired by J-Star, which now digitization, many organizations cash flow. Of the various exit options, a strategic owns around 66% of the business. Financial still rely on paper originals.” sale to a big data vendor that wants to gain details were not disclosed, but according to AVCJ The company’s ties with J-Star goes back access to Primagest’s extensive client roster is Research, the first tranche of the investment, a decade as many of the GP’s current team regarded as the most likely. which took place in June, saw J-Star buy an initial were at venture firm JAFCO in 2002 when it This latest investment was made through 34.7% stake for JPY498 million ($5 million). backed a $82.5 million management buyout J-Star No. 2, a JPY20.4 billion vehicle that reached Until recently, Primagest’s core business has of Primagest. At the time, it was a subsidiary of a final close in July. Panasonic unit gets KKR cure

KKR’s acquisition of Panasonic the future growth of the unit. Around 10 private and we believe it has significant growth Healthcare marks a return to form for the firm equity firms and a handful of strategic investors potential,” said KKR co-founder and co-CEO Henry after its earlier efforts to acquire Japanese were said to have entered first- Kravis, in a statement. chipmaker Renesas were frustrated by the round bids, including Toshiba According its president, Kenji government-backed Innovation Network Corp. and a consortium including Yamane, Panasonic Healthcare Corporation of Japan (INCJ). The deal had raised Bain Capital, Mitsui & Co and now aims to accelerate growth concerns in the industry over unfair government- the Development Bank of Japan by building out its global sales linked competition and even to conjecture that (DBJ). channels to major overseas this next deal would actually see KKR team up Last month it emerged that healthcare facilities, while with INCJ or one of its equivalents. KKR had obtained preferential leveraging KKR’s networks. The These rumors proved unfounded. KKR has negotiating rights. Panasonic unit: In the pink unit generated JPY8.7 billion in sealed its largest Japan buyout to date, taking Panasonic Healthcare claims operating income and JPY134.3 an 80% stake in Panasonic’s healthcare unit to be the leading global manufacturer of blood billion in sales for the financial year ended March for JPY165 billion ($1.66 billion). It is close to glucose monitoring meters and sensors used 2013. The operating profit margin was 6.5%. five times the size of the firm’s second-biggest to monitor diabetes. Its Medicom business, Panasonic, which will continue to hold 20% investment, Intelligence Holdings, which was meanwhile, is the domestic market leader for of the healthcare unit, has not fared so well in exited earlier this year. medical receipt computers, electronic health recent times, posting combined losses of $15 The investment also weighs in as the 10th record systems and other IT equipment. The billion over the last two financial years. largest private equity buyout Japan has seen, company is also strong at home and overseas in This prompted the vast restructuring efforts ironically just behind the INCJ-led bailout of biomedical laboratory equipment such as carbon that led to the sale of the healthcare unit and Renesas, which was valued at $1.67 billion. dioxide incubators and ultralow temperature number other assets, including Sanyo Electric’s The sale process dates back to March when freezers. digital camera business, which was sold to Panasonic, under pressure to jettison assets, “Panasonic Healthcare has excellent market domestic mid-market buyout firm Advantage announced it was seeking a partner to assist positions and high-level technical capabilities, Partners in December.

14 avcj.com | October 08 2013 | Volume 26 | Number 38 Aman Lakhaney | Industry Q&A [email protected] Beyond BRICS The Abraaj Group’s acquisition of Aureos Capital last year was a massive short cut to a larger Asia presence. Aman Lakhaney, director at The Abraaj Group, explains the firm’s approach to non-BRIC emerging markets

Q: What has the acquisition of looking at opportunities in the to play in. In certain sectors, we there. It also has a few Middle Aureos last year brought to processing space in particular. are also seeing opportunities East franchisees. Crossland is the firm? for a series of smaller deals in another example. Right now it A: The benefit in bringing the two Q: There have been a number of fragmented sectors, which bring operates routes solely within organizations together was the healthcare deals in the region together platforms we can help Thailand. We’re in the process of close to zero geographic overlap. – Abraaj recently exited the partner companies expand into doing add-ons there which will Aureos had sub-Saharan Africa, Filipino Daniel O. Mercado give it a presence in Malaysia, South America and Southeast Medical Center, Vejthani Singapore, Vietnam and China, so Asia as a focus, and no presence Hospital and IHH Healthcare... it will have a contiguous ASEAN in the Middle East or North A: Healthcare is a big focus for us route. Southeast Asia is grouped Africa where Abraaj is present. and we are evaluating a number as a bloc but every country is We have a platform with offices of opportunities. This includes completely different in terms in each of the countries we hospitals and also medical of the local sponsors, as well as invest in and six regional hubs. In and laboratory chains, generic regulatory environment and Southeast Asia we have country pharmaceutical manufacturing, language. The ASEAN economic offices in Singapore, Indonesia, pharmacy retail and medical community will be implemented Malaysia, Philippines, Vietnam, consumables. If you look at over the coming years and we Thailand and Brunei and a hub any macro statistic in terms of see that as a big opportunity. in Singapore. We have over healthcare spending, there is a 30 offices globally, and I don’t significant gap. At the same time Q: Do the operational changes think there is another PE firm you have growing middle classes “I don’t think apply to minority stakes? operating in global growth and with that comes demand for there is another A: We’re never passive in our markets with the geographic increased quality. So healthcare investments. In many emerging presence that we have. for us is about injecting PE firm operating markets, family groups or additional funds and helping entrepreneurs are not willing Q: What is the allocation to companies grow within their in growth to give up control. We look for Southeast Asia? domestic markets first and then markets with a sizable minority stake of at A: We closed our $250 million helping them expand outside least 25-30%, where we have an second Southeast Asian fund their national boundaries. the geographic alignment of interest with the in March. Our most recent parties involved and can bring in investments include ODG, an Q: How has increased investor presence that we the right operating expertise to Indonesian mechanical and interest in the region affected have” help them grow. There is a lot of electrical contracting and competition for deals? liquidity in the market so when engineering services provider; A: We see a lot of competition in you’re meeting entrepreneurs Crossland Logistics, which a Southeast Asian context as places like Africa, the Middle and family groups you need to is a cross-border trucking the last three years has seen an East and South America as well. be able to demonstrate that you company in Thailand; and Orca influx of international firms and Within a growth markets context bring more than just capital. The Global, an English Language the growth of domestic and we’re one of the few that have Abraaj Portfolio Acceleration Training provider based in regional players. Many PE firms that kind of operating expertise Group helps us do that. It’s a Singapore, with a presence in focus on the same sectors. I think across geographies and across 25-member group comprised of Indonesia and Thailand. We the key differentiators for us are sectors. people with specific operating are sector agnostic, but there the deal size and local presence. expertise that works with the are certain sectors we tend to Many international firms Q: Can you give an example of investment teams from inception focus on, such as consumer, pursue $100-million-and-above this expansion? of the deal. It looks at potential fast moving consumer goods, investments where the number A: Pancake House, which is a investments from an operating quick service restaurant casual of companies that are potential fast casual dining chain in the lens and adds value in the due dining, healthcare, education targets is small and often Philippines with about 300 diligence process through and logistics. In agriculture, competition is intense, driving outlets. It was completely the creation and subsequent ASEAN is interesting in terms of up valuations. By focusing on $15 Philippines-based but we helped execution of 100 day plans, being an exporter to China and million investments and up, we the firm expand into Malaysia and value creation with partner other parts of the world. We are have a much bigger spectrum and find a joint venture partner companies through to exit.

Number 38 | Volume 26 | October 08 2013 | avcj.com 15 Customized Research Report Asian Private Equity Data Made Simple

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