Upping the Dosage Cathay Launches Third Sino-French Vehicle Are PE Investors Getting What They Expected in Chinese Healthcare? Page 7 Page 13

Asia’s Private Equity News Source avcj.com April 08 2014 Volume 27 Number 13

EDITOR’S VIEWPOINT Trial and error in private equity co-investment Page 3 NEWS Baring Asia, Blackstone, BVCF, Everstone, Hopu, IFC, MSPEA, SAIF, Tata Capital, Temasek Page 4 DEAL OF THE WEEK India’s Rabo Equity seeks nourishing returns Page 12 Wolsely draws up consolidation blueprint Page 12

FUNDS Siguler Guff cements BRIC fund close Page 13 Upping the dosage Cathay launches third Sino-French vehicle Are PE investors getting what they expected in Chinese healthcare? Page 7 Page 13

FOCUS PORTFOLIO

Consumer complex Improved reception GPs on the implications of Japan’s tax hike Page 11 CDH, Mekong and Vietnam’s Mobile World Page 14 15th Annual Private Equity & Venture Forum Japan 2014 26-27 June, Conrad Tokyo

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjjapan.com Prospering in the New Japan Early confirmed LP speakers include:

Juan Delgado-Moreira Hidekazu Ishida Managing Director, Investment Investment Officer Committee, Asia OSAKA GAS PENSION FUND HAMILTON LANE

Takeshi Ito Yoshisuke Kiguchi Senior Portfolio Manager Chief Investment Officer AISIN EMPLOYEES’ PENSION FUND OKAYAMA METAL AND MACHINERY PENSION FUND

Kazushige Kobayashi Tatsuya Kubo Managing Director Managing Director CAPITAL DYNAMICS HARBOURVEST PARTNERS (JAPAN) LIMITED

Soichi Sam Takata Zhan Yang Head of Private Equity Director TOKIO MARINE ASSET MANGEMENT BLACKROCK PRIVATE EQUITY CO. LTD PARTNERS, ASIA

For the latest programme and speaker line-up, please visit avcjjapan.com Secure your seat now, SAVE US$400 on admission Contact us Registration Enquiries: Carolyn Law T: +852 3411 4837 E: [email protected] Sponsorship Enquiries: Darryl Mag T: +852 3411 4919 E: [email protected]

Asia Series Sponsor Co-Sponsors

Simultaneous translation between Japanese and English will be available throughout the event 開催言語：日本語および英語通訳同時あり Join your peers 7,506 Scan the QR code with your phone to access avcjjapan.com Tweet #avcjjapan avcjjapan.com 15th Annual Private Equity & Venture Forum EDITOR’S VIEWPOINT Japan 2014 [email protected] 26-27 June, Conrad Tokyo Managing Editor Tim Burroughs (852) 3411 4909 Staff Writers Andrew Woodman (852) 3411 4852 Winnie Liu (852) 3411 4907 Co-investment: Creative Director Dicky Tang Designers Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjjapan.com Senior Research Manager Toe in the water Helen Lee Research Associates Herbert Yum, Isas Chu, Prospering in the New Japan Jason Chong, Kaho Mak IS CO-INVESTMENT WORTH IT? transaction rather than across all the deals could Circulation Manager Absolutely, provided the LP in question has also expose the LP to more downside. Sally Yip sufficient willingness, experience and resources One of the primary risks is adverse selection. Circulation Administrator Early confirmed LP speakers include: Prudence Lau to conduct due diligence on a deal before the GPs may not open up the best transactions for Subscription Sales Executive window of opportunity closes. co-investment because they want to keep good Juan Delgado-Moreira Hidekazu Ishida Jade Chan Andy Hayes, private equity investment officer deals within the fund structure and maximize Managing Director, Investment Investment Officer Manager, Delegate Sales at the Oregon State Treasury (OST), is part of their carried interest; or they open up potentially Pauline Chen Committee, Asia OSAKA GAS PENSION FUND a three-person team responsible for the $13.9 bad transactions by stepping beyond their HAMILTON LANE Director, Business Development billion Oregon Public Employees Retirement comfort zone in terms of deal size. Darryl Mag Fund has allocated to the asset class, nearly 21% LPs that recognize their limitations and either Takeshi Ito Yoshisuke Kiguchi Manager, Business Development of the total corpus. The co-investment program outsource co-investment or build up in-house Anil Nathani, Samuel Lau Senior Portfolio Manager Chief Investment Officer is run jointly with Washington State Investment resources (the OST approach versus the TPC Sales Coordinator AISIN EMPLOYEES’ PENSION FUND OKAYAMA METAL AND Board and management is outsourced. approach) are less likely to get caught out. Debbie Koo MACHINERY PENSION FUND Contrast that with Teachers’ Private Capital Industry participants warn that LPs who spread (TPC), the PE and direct investment arm of their staff too thinly and often end up being the Conference Managers Jonathon Cohen, Sarah Doyle, Kazushige Kobayashi Tatsuya Kubo Ontario Teachers’ Pension Plan (OTPP). It has last people to see deals and the last people to Conference Administrator Managing Director Managing Director deployed C$12 billion ($11 billion) globally – split hear what is being said on the ground. Amelie Poon equally between fund and direct investments – Given Altius’ findings are based on deals done Conference Coordinator CAPITAL DYNAMICS HARBOURVEST PARTNERS Fiona Keung, Jovial Chung with in-house experts to look at opportunities in in the US only, they may not reflect the fact that (JAPAN) LIMITED different industries and satellite offices (including the predominantly US-based investor base is not Publishing Director Hong Kong) to cover different geographies. as gung-ho globally as in their home markets. Allen Lee Soichi Sam Takata Zhan Yang TPC favors the proactive co-underwriting Marcus Simpson, head of global PE at QIC, Managing Director Head of Private Equity Director deals alongside managers over passive estimates there are only 15-20 LPs capable of Jonathon Whiteley TOKIO MARINE ASSET MANGEMENT BLACKROCK PRIVATE EQUITY downstream syndication where there is little underwriting co-investments in the manner CO. LTD PARTNERS, ASIA participation in deep due diligence. OST, by the of TPC. However, he accepts that post-deal very nature of its set up, errs more towards the syndication is the first step in a journey that may Incisive Media For the latest programme and speaker line-up, please visit avcjjapan.com latter end of the spectrum. end in a more proactive approach. Unit 1401 Devon House, Taikoo Place It is in this context that the results of Altius According to Bain & Company, LPs 979 King’s Road, Quarry Bay, Hong Kong Associates’ recent study on co-investment participated in only 15% of US buyouts north T. (852) 3411-4900 programs should be viewed. Relying on a of $1 billion between 2009 and 2013, typically F. (852) 3411-4999 Secure your seat now, SAVE US$400 on admission E. [email protected] sample of 886 realized US buyout and growth as a co-underwriter. Canadian Pension Plan URL. avcj.com investments made between 1979 and 2010, the Investment Board, GIC Private, OTPP and Temasek Contact us Registration Enquiries: Carolyn Law T: +852 3411 4837 E: [email protected] Beijing Representative Office study found there is a substantial probability that Holdings were the most active co-investors. No.1-2-(2)-B-A554, 1st Building, Sponsorship Enquiries: Darryl Mag T: +852 3411 4919 E: [email protected] No.66 Nanshatan, a co-investment portfolio comprising 10 assets In Asia as elsewhere, there is increased Chaoyang District, Beijing, would generate an IRR below 0%. appetite for co-investment. But beyond a People’s Republic of China Deal selection is one of the most important number of very large institutional players there T. (86) 10 5869 6203 Asia Series Sponsor Co-Sponsors F. (86) 10 5869 6205 components of driving returns for investors, Dr. is still more talk than action. Even among the big E. [email protected] William Charlton, Altius’ head of US investment, fish, experience varies hugely, and they will have noted. But even with good choices, portfolios their successes and failures – in part driven by may be subject to additional risk because a small whether their understanding of the resources The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of number of transactions can move the returns required to participate matches the reality. AVCJ Group Limited. needle substantially – positively or negatively. ISSN 1817-1648 Copyright © 2014 The rationale has been explained before. If done correctly, co-investments offer LPs the opportunity to deepen their exposure to certain Tim Burroughs Simultaneous translation between Japanese and English will be available throughout the event assets in a fund portfolio without incurring Managing Editor 開催言語：日本語および英語通訳同時あり additional fees. But deploying capital in a single Asian Venture Capital Journal Join your peers 7,506 Scan the QR code with your phone to access Tweet #avcjjapan avcjjapan.com avcjjapan.com Number 13 | Volume 27 | April 08 2014 | avcj.com 3 NEWS

Blackstone’s Michael Chae backed by DCM, Temasek Holdings, Gobi Partners ASIA PACIFIC and Sequoia Capital, is seeking to raise up to to return to New York $120 million through a US IPO. DCM owns 23.5% Baring Asia targets $3b for Michael Chae, head of international private of Tuniu, while Temasek, Gobi and Sequoia hold equity at The Blackstone Group, will move stakes of 16.7%, 16.4% and 13.2%, respectively. Fund VI back to New York after a four-year stint in Baring Private Equity Asia will seek to raise around Hong Kong. Chae will continue to oversee Intel Capital plans $100m $3 billion for its sixth pan-regional fund, its largest Blackstone’s Asia Pacific PE investments and while vehicle to date. Sources familiar with the matter reassuming responsibility for firm’s media and China smart device fund told AVCJ that the fund is expected to launch communications Intel Capital, the VC unit of chipmaker Intel, has within the next two months. The predecessor investments. He launched a $100 million China fund to help vehicle beat its original target of $1.75 billion will also help accelerate the growth of smart devices. The when it reached a final close of $2.46 billion in oversee the firm’s new fund - Intel Capital China Smart Device January 2011 after just six months in the market. $5 billion Tactical Innovation Fund - is the third China-focused fund Opportunities the firm has established. It will reinforce Intel’s BlackRock names new Asia Fund, which commitment to China and developing the China launched in technology ecosystem by using its chips. head 2012. BlackRock has appointed Ryan Stork as head of Chae arrived Kingsoft commits $90m to Asia Pacific operations, replacing Mark McCombe in Hong Kong in who will relocate to the US to become the 2010 to replace file-sharing service Xunlei company’s global head of institutional client former Asian Chinese software developer Kingsoft Corporation business and chairman of the alternative head Ben Jenkins. At the time, he was a senior will invest $90 million in Xunlei, a file-sharing investment division. partner in New York. A significant part of Chae’s service backed by a string of VC firms including remit was to build the Blackstone’s team in Asia, Morningside Technologies, IDG Ventures and combining local hires with talent developed in Ceyuan Ventures. According to a regulatory AUSTRALASIA the New York and London offices. During the last filing, Hong Kong-listed Kingsoft will subscribe four years Blackstone has more doubled its Asian to approximately 39 million preferred shares in Standard Chartered backs headcount to 225. This has included opening an Xunlei at $2.82 apiece, giving it a 9.98% stake in office in Singapore last year with 30 people. the company. listed manganese miner Ed Huang and Yi Luo will lead Blackstone’s Standard Chartered Principal Finance has PE investments in China and Jan Neilsen MSPEA in another partial provided a $50 million debt financing package and James Carnegie will head the business for OM Holdings, an Australian Securities elsewhere in Asia. Also, Gautam Banerjee, exit from Sihuan Pharma Exchange-listed mining company. The capital chairman of Blackstone Singapore, will become Morgan Stanley Private Equity Asia (MSPEA) has will be used to refinance debt and support the a senior managing director and co-chairman of made another partial exit from Hong Kong- construction of a smelter in Malaysia that will Blackstone’s Asia operating committee. listed Sihuan Pharmaceuticals, generating supply silicon-based ferroalloys to steelmakers. up to HK$1.12 billion ($145 million) through a block trade. The PE firm, which supported through a NASDAQ IPO. The company sold 15.3 management in a privatization of Singapore- GREATER CHINA million shares at $9 apiece. The stock opened at listed Sihuan in 2009 before re-listing the $10.39 on Thursday and has since fallen by nearly business in Hong Kong the following year, sold BVCF raises $200m for 13% to trade just above the IPO price. Goldman 120 million shares at HK$9.36 apiece. third life sciences fund Sachs did not exit any shares in the IPO. Online liquor retailer BVCF, a China life sciences-focused PE firm, Morgan Stanley PE Asia has reached a final close of $200 million on its Jiuxian raises $68m third fund. Investors include Adveq, Mayo Clinic agrees two take-privates Jiuxian.com, a Chinese e-commerce site that sells Foundation, International Financial Corporation, Two privatizations US-listed Chinese companies wines and spirits, has raised RMB425 million ($68 Novartis, BlackRock and Munich Private Equity backed by Morgan Stanley Private Equity Asia million) across two rounds of funding. Return Partners. The vehicle, which launched in June (MSPEA) have won board approval. Noah backers include Beijing-based Rich Land Capital, 2011, is more than $100 million larger than its Education Holdings and Sino Gas International Shenzhen Oriental Fortune Capital and Sequoia vintage predecessor. Holdings are now a shareholder vote away from Capital. de-listing. The offers value the companies at IDG, Jafco make partial $107.4 million and $74.9 million, respectively. Chinese PE firm secures exits through Tarena IPO local pension fund tie-up VC-backed package tour IDG Capital Partners and Jafco have made partial PE firm China Treasury Wharton Capital exits from Tarena International after the Chinese platform files for US IPO Management has partnered with China Social IT training services provider raised $137.7 million Tuniu, a Chinese online package tour provider Welfare Foundation, a government-backed

4 avcj.com | April 08 2014 | Volume 27 | Number 13 NEWS

public fund system, to develop an elderly care Hopu supports $1.5b Noble PepsiCo for India, Sri Lanka and Africa. project. The Evergreen International Health Care Agri deal City project, managed by Evergreen Fund, a CDC invests $28m in India’s wholly-owned pension fund of CSWF, aims to A consortium led by Hopu Investments will establish facilities such as hospitals, libraries, and take a minority position in an agribusiness joint Ratnakar Bank healthcare centers. venture being set up by Chinese agricultural CDC Group has paid $28 million for a 4.8% stake conglomerate COFCO Corporation and Noble in India’s Ratnakar Bank, which specializes in Group, an agriculture and energy supply chain lending to small businesses. The bank has been NORTH ASIA manager. The investment follows the private seeking to raise around $60 million ahead of an equity firm’s first close of $1.1 billion on Hopu IPO. Ratnakar will use the fresh capital to support Jafco invests $2m in leisure Master Fund II, which is said to be targeting its expansion plans. booking site at least $2 billion in total. The fund focuses on the consumer, natural resources and financial Temasek invests $40m in Globis Capital Partners and Jafco Ventures services sectors. have invested JPY200 million ($1.95 million) in COFCO has agreed to pay an initial $1.5 billion India’s StarAgri Catarizm, the Japanese start-up behind online for a 51% stake in Noble Agri from Noble Group. Temasek Holdings has invested INR2.5 billion leisure booking site Asoview. Set up in 2011, The assets will then be spun out into a new joint ($40 million) in Indian agri-services provider Star Catarizm provides online booking services for Agriwarehousing and Collateral Management. a range of weekend activities via its Asoview Set up in 2006 by four former franchisees of rural platform. lending products, StarAgri is one of the country’s largest post-harvest agri-solutions providers, KKR, Affinity complete offering rural supply-chain infrastructure including logistics services, warehousing, labs Oriental Brewery exit and collateral finance. KKR and Affinity Equity Partners have completed their exit of Korea’s Oriental Brewery (OB) to IFC to support Brummer’s previous owner Anheuser-Busch InBev (AB InBev) for $5.8 billion. The transaction represents the second Bangladesh fund largest-ever trade sale exit in Asia by private International Finance Corporation (IFC) plans to equity investors in dollar terms, according to invest up to $20 million in Frontier Bangladesh AVCJ Research. The money multiple is said to be venture, in which Noble Group will retain a 49% II, a $100 million fund being raised by Swedish around 5x. interest. COFCO owns two thirds of the vehicle alternative asset manager Brummer & Partners. through which the acquisition is being made, IFC also supported the predecessor fund, a 2009 with the Hopu consortium holding the balance. vintage vehicle that raised $88 million. This was SOUTH ASIA Noble Agri had equity of $2.8 billion and the first dedicated Bangladesh private equity net debt of $2.5 billion as of year-end 2013. The fund. The new fund has a hard cap of $150 SAIF-backed HomeShop18 transaction values the equity portion at 1.15x million. files for US IPO book value for 2014. Everstone invests $16m in HomeShop18, an Indian television shopping network and online market place backed by SAIF Tata Opportunities Fund fashion house Partners and OCP Asia, has filed to go public on backs Varroc Engineering Everstone Capital has invested INR1 billion ($16.6 the New York Stock Exchange. The IPO will see million) in Indian fashion label RituKumar in CEO Sundeep Malhotra and parent company Tata Opportunities Fund has invested INR3 billion return for an undisclosed minority stake. Set up Network18 exit part of their stake in the company ($30 million) in Varroc Engineering, an Indian in 1969, Ritu Kumar produces a range of women’s while SAIF, OCP and South Korea’s GS Home auto component manufacturer owned by Varroc clothing under three main brands: Ri, a premium Shopping will retain their shares. Group. This is Tata Opportunities Fund’s first bridal and formal wear line; Ritu Kumar, a line investment outside of the Tata group and its third in ethnic every day and semi-formal wear; and India Infoline buys transaction overall, having previously invested in Label, a Western-style designer brand. majority stake in PE firm Ginger Hotels and satellite TV player Tata Sky. LeapFrog invests $29m in IIFL Wealth Management, a listed unit of India IFC to invest $85m in Infoline (IIFL) Group which is in turn backed by IFMR Capital The Carlyle Group, has acquired a majority stake PepsiCo’s India bottler LeapFrog Investments, a US-based specialist in PE firm India Alternatives Investment Advisors. International Finance Corporation (IFC) is investor in financial services in growth markets, IIFL has also made a contribution to the firm’s investing $85 million in Varun Beverages, the has invested $29 million in Indian non-banking India Alternatives Private Equity Fund, which has largest South Asian bottler for soft drinks giant finance company (NBFC) IFMR Capital. LeapFrong received an initial INR2.3 billion ($38 million) in PepsiCo. Varun Beverage – a portfolio company wants to leverage IFMR’s structuring expertise, capital and focuses mid-stage growth capital of Standard Chartered Private Equity – holds reach and relationships across financial products deals. bottling and distribution franchise rights from and sectors in India.

Number 13 | Volume 27 | April 08 2014 | avcj.com 5 13th Annual Private Equity & Venture Forum China 2014 10-11 June • Park Hyatt, Beijing

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjchina.com Book before 25 April to save up to US$300 Early confirmed speakers include: Linbo He KEYNOTE Shiming Jiang Toshiyuki Kumura Managing Director and Head Director, Private Equity Co-head of Private Equity of Private Equity Investment Investment Dpt., Investments Dept., CHINA INVESTMENT NATIONAL COUNCIL FOR TOKIO MARINE ASSET CORPORATION (CIC) SOCIAL SECURITY FUND MANAGEMENT CO., LTD.

Pak-Seng Lai Hiro Mizuno John Qu Managing Director and Partner Vice General Manager Head of Asia COLLER CAPITAL CHINA RE ASSET AUDA MANAGEMENT CO., LTD.

Sally Shan Jixun Foo JP Gan Managing Director Managing Partner Manager Partner HARBOURVEST PARTNERS GGV CAPITAL QIMING VENTURE (ASIA) LIMITED PARTNERS

Richard Hsu Robert Hu Roy Kuan Managing Director Managing Director Managing Partner INTEL CAPITAL INFINITY GROUP CVC CAPITAL PARTNERS

Hurst Lin David H. Liu James Mi General Partner Member & Head Co-Founder and DCM CHINA KKR CHINA Managing Director LIGHTSPEED CHINA PARTNERS Gordon Shaw Weichou Su Alex Zheng Managing Director, Shanghai Partner Chairman BARING PRIVATE EQUITY STEPSTONE SHENZHEN COWIN ASIA VENTURE CAPITAL CO.

Jonathan Zhu Contact us Registration: Pauline Chen Managing Director T: +852 3411 4936 E: [email protected] BAIN CAPITAL ASIA, LLC Sponsorship: Darryl Mag … and many others! T: +852 3411 4919 E: [email protected] For the latest programme and speaker line-up, please visit www.avcjchina.com Asia Series Sponsor Co-Sponsors VC Legal Sponsor

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avcjchina.com 13th Annual Private Equity & Venture Forum COVER STORY China 2014 [email protected] 10-11 June • Park Hyatt, Beijing Innovation issues There is plenty of buzz about investment in Chinese healthcare but the pharmaceuticals segment has yet to fulfill its promise as an R&D hub. Should PE and VC investors be looking for different angles?

CORD BLOOD MIGHT TURN OUT TO BE other hand, has witnessed a 125.8% jump pharma player GSK over allegations of bribery. GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjchina.com the ultimate life insurance policy. Samples of investment between 2011 and 2013, led by This made PE investors turn cautious, for fear around 60 milliliters are taken from the umbilical interest in China and India. of inadvertent association with individuals and cord shortly after birth and placed into storage. However, it is still unclear what form the China companies that may be sucked into the scandal. Book before 25 April to save up to US$300 Should the child later be stricken by a serious opportunity will take and how big it can become, Second, as part of broad healthcare reforms, illness, stem cells extracted from the blood can and by extension, whether these investments will more drugs are being added to the list of Early confirmed speakers include: be used to treat more than 80 diseases, notably deliver the anticipated returns. treatments deemed essential to meeting basic leukemia, lymphoma and anemia. “Investing in China’s healthcare sector is like medical needs. Those drugs are made available to KEYNOTE Linbo He Shiming Jiang Toshiyuki Kumura Stem cell research remains a relatively wondering around in an antique flea market all grassroots healthcare services providers, with Managing Director and Head Director, Private Equity Co-head of Private Equity nascent area of science and it is not certain that where it is difficult to tell if the products are real the cost fully reimbursed through the insurance of Private Equity Investment Investment Dpt., Investments Dept., CHINA INVESTMENT NATIONAL COUNCIL FOR TOKIO MARINE ASSET cord blood contains sufficient stem cells to be or not,” says Dr. Zhi Yang, founder and managing system. As such, prices are set deliberately low. CORPORATION (CIC) SOCIAL SECURITY FUND MANAGEMENT CO., LTD. successfully used in treatment. Storage has also director at BVCF, a China-focused life science PE In 2012, the list expanded from 307 to 502 yet to become habitual for Chinese parents. Of firm. “People may regret over-blowing the market products, including 317 conventional drugs and Pak-Seng Lai Hiro Mizuno John Qu the 60-80 million children born in the country in the future, especially if they don’t know the 203 traditional Chinese medicines (TCMs). It Managing Director and Partner Vice General Manager each year, samples are collected in just 1% of industry well.” includes Bayer’s Glucobay, Pfizer’s Norvasc and Head of Asia COLLER CAPITAL CHINA RE ASSET AUDA MANAGEMENT CO., LTD. cases, compared to 15-20% elsewhere in Asia. AVCJ Research breaks down PE investment in Novartis’ Diovan. The investors that have backed US-listed the sector into three categories: service providers, “The government’s expansion of the China Cord Blood Corporation (CCBC), the pharmaceuticals and medical devices. Only essential drug list will inevitably put pressure Sally Shan Jixun Foo JP Gan leading domestic blood banking operator, are the service provider segment saw an uptick in on pharmaceutical companies’ growth margins. Managing Director Managing Partner Manager Partner betting on the long game. KKR committed $65 HARBOURVEST PARTNERS GGV CAPITAL QIMING VENTURE (ASIA) LIMITED PARTNERS million in 2012, making its first foray into the country’s health services sector. Hao Capital PE investment in China’s healthcare sector invested six years earlier, when the market was 2,000 60 Richard Hsu Robert Hu Roy Kuan very much in its infancy. Managing Director Managing Director Managing Partner Cord blood collection in licenses are closely 50 INTEL CAPITAL INFINITY GROUP CVC CAPITAL PARTNERS 1,500 held in China. The government only permits 40 the practice in 10 provinces and municipalities 1,000 30

and CCBC has exclusive rights in three of them. Deals Hurst Lin David H. Liu James Mi Elaine Wong, a partner and co-founder of Hao US$ million General Partner Member & Head Co-Founder and 20 Capital, notes that these local monopolies were 500 DCM CHINA KKR CHINA Managing Director LIGHTSPEED CHINA necessary to attract investors. 10 PARTNERS The PE firm fully exited its holding last year 0 0 with a reasonably high return and can therefore 2007 2008 2009 2010 2011 2012 2013 2014YTD Gordon Shaw Weichou Su Alex Zheng endorse the business model. But the investment Managing Director, Shanghai Partner Chairman Value (US$m), healthcare services Value (US$m), biopharma Value (US$m), medical devices BARING PRIVATE EQUITY STEPSTONE SHENZHEN COWIN thesis has little in common with perceptions of No. of deals, healthcare services No. of deals, biopharma No. of deals, medical devices ASIA VENTURE CAPITAL CO. Chinese healthcare. Source: AVCJ Research “It’s more of a consumer play – cord blood storage is like health insurance. The focus of the Jonathan Zhu Contact us Registration: Pauline Chen company was on storage rather than research activity last year, with eight deals totaling $202 Once drugs are on the list, price cuts range Managing Director T: +852 3411 4936 E: [email protected] BAIN CAPITAL ASIA, LLC and development of stem cell therapies,” she says. million, nearly double the 2012 figure. from 5% to even half the original level,” says Nisa Sponsorship: Darryl Mag The most dramatic shift was in commitments Leung, managing partner at Qiming Venture … and many others! T: +852 3411 4919 E: [email protected] Hype and reality to pharmaceutical firms, which came to $441 Partners. China has become a magnet for healthcare million, compared to $1.6 billion in 2012 and For the latest programme and speaker line-up, please visit www.avcjchina.com investors, apparently at the expense of close to $1 billion in each of the two years before Other options Asia Series Sponsor Co-Sponsors VC Legal Sponsor developed economies. According to London- that. This was the primary reason healthcare In this context, investing in generic drugs based research firm GlobalData, PE investment investment as a whole dropped to $688 million manufacturers might not be as attractive as it in the sector came to $19.8 billion last year, well in 2013, from $1.8 billion the previous year. once was. On the flip side, healthcare reforms short of the 2007 peak of $57.7 billion. Activity The pharmaceuticals slowdown is blamed have given impetus to PE firms looking at other 关注我们： in Europe fell by 30.5% year-on-year and North on two factors. First, the Chinese government parts of the sector, notably service providers. The America saw growth of just 2.5%. Asia, on the launched an investigation into multinational government’s decision to relax curbs on foreign avcjchina.com Number 13 | Volume 27 | April 08 2014 | avcj.com 7 COVER STORY [email protected]

professional skills to manage doctors and nurses, TCM: A local cure who are highly educated.” A model apart raditional Chinese medicine (TCM) was identified as one of the nation’s seven strategic In contrast to recent patterns in China, the Tindustries under the 12th Five-Year Plan, a document outlining government policy for 2011- pharmaceuticals segment has consistently been 2015. Buoyed by this support, the industry is expected to grow from $18.6 billion last year to more the most popular among investors in the US, than RMB550 billion ($87 billion) by 2015. followed by medical devices and providers. TCM remedies now account for 203 of the 502 drugs on the list of treatments deemed The power of the US Food and Drug essential to meeting basic medical needs. This is a reflection of the government’s desire to Administration (FDA) is the critical differentiating support the use of TCM in lower tier cities and rural areas where it generally popular. Drugs on the factor. Once a new drug receives regulatory list are available to grassroots healthcare services providers at low prices, with costs reimbursed approval, large-scale production usually begins through the insurance system. and the technological and chemical patents TCM providers are also being encouraged to expand globally, with 10 companies expected to that underpin and protect its value ensure high set up such branches in Southeast Asia, Europe and the US by 2015. However, given alternative margins. treatments are less recognized in Western countries, how far can these drug makers go? This kind of product innovation is one area “There is no standard procedure to produce Chinese medicine and so it will be a challenge in which China is decidedly lagging. While TCM expanding TCM globally. A lot of lobbying work should be done with regulators such as the US and biological pharmaceuticals are faring well, Food & Drug Administration to prove that TCM actually works,” says Mei Dong, a partner with chemical drugs represents the problem area, with KPMG China. “I think TCM will be more focused on Asia because people here understand it more.” generics manufacturers seeing slower growth as Indeed, it is the domestic strength of TCM that is attracting private equity investors. a result of the essential drugs list. It is suggested Shandong Buchang Pharmaceuticals, a TCM manufacturer specializing in heart disease the Hony Capital-backed management formulas, has received several rounds of funding from Morgan Stanley Private Equity Asia, AIF buyout of US-listed generics player Simcere Capital, TDR Capital, ARC Capital and Hao Capital. Having developed strong local distribution Pharmaceutical Group last year was in part driven channels, the company has started supplying foreign traditional drugs, such as those developed by expectations that American investors wouldn’t in Japan, says Elaine Wong, a partner and co-founder of Hao Capital. respond well to more moderate growth. Foreign strategic investors are also interested. Two months ago, Germany’s Bayer HealthCare However, Bain & Co’s Leung notes the bought Dihon Pharmaceutical Group, a TCM manufacturer based in Yunnan province. The deal slowdown in investment is going to be facilitated the exit of Legend Capital, an investor in the firm since 2010. temporary. He foresees a wave of industry The acquisition is part of Bayer’s ambition to become the leading multinational in the Chinese consolidation, especially when new regulations over-the-counter market, of which TCM accounts for about half. Several other multinationals come into force. have also expressed an interest in herbal treatments, with Sanofi buying BMP Sunstone for $520.6 “Injectable drug manufacturers must million in 2010. implement a revised set of good manufacturing “We’re optimistic on the growth prospect for TCM in China. Since it has a long history in practices (GMPs) by January 2014, and the Chinese culture, many people believe in its pharmacology and will combine Western and Chinese manufacturers of other drugs must do so medicine to recover from sickness,” says Nisa Leung, managing partner at Qiming Venture by January 2016,” Leung says. “That will be a Partners. milestone or hurdle and some local pharma firms The VC firm committed a Series A round for Jun He Tang last October with a view to scaling up will actually need either to shake-up or get out the company’s chain store business. “Jun He Tang provides standardized services and operates in of business.” the same business model as Western clinics, which is easier to expand and manage,” Leung adds. This may well result in opportunities for financial investors to partner with managers of renminbi-denominated funds, creating investment in state-owned hospitals is seen as hospitals in tier-one and tier-two cities because reasonable size generic pharma companies indicative of a more favorable environment. they are less differentiated and have a lot of through series of roll-up investments. Notable deals in the 18 months include: complexities,” says Phil Leung, a Shanghai-based Regardless of whether or not roll-ups prove GIC Private and Goldman Sachs’ $100 million partner with Bain & Company, who also leads the to be strong investment thesis, a dependency investment in medical examinations provider firm’s China healthcare practice. on generic drugs manufacturing does not iKang Healthcare, which recently listed in the It is not for everyone, though. Public hospitals represent an attractive long-term goal for US; the $49 million commitment to Meinian can be a turn-off because, without strong policy China’s pharmaceutical industry. The product Onehealth Healthcare Group, a leading support or a clear turnaround opportunity, they innovation issue must be addressed with a view independent provider of preventive check-up are inherently low-growth and hampered by to generating higher value, patent-protected services, by The Carlyle Group, Cathay Capital bureaucracy. Even the private specialty chains are treatments. and Ping An Insurance; and Warburg Pincus’ generally off limits to VCs and mid-cap PE players “There is a lot of talk about innovative drugs. investment in the maternity-focused Amcare because of the amount of capital required. However, few people know how to be innovative hospital chain. “The hospital sector is overheating and and even fewer people understand the value of “In the provider space, there are still some valuations are being pushed up,” says BVCF’s being innovative. Finding good projects in China assets available in the market for financial Yang. “Furthermore, some investors will come to is like looking for a needle in a haystack, taking a investors to land on. Those specialty chains, such regret their involvement if they don’t have the lot time to find,” says BVCF’s Yang. as dental care and eye care, are focused on the right management skill sets. It isn’t like investing His firm recently reached a final close of $200 repeatable model. They are preferred to general in a hotel or shopping mall. You need capable million on its third China life sciences fund. The

8 avcj.com | April 08 2014 | Volume 27 | Number 13 COVER STORY [email protected]

pipeline should already be in place. Global healthcare PE deal volume by region “In our experience, even though a product 250 may have received FDA or Europe’s CE Mark licensing in other geographies, it can still take 200 several years to obtain China Food & Drug Administration licensing. Very few venture capital 150 funds have the fund life and expertise to invest in new drug development,” says Hao Capital’s Wong. 100 Deals She sees the biotech ecosystem evolving in China, with increased demand for pre-clinical 50 medical equipment and services indicated a higher level of interest in early-stage drug 0 2006 2007 2008 2009 2010 2011 2012 2013 development. But the market is still very small. Asia-Paci c Europe Middle East and Africa North America South and Central America Joint venture-type investments like those Soure: GlobalData, Pharma eTrack endorsed by BVCF are only just moving from thought to execution and no one is anywhere near producing the next blockbuster treatment. portfolio already includes Kunshan RiboQuark partnerships with US venture capital firms . “R&D has become an area of focus for Chinese Pharmaceutical Technology, a joint venture companies, but it is not yet comparable to established by US-based Quark Pharmaceuticals Positive signs? Western countries,” says Mei Dong, a partner with and Suzhou Ribo Life Science, and MicuRX BVCF’s activity is representative of more VC KPMG China. “Meanwhile, I think most of the Pharmaceuticals, a biopharma firm developing money flowing into early-stage companies. Sino-foreign joint ventures may only focus on next-generation antibiotics. It didn’t happen much in the past because domestic market. When a foreign firm comes in, Yang expects cross-border transactions the development cycle is long and risky and it needs local distribution channels – that is the – using joint ventures with overseas regulatory barriers are high. main purpose of forming a JV.” pharmaceutical and medical devices companies Taking a new drug from clinical tests to These firms come with drugs ready to sell, not to bring innovative products and technologies commercialization often takes 7-10 years and the awaiting development. It is a model comparable to China – to feature strongly in the fund. BVCF success rate in China is less than 1%. For investors to that of China Cord Blood: an investment in the also hopes to generate deal flow through to consider such opportunities, a product consumer, rather than technology itself.

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NASDAQ listed Focus Media has received a non-binding tender offer of $5.4 per share, or $27 per ADS, of its entire outstanding common shares from a consortium of investors, including company chairman Nan-chun Jiang, CDH Investments, China Everbright Limited, CITIC Capital Partners, FountainVest Partners and The Carlyle Group. The consideration would be approximately $2.88 Features billion based on the 532.95 million common shares outstanding and not held by the chairman.

Announced (US$mln): $2,877.9400 Previous Stake: 17.56% Stage: Buy-outs (MBO/MBI/LBO)

Announced Date: Aug 12, 2012 Deal Stake: 82.44% Closed (US$mln): n/d ■ Final Stake: 100.00% A large profile pool with around 6,800 Closed Date: n/d

Deal Type: Private Equity Buyout funds, 3,800 GPs and 3,000 LPs Deal Status: Agreement in Principle Acquisition Technique: Leveraged Buyout

Acquisition Attitude: Neutral ■ Comprehensive records, including Involved Companies Company Name Deal Role Amount(US$mln) Deal Stake Industry Nationality

Carlyle Asia - China Investor n/d n/d Private Equity United States more than 80,000 M&A transactions; CDH China Management Co., Investor n/d n/d Private Equity Hong Kong Ltd. China Everbright Ltd. Investor n/d n/d Finance Hong Kong CITIC Capital Partners Ltd. Investor n/d n/d Private Equity Hong Kong 19,000+ PE/VC investments; over FountainVest Advisors Ltd. Investor n/d n/d Private Equity China (PRC) Nan-chun Jiang Investor n/d n/d Unclassified China (PRC) Focus Media (China) Holding Investee n/d n/d Advertising China (PRC) 2,400 PE/venture-backed IPOs; and in Co., Ltd. (FocusMedia) Fosun International Ltd. Seller n/d -17.20% Steel China (PRC) Undisclosed Shareholder(s) Seller n/d -65.24% Unclassified United States Citigroup Global Markets Asia Financial Adviser, n/d n/d Securities/Investment United States excess of 3,400 exits Ltd. Investor (Carlyle Asia Banking - China) Citigroup Global Markets Asia Financial Adviser, n/d n/d Securities/Investment United States Ltd. Investor (CDH China Banking Management Co., Ltd.) ■ Pan-Asian coverage, including Citigroup Global Markets Asia Financial Adviser, n/d n/d Securities/Investment United States Ltd. Investor (China Banking Everbright Ltd.) Citigroup Global Markets Asia Financial Adviser, n/d n/d Securities/Investment United States Australasia and Japan Ltd. Investor (CITIC Banking Capital Partners Ltd.) Citigroup Global Markets Asia Financial Adviser, n/d n/d Securities/Investment United States Ltd. Investor Banking (FountainVest Advisors Ltd.) ■ Citigroup Global Markets Asia Financial Adviser, n/d n/d Securities/Investment United States Data that is updated daily and tracked Ltd. Investor (Nan-chun Banking Jiang) JP Morgan & Co Inc. Financial Adviser, n/d n/d Securities/Investment United States Investee (Focus Media Banking as far back as 1990 - the longest and (China) Holding Co., Ltd. (FocusMedia)) Morgan Stanley - Beijing Financial Adviser, n/d n/d Securities/Investment United States Representative Office Investor (CITIC Banking deepest track record in Asia. Capital Partners Ltd.) Conyers Dill & Pearman Legal Adviser, n/d n/d Legal Services United Kingdom Investor (Nan-chun Jiang) ■ Data downloads in MS Excel and PDF Copyright 2012 AVCJ Group Ltd. All rights reserved. formats Plus 1

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For a live demonstration or to subscribe, please call Helen Lee at +(852) 3411 4961 or email [email protected] avcj.com FOCUS [email protected] Taxing tactics Investors are concerned about the potential repercussions for the economy – and their portfolio companies – of Japan’s staged consumer tax hike. Could it really derail the country’s fragile recovery?

JAPANESE SUPERMARKET CHAIN SEIYU chain Akindo Sushiro for $1 billion; and, more which would be supportive to the Bank of Japan’s exhibits a curious rallying cry to customers on recently, MBK Partners’ JPY43 billion purchase of current policy,” says Joji Takeuchi, CEO of Tokyo- its website: a muscle-bound manga character restaurant chain Komeda Coffee. based consultancy Brighttrust. “That is unless with burning eyes calls upon shoppers “not Fears that the tax will have an adverse impact weaker demand pushes down pre-tax prices of to give in to the consumer tax raise,” while a on these consumers businesses, or could even goods and services in the next few months.” banner message in Japanese cries out “Shop with derail the country’s fragile economy recovery, Even if the economy is able to absorb the courage!” are by no means unfounded. The consumption impact of the hike, there is still a question mark On April 1, the Japanese government tax was first introduced at rate of 3% in 1989. The over whether consumers and businesses could increased the consumption tax from 5% to 8%, only previous increase – to 5% – was in 1997. stomach that further scheduled increase to the first hike in 17 years. It will rise again, to 10%, “If you look back to 1997 it was a very similar 10%. Ernst & Young’s Stuart-Smith explains that in October next year. Seiyu is one of a number story to today,” says Jonathan Stuart-Smith currently there is a get-out clause: if the economy of retailers encouraging customers to buy in Asia Pacific Leader with Ernst & Young’s stutters the move can be deferred. Abe is due to bulk ahead of the next stage in the tax hike – global tax network. “Back then the economy was make a decision at the end of this year. imploring them to stock up on a one-month starting to recover from a previous slump, but “Next year will be problematic,” reflects J-Star’s supply of chocolate bars or three months’ worth when the consumption tax increase came in, it Arakawa “We should check for real consumer of instant noodles before shops start raising was widely blamed for causing the slump into spending recovery before accepting another tax prices. recession thereafter.” increase.” While in the short-term some companies are A lot of the spending recovery will depend looking to make the best of the situation many Recovery plans on the success of other policy objectives, anticipate a slowdown in spending. Across the However, it could equally be argued that the chief among them a push to increase wages. board, Japan’s consumer-focused businesses are tax hike should be viewed in the context of According to Japan’s Ministry of Health, Labor bracing themselves for the pinch and private economic reforms taking place in Japan. & Welfare, the average wage has dropped 15% equity portfolio companies operating in this It is part of the broader “Abenomics” policy over the past 15 years. In the 11 months through sector are no exception. The logic goes that a package – Prime Minister Shinzo Abe’s three- November 2013, it rose only 0.2%, while base drop in consumer spending will have a negative pronged strategy comprising monetary, fiscal wages fell for the 19th consecutive month last impact on balance sheets and consequently and structural measures. Together they aim to December. At the same time, real household impact investor appetite in the sector. But is this tackle Japan’s three economic problems of slow income also fell 1.7% year-on-year in December. necessarily the case? growth, deflation and a dependence on deficit “If people’s expectation for stable growth is “The tax is an inevitable measure as there is a spending. The hope is that the extra revenue positive, then the additional 2% hike is less of need to reform the Japanese government’s fiscal generated by the consumer tax increase will help a concern,” says Tatsuo Kawasaki, co-founder of structure,” says Satoru Arakawa, a partner with the government tackle its mountainous public Unison Capital. “But if the government pushes for local mid-market buyout firm J-Star. “It is too early debt, which currently stands at 240% of GDP. the hike without any tangible growth prospect to say what the effect will be, we have to wait “The consumer tax will probably lead to an or stability in the economic outlook then you can several months. If anything the impact so far has increase in the nominal and real inflation rate, only wonder what might happen.” been that consumers have been on a shopping spree ahead of prices going up.” According to AVCJ Research, consumer- Japan PE buyouts 2008 - 2014ytd by sector related companies have accounted for a fairly significant portion of private equity investment Computer related / IT 24 in Japan over the past few years. Of the 2,404 PE Consumer / retail 75 and VC deals announced since the beginning of Financial services 22 2008, 562 have been in consumer-related sectors. Manufacturing/ construction 35 Among buyouts alone, the consumer portion is Media/ Telecommuncations 5 much higher – accounting for one third (75) of Medical 13 the 230 buyouts to take place during the period. Services 31 Several of the largest transactions seen Transportation/ Distribution 18 in Japan in recent years have focused on the Other 4 sector, including: Bain Capital’s acquisition of a 50% a stake in Jupiter Shopping Channel for JPY85 billion (just over a $1billion in June 2012); Source: AVCJ Research Permira’s acquisition of a majority stake in sushi

Number 13 | Volume 27 | April 08 2014 | avcj.com 11 DEAL OF THE WEEK [email protected] / [email protected] Rabo Equity’s India nutrition play

VALUED AT AROUND INR720 BILLION and beverage brands targeting the health and marketing in order to support brand building. ($11.9 billion), India’s pharmaceutical market wellness market. There will be a simultaneous effort to tap continues to be a popular destination with “Nutraceuticals has been one our favorite growing domestic demand. private equity investors, but the sector sectors, and we have been tracking it for a “Beloorbayir currently supplies the big has seen better days. A recent report by number of years,” explains Rajesh Srivastava, a manufacturers, so it does not produce consumer- PricewaterhouseCoopers shows a tightening managing director with Rabo. facing nutraceutical products, regulatory environment – in particular new rules “It is growing fast in India but it and it can be difficult to launch on drug pricing – led to sector growth slowing to still has a small base. So far, the a brand in US or Europe,” says 9.8% in 2013 against 16.6% the year before. biggest opportunity has been in Srivastava. “However, the Contrast this with nutraceuticals – the supplying developed countries.” company will look at launch a burgeoning market for nutritional food and The global nutraceutical few brands in India within the beverage supplements – which has not suffered products market is expected next 18 months.” from the same constraints. The sector continues to expand from $175 billion in Beloorbayir represents the last to see compound annual growth of 18.46%, 2013 to $204.8 billion in 2017, Healthy additives: Beloorbayir investment from Rabo Equity’s according to India’s Ikon Marketing Consultants. by which point the nutraceutical first India Agribusiness Fund, Beloorbayir Biotech, the Bangalore-based ingredients market will be worth $29.5 billion. which is now fully deployed, having committed drug developer that recently received INR750 Asia Pacific is set to become the second-largest capital to 12 companies. Previous investments million from Rabo Equity Advisors, was one of the geography with a 30.4% share, trailing North include Maharashtra-based Prabhat Dairy, Super early movers in this space. America’s 39.2%. Agri Seeds, Daawat Food, Sri Biotech Laboratories Set up in 1981, the company produces According to Srivastava, Beloorbayir will and National Collateral Management Services. a range of drugs that address high blood use part of Rabo’s capital to further expand the Rabo Equity is currently nearing a $100 million pressure, heart disease, obesity and diabetes. business into overseas markets. The company first close on its second India Agribusiness Fund, It also has a fast-expanding nutraceutical plans to set up a new facility in the US and which launched in December 2012 with a target business, manufacturing ingredients for food invest more in research and development and of $200 million. Blue Star on consolidation path

IT IS DIFFICULT TO CAPTURE THE SCALE OF making money, had a good offering to the creative content, which now ranges from graphic Australia’s printing industry given the amount of market but needed a different balance sheet and design to augmented reality services. activity that takes place outside of the traditional management team,” says Angus Stuart, a director Stuart contends that Australian customers silos. The data points highlighted by the national at Wolseley Private Equity. “We also held the view are not necessarily buying fewer printed industry association, however, do not make for that there would be further consolidation and products but becoming more specialized in comforting reading. there was a prize for the player their requirements. “In the A total of 120,000 people were employed who could lead that.” past it was sheet-fed printing, across the pulp and paper manufacturing, Wolseley acquired Blue Star going into web offsetting and printing and support services, and publishing in from CHAMP Private Equity in digital offsetting,” he says. “Now 2007-2008. By 2011-2012 it had fallen to 106,000. November 2012, following a we have variable imaging Industry EBITDA dropped by one third to A$4 restructuring effort. It partnered whereby a retailer’s catalogue billion ($3.7 billion) over the same period. Small with printing industry veterans can be tailored based on big players still dominate, with the vast majority of Geoff and Paul Selig – the former data knowledge of particular participants employing less than 20 people. previously served as CEO of Blue Pressing ahead: Blue Star consumers.” In early 2011, around the time Blue Star Star’s Australian operation. Blue Star’s merger with IPMG Group, one of the market leaders, was exploring A portfolio of assets was picked up last year is being funded from its own balance sheet. the options for restructuring its debt, insolvency from distressed printer Geon and then last week Wolseley has not disclosed how much it put into firm Ferrier Hodgson estimated that 500 printers Blue Star agreed a merger with Independent the company, but it falls within the firm’s typical had shuttered over the previous six years in Print Media Group (IPMG). range of A$30-120 million in enterprise value. the face of weak consumer spending and The combined entity will have revenues “We don’t look for distressed players per se overcapacity. Further consolidation was seen as of A$700 million, becoming Australia’s largest but if there is an underperforming player where inevitable and Blue Star, now recapitalized and printer. It will have operations all along the the right management and the right balance under new ownership, is playing a role in it. eastern seaboard, encompassing printing, sheet can transform performance then we are “We held a view that this business was distribution, print management and logistics, and interested,” Stuart adds.

12 avcj.com | April 08 2014 | Volume 27 | Number 13 FUNDS [email protected] / [email protected] Siguler Guff closes third BRIC fund

SIGULER GUFF FACED TWO PARTICULAR already been in the market for more than two managers will receive less than 10% of Fund III – challenges when raising its third BRIC years and the firm decided against waiting until it plans to maintain a significant commitment to opportunities fund: one foreseen and well the storm passed. A final close came last week China. Jaeger says China has outperformed India prepared for; the other more out of leftfield. on $650 million, short of the $1 billion target and and is on a par with Brazil and Latin America. The first was the departure of Patricia also smaller than the previous BRIC fund, which Russia has been one of Siguler Guff’s best Dinneen, longstanding portfolio manager for the closed in March 2009 on $893 million. geographies for a number of years. firm’s investments in emerging markets. Dinneen “We had made extensions, but when the The fund has also begun to embrace had made no secret of her plans to leave and crisis happened we didn’t want to hold off any non-BRIC the handover to Ralph Jaeger was effectively a longer,” Jaeger says. “With the commitments geographies, three-year process, but there was still a degree of already achieved I am confident we will be in with Creador investor uncertainty. “Although it was text-book the market again soon and able to convince II – a primarily succession planning, some investors said they people that momentum continues to be strong, Indonesia- and wanted to see how the performance shapes up opportunities continue to be plentiful and Malaysia-focused and what the portfolio looks like and then be a performance continues to be as attractive.” fund – among candidate for the next fund,” Jaeger tells AVCJ. “It’s Jaeger and his team have already committed the beneficiaries. an understandable approach.” nearly 100% of the comingled corpus to a BRICs: Emerging opportunities However, it The second challenge came last summer as range of GPs and co-investment opportunities. retains a mid- the US indicated it would begin a gradual scaling The $650 million also includes three separate market sweet-spot, with an average underlying back of quantitative easing measures. Prophecies accounts for large investors; once these are fund size of $300-400 million, and keeps a close of emerging markets struggling due to capital factored in, the fund is two thirds committed. eye on consistency across vintages. flight and currency volatility became self-fulfilling The expected allocation for the previous BRIC “We are mindful of avoiding managers where – for a few months, at least – and this gave vehicle was at least 50% China, 15-20% India, you see size and strategy drift,” says Jaeger. “We prospective LPs pause for thought. 5-10% Russia and 15-20% Brazil. While Siguler also want managers to be primarily motivated by Siguler Guff BRIC Opportunities Fund III had Guff is scaling back its exposure to India – local carry generation rather than fees.” Cathay forges Sino-French ties

IT IS 50 YEARS SINCE FRANCE BECAME THE a continuation of what we do, but with a bigger strategy, such as healthcare, veterinary medicine, one of the first European countries to officially ticket size.” consumer goods, distribution and cleantech. Cai recognize the People’s Republic of China. The Cathay currently has EUR420 million in assets is particularly interested in providing Chinese anniversary of that event was marked in Paris under management. This latest fund is more companies access to French technologies, last month by Chinese President Xi Jinping and than seven times the size of Cathay Capital I, a whether this is through partnerships in China or his French counterpart Francois Holland. During EUR70 million vehicle that launched in 2007 and acquisitions in France. the meeting, the two leaders to signed off 50 invested in 18 French and Chinese companies However, another key distinction is that bilateral deals worth EUR18 billion ($24.7 billion). between 2008 and 2011. The 2011 vintage Fund Cathay is no longer limited to France. While Around the same time China Development II received commitments of almost EUR190 previous vehicles split their corpuses equally Bank (CDB) and Bpifrance, a subsidiary of French million and is still being deployed. between French state-owned bank Caisse des Dépôts, announced LPs in Fund I mainly consisted of French and Chinese a EUR100 million commitment to the fund family offices and a small group of institutional companies, Fund launched by Sino-French PE firm Cathay Capital. investors. It wasn’t until September that CDB and III is expected The EUR500 million vehicle, the firm’s largest Caisse des Dépôts came on board, creating a to deploy 40% to date, will support the international expansion EUR150 million vehicle to invest in cross-border of its capital in of mid-cap French and Chinese companies. small- and medium-sized enterprise (SMEs). This China, 40% in Cathay Midcap Growth Fund III carries the same was subsequently rolled into Fund II. France, and 20% core investment theses as its predecessors, but Cai argues that the cross-border expansion of Cathay: A cross-border play elsewhere in there have been a few strategic tweaks. Chinese and French companies still represents Europe. “The first distinction is the size of the a largely untapped opportunity and one that “We have essentially positioned ourselves companies we will invest in,” says Mingpo Cai, appeals to LPs. He is confident that the fund will is as very local firm which a very international Cathay’s president. “We are going to invest reach a first close of EUR350 million by June. scope “says Cai. “Our aim to make our European around EUR30-50 million per company, with an Fund III will focus on the same sectors that entrepreneur feel at home in China and our enterprise valuation above EUR120 million. It is have previously benefited from this cross-border Chinese entrepreneurs feel at home in Europe.”

Number 13 | Volume 27 | April 08 2014 | avcj.com 13 PORTFOLIO [email protected] Retail reformer Early investor Mekong Capital and recent addition CDH Investments have guided Mobile World through rapid growth and growing pains. Now the Vietnam-based mobile phone retailer is about to go public

PLENTY OF RETAIL CHAINS IN CHINA didn’t know if the products were real or fake, new lot of open debate and discussion and they have failed after failing to achieve scale. With a or old, with warranty or without.” didn’t always agree with each other, which was commanding provincial position, the ambitious But there are two critical differences between a positive.” entrepreneur sets his sights on establishing the countries’ respective retail sectors that explain The private equity firm invested $3.5 million a nationwide franchise but the challenges of why Mobile World has carved out a dominant in Mobile World in 2007, taking a 32.5% stake, taking on new local competitors in unfamiliar market position, increased revenues more than which was subsequently reduced to 25.8% when geographies – while hamstrung by middle threefold over the last four years, and is now set CDH entered. Back then the company – which management that lacks either quality or for a public listing that will value the business at operates under the The Gioi Di Dong (TGDD) empowerment – prove too great. $280 million. brand – had just seven stores in Ho Chi Minh There are also examples of retailors that First, Vietnam is a fraction the size of China City but Mekong was emboldened by the strong have made the grade with the assistance of so achieving nationwide scale is a less time- performance it was seeing from consumer- PE capital and expertise. Several companies in consuming task, letting operators realize related companies in its portfolio. CDH Investments’ historical portfolio went from economics from better bargaining power more There was also the expected explosion in regional bit-part player to Hong Kong-listed quickly. Second, retail sector consolidation is not mobile phone demand and the belief that a heavy hitter and now the Chinese GP is looking happening as quickly in Vietnam as in China, professionally-managed outfit could take market to ride a similar evolutionary wave as it branches which Lanyi believes is in part due to the relative share from the mom-and-pop players. out into Southeast Asia, notably Vietnam. scarcity of good management teams. According to the Vietnam Ministry of “We find a huge number of similarities Information & Communications, there were 18.9 between China and Vietnam in the consumer Collective decision-making million mobile phone subscribers in 2006. This sector, driven by similarities in political systems, Tai is one of five co-founders of Mobile World and became 131.6 million by 2012. Mobile World, religious attitudes, consumer behavior, and three remain actively involved in the business meanwhile, received a shot in the arm from entrepreneurial mindset,” says Thomas Lanyi, – a rare dynamic in Vietnam and one that drew Mekong. The founders provided initial start-up deputy head of Southeast Asia at CDH. “When Mekong to the company in the first place. capital and each new store was financed through we present an opportunity in Vietnam, the team shares feedback from what they have seen in Mobile World store growth China. It’s a bit like looking into the future.” For its debut investment in Vietnam, CDH 300 bought a 19.88% stake in Mobile World – a 250 mobile phone and consumer electronics retailer – in March 2013 for approximately $20 million, 200 allowing partial exits for company management 150

and existing investor Mekong Capital. Stores The private equity firm was entering familiar 100 territory. Mobile phone retailer Digitone and consumer electronics business China Paradise 50 are current and former portfolio companies, 0 respectively. And then there was Lanyi, who 2008 2009 2010 2011 2012 2013 2014E before joining CDH in 2012 spent four years The Gioi Di Dong (mobile phones) Dien May (consumer electronics) at Mekong, where he was responsible for the Source: Mobile World Mobile World investment. The transition to organized retail and resultant shift from fragmentation to industry This was no patriarchal, family-led governance cash generated by existing outlets. No longer consolidation that has characterized the structure. With the exception of the chairman, dependent on this cycle, the number of stores company’s 10-year history invites comparisons the co-founders were in their mid-30s and came rose to 31 in 2008 and then 211 in 2011. with China and other emerging markets. from relevant professional backgrounds; their Mekong helped the company recruit middle Mobile World CEO Nguyen Duc Tai explains CVs include stints with Japanese and Korea management and introduce modern reporting the motivation to start the business as follows: “I multinationals in Vietnam, such as SK Telecom systems, such as measurable targets through tried to buy a mobile phone but couldn’t find a and Sony Ericsson, as well as sales and marketing which to set out clear long-term goals – although proper shop with good service and a trustworthy experience with local companies. the goalposts had to be moved several times as environment. There were only mom-and-pop “They were entrepreneurs,” says Chris Freund, growth came in faster than expected. operators selling out of small kiosks. Customers partner and founder at Mekong. “There was a Mobile World expects to have 253 stores by

14 avcj.com | April 08 2014 | Volume 27 | Number 13 PORTFOLIO [email protected]

the end of this year. It established a foothold in infrastructure they required. to join the board as a non-executive director and Vietnam’s six largest cities and now covers all Inventory selection and management were became a shareholder in early 2013. He now also 63 provinces. The company controlled more the root cause of the problem, and it took sits on Mekong’s advisory board. than 20% of the mobile phone retail market in the best part of a year to bring holdings costs “He has been a tremendous resource to 2013 – the next largest player, VTA, is on less than back under control, work out poor purchasing Mobile World,” says CDH’s Lanyi. “Many companies 10% – and wants to be at 30% by 2016 as the decisions and ensure the best-performing in Vietnam are not open to that at all – they mom-and-pop share is further eroded. products were displayed in the best places. By are worried about people interfering in their “Several chains have followed us, such as August 2013 a more streamlined and consumer- business practices.” VTA and FPT, but we had a few years’ head start oriented Mobile World was back on form. First at Mekong and now at CDH, Lanyi has busied himself establishing ties between Mobile World and other retailers across the region so Vietnam mobile phone usage vs GDP per capita the business can learn from the experiences of 150 2,000 counterparts. Executives from Digitone have visited Vietnam on two occasions. There have also been exchanges with consumer electronics 100 1,500 retailers Edion of Japan and Courts of Singapore, as well as two mobile phone players, India’s Univercell and Indonesia’s Erajaya. US$ million Subscribers 50 1,000 At time of publication, the Mobile World team was in Indonesia for an Erajaya site visit. 0 500 The company is seen as particularly important 2006 2007 2008 2009 2010 2011 because it has successfully managed to roll out a GDP per capita (US$) Mobile phone subscribers network of small stores in rural areas, a key area Source: Vietnam Ministry of Information & Communications; World Bank of focus for Mobile World this year. “CDH, because of its network in Asia, is able to introduce us to many potential partners in and have expanded our lead over time,” says Tai. Mekong’s Freund argues that these growing the region,” adds Mobile World’s Tai. “Several “We estimate about 50% of the market is now pains would be more keenly felt by other retailers times each year we travel somewhere to meet controlled by modern retailers and most of the that don’t have the same quality of management. someone in a similar industry to learn from each other 50% is in the countryside. We plan to attack “There might be five areas in which you other and explore possible cooperation.” that market segment this year and next, and have to manage growth and Mobile World can consolidate further.” handle 3-4 of those concurrently whereas the Long-term plans He also wants to boost Mobile World’s online typical Vietnamese company might only be able Mekong and CDH are in process of selling a small business. While the market leader, only 6% of to deal with 1-2 concurrently,” he says. “Opening portion of their holdings ahead of the IPO on revenues come via e-commerce and the goal is new stores, for example, can be handled by the Ho Chi Minh exchange in order to meet free to double it by 2015. the regional teams and requires no top-level float requirements. The placement is said to be Three years ago the company expanded into approval. In the typical retailer, the CEO would be substantially oversubscribed with both local and the consumer electronics space, under the Dien intensely involved in opening every new store.” international investors interested. Another partial May brand, and has built up a network of 13 More recently, consumer electronics business exit will come with the IPO itself but neither stores. Twelve more will be opened this year, and Dien May has required some recalibration. PE firm is in any hurry to fully sell down their although Dien May is unlikely to match TGDD The unit was not meeting its potential so the interests once public trading begins. for market share, it will likely become a larger independent management team was absorbed Mobile World’s past growth has been entirely revenue contributor simply because consumer by the mobile phone division in January, organic but now domestic M&A options are electronics is a broader space. resulting in a number of personnel changes. being examined – and PE investors can help Mobile World recorded $452.3 million in Store layout and category management by conducting initial diligence and discussions, revenue for 2013 and the company is looking were again at the forefront of reforms. Freund saving the company from making a direct to reach at least $600 million this year and $900 describes a transformation from “what looked approach immediately. Beyond that, expansion million by 2016. Profit is forecast to come in at like a discount store that was kind of messy and into new geographies is a possibility, with Laos $21 million for 2014 – up from $12.3 million last wasn’t clear what it was trying to be” to a more and Cambodia under preliminary consideration. year – and then $32.1 million by 2016. compelling brand strategy with “televisions and More retail concepts are also likely once Dien home appliances as the key broad categories May has been scaled up. Growing pains and no halfway categories like alarm clocks and “We have a team of people that looks into Progress has not been entirely smooth, power adaptors.” new ideas, which we can develop over time. however. After a period of rapid expansion, Mobile World’s management team is Our basic assumption is that retail in Vietnam Mobile World’s profits began to tail off, falling supported by Robert Willett, a retail veteran continues to be below both its potential and from $7.5 million in 2011 to $6 million in 2012. who previously served as CEO of Best Buy the global standard. This is our opportunity,” This underperformance stems from a struggle International, where he was chairman of says Tai. “The key question when we choose our to accommodate the growth spurt of the CarPhone Warehouse, Europe’s largest mobile next category is always ‘How big can we grow previous few years: New stores were opening at phone retailer. Originally introduced by Mekong this business?’ We want to serve the masses, not a faster pace than the supporting systems and to consult on Mobile World, Willett was invited some niche market.”

Number 13 | Volume 27 | April 08 2014 | avcj.com 15 9th Annual Private Equity & Venture Forum USA 2014 8 July • Harvard Club of New York City

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