Runaway Horses? Catching a Ride with Asia’S Tech Unicorns Page 18

Asia’s Private Equity News Source avcj.com October 27 2015 Volume 28 Number 40

Runaway horses? Catching a ride with Asia’s tech unicorns Page 18

Fundraising: key issues Page 11 O2O: Scale opportunity Page 25 Media: CMC’s Ruigang Li Page 37

CONFERENCE SPECIAL ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM HONG KONG 2015 Anything is possible if you work with the right partner

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

EDITOR’S VIEWPOINT CHINA 05 Big auctions, co-investment and technology Open to alternatives have driven Asia PE investment in 2015 34 With uncertainty shrouding China’s public NEWS markets, PE investors are looking at other options. Trade sales are getting traction 07 Apollo, Carlyle, Formation 8, General Atlantic, GGV, GIC, OrbiMed, Tiger Global Perception vs reality FUNDRAISING 38 A portfolio of China funds offers a surprisingly good risk-return profile, say Friends with benefits Claudia Zeisberger and Michael Prahl 11 Co-investment is getting more sophistacted as managers sharpen fundraising strategies and respond to the needs of large investors INDUSTRY INTERVIEWS TECHNOLOGY 17 Nicole Musicco of Ontario Teachers’ Pension Plan discusses co-investment strategy The billion-dollar club 23 Anthony Tan, co-founder and CEO of 17 Asian internet firms are raising capital high GrabTaxi, on building a ride-hailing business valuations, but as sentiment weakens, some of these behemoths should be worried 37 Ruigang Li of CMC Capital Partners talks China media and entertainment investment The long tail 25 Online-to-offline services are changing consumption channels in emerging Asia. Much of the sector is still up for grabs 27 Case study: Southeast Asia’s aCommerce 31 Case study: India’s Grofers 33 Case study: China’s Helijia

Number 40 | Volume 28 | October 27 2015 | avcj.com 3 Light. Fast. Flexible.

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Managing Editor Tim Burroughs (852) 3411 4909 Associate Editor Guarded optimism Winnie Liu (852) 3411 4907 Staff Writer Holden Mann (852) 3411 4964 TO MOST INDUSTRY PARTICIPANTS, 2015 Investment Board (CPPIB), Temasek Holdings Creative Director feels like a relatively slow year for private equity and the Public Sector Pension Investment Dicky Tang in Asia. Perhaps it is the lack of drama-packed Board all involved. CPPIB’s contribution alone Designers hostile takeovers or the comedown from the was worth $534 million Catherine Chau, Edith Leung, stellar exits of 2014 such as Alibaba Group IPO or 3) The above comes in many different flavors, Mansfield Hor, Tony Chow the Oriental Brewery trade sale. with a small but significant number of direct Senior Research Manager Certainly, the sluggish economies of many deals as well as co-investments Helen Lee Asian countries, volatility in currency and equities 4) The rise of unicorns in Asia. Technology Research Associates markets, and lofty valuations have made many “start-ups” valued at over $1 billion are a pretty Herbert Yum, Jason Chong, Kaho Mak GPs less aggressive this year. According to common nowadays, with private equity firms, AVCJ Research, deal volume is tracking down hedge funds and even mutual funds coming Senior Marketing Manager on last year, with just over 2,000 investments into increasingly large funding rounds. Didi Sally Yip Circulation Administrator announced, compared to nearly 2,800 for 2014 Kuaidi, Flipkart and Coupang – representing Prudence Lau as a whole. China, India and South Korea, respectively Subscription Sales Executive That said, the amount of capital deployed – are just a few of the names able to attract Jade Chan is already on a par with last year (at $92 billion), large amounts of money. Manager, Delegate Sales which means 2015 is all but certain to become These are but a few reasons why the Asian Pauline Chen the second most active 12-month period on private equity and venture capital industry is Director, Business Development record. The continued rise in total investment still active and playing a substantial role in the Darryl Mag value can be attributed to a number of factors, broader M&A market. Based on the amount of which reflects some of the current trends in the dry powder sitting on the sidelines, the potential Manager, Business Development Anil Nathani, Samuel Lau Asian private equity and venture capital space. for even greater involvement is huge. They include: However, it remains to be seen how quickly Sales Coordinator Debbie Koo 1) Big auctions are still happening. The $6.4 private equity investors that have held back billion acquisition of Homeplus – Tesco’s choose to reengage. A continued decline in Conference Managers South Korea operation – by an MBK Partners- China’s economic prospects, which would impact Jonathon Cohen, Sarah Doyle, Conference Administrator led consortium and the $6.3 billion purchase other markets as well, could create investment Amelie Poon of GE Capital’s Australia and New Zealand opportunities. But valuation remains largely a Conference Coordinator consumer lending business are the two function of competition and the more groups Fiona Keung, Jovial Chung largest private equity deals ever seen in pursuing a deal, the more it becomes a seller’s Publishing Director Asia (and a major reason they the overall market. Allen Lee investment number is so high) 2) Sovereign wealth funds, pension funds and corporations are getting involved in private Allen Lee equity deals. Homeplus is once again a Publishing Director Hong Kong Headquarter Unit 1401 Devon House, Taikoo Place good example, with Canada Pension Plan Asian Venture Capital Journal 979 King’s Road, Quarry Bay, Hong Kong T. (852) 3411-4900 F. (852) 3411-4999 Asia private equity investment by stage E. [email protected] URL. avcj.com 100,000 3,000 Beijing Representative Office No.1-2-(2)-B-A554, 1st Building, 80,000 No.66 Nanshatan, Chaoyang District, Beijing, 2,500 People’s Republic of China 60,000 T. (86) 10 5869 6203 F. (86) 10 5869 6205

Deals E. [email protected] 40,000 US$ million 2,000 20,000

The Publisher reserves all rights herein. 0 1,500 Reproduction in whole or 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD in part is permitted only with the written consent of AVCJ Group Limited. Buyout Growth/pre-IPO PIPE Start-up/early-stage Other ISSN 1817-1648 Copyright © 2015 No. of deals Source: AVCJ Research

Number 40 | Volume 28 | October 27 2015 | avcj.com 5

NEWS

AUSTRALASIA GGV seeks $1.1b for China, Philips uncertain over US venture deals Lumileds sale to Go Scale Apollo agrees partial exit GGV Capital is planning to raise up to $1.1 billion Philips has cast doubt on the sale of its LED unit across three vehicles – a core venture fund, a to a Chinese PE consortium as it emerged that from Nine top-up vehicle and an early-stage fund – that the Committee on Foreign Investment in the Apollo Global Management has agreed to sell will target start-up and growth-stage technology United States (CFIUS) has “expressed certain a 13% stake in Australia’s Nine Entertainment to deals in China and the US. unforeseen concerns” about the deal. Go Scale regional broadcaster WIN Corp. A WIN subsidiary The GP has yet to release a private placement Capital, which is sponsored by VC firms GSR acquired approximately 119 million shares in memorandum, but even in this soft marketing Ventures and Oak Investment Partners, agreed to Nine across several transactions, paying an stage, LP interest is said to be very strong. The buy an 81.1% stake in the Lumileds unit in April. aggregate A$193 million ($139 million). fundraising process is expected to be completed in the first quarter of 2016, although there is no CMC, Merlin Entertainment Bridgeport Capital acquires agree Legoland JV Australia’s UCS CMC Capital Partners has agreed to form Bridgeport Capital, the direct investment a joint venture with London-based Merlin arm of Hawkesbridge Capital, has acquired Entertainments Group to develop a Legoland Australia’s Underground Cable Systems (UCS) park in Shanghai. The Legoland Discovery Center in a deal worth approximately A$100 million is among three attractions that Merlin and CMC ($73 million) alongside company management. plan to open in the next 18 months. They also UCS’ businesses include the design, installation have built a Madame Tussauds and Sea Life and cable jointing of underground electricity aquarium in Chongqing. distribution networks. Car servicing platform

GREATER CHINA firm deadline, according to a source familiar with Tuhu raises further $50m the situation. Tuhu, a Chinese B2C auto services platform, China travel sites Ctrip, GGV has set the hard cap for its sixth core has raised $50 million in an extended Series C fund at $600 million, with a further $200 million round of funding led by Hillhouse Capital. A Baidu, agree merger targeted for a parallel top-up vehicle, and $300 fund managed by China International Capital China-based travel services companies Ctrip and million for the early-stage fund. This is broadly Corp, Greenwood Asset Management, Hong Baidu-controlled Qunar have agreed an all-share comparable to the approach to Fund V, although Kong-listed leasing business Far East Horizon and merger that will create a single dominant player the core and top-up vehicles were raised Qiming Venture Partners also participated. in the domestic hotel and air ticket booking separately. market. The deal comes about four months after Fund V closed in April 2014 at $620 million, PE firms exit US oil assets Qunar rejected an unsolicited buyout offer from comprising an institutional tranche of $600 Ctrip and then agreed a $500 million strategic million plus an entrepreneurs fund that included to property developer investment, of which $330 million came from contributions from the GP and business Chinese real estate developer Yantai Xinchao Silver Lake. associates. GGV Capital Select, a top-up fund of Industry has acquired two oil assets in West Texas $457 million dedicated exclusively to follow-on backed by US-based private equity firms ArcLight Taikang Life leads $220m investments in portfolio companies from Funds Capital Partners and Denham Capital. The deal round for Womai IV and V, closed in May of this year. values the assets at RMB8.3 billion ($1.3 billion). Taikang Life Insurance has led a $220 million Google invests in VC- Series C round of funding for Womai.com, an family owner together paid HK$819.8 million online grocery shop under Chinese state-owned ($105.8 million) for a 65.53% stake. The family has backed start-up Mobvoi food conglomerate COFCO, valuing the company now acquired Carlyle’s 50% interest for HK$565.6 Google has agreed to buy a significant minority at approximately $1 billion. Chinese search giant million. stake in Mobvoi, a Chinese voice-activated Baidu, Yunlong Capital and Yang Guang Ronghui mobile search services provider, as part of a $75 Capital also participated. LeTV buys control in VC- million Series C round of funding. Mobvoi’s best backed Yongche known product is Chumen Wenwen, which Carlyle exits Natural offers searches covering catering, group-buying, Chinese media company LeTV Holdings has navigation, weather, tourism and public transport Beauty via buyback acquired 70% in Yongche.com, facilitating an via WeChat and an Android app. The Carlyle Group has exited in Natural Beauty exit for existing shareholders in the car rental Bio-Technology though a management buyback, and taxi-booking app. VC and PE investors in PE-backed drug developer prompting a group led by the founder and the company include Zhenfund, Morningside chairwoman to submit a takeover bid for the Technologies, Qualcomm Ventures, China files for US IPO Hong Kong-listed business. The PE firm and the Broadband Capital, DCM and GIC Private. BeiGene, a Chinese company backed by the likes

Number 40 | Volume 28 | October 27 2015 | avcj.com 7 NEWS

of Hillhouse Capital and CITIC Private Equity that PE investors set for part- Dadha. Netmeds offers both prescription drugs develops drugs to treat cancer, has filed for an and over-the-counter products through its IPO in the US. The company has has four clinical- exits from Viom mobile app. stage drug candidates. IDFC Alternatives and Macquarie SBI Infrastructure Management will make partial exits PE-backed SSIPL files for from India-based Viom Networks as American NORTH ASIA Tower Corporation (ATC) buys a 51% stake in the domestic listing telecom tower business. SSIPL Retail, a footwear manufacturer and retailer CITIC Capital buys Japan ATC will pay INR76 billion ($1.17 billion) in based in India, has filed for an IPO, providing an cash for Viom, which was formed through a exit for PE investor Tano Capital. The company footwear brand merger between Quippo and Tata Teleservices’ hopes to raise up to INR720 million ($11 million) CITIC Capital Partners has acquired Japanese telecom tower division in 2009. As part of the through the issue of an undisclosed number of footwear company Akakura for an undisclosed agreement, the US-listed company may acquire shares plus Tano’s entire stake. sum. Akakura produces and sells women’s or be required to acquire the outstanding 49% footwear through a network of directly-owned in Viom. I Squared buys asset from stores nationwide. The PE firm is planning a Macquarie SBI and IDFC Private Equity Fund revitalization of the company, which will involve III will retain certain interests in the company, Madhucon operational improvements and supporting Cube Highways & Infrastructure, the India toll expansion. road and transportation investment platform of I Squared Capital, has bought an Indian toll Reorient sells stake in road from developer Madhucon Infra. The firm will pay INR2.48 billion ($37 million) for 100% Korean GP EQ Partners of Madhucon Agra-Jaipur Expressways, which Korean Investment Holdings has agreed to buy manages a 57-kilometer stretch of the NH-11 Hong Kong-listed financial services Reorient road connecting Mahua and Bharatpur in the Group’s stake in Seoul-based private equity firm state of Rajasthan. EQ Partners for $6.6 million in cash. EQ spun out from Korea Investment Holdings in 2010 and PremjiInvest commits Reorient bought a one third stake in the business two years ago for $33m to India’s HRI as will Tata Teleservices and SREI Infrastructure PremjiInvest, the private investment firm for Finance. SREI is a listed entity controlled by the Wipro Enterprises Chairman Azim Premji, has SOUTH ASIA Kanoria Foundation; Kanoria Group is the current invested INR2.16 billion ($33 million) in cosmetics managing shareholder of Viom. SREI and other developer Hygienic Research Institute (HRI). General Atlantic buys stake Kanoria block shareholders will sell their entire The company will use the funds to invest in stake to ATC for $452 million, according to a automation of its factories and upgrade its IT in IIFL Wealth separate filing. systems, in addition to R&D. General Atlantic has agreed to pay up to INR11.2 Viom currently owns and operates billion ($173 million) for a minority interest in approximately 42,200 wireless communication Tiger, Flipkart lead $7.7m IIFL Wealth Management (IIFLW), a subsidiary of towers and 200 indoor distributed antenna IIFL Holdings, the Indian financial services group systems across Asia. ATC’s existing India portfolio round for Cube26 formerly known as India Infoline. The investoris of approximately 14,000 towers will be merged Tiger Global and Flipkart have led a INR500 expected to end up with a 21.61% stake. with that of Viom. million ($7.7 million) seed round for Cube26, an India-based developer of gesture control PE-backed Coffee Day to technology for smart phones. It is the first round developer that has previously received funding of institutional funding for Cube26, which has raise $177m in IPO from the likes of TPG Capital and EIG Global been bootstrapped to this point. Indian coffee shop and restaurant chain Cafe Energy Partners. It will pay approximately Coffee Day has fixed a price for its upcoming IPO GBP162.8 million ($252 million) for all of the that will put the offering on course to meet its assets held by AIM-listed Greenko. SOUTHEAST ASIA target of INR11.5 billion ($177 million). PE backers KKR, New Silk Route Partners (NSR) and Standard OrbiMed leads $50m round Formation 8 backs grocery Chartered Private Equity (SCPE) set to retain their stakes. for Netmeds delivery service Healthcare focused investment firm OrbiMed US-based VC firm Formation 8 has led a $15 GIC to buy renewable has led a $50 million round of funding for Indian million Series A round for Singapore on-demand online drug marketplace Netmeds. Previous grocery delivery start-up Honestbee. The firm energy platform Greenko investor MAPE Advisory Group also participated employs part-time shoppers at affiliated grocery Singapore’s GIC Private has agreed to acquire in the round, along with the family investment stores to fulfill customers’ online orders and Greenko, an India-focused renewable energy fund of Netmeds CEO and founder Pradeep drivers to deliver the purchased goods.

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Information on Sanne and its regulators can be accessed via sannegroup.com FUNDRAISING [email protected] Friends with benefits Co-investment is becoming more sophisticated as managers sharpen fundraising strategies and respond to Global leaders in private the needs of large investors. It points to an increasingly customized and complicated GP-LP relationship equity administration THE PURSUIT OF CLEANING AND CATERING up from the classic Australian upper middle be closing in three months time, let us know contractor Spotless Group by Pacific Equity market deal to target businesses with enterprise what number you want and you may or may not Partners (PEP) took upwards of six months. values of A$1 billion. But it functions most get it,’ that is an entirely different dynamic.” > Over 200 dedicated professionals focused on The Australian company’s board resisted a effectively with pre-qualified co-investors that This state of affairs also contributes to an alternative asset administration across Asia, London, series of approaches by the PE firm until, under have the experience and resources to respond to ongoing bifurcation in fund size. A total of $45.7 Channel Islands and Luxembourg pressure from major shareholders, in April 2012 opportunities within a set timeframe. billion has been raised for Asia-focused private it endorsed a bid that valued the business at This increasingly customized approach to co- equity funds so far this year, tracking below the > In excess of US$ 89bn of alternative assets around A$1.1 billion (then $1 billion). investment is not unique to PEP. Various industry 2014 level but roughly on par with each of the under administration PEP did not act alone. While the bulk of the participants say they are seeing a shift away from two years before that. A consistent trend is that equity came from the firm’s fourth fund, there dedicated vehicles to bespoke arrangements. It this capital is going to an ever smaller number > Trusted partner to the leading alternative asset managers were further commitments from a parallel co- is not only a reflection of the differing levels of of managers. A select few of these managers are investment vehicle and additional co-investment importance LPs attach to co-investment but also, raising ever larger funds. from the market. Spotless swiftly introduced That’s the difference a value creation plan intended to improve earnings. Non-core assets were offloaded, Asia private equity fundraising overheads were reduced and productivity 100,000 600 improved, and the business was repositioned to better engage with customers. By the time it re- 80,000 500 listed in May 2014, EBITDA was up 78%. Investors had already taken out some cash via 60,000 a refinancing and further proceeds came through 400 40,000 Funds a partial exit at IPO and then three block trades, US$ million the last of which was completed in August 2015. 300 20,000 The investment generated a multiple of 2.4x

and an IRR of 55%. PEP is hoping for more of the 0 200 same in its fifth fund, which closed earlier this 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD year. However, the way in which co-investors Buyout Infrastructure Growth Venture Other participate will be different. No. of funds The PE firm’s previous three funds were two Source: AVCJ Research thirds core equity and one third supplemental, > Market leading private equity, debt and real with the latter used as top-up capital for estate administration services deals above a certain size. Both tranches on a broader level, an acknowledgement that not “There has been a bit of a shakeout in the charged carried interest of 20%, but while the all investors are created equal. In a competitive middle market,” says Nicole Musicco, head of Asia > Director-led, high-quality, personal service management fee for the main fund was 2%, the fundraising environment, groups that are willing Pacific at Ontario Teachers’ Pension Plan (OTPP). supplemental vehicle took a 1% fee on drawn to come in big and come in early have increasing “There are groups that hoped this time around > Disciplined teams of experts down capital only. Every LP in the main fund had scope to dictate their own terms. they would be able to raise capital and they’re pro rata exposure to the supplemental vehicle. having a tough time. And the bigger guys seem > Highly responsive and completely bespoke For Fund V, the dual tranche approach Haves and have-nots to be able to continue raising capital, assuming service to each client has been modified, with a select subset of Private equity fundraising in Asia follows the they have good track records.” prequalified LPs now able to participate in co- 80-20 rule: 20% of managers have no problem Track record is generally the most important investment on a discretionary basis with zero fees. attracting capital, their vehicles come in ingredient of a fundraise, but it is not the only “The previous model worked well for us, but it oversubscribed, and LPs are term takers rather one. Doug Coulter, partner at LGT Capital Partners, The difference became clear there was increasing segmentation than term setters; the remaining 80% find the emphasizes the importance of a “narrative that in the market between investors who valued going tougher, and flexibility in terms and hangs together” – a clear and compelling story co-investment greatly and those that were not as conditions becomes a means of attracting LP that expresses the market opportunity and how a Key contacts in Asia: able to participate in it,” says Tim Sims, managing commitments. particular GP is positioned to capture it. [email protected] director at PEP. “The pricing had also changed “With funds that have a normal fundraising This corresponds to the experience of a for co-investment, with the more sophisticated track you can play around with the LPA [limited manager who closed a fund earlier this year. The [email protected] investors wanting to participate at no or low fee partnership agreement] and negotiate,” adds Wen team’s pitch was based on a differentiated story, a sannegroup.com level.” Tan, a partner at Aberdeen Asset Management. credible track record, and a strategy and skill sets Under the new model, PEP is still able to flex “The ones that say, ‘We are fundraising and we’ll that are relevant to the Asian PE landscape. For all

Information on Sanne and its regulators can be accessed via sannegroup.com Number 40 | Volume 28 | October 27 2015 | avcj.com 11

FUNDRAISING [email protected]

the supporting documentation provided to aid due diligence, one LP had seven meetings but didn’t commit, while another was happy enough Fees: Marginal movement to come in as the first investor after just one lunch, having got comfortable with the story and uy Hands, founder and chairman of Terra Firma, announced earlier this year that his next fund the dynamics of the team. Gwould not charge fees on uncommitted capital. “This means there will be no pressure from Comfort is key, particularly for US and investors. We can take our time and deploy capital in an opportunistic way,” he told AVCJ. European LPs with investment committees that There are said to be GPs in Asia considering a similar approach, but the trend has yet to take do not necessarily have a strong grasp of Asia. hold. Indeed, while some LPs push for fee breaks in return for making early or substantial fund Like many institutional investors, Andy Hayes, commitments, industry participants say the 2% management fee, 20% carried interest model is private equity investment officer at Oregon State more or less intact. Treasury, considers whether opportunities are “The downward pressure has largely been driven by LPs’ view that managers shouldnt’ make additive to the portfolio in terms of diversification profits on management fees,” says Chris Churl-Min Lee, an associate at Cleary Gottlieb. “If a smaller and returns, but there is also a somewhat holistic manager goes out to raise a larger successor fund with essentially the same team, LPs might push angle. for lower fee rates or one or more step-downs in the fee rate above certain fund size thresholds.” “It’s a question of how they see us as partners,” The 2/20 model is described many as “a good starting point” for negotiations. Anything over he explains. “Do we believe that if something $1 billion and it becomes difficult to defend 2%; below $1 billion and there is less push back. goes wrong we can sit down with them and Several LPs express discomfort at the notion of extracting discounts from smaller managers that figure out how to go forward? That is something might be struggling to get traction on a fundraise, although the practice is not unknown. not all GPs in Asia understand but it is important “We’ve done around 50 first-time institutional funds and there are situations where terms are to US LPs. It is all about trust and without that untenable,” says Chris Lerner, a partner with placement agent Eaton Partners. “If you are trying to trust you don’t even start.” build a business and you have an operating budget for that and you are being squeezed to take a discount it becomes difficult to run the business. The GP and advisor must have a good idea of Getting comfortable what the operating budget is and then what fund size and fee string they need.” In this context, negotiations over terms and For some investors, the ideal scenario is using an operating budget, not 2%, as the starting conditions not only establish how an LP can point. “The GP presents a budget to the advisory board and then they back into a management hold a manager to account during the life of fee based upon that,” says Doug Coulter, a partner at LGT Capital Partners. “It’s a transparent a fund, but also offer insights as to how the process, and in the cases I’ve seen, it tends to be less than 2%.” GP-LP relationship would function. Governance There is also variety in the hybrid structures that are emerging in Asia. If a GP a wants to build rights are a priority for many LPs, particularly up its track record and with a view to raising a traditional blind pool fund in the future, it might what action can be taken – GP removal, key line up several deals and invite LPs to participate in a shorter-term structure. There are examples person events, no fault divorce clauses, and so of fee breaks beyond the standard 25 basis points and even GPs charging no fees at all. on – should a manager fall short on its fiduciary However, with zero-fee co-investment increasingly used to ease the financial burden on LPs, responsibilities. the focus is more on other charges. With the US Securities & Exchange Commission honing in Fees are another consideration. While on PE firms’ approach to monitoring fees and board fees levied on portfolio companies, the real fund managers and advisors suggest the 2% pressure is on management fee offsets. management fee, 20% carried interest structure “Some of that historically has gone straight into the GPs’ pockets, but over the years it has is not in imminent danger, discounts are available shifted in favor of LPs,” says Wen Tan, a partner at Aberdeen Asset Management. “The proportion to those who commit a substantial sum to a fund of funds in Asia with a 100% management fee offset has increased from 48% in 2009 to 84% this or offer early support to a GP working towards a year.” first close. Promises of co-investment perform a similar role. “Some funds have a parallel non-discretionary commitments of sufficient size to funds that This means that certain managers are too co-investment vehicle that is there for fee they might be expected to receive some kind of small for its remit, but the co-investment angle reduction purposes,” says Niklas Amundsson, special treatment. However, the importance they also imposes pressure at the upper end of the managing director at Monument Group. “You attach to co-investment difers hugely. scale. There is a wariness of funds in Asia raising put in $100 million and $50 million goes into the All of Oregon’s co-investment activities in excess of $3 billion and the sweet spot is seen master fund at 2/20, and $50 million in the co- are outsourced to a joint venture platform as $1-2 billion, with the expectation of putting investment vehicle, which is no fee and no carry. with Washington State Investment Board. In meaningful co-investment capital to work in a On a blended basis you get 1/10.” Hayes’ view, this approach brings clarity to the few larger deals. “If a GP needs to fill a $200-300 In its annual survey of fund terms in Asia, decision-making process: there is no danger of million equity hole – which would be rare – our Aberdeen Asset Management found that backing “a B-minus GP that could deliver a lot of hope is they put in $200 million and we put in approximately 40% of GPs have a tiered model, co-investment.” $100 million,” Musicco says. with LPs qualifying for preferential rights on co- Musicco, meanwhile, describes co-investment It is possible that a GP might up with an investment if they commit over a certain amount as part of OTPP’s DNA. The pension plan insists LP base comprising: large but passive US or come in at the first close. A further 40% or on participating as a co-underwriter in deals, pension funds; Canadian pension plans and so have a pro rata policy with co-investment working with the GP from day one and playing sovereign wealth funds that actively lobby for shared out equally, and the rest have no specific a role in the value-add process. It wants to write co-investment; fund-of-funds that write smaller guidelines. checks of $150-250 million per fund and seeks checks but are looking to fuel their own co- Oregon State Treasury and OTPP both make co-investments of at least $75 million. investment programs; and any number of smaller

Number 40 | Volume 28 | October 27 2015 | avcj.com 13 INNOVATION... SOPHISTICATION... INTEGRATION...

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players that might value the chance to increase examples of LPs refusing to invest because (CPPIB) $534 million contribution to the MBK their exposure to a particular deal. they feel the terms granted to other groups are Partners-led $6.4 billion acquisition of South untenable, and GPs with unwieldy LPAs that Korean retailer Homeplus is extraordinarily Read the small print require co-investments to be shown to every large by regional standards. Indeed, CPPIB Distributing these opportunities – and factoring single fund investor. As with other terms and previously reduced its minimum check size for in considerations such as size and timeliness conditions, the level of flexibility comes back to co-investments in Asia from $50 million to $35 of commitment, the longevity of the GP-LP how badly a private equity firm needs the money. million in order to capture more deal flow. But relationship, and strategic objectives like “If you are struggling to raise $400 million as economies mature, and more control deals rebalancing the LP base – is a complex process. and someone offers $80 million but they want become available in emerging markets, large-cap PEP and others are jettisoning the pro rata model first-in-line co-invest, what do you say? That you transactions should proliferate, albeit gradually. in favor of a zero-fee approach designed for a have to keep it open?” asks Andrew Ostrognai, more select group of co-investors, but they may a partner at Debevoise & Plimpton. “So you give The big get bigger resist making specific promises. them first-in-line rights and that virtually assures The more capital these investors want to deploy, “During a fundraise, a significant number you won’t get the second $80 million check from the greater their demand for customized of investors are likely to request co-investment an investor that likely wants to co-invest, because solutions from GP partners. Fund formation rights in their side letters, and larger investors that investor won’t take second-in-line. But what lawyers are already seeing a rise in separate often push for priority co-investment rights” is worse – not getting the second $80 million or accounts that exist alongside but independent of says Chris Churl-Min Lee, an associate at Cleary getting nothing? At a certain point you take the traditional co-mingled funds. For these vehicles, Gottlieb. “In general, GPs try to avoid making leap.” terms and conditions are subject to a completely firm commitments to provide these rights. They Just as there is an element of cyclicality open-ended negotiation. “There is no one-size- prefer to retain flexibility over the allocation of to private equity fundraising that influences fits-all answer,” says Debevoise’s Ostrognai. “It is co-investment opportunities for each deal.” There are numerous reasons for this. For example, the GP has to take into account the “If you are struggling to raise $400 million and individual capabilities of its LPs. If a deal is moving quickly and co-investors need to complete their someone offers $80 million but they want first- due diligence within a limited timeframe, it is impractical to bring in LPs that are known for in-line co-invest, what do you say? That you have having very lengthy approval processes. PEP’s to keep it open?” – Andrew Ostrognai Sims notes that co-underwriters are particularly useful in public-to-private transactions where the GP must show it can provide funding. how much GPs must concede on terms and not a question of what other LPs are getting; In other situations, a certain LP might be conditions, some LPs are likely to reconsider their there are no other LPs.” targeted because it can add value to a deal. This position on co-investment. Nevertheless, a separate account could have is where a group like OTPP would want to involve A number of groups led the way, building an impact on co-investment opportunities its in-house sector specialists; indeed, the way teams able to evaluate and execute transactions, available to LPs in funds run by the same in which these teams can complement a GP’s and others have followed, regardless of the fact manager. It makes the web of agreements resources and strategy is included in the criteria they aren’t properly set up to do co-investments. around preferential rights and fiduciary for assessing fund commitments. Those that rush into every single opportunity responsibility all the more complex. Second, concessions on co-investment may presented to them without conducting proper This change may only be happening at conflict with pre-existing “most favored nation” due diligence are likely to run into trouble. They the margins but it points to a fraying in the (MFN) agreements a GP has with other investors may ultimately conclude that the risks outweigh traditional GP-LP relationship and the terms that in the fund. Even if an LPA says that the GP the returns. bind it. If the industry is to become increasingly has full discretion to distribute co-investment “It takes some time – you can’t just look at 1-2 customized, for sophisticated investors making opportunities should they arise, larger LPs have years of results – but in the medium term your large commitments or for groups that want been known to ask for side letters that give co-investment returns have to be better than special treatment in return for taking a risk on them preferential rights, in terms of first-look or your fund returns,” says LGT’s Coulter. “If a new an emerging manager, the onus falls on the GP percentage allocation. However, by entering into CIO comes in, asks why the co-investment results to manage the process. It is then a question of such an arrangement, the rights of other groups are worse than the fund results, and the answer is internal resources and what the leaderships and might be violated. because you’ve just been doing top-down box- back office can accommodate. “You might see under-the-table deals checking work, he is likely to say, ‘We are either “You want to keep it simply MFN, you want to between GPs and LPs along the lines of, ‘I am going to build up a proper co-investment team keep straight,” says Mark Chiba, group chairman not going to put it in writing that I will give you or we will stop doing it.” and partner of The Longreach Group, a Japan preferential rights but we are business partners But even if only a small portion of those and North Asia-focused PE firm. “You don’t want and we will take your needs into consideration,’” under-resourced LPs start taking co-investment 20 LPs with 15 different economic relationships says Lorna Chen, a partner at Shearman & seriously, there will likely still be increasing because people choose different packages. At Sterling. “So rather than a side letter, there is an amounts of capital available from the big players. the end of the day, you are trying to take their understanding between the GP and certain large One reason for this is the expectation of more capital and multiply it – that should be the basic LPs.” deal flow out of Asia. objective. If you make terms too complex or However, there are still plenty of anecdotal Canada Pension Plan Investment Board’s heterogeneous they just become a distraction.

Real challenges Unreal rewards

If you understand a market, it doesn’t matter much where it is. But if you don’t it seems distant and insurmountable. We’re here to help bridge that gap. Our highly integrated global private equity team can help you with your investments into new markets. Visit ey.com/privateequity NICOLE MUSICCO | INDUSTRY Q&A [email protected] Direct exposure Co-investment is a key tenet of the private equity strategy at Ontario Teachers’ Pension Plan. Nicole Musicco, managing director and head of Asia Pacific, explains how the group likes to participate

Q: What do you look for from raising $1-2 billion where there working with a GP we like to who has the most expertise, potential portfolio GPs in Asia? average check size is going to be work with a local partner that we and who would need us as a co- A: If you look at our developed $150-250 million and we think have got to know over time. investor. When you go through markets portfolio, the funds we can provide a co-investment that framework you would be tend to be $1-3 billion size and solution that is meaningful Q: What happens if you have surprised how quickly it makes sector-focused. We can take our enough in size. If a GP needs co-investment opportunities our life easy. internal team and be another to fill a $200-300 million equity with two different GPs that are smart set of eyes for the GP, hole – which would be rare – our bidding for the same asset? Q: You said OTPP is interested in and that has worked well. So in hope is they put in $200 million A: We often get calls from one GPs that are looking to be a bit Asia Pacific a big piece of it is and we put in $100 million. more creative about structure. who the partner is, the types of To what extent do you see that deals they are going to do, and Q: How small a check could you creativity in Asia? whether our expertise overlaps cut for a co-investment? A: We are starting to see more nicely with theirs. If all we are is A: We have tried to stay at a variety. A lot of investments just another LP with a big check minimum of $75 million. In that were underwritten as 3-5 book then we are unlikely to see the context of a $20 billion year deals haven’t necessarily co-investment. We look at who private equity portfolio and a been exited and our message the other LPs are and whether very small team in this region to our GPs is maintain discipline we offer a differentiated solution we are cognizant of that return and make sure you are getting because we have expertise in effort. In this market specifically, value creation done. Don’t just the sector or because the style of where there are probably more look for a quick exit because we investing requires an LP that can platform-play investments, we need the capital back. LPs are be more agile and innovative. definitely see a scenario in which becoming more sophisticated in If the GP is looking to be a bit we write a smaller check today making sure we set our GPs up more creative about structure, knowing that we would be If all we are is for success. There is dialogue at maybe about how long they adding more capital over time. the LP advisory committee level hold the asset for, we can play a Maybe you start with $50 million just another LP as to whether there is value to be larger role. and grow that to $100 million or with a big check had if we are a bit more patient. $200 million. In other instances we find a way Q: What is the optimal fund size book then we are to work with the GP, help them for you in Asia? Q: And OTPP has to be a co- get a realization at a valuation A: When we first came out here in underwriter in a deal, there unlikely to see that makes sense, and then a larger way in the early 2000s, is no interest in downstream co-investment together with other LPs that are we were either carving out syndication… interested, take the company to teams from larger groups of A: In 2006-2008 we participated the next stage. setting people up in new shops. in some syndicated deals and or two groups so we are The funds tended to be under we weren’t happy with the extremely diligent about not Q: Do you expect more LPs to $1 billion because that is what results. There was a pretty clear putting ourselves in an awkward build in-house teams in the the market could handle. Fast connection between returns and position. When we get a call region so they can do things forward to the next era and the being at the table, using our own from one group we refrain from like this? funds were in the $1-3 billion eyeballs and our own insights, taking calls from others. We A: If you have the right governance range, and we were comfortable versus just writing a check. don’t always win but it’s more and compensation systems in with that. Now when we see One of the reasons we sent a important to us to maintain that place, it comes back to having funds raising above that it team out here was to establish trust with our partner than to the autonomy and agility to makes us nervous because we relationships with local partners switch horses. If it’s a large deal get deals done. Without a know there is lots of dry powder – and those partners could be we like to know it’s coming to combination of those three sitting on the sidelines – not anything from an entrepreneur market and so in most cases things it’s really hard to have the only with traditional GPs but or family through to a very local we have already done our 20-year record we have in private with sovereign wealth funds GP or sovereign. Our strong homework so if and when the equity. I think more groups will and groups like us. That tends to preference is to work with GPs call comes we know who we build in-house teams but it is not lead us in the direction of funds we have on hand. If we aren’t think is best positioned to win, an overnight exercise.

Number 40 | Volume 28 | October 27 2015 | avcj.com 17 TECHNOLOGY [email protected] The billion-dollar club Asia accounts for one fifth of the global tech sector’s unicorn population as companies raise larger rounds at ever higher valuations. But as investor sentiment weakens, some of these behemoths should be concerned

DON’T FANCY COOKING? SHAOFANFAN prospects now appear less certain. Investors are services, e-commerce, financial technology and will send a chef to your home who will serve beginning to ask when, and how, they are going hardware. China has 21 unicorns and at least one up a meal for you. This was how the Chinese to get their money back. representative in each category, while India has online-to-offline (O2O) start-up positioned itself “The VC market has cooled compared to seven, mostly in e-commerce and O2O services. when opening for business last year. Within a earlier in the year. Some later-stage financing is South Korea and Southeast Asia have two few months, the company claimed to have more taking longer and some companies are adjusting unicorns apiece. than 200,000 users and over seven million chefs their valuations,” says James Mi, co-founder The e-commerce space is packed with registered on its platform. IDG Capital Partners at Lightspeed China. “Companies that are companies looking to emulate the success of and Shunwei Capital Partners duly invested. consuming a lot of money are under much more China’s Alibaba Group and JD.com, both of which Last week Shaofanfan closed down. “After 11 months, regrettably we haven’t figured out a sustainable business model,” Zhijian Zhang, the “There have been several ‘private IPO’ financing company’s founder, said in a WeChat message to rounds by large mutual funds and hedge funds, users. “We tried to separate ourselves from all the craziness in the industry over internet-plus and but that does not necessarily solve the problem O2O, and focus on what we really wanted to do. – Jessica Archibald But the private chef model is just so inefficient.” for venture capitalists” One of several private chef platforms to receive VC backing, Shaofanfan failed to gain pressure. Instead of burning cash, they need to went public in the US last year. India’s Flipkart and traction in a competitive market despite altering figure out how to grow their businesses on a Snapdeal and South Korea’s Coupang sit near its strategy several times, one investor says. limited capital basis.” the top of the valuation rankings. Ride-hailing A few weeks earlier, Meituan, a leading O2O platforms are represented by Didi Kuaidi, Ola and services player with five years of history and Myth to reality GrabTaxi, from China, India and Southeast Asia, millions in private funding behind it, experienced The term of unicorn emerged in the US about respectively, while China alone boasts several its own wobble. The company approached three years ago. They were a rare species to begin lifestyle-oriented local services unicorns, led by investors about raising more capital at a higher with but have grown in number as companies Meituan and Dianping (their merger is pending). valuation but the response was lukewarm. This in the past 18 months. According to CB Insights Sectors such as healthcare and financial triggered a flurry of negotiations and Meituan data, there are currently 140 unicorns globally technology – rich unicorn territory in the US – announced a merger with rival platform with a total accumulative valuation of $506 are also getting traction in China. Ant Financial, Dianping, in the expectation that investors will million, although given the nature of private Alibaba’s online finance affiliate, is said to be look more favorably on an outright market leader. markets this could be a low estimate. valued at more than $40 billion, although it is Two companies of contrasting size and two Asia is home to 32 unicorns worth a missing from the CB Insights rankings. There are very different outcomes, but a common driving combined $132 billion, having raised more than places for peer-to-peer (P2P) lending platform factor: weaker sentiment in the tech space in $18 billion. Chinese smart phone brand Xiaomi Lufax and healthcare information portal Guahao. China, and every chance that it will spread to leads the way, occupying second place in the These valuations are more about projection India and Southeast Asia as well. For the unicorns global rankings with a purported worth of $46 than reality: investors calculate an expected in these markets – companies like Meituan that billion, just behind Uber on $51 billion. These market size for a particular vertical and attribute have valuations of $1 billion or more – once solid companies are largely concentrated in O2O valuations to companies based on their market

Asia’s unicorns CHINA There are 140 tech start-ups globally Xiaomi currently valued at $1 billion or Consumer electronics more, according to CB Insights. Here Valuation: $46b are Asia’s 32 (although it’s possible Funding: $1,540m there are quite a few more)... >>>

18 avcj.com | October 27 2015 | Volume 28 | Number 40 TECHNOLOGY [email protected]

share, even though in most cases the capital and accumulate market share. Some companies maintain a low cost burn and have at least a 3-5 being raised goes towards subsidies used to offer free consultations, even though they don’t year horizon in terms of cash on hand to run with attract customers and maintain or increase have enough doctors; and others are paying before doing another raise,” says Ozi Amanat, market share. As such, several companies are not doctors RMB50-100 ($8-15) a time to download founder of K2 Global, which makes pre-IPO only valued in excess of $1 billion, but have also apps. We’re the only start-up not giving money investments in technology companies. raised more than $1 billion in fresh capital. So away because it isn’t going to work,” says Martin In the US, Top Tier Capital Partners currently what does it actually mean to be a unicorn? Shen, founder and CEO of Xingren. “Patients will has more than 50 unicorns in its portfolio and “Unicorn status is less meaningful than a get better and stop using the platform.” another 40 publicly-listed companies worth over couple years ago. In the past when you had This competitive dynamic is a product $1 billion in which its portfolio VC funds still hold valuation of more than $1 billion in theory this meant you were safe – no one could beat you. Asia later-stage VC investment Now I don’t think being a unicorn is enough to ensure a successful IPO. We will see unicorns die. 15,000 Right now there are a lot of inflated unicorns because of the valuation bubble,” says David Wei, 12,000 co-founder of Vision Knight Capital. 9,000 Competitive spirit

The first generation of Chinese internet giants US$ million 6,000 – Baidu, Alibaba and Tencent Holdings (the BAT) – has contributed to the current state of 3,000 affairs. Keen to differentiate their business models 0 or at least create traction for their ecosystems, 2011 2012 2013 2014 2015 YTD these companies used capital to secure strategic China India South Korea Southest Asia alignments in each new vertical. Source: AVCJ Research Prior to their merger earlier this year, Kuaidi Dache was backed by Alibaba while Didi Dache counted Tencent among its investors. Passengers relentless ambition. Every founder envisages shares. The fund-of-funds only tracks the top 1% could make payments through Alipay or Tenpay becoming the dominant player in his space and of these unicorns for which the average valuation and enjoy free rides if they used Alipay or potential long-term pay-off is so great they are is $6.3 billion. WeChat. Similar synergies were behind Alibaba willing to whatever it takes to maximize their Top Tier’s findings indicate that these and Tecent’s decision to support Meituan and chances of success. “A lot of these founders think companies are generating average revenue of Dianping, respectively. The O2O services players several years ahead and ask ‘What must I do to around $500 million and seeing year-on-year were encouraged to broaden their scope and become a significant player?’ They are willing to growth of 142%. These revenue numbers are a compete for business not only in group buying sacrifice profits today for a bigger market share source of comfort: though valuations are high, but in a host of other segments as well. and profitability in the future,” says John Lindfors, the companies’ performance suggests they are Other verticals such as mobile healthcare managing partner at DST Global. not inflated. platforms that connect doctors and patients Subsidies are therefore seen as a necessary “Our biggest concern is the motivation for appear to be following suit. Tencent invested part of the expansion phase. The company builds these unicorns to go public is small,” says Jessica $394 million in that Guahao and industry peers market share, gets users comfortable with its Archibald, managing director at Top Tier. “There including Spring Rain and Xingren responded service, and then weans them off the subsidies. have been several ‘private IPO’ financing rounds by raising large rounds from the likes of It is hoped that customers will have developed by large mutual funds and hedge funds, but FountainVest Partners and Yunfeng Capital, which sufficient loyalty to the platform that they are that does not necessarily solve the problem for was co-founded by Jack Ma, executive chairman willing to pay a higher take rate. venture capitalists. These ‘private IPOs’ are more of Alibaba. The proceeds are being used to wage Not all investors are happy with this of an exit risk for VCs than an opportunity, but it is a marketing war. approach. “We’re hyper-aware of cash burn and too early to call it a real concern.” “We are seeing unicorns in our space. A lot of any company that has an asymmetry in cash The recent experiences of US-based people are putting in money to provide subsidies burn I walk away from. It is very important they document-sharing software provider Dropbox

INDIA CHINA CHINA CHINA Flipkart Didi Kuaidi Lufax DJI Online marketplace Car-hailing apps Online P2P lending Consumer drones Valuation: $15b Valuation: $15b Valuation: $10b Valuation: $10b Funding: $3,150m Funding: $4,420m Funding: $483m Funding: $105m >>> >>>

Number 40 | Volume 28 | October 27 2015 | avcj.com 19 kpmg.com/cn +852 2140 +8522140 2838;[email protected] 2206;[email protected] +8610 85087095;[email protected] Sebastian Leotta: Kenneth Pang: +852 2140 2871;[email protected] Chamberlain: John Gu: For moreinformation, pleasecontact: Dedicated to Private Equity. Dedicated to your success. throughout theentireinvestment cycle. office toassist you locationsthroughoutChina,tailorourservices we can in mind. skillsacross With Audit, Tax & andanetworkcoveringAdvisory 16 KPMG hasadedicatedPrivate Group inChinaorganisedwithyour Equity needs business andcanhelpyou stayaheadofthe game. business inChina. You needtowork withprofessionals your who understand environment, privateisanincreasinglycomplexregulatory equity andcompetitive anabundanceofnewWith investment combinedwithanever capital, changing

© 2015 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. TECHNOLOGY [email protected]

illustrate the difficulties that arise when private served a similar purpose and the now-combined Lu, a partner at law firm Cooley. “You have market valuations become unjustifiably high. entity has ended subsidies and is looking to already seen a lot of the companies start to have Dropbox raised a $350 million Series C round create a pricing system based on data generated operational issues, because their overhead is so last year at a valuation of $10 billion. However, before the relentless undercutting set in. big, and the competition is so fierce.” industry peer Box then went public at a valuation “They are making money from premium car One more recent development in the market $1.6 billion, despite its revenues being no services and there is still a lot they can do to is a growth in M&A activity and it is inevitable more than 50% lower than those of Dropbox. improve service quality. It’s like Alibaba, which that larger players will pick of their weaker Investment bankers told the company it would took 14 years to go IPO. The need for Didi Kuaidi counterparts. These moves will also support struggle to hit a $10 billion valuation on IPO. to list isn’t as high as before, because there is continued expansion into new growth areas, BlackRock and other investors wrote down a private market for them to raise money,” says as already evidenced in the strategies of Baidu, the value of the asset on their books, reportedly Alibaba and Tencent. Increasingly, this is likely to to around $6-7 billion, and Dropbox shelved the see Chinese companies establish footholds in IPO plan. According to PitchBook, US companies “Category leaders will other emerging markets. are now waiting a median of 7.7 years to go always be able to raise Similar patterns are emerging in Southeast public, up from 5.8 years in 2011. Asia and India. GrabTaxi and Ola have both The classic example of a successful Asian funds at a certain launched delivery services, while Snapdeal unicorn IPO is JD.com – it went public at a and Flipkart are also making tech investments. valuation of $26 billion and now trades at close valuation. If you aren’t These companies are not as acquisitive as their to $40 billion, representing significant upside for one of the superstar Chinese peers and reasons are given for this: the even the later-stage investors. But the private logistical and cultural challenges presented by market valuations commanded by arguably less companies, it is a lot Southeast Asia’s multiple markets are a hindrance impressive companies, coupled with questions as to expansion; and in India the middle class is – John Lindfors to how many Chinese unicorns US markets can more difficult” still comparatively small. At the same time, the accommodate, is giving pause for thought. unicorns in these markets are simply younger Dianping was preparing for an A-share listing Jixun Foo, a managing partner at GGV Capital. than the Chinese. earlier this year before public markets crashed, “Third, there is liquidity. If I wanted to sell my “In India, it may be too early to say, because the offering was postponed, and the Meituan stake in Didi Kuaidi today, there will be people none of the truly large internet companies in this merger was agreed. The combined entity is said who want to buy in the private market.” cycle have gone through exits. My sense is, once to be looking to raise capital at a valuation of some of the largest unicorns have go through $17 billion – more than the two companies were Winners and losers this, it will have an impact on downstream worth as independents – but would the public The mergers also reflect an acceptance on funding for the next batch. I think over the next markets value it so highly? the part of Alibaba and Tencent that the 18-24 months there will be exits, at least for the “Dianping probably does over RMB2-5 billion market opportunity is best addressed through largest companies,” says Gourav Bhattacharya, a month in transaction value, while Meituan has collaboration rather than cutthroat competition. vice president at Matrix Partners India. about RMB 5-6 billion. That is more than RMB10 Investors may to participate for longer than If valuations cool as many industry billion worth of transactions in one month,” originally envisaged – and perhaps invest more participants expect, there will be more casualties says J.P. Gan, managing partner at Qiming as the company continues to expand – but it is like Shaofanfan in China. Some unicorns may Venture Partners and an investor in Dianping. expected to deliver economic sustainability. also run into difficulty, particularly if they have “Commissions are 5-10% so the company is However, it is unlikely to work out well for not been able to use their funding to establish generating around $500 million in annual income everyone. Industry participants point to earlier leadership positions. With an abundance of new investment capital, combined with an ever changing and growing 30-50% year-on-year. Why don’t you developments in the e-commerce space. More “Category leaders will always find it is possible regulatory environment, private equity is an increasingly complex and competitive think they can’t be worth billions of dollars?” than 1,000 companies have raised capital over to raise funds at a certain valuation. If you aren’t business in China. You need to work with professionals who understand your The merger of Dianping and Meituan is a the last 10 years but only a handful has achieved one of the superstar companies, it is a lot more business and can help you stay ahead of the game. cost-saving exercise. They will no longer pump significant size – the hit ratio is said to be 5%. difficult to raise money in a challenging market,” capital into subsidies intended to win market “Everyone has to figure out how to build a says DST’s Lindfors. “That’s what happens when share off each other, and as the single dominant sustainable business model. When the investing a market is hot – a rising tide lifts all boats. When KPMG has a dedicated Private Equity Group in China organised with your needs player in the market, there are no other rivals. The environment changes those that are slowest in the markets face a tough time, investors will be in mind. With skills across Audit, Tax & Advisory and a network covering 16 earlier merger of Didi Dache and Kuaidi Dache finding an answer are the first go,” says James more selective.” office locations throughout China, we can tailor our services to assist you throughout the entire investment cycle. CHINA SOUTH KOREA CHINA INDIA Dedicated to Private Equity. Dedicated to your success. Meituan Coupang Dianping Paytm For more information, please contact: O2O services Online marketplace O2O services Online payment John Gu: +8610 8508 7095; [email protected] Valuation: $7b Valuation: $5b Valuation: $4.1b Valuation: $3.4b Rupert Chamberlain: +852 2140 2871; [email protected] Funding: $1,270m Kenneth Pang: +852 2140 2838; [email protected] Funding: $1,070m Funding: $1,420m Funding: $1,440m Sebastian Leotta: +852 2140 2206; [email protected] >>>

kpmg.com/cn affiliated with partnership and a member firm of the KPMG network independent firms KPMG, a Hong Kong © 2015 KPMG name and logo are registered The All rights reserved. entity. (“KPMG International”), a Swiss KPMG International Cooperative trademarks or of KPMG International. Number 40 | Volume 28 | October 27 2015 | avcj.com 21

ANTHONY TAN | INDUSTRY Q&A [email protected] In the fast lane GrabTaxi started out as an entry in business plan contest at Harvard Business School in 2011, where it placed second. Co- founder and CEO Anthony Tan explains how it has since become Southeast Asia’s leading ride-hailing company

Q: To what extent has the pace Manila. We also want to improve considerations when deciding or nature of GrabTaxi’s growth our technology back-end and whether or not to work with? surprised you? expanding our engineering A: As a start-up, we are always A: We started out with a vision offices, and implement more keen to partner with investors to solve local taxi problems by driver-centric programs to that can help us scale our brand addressing safety and traffic support recruitment and quickly and efficiently. This congestion. Today we work retention. would allow us to continue our with over 141,000 drivers and pace of growth, provide more our app has been downloaded Q: What are the most challenging transportation options and on almost eight million mobile aspects of scaling the expand to even more cities in devices across 26 cities in six business? Southeast Asia. We also look Southeast Asian countries. I’ve A: The diversity of the Southeast for potential investors who are focused on taking it one step at Asian region, such as language, aligned with our hyper-local a time; expanding into a new cultural differences and to their preferred mode of approach. city when we have understood infrastructure challenges, can transportation, whether it is the local needs, offering a new make scaling a business difficult. GrabTaxi, GrabCar or GrabBike. Q: How do you feel about transportation option when we However, it is also our greatest We are the only app in this GrabTaxi being labeled a ascertain there is a gap in the advantage: We grew up here, region that offers a diversified unicorn? Does it add to the market. In the past 6-12 months, we understand the nuances portfolio of services under the pressure or is it just a number? we have diversified our portfolio of local communities and our GrabTaxi platform, allowing A: The labels are part of the business, – with GrabCar and GrabBike – to engineering and operational users to choose the vehicle as we are the largest player, give consumers more options, resources are focused on solving type that best suits the current with the largest land transport depending on their needs and them. It is no coincidence traffic conditions, weather and fleet, with the most options, in preferences. that the leading ride-hailing other factors that may affect Southeast Asia. Personally my companies in Southeast Asia, how they travel. By segmenting focus is very much on building Q: You have raised about $700 China and India are all local our verticals, it ensures that a great business that provides a million in funding. How is it companies. Our hyper-local each vertical is able to grow much-needed service to the local being used? strategy means we understand consistently. There are also communities in Southeast Asia. A: We are making strategic the local issues and are able to dedicated teams for each The numbers that matter to me investments to extend our leverage this local knowledge vertical, so they can dive into the are the number of drivers who market leadership in Southeast to build a viable business model nuances of how customers use can improve their livelihoods Asia. We will continue to invest that suits each community. services and develop programs using the GrabTaxi app, and the in important pillars of our that cater to these specific number of passengers who can business, including increasing Q: How do you strike a balance preferences. easily book safe rides every day. our offerings and growing our between offering new services Regardless of the size of GrabTaxi, network to include services and ensuring existing ones Q: When you are approached by my goal remains the same – to such as GrabCar, GrabBike and meet expansion targets? new investors interested in make public transport safe, beta testing a courier service, A: Our priority is to ensure that participating future funding affordable and reliable to all in GrabExpress, in Bangkok and passengers have access rounds, what are the key Southeast Asia.

AUSTRALIA CHINA INDIA INDIA Atlassian Ele.me Snapdeal Olacabs Security software O2O services Online marketplace Car-hailing apps Valuation: $3.3b Valuation: $3b Valuation: $2.5b Valuation: $2.4b Funding: $210m Funding: $1,090m Funding: $1,540m Funding: $905m >>>

Number 40 | Volume 28 | October 27 2015 | avcj.com 23 With over 30 years of experience in Asia, Cleary Gottlieb Steen & Hamilton LLP has handled some of the largest NEW YORK and most innovative transactions in the region, including

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BUENOS AIRES “Well-resourced to handle large- scale transactions and coordinate SÃO PAULO them across various jurisdictions” ABU DHABI Chambers Asia-Pacific, 2013

SEOUL Investment Funds Client Service Firm of the Year Chambers and Partners, 2012

clearygottlieb.com TECHNOLOGY [email protected] / [email protected] The long tail From taxi journeys to pedicures, online-to-offline services are changing consumption channels in Asia’s emerging markets. Some leaders have emerged, but much of the sector is still up for grabs

WHEN INDONESIA-BASED MOTORCYCLE app-based ride-hailing platform getting traction to run, easier to park, and quicker to mount and taxi firm Go-Jek wanted to recruit more riders, it in new verticals. That the company has been dismount than anything on four wheels. This moved from one recruitment center to a larger able to achieve this confirms the founders’ initial efficiency is essential in traffic-laden cities like one and then a yet larger one. Eventually the notion that Indonesia’s ojek resources were being Jakarta. company resorted to hiring out sports stadia underutilized – from standing on street corners as its army of riders – local people looking for waiting for rush hour, they have become multi- China and beyond additional income who connect with customers taskers and are better compensated as a result. Local nuance is the lifeblood of O2O in the sense via a mobile app – ballooned from 300 to over But it was also the right business model at that technology uses resources at a city or even 100,000. community level to address imbalances Go-Jek, which takes its name from the Largest O2O funding rounds in China, India between demand and supply in the ojek motorcycle taxis that are part of urban and Southeast Asia, 2014-2015 services sector. But follow the wealth life in Indonesia, has been in existence creation patterns in Asia’s leading emerging Amount for about three years. It was built on a Date (US$m) Investee Business markets and – as has proved to be the case call center model, although by the time CHINA with e-commerce – the areas of activity NSI Ventures invested in the business in Aug-15 3,000 Didi Kuaidi Ride-hailing apps in China are likely to be replicated in India late 2014, the service was about to be re- Apr-15 850 Dianping O2O services and Southeast Asia, although there is no launched with a location-based application. Jan-15 700 Meituan O2O services perfect imprint. “Timing is important because if you Dec-14 700 Didi Dache Ride-hailing apps “These markets will follow China one launch these things too early – before Aug-15 630 Ele.me Food delivery way or another, but the question is how people have the right connectivity, the Jan-15 600 Kuaidi Dache Ride-hailing apps and when,” says John Lindors, managing right phones – you need to be sufficiently Jan-15 350 Ele.me Food delivery partner at DST Global. “The enormous confident that it can scale up,” says Shane Oct-15 300 58 Daojia O2O services middle class and fixed broadband as Chesson, co-founder of NSI. INDIA well as the proliferation of smart phones As the green-jacketed riders proliferated, Apr-15 400 Ola Ride-hailing apps have driven a lot of growth in China, but the company grew in scope as well as scale. Sep-15 225 Ola Ride-hailing apps in Southeast Asia and India the middle Go-Jek’s core services involved transporting Oct-14 210 Ola Ride-hailing apps classes are proportionally smaller and fixed people and packages on the back of a Mar-15 110 Foodpanda Food delivery broadband will never be built out to the bike. They were soon joined by dedicated May-15 100 Foodpanda Food delivery same extent as in China. These markets will grocery and food delivery services. SOUTHEAST ASIA really be driven by smart phone usage.” The company has since branched out Aug-15 350 GrabTaxi Ride-hailing apps The sophistication of communications into online-to-offline (O2O) local services, Jul-15 250 GrabTaxi Ride-hailing apps infrastructure, the nature of competition whereby the app locates the cleaner, Source: AVCJ Research and local logistical challenges shaped masseuse or beautician closest to the the emergence of Go-Jek in Indonesia. customer’s home and a Go-jek driver ferries the right time. While Go-Jek faces increased However, if China is a rough blueprint for how them over. Go-Box, meanwhile, targets the competition from the likes of GrabTaxi’s GrabBike, O2O services will evolve in Asia, the future will be same user base but involves transporting larger grocery delivery service Happy Fresh and the one of consolidation around three key verticals: consignments by truck. Sequoia Capital invested ubiquitous Food Panda platform, for now it is less transportation, food delivery and local services. in the business earlier this year as NSI re-upped. intense than in other emerging markets. There is Over the last two years, capital has poured Chesson claims Go-Jek is a rare example of an also a practical element: a motorbike is cheaper into these verticals, often supporting the

SOUTHEAST ASIA CHINA CHINA INDIA GrabTaxi Ucar Beijing Lakala Mu Sigma Car-hailing apps Car-hailing servicet Online payment & services Data analytics Valuation: $1.8b Valuation: $1.8b Valuation: $1.6b Valuation: $1.5b Funding: $690m Funding: $800m Funding: $274m Funding: $178m >>>

Number 40 | Volume 28 | October 27 2015 | avcj.com 25 15-000949 Strong Ideas 210x294 A4_Outline text.indd 1 10/21/15 2:25 PM TECHNOLOGY [email protected] / [email protected]

subsidies required to get consumers and merchants interested, and build market share. The $3 billion round closed by ride-hailing app CASE STUDY operator Didi Kuaidi in September, valuing the business at $16 billion, is said to be the largest ever fundraise by a private internet start-up. Southeast Asia: As of July, the company – created earlier in the year through the merger of two rivals –was aCommerce processing three million taxi rides and three million private car rides per day through its he still-developing world of online retail provides many niches where a company can start to platform. However, the arrival of Uber has since Tgrow. For Thailand’s aCommerce, the opportunity lay in the realization that many brands are shaken up the market. eager to sell their products online, but lack the interest or the resources to set up an online portal Companies in the food delivery and local themselves. services spaces do not yet command such high “Normally for a brand, your main focus is to manufacture or develop great products. And valuations but the likes of Ele.me, Dianping, everything that is normally non-core, you actually outsource to other providers,” says Peter Kopitz, Meituan, 58 Daojia and Baidu Delivery have group COO of aCommerce. “Even overseas, the majority of the top brands actually outsource their received plenty of capital from private investors. own e-commerce, and they outsource it to similar providers to us.” Indeed, Dianping and Meituan recently Since launching in 2013 with backing from Ardent Labs, aCommerce has set itself up as a announced a merger and are believed to be provider of e-commerce expertise in Southeast Asia for international as well as domestic brands. working on a $3 billion round at a valuation of The company offers end-to-end service, from setting up an online front-end to warehousing and $17 billion. last-mile delivery, in Thailand, Indonesia, the Philippines and Singapore. Excitement about the potential of these ACommerce also engages with dedicated online retail providers such as Lazada and Tarad, two verticals is underpinned by the numbers. which are capable of handling most of the front and back end themselves, but may find it more One investor justifies his decision to back Baidu convenient to outsource certain functions. Last-mile delivery, which aCommerce provides for Delivery as follows: the out-of-home dining Lazada, is a common case, since the company has connections with most of the major third-party market in China is worth RMB5 trillion while logistics providers in the areas where it operates. the penetration of takeout delivery is below Kopitz describes the ability to separate out its services for clients as an asset to help the 10% compared to 30% in developed markets; company scale its operations. “That’s why we have a huge tech team that develops all our internal doubling the China figure could create a RMB1 systems, the WMS [warehouse management system], the fleet management, all that kind of stuff,” trillion market. Speaking after KKR joined a he says. “We’re leveraging all the technology that we basically build in house and that makes it consortium that invested $300 million in O2O extremely scalable.” local services platform 58 Daojia, Lane Zhao, a This focus on backend support means that aCommerce is not a highly visible component of director at the firm, described a market worth the online retail ecosystem, but this is also seen as a positive. A company that acts as an ally to the $180 billion nationwide, again with relatively low brands and the retailers can not only save the money that it might otherwise have to spend on penetration. advertising, but can also maintain a strong network with connections to both sides. The business models that exist around these Now aCommerce hopes to use the tools and connections it has built up in the e-commerce verticals share two particular characteristics. space to build its presence in local services. When messaging app Line held a promotion First, there must be an imbalance between providing online deals for grocery products, it turned to aCommerce for same-day and next-day demand and supply in traditional markets that delivery. The company saw this as a chance to sharpen its logistics skills. is bridgeable using technology: a consumer ACommerce is also experimenting with kiosks in Bangkok’s mass transit system. These kiosks, demand that is not being met, workers who are which are currently operating in six stations, serve a variety of purposes. Customers can choose underutilized, and an app-based platform that to pick up online orders there instead of waiting for home delivery, and merchants can drop off brings them together. orders for aCommerce to handle the last-mile delivery. The strategy makes the company more “As the middle class grows in China we are visible, but still serves its primary goal of providing support. seeing big demand growth. But the home “We see ourselves more as the arms dealer in a war,” says Kopitz. “We’re equipping brands and services market is also very fragmented – e-commerce players with all the tools and resources they need to be in this war, without actually dominated by over one million small mom and fighting at the front.” pop shops or small agents that provide very low

CHINA CHINA SOUTHEAST ASIA CHINA Guahao Koudai Lazada Tujia Online healthcare Online marketplace Online marketplace Online vacation rentals Valuation: $1.5b Valuation: $1.4b Valuation: $1.3b Valuation: $1b Funding: $516m Funding: $362m Funding: $735m Funding: $464m >>>

Number 40 | Volume 28 | October 27 2015 | avcj.com 27

TECHNOLOGY [email protected] / [email protected]

customer satisfaction and inconsistent service new market with its core taxi service, gets riders penetration still only extending to a relatively quality,” Zhao observes. and users comfortable with the service, and then small number of neighborhoods. A platform like 58 Daojia is intended to gradually introduces new product offerings. “They have enough to do without going into consolidate and standardize: enabling consumers The ease with which other players can do this new categories,” Bhattacharya adds. “Where we to pay a set fee and choose a quality service depends on the amount of local competition have seen integration it hasn’t been horizontal, provider, either based on past experience or – and by extension the roll-out costs – and the but vertical – food delivery guys are getting into customer reviews. The cleaners, removal men, level of sophistication involved in providing a discount coupons for restaurants.” babysitters and beauticians benefit too: they high-quality service. In China, meanwhile, even among the manage their own time and pay the platform a Singapore-based online grocery marketplace established players, there is a pressing need to 25% commission compared to the 60-70% taken RedMart is a case in point. The company create sustainable business models. Horizontal by offline establishments that have higher fixed wants to become a regional e-commerce and expansion can contribute to these efforts, but at costs to cover. logistics platform by controlling its entire supply the same time they may add to the confusion, The second common characteristic is high chain, from fulfillment to last-mile delivery. making it harder to identify potential winners. transaction frequency. Whether a platform is The challenge is scaling the business to meet DST prefers to invest in market leaders where processing taxi rides, food delivery or manicure services, enough people have to be placing enough orders for the commissions to reach a “We are quite conscious of the fact that different reasonable amount. Or, to put it another way, a platform must attract sufficient users to suggest markets have different dynamics and you have to it could be profitable in the future, and therefore justify the subsidies paid out to build market look beyond the hype of hyper-local services and share today. consider the economics of the model” – Shane Chesson “Didi Kuadi is a high-frequency transaction platform – you might make 2-3 taxis journeys a day – but it is a smaller addressable market consumer demand in an operationally complex there are barriers to entry or clear competitive than dining,” says Vincent Huang, founder of category. advantages. Didi Kuaidi and Ola are both in the Juntong Capital. “Takeout delivery services could “It took Amazon seven years to figure out firm’s portfolio but it has so far resisted food be used 3-4 times a day, and although the ticket online grocery out and expand beyond Seattle. delivery and local services. size is smaller than for dining out, once you Now they’ve cracked it they are going into many “The market leaders are definitely emerging, are delivering food to people’s homes you can other markets pretty rapidly,” says Roger Egan, co- but it will take time for things to shake out,” says deliver other products as well. The ticket price founder and CEO of RedMart. “But it takes a while Lindfors. “The Dianping-Meituan merger creates goes up and average revenue per user goes up.” to build out the expertise and capabilities. We’ve a very strong player in two key areas where they spent the last four years doing that so we have a have significant complementarity – restaurants Volume vs. value bit of a head start.” and the long tail of different services in China.” This raises the question of how broadly an O2O India has also seen a proliferation of The problem is the sheer length of this tail. player can leverage the consumers and service technology-enabled delivery services, with the Dianping has expanded its restaurant listings providers that use its platform. Ele.me, for likes of BigBasket, Grofers and Delhivery working and group-buying business to encompass other example, claims to have 4,000 full-time couriers their way through rounds of institutional funding. leisure-related areas, including a few forays into plus over 200,000 more on a part-time basis However, there is little sign of these or smaller O2O local services. Meituan started in group- through arrangements with third-party providers. players in the space looking to extend their reach buying and now also covers hotel booking, Their primary task is to transport food from into other segments. where it faces incumbents Ctrip and Qunar 300,000 restaurants to the estimated 40 million Gourav Bhattacharya, a vice president with (which recently announced a merger); movie consumers Ele.me serves nationwide. But across Matrix Partners India, explains this is because ticket booking; and food delivery, competing how many product groups or verticals could the only vertical in which local companies have with Ele.me, Baidu Delivery and others. they meet consumers’ demands? And what does achieved scale is ride-hailing apps, where Ola Indeed, the prospects for food delivery are this mean for the value of the company and the is engaged in a fierce battle with Uber. No clear uncertain in a post-subsidies world. The current dynamics of the industry as a whole? winner or even a sub-set of market leaders market leaders gained momentum by serving According to NSI’s Chesson, Go-Jek enters a has emerged in the grocery segment, with the student population, but this demographic

INDIA INDIA SOUTHEAST ASIA SOUTH KOREA Quikr Zomato InMobi Yello Mobile Online classifieds Online restaurant listings Mobile advertising Mobile services Valuation: $1b Valuation: $1b Valuation: $1b Valuation: $1b Funding: $350m Funding: $223m Funding: $221m Funding: $129m >>>

Number 40 | Volume 28 | October 27 2015 | avcj.com 29 ICR_Ad_ODwyers_Artwork_032615_final.pdf 1 3/26/15 12:44 PM TECHNOLOGY [email protected] / [email protected]

“There has to be a CASE STUDY depth of knowledge and technicians who India: Grofers are skilled professionals ndia’s grocery delivery space has attracted a significant amount of investor interest, and Grofers Iis one of the biggest successes so far, receiving $45 million across two funding rounds this year. so it is hard for firms Now, having made its name in the food space, the company believes it can convince customers running large platforms to turn to it for more. Grofers began with pickup and delivery of commonly purchased items from local stores, or to do it themselves. kiranas,at which India’s middle class traditionally buys food, flowers, and baked goods. Partner You need this barrier to merchants list items on Grofers’ mobile app, and when customers place orders, drivers collect the items and take them to their homes. entry” – Choon Chong Tay The team has steadily added more product categories, such as electronic accessories and books; the challenge was educating consumers that the option was there. “Millions of people shop online, but what they’re buying is mostly electronics and fashion,” says Kshitji Torka, Grofers’ is unlikely to remain loyal if there is a cheaper vice president of marketing. “Most of them are not aware of the other categories that we provide, option in the market. While Baidu is a relative and have no concept of hyper-local delivery.” newcomer to the space, it brings a different The company is working to address the awareness gap with its most recent advertising target customer base and one of China’s best campaign, organized around the theme “We get it.” This slogan works on two levels: Grofers can location-based mapping systems. Baidu Delivery deliver the goods that consumers want; and it understands the pressures that its young, career- could end up offering a differentiated service to oriented, tech-savvy target customers face, and wants to make their lives easier. customers that are more willing to pay for it. A more ambitious promotion saw Grofers partner with electronics retailer Reliance Digital A similar debate is taking place among O2O and positioning itself as the only source for home delivery of the iPhone 6S on launch day. The local services providers, although 58 Daojia is company’s delivery teams picked up phones from stores at midnight distributed them to all the one of few that can claim significant scale. The customers who had registered in advance, days before they would have arrived through regular market remains characterized by the presence e-commerce channels. of smaller players targeting particular niches “It was effective in three ways. Number one is just the fact that Grofers, which has been around that cannot hope to match larger rivals in terms for such a short time, could do something like this, where even the largest e-commerce players of transaction frequency. It remains to be seen were not delivering at that time,” says Torka. “Second, by doing this we built up awareness of the whether specialization, and the higher service fact that we deliver electronics now. And the third thing was penetration, whether through social quality this infers, is enough to sustain them on a media, or through people going to their office to tell their colleagues.” stand-alone basis. The publicity boost has helped build traction for hyper-local delivery in general, as well as “We looked at lower frequency models – such for Grofers in particular. For example, more vendors are becoming aware that the internet can as appliance repair services – but we decided connect them with a younger customer base and ease their reliance on foot traffic. to put that on hold, because the easiest entry Though the numbers are gratifying, Grofers is focused on maintaining a satisfactory customer point is still at the higher frequency end. If you experience. “Depth is equally if not more important than breadth right now for us,” says Torka. plug into higher frequency businesses then you “We already have enough categories to cover 80% of consumers’ needs right now. What we need can do some lower frequency services as well,” is to do that at a deep enough level that consumers know they can come to Grofers and find says Helen Wong, a partner at Qiming Venture everything that they want within that space.” Partners. She offers Helijia as an example. The company started out as a platform dedicated and wellness segment, which Wong believes This view is echoed by Choon Chong Tay, to connecting consumers with manicurists, but gives Helijia an edge over 58 Daojia. The latter’s managing director at Vertex Ventures China, with has since broadened its scope of services and strengths are its size and ability to standardize, the added caveat that achieving substantial scale generates higher transaction velocity as a result. whereas the former’s focus can deliver customers shouldn’t necessarily be the goal. In Ayibang and However, expansion is limited to the beauty a more personalized service. QingSong, Vertex has two portfolio companies

CHINA CHINA CHINA CHINA Apus Group Fanli Mogujie Beibei App developer Online marketplace Social commerce Online marketplace Valuation: $1b Valuation: $1b Valuation: $1b Valuation: $1b Funding: $116m Funding: $130m Funding: $230m Funding: $134m >>>

Number 40 | Volume 28 | October 27 2015 | avcj.com 31

TECHNOLOGY [email protected] / [email protected]

that focus solely on maid services and household repairs, respectively. The emphasis is on winning consumers’ trust and establishing a reputable CASE STUDY brand. “In the long term companies have to develop loyal customer bases so they aren’t just China: Helijia competing on price,” Tay says. “There has to be ather than target a mass market vertical like takeout delivery, Chinese start-up Helijia found its a depth of knowledge and technicians who are Rown niche within O2O local services. Its mobile app was used exclusively by women wanting skilled professionals, so it is hard for firms running to book beauticians for at-home nail-polishing appointments large platforms to do it themselves. You need this In April, the company received $50 million in Series C funding led by Qiming Venture Partners kind of barrier to entry; it’s not just about getting at a valuation of $300 million. Existing investors IDG Capital Partners and China Broadband Capital a lot of users on board.” also participated alongside new backers Maison Capital and GX Capital. Helijia has since moved aggressively into additional beauty and lifestyle categories – its Impending shakeout services now encompass eyelash extensions, facials, hairstyling and makeovers, to name but a A number of industry participants have few. The most recent initiative has seen personal trainers introduced to the platform as well as difficulty reconciling this strategy with their attractive professionals who offer to teach music and languages. general expectation that O2O local services will This change in strategy means the company can operate on a higher transaction frequency consolidate around a handful of platforms, much basis. There is more demand for services and therefore a greater opportunity to achieve scale. like the other verticals. This tension between However, Helijia has been careful to stay within its domain of expertise. “Category expansion is scale and sustainability will likely last as long as possible when you have a loyal customer base,” says Helen Wong, a partner at Qiming. “Their user investors are willing to continue pumping in base is middle-class women. It’s quite easy to imagine what they might need on the beauty side.” money – and, in the case of India and Southeast All service providers on the platform are small beauty enterprises or individual beauticians. Asia, to what extent the hunger for exposure to Wong draws comparisons between Helijia and Alibaba Group’s C2C e-commerce platform ride-hailing apps spreads into other verticals. Taobao in that service providers are not restricted by the fixed costs of running a store and their While Aashish Bhinde, executive director with compensation rate is biddable, based on the level of demand. Helijia takes a flat rate commission. Avendus Capital in India, believes there would For example, the company launched a promotional campaign on September 23, offering be ample demand for professional O2O services special beauty packages in every category. One premium nail polishing package sold for as much providers in the laundry segment, he appreciates as RMB5,000 ($786) and Helijia generated approximately RMB19 million in total revenue for that that building out supply where there currently one day alone. The company claims that its top manicurist earns upwards of RMB240,000 per is none would be a challenge. For the market month. to take off, companies would have to achieve a Helijia has seen numerous competitors emerge in the O2O services space. At the larger end of reasonable scale so capacity is fully utilized. the scale is 58 Daojia, a broad-based services platform controlled by US-listed Chinese classifieds However, under the market dynamics present site 58.com. However, Wong believes Helijia’s position is defensible – despite 58 Daojia’s wider in the country’s ride-hailing space, sustainability marketing reach – because it has taken time to build its brand among female users. has more to do with the level of competition Furthermore, 58 Daojia has adopted a B2C model that is based on standardization. Helijia than fundamental economics of the business. is able to do more in terms of merchant engagement, for example providing training to the “At some point in time, either one company will beauticians registered on its platform, which can in turn lead to a higher quality of service for emerge as a clear winner and become profitable customers. “At the end of the day, it’s about a service – whether people are satisfied with that you or a couple of companies may co-exist and are offering and whether they will come back,” Wong adds. “You can charge higher fee for quality as their business scales they will stop offering services.” incentives and subsidies,” Bhinde says. The more time that passes before this shakeout occurs, the greater the risk to which their confidence in management teams and the NSI’s Chesson. “If you can show that demand investors are exposed, particularly if they are belief in the underlying fundamentals. stays strong even as subsidies are being reduced; continuing to support companies at ever higher “We are conscious of the fact that different if you are able to deliver value to vendors who valuations. It is difficult to tell how soon this markets have different dynamics and you have are prepared to pay a percentage of gross day of reckoning might arrive in China, India or to look beyond the hype of hyper-local services merchandise volume; then you are creating a lot Southeast Asia, and so investors must rely on and consider the economics of the model,” says of value.”

CHINA CHINA CHINA Panshi Aiwujiwu China Rapid Finance Mobile advertising Online property listings Online P2P lending

Valuation: $1b Valuation: $1b Valuation: $1b Source: CB Insights, Funding: $220m Funding: $200m Funding: $56m AVCJ Research >>|

Number 40 | Volume 28 | October 27 2015 | avcj.com 33 EXITS [email protected] Open to alternatives With China’s public markets still dogged by uncertainty – and, at time of writing, new share offerings suspended – PE investors are looking at other options. Trades in particular are getting more traction

THANKS TO SHANGHAI JIN JIANG The Shanghai-Hong Kong Stock Connect backed Chinese company to complete an IPO. International’s recent acquisition of budget hotel scheme was unveiled, allowing mainland Within a few months it announced a take-private operator 7 Days Inn and Shenzhen Energy’s investors to trade Hong Kong-listed stocks, proposal. purchase of China Hydroelectric, the total value and vice versa. It boosted both markets. The pick-up in trade sales has been helped of announced private equity trade sales in China Meanwhile, China’s much anticipated switch by the acquisitive tendencies or listed Chinese this year has nearly doubled. from an approval-based IPO system in to a companies. AVCJ Research has records 21 trade Jin Jiang is paying $1.3 billion for 7 Days Inn, market-oriented registration model for being sales to A-share listed buyers in 2015, or 50% of with The Carlyle Group, Actis Capital, Sequoia foreshadowed by the National Equities Exchange the total. Last year, it was 59%, with a scattering Capital and GIC Private due most of the proceeds, and Quotation (NEEQ), or New Third Board, to of Hong Kong and US-listed Chinese companies while the $542.6 million China Hydroelectric deal great effect. Many of the 600 or so applicants in making up the numbers. This represents a represents a full exit for NewQuest Capital Partners line for mainboard listings turned their attentions significant turnaround from the three years and Tsing Capital. These are two prominent to the New Third Board instead. before that: in 2011, 2012 and 2013, mainland- examples of a rising trend. According to AVCJ However, in July macroeconomic concerns listed companies were responsible for 16%, 15.8% Research, a record 79 trade sales generated $5.2 prompted a massive slump in the domestic and 18.9% of all China PE-backed trade sale exits. billion in 2014. So far this year, there have been 45 markets, which in turn hit Hong Kong and The change mirrors a spike in overall M&A deals worth $4.2 billion, exceeding the IPO and activity. Plenty of industries in China are ripe open market sale numbers on both counts. for consolidation and listed companies see This shift in the exit balance is largely a “We were actively acquisition as a means of opening up new product of necessity. For all the relief that greeted looking at a Shanghai avenues of growth. Chinese M&A reached a the end of the embargo on new domestic share record $454.1 billion last year, with more than offerings in the domestic market in January 2014, or Shenzhen listing for 5,200 deals announced. Domestic companies IPOs have yet to recapture their previous highs. were responsible for 75% of transaction value, Moreover, approvals were paused again this one of our companies. compared to 61% in 2013, according to Thomson summer in response to market turmoil. China’s Unfortunately, the Reuters. As of September, 4,000 deals had been private equity exit problem has not gone away. announced in 2015 worth a collective $477 billion. “Up until June, the Chinese stock market regulator took the In addition to agreeing a deal for 7 Days, in looked like a wonderful place to exit. So if you last 12 months Shanghai Jin Jiang has snapped put together a plan and started spending money option off the table” up properties in China and abroad. Notable on lawyers and accountants, by August you – Kyle Shaw acquisitions by state-owned group include would have been disappointed,” says Kyle Shaw, Europe-based Louvre Hotels from US real estate managing director at ShawKwei & Partners. “We investor Starwood Capital. were actively looking at a Shanghai or Shenzhen other bourses. About half of the stocks listed “The central government’s reforms involve listing for one of our companies. Unfortunately, in Shanghai and Shenzhen voluntarily halted supporting outbound investments and the regulator took the option off the table.” trading. Then the plug was pulled on new acquisitions of businesses that can bring offerings and there has been nothing since. know-how and expertise to help improve the Ups and downs “There are some uncertainties about when efficiency of the domestic market, things like PE exits in 2014 were the fourth-highest on these companies can list and they have to precious engineering and finance services. They record, coming in at $12.9 billion, with shares consider other exit channels. A Hong Kong IPO are streamlining regulatory approval process sold at IPO accounting for $2.99 billion (although is one of the options. It’s similar to the A-share for domestic investors to make outbound Alibaba Group and JD.com’s offerings accounted market IPO suspension in 2012-2013. A lot of acquisitions,” says Rupert Chamberlain, another for 80% of this). In total, the Shanghai and companies couldn’t get listed in China so they partner at KPMG. Shenzhen A-share markets, plus Chinext and the came to Hong Kong. There are many Chinese Another example of a PE trade sale exit SME Board, saw 62 PE-backed offerings. applicants in the pipeline in Hong Kong and they is Shanghai-listed Guangdong Yihua Timber The wave of IPOs carried through to July of want to list before the end of this year,” says Paul Industry’s agreement to buy an 18.21% stake this year, with 75 more PE portfolio companies Lau, a partner at KPMG China. in Meilele, an online-to-offline (O2O) furniture going public. It coincided with a 59% gain in the Nevertheless, Hong Kong is still a highly retailer. The company uses online traffic to drive Shanghai Composite Index between January selective market in terms of size and sectors. customers to offline stores where they can look and mid-June – public market exits accounting So far this year, only 18 PE-backed Chinese at the furniture and make purchases – a useful for over half of total transaction value – and the companies have achieved listings in the city, add-on for Yihua Timber’s traditional wood announcement of a slew of capital markets- compared to 37 last year, and 40 in 2010. The US manufacturing business. friendly reforms. market has also dried up with WoWo the only VC- “We like the buyer because it can help in

34 avcj.com | October 27 2015 | Volume 28 | Number 40 EXITS [email protected]

other aspects of Meilele’s business and that was company fail to achieve three consecutive years Giant Interactive, an online games developer why we just did a partial exit – we see more of profitability there is an additional financial that was also taken-private, in this instance by upside in combining Yihua’s expertise with that penalty. Baring Private Equity Asia and Hony Capital, is of Meilele,” says Choon Chung Tay, managing With this in mind, some GPs are willing to wait also being primed for a backdoor listing. director at Vertex Ventures China. Lightspeed for the IPO window to re-open. “Managers should However, reverse mergers are harder to China and China Renaissance K2 Ventures also be looking at a variety of choices,” says Shaw pull off than trade sales and include a higher sold part of their stakes in the business. Kwei’s Shaw. “But if I am talking to a trade buyer degree of risk. Focus Media’s plan to relist Succession issues are another factor. Vanzo or a listed company about selling, it would be through Jiangsu Hongda was terminated as Communication Technology, a Chinese mobile better if the China market is doing well, because the chairman of the shell company resigned in handset maker backed by Spring Capital, was then I could tell them I have alternatives. If they response to a probe by authorities. A new shell sold to Shanghai-listed Hubei Kaile Science & know the market is closed, that means I have less had to be found. Hong Kong regulators have Technology in a deal worth $140 million. Vincent leverage in negotiation.” also made companies more difficult to list via Chan, Spring Capital’s CEO, notes that Hubei Kaile reverse merger. For example, the reverse merger is not only wanted new intellectual property and In reverse is treated like an IPO and therefore subject to all customers, but was also keen to add new blood For those unwilling to bet their fortunes on shifts listing requirements. to its management team. “The founder of is in the regulatory mind-set, especially if they are In terms of secondary market appeal, Focus about 60 and his kids don’t want to take over the sitting on substantial unrealized investments, Media and Giant are large and cash generative. business. He saw in Vanzo’s founder a 33-year-old there is another, higher risk option: a backdoor Smaller companies in less fashionable industries may find it more challenging to drum up interest. Focus Media and Giant are also notable in China private equity exits by type that companies partnered with PE investors to 20,000 80 privatize the businesses with a view to going public in China. As such, there is an alignment 15,000 of interest in choosing this exit route, as there is 60 with a standard IPO. This is not necessarily the case with a trade sale, where the founder may be 10,000 reluctant to give up control. Trade sales Trade US$ million 40 As minority investor in a company, it is 5,000 incredibly challenging to preserve that alignment of interest while maximizing exit options 0 20 available. There are examples of founders looking 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD to get out due to advancing age or a more IPO Open market sale Share buyback Trade sale No. of trade sales complicated commercial environment, but they

Source: AVCJ Research are the exception rather than the rule. “The on-and-off scenario in the A-share market is always there and it is actually part of who has the passion to run the business,” he says. listing. There are several reasonably high- the uncertainty of emerging markets in general,” However, not every trade sale to an profile examples of companies opting to list says John Zhao, CEO of Hony Capital, “When you A-share listed company makes sense. Clothing domestically via reverse mergers. This involves invest in China, understanding the uncertainties manufacturer Kaiser, for example, bought mobile a listed shell absorbing the privately-held asset associated with the market is part of the deal.” games developer Youkia despite the absence and then issuing securities to the investors. “The Hony has been on the wrong side of a any recognizable synergies between the two popularity of reverse mergers is a symptom of regulatory decision before, having structured businesses. Industry participants observe that investors needing a liquidity event,” one GP says. most of its portfolio companies for onshore fashionable technology start-ups are popular Outdoor advertising business Focus listings only to see the A-share market shut targets for some listed companies because the Media was taken-private in 2012 by a PE and down in 2009-2010. As a result, the majority of presence of these new assets can shore up a management-led consortium in 2012 at a investments in the firm’s fifth US dollar fund and dropping stock price. valuation of $3.5 billion. In May, Shenzhen-listed second renminbi fund have been structured For the sellers, trade sales can be less Jiangsu Hongda New Material said it would offshore. Hony also adds a provision to its attractive because the exit multiples are lower acquire the firm for RMB45.7 billion ($7.37 billion). investment agreements stating that, even as a than for IPOs. Neither are they guaranteed a One month before the transaction was minority investor, if a domestic listing is less likely pile of cash: many deals – particularly where an announced, a group of Focus Media’s offshore it can opt for a trade sale or an offshore IPO. offshore investor is involved and approvals take shareholders, including Carlyle, FountainVest “When we do the due diligence, we don’t longer – are predominantly structured as share Partners, Fosun International, CITIC Capital negotiate how to make an exit. We negotiate swaps. The PE investor would then be subject to Partners, China Everbright and Primavera Capital, how we can come together and have upfront three year lock-up in the listed company. made partial exits to 36 domestic institutional discussions about growth strategies,” Zhao adds. Furthermore, share swaps seldom happen investors at a valuation of RMB45 billion. The “We are also very direct in saying that we are a at equal valuations. If the listed company is move was to remove the “red chip” offshore financial investor – we invest for a certain period trading at a price-to-earnings (P/E) multiple of listing structure and become an onshore- of time and then they must support our business 30-40x, the target company’s shares are valued controlled entity. The investors are understood to model and allow us to exit. When that is clear, we at 10-15x, Spring’s Chan says. Should the target have reaped a 3.8x return on the sale. start to work together.”

Number 40 | Volume 28 | October 27 2015 | avcj.com 35 Private Equity & Venture Forum 2015 -16 2015 AVCJ Private Equity & Venture Forum Conference Series India 2015 GLOBA L PER SPECT IVE, LO CAL O PPORTUN ITY 1-2 December 2015, Mumbai avcjindia.com

AVCJ Private Equity & Venture Forum Taiwan 2015 2 December 2015, Taipei avcjtaiwan.com 2016

AVCJ Private Equity & Venture Forum Australia & New Zealand 2016 2-4 March 2016, Sydney avcjausnz.com

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SPONSORSHIP ENQUIRIES: Registration Enquiries: Darryl Mag Jayla Tam Join your peers t: +852 3411 4919 t: +852 3411 4935 avcj.com @avcj e: [email protected] e: [email protected] RUIGANG LI | INDUSTRY Q&A [email protected]

Private Equity & Venture Forum 2015 -16 2015 Media mogul AVCJ Private Equity & Venture Forum Conference Series India 2015 Ruigang Li forged a career with Shanghai Media Group and then left to start media-focused private equity firm CMC Capital GLOBA L PER SPECT IVE, LO CAL O PPORTUN ITY 1-2 December 2015, Mumbai avcjindia.com Partners. He explains why capital is entering the sector and where he sees it heading AVCJ Private Equity & Venture Forum Taiwan 2015 2 December 2015, Taipei avcjtaiwan.com Q: CMC claims to run the first mainly focused on media and establish brands in China. IMAX media and entertainment- entertainment companies. Our China is a classic case of how we focused fund approved by first deal was the acquisition add value. The US-listed parent the National Development of a 53% stake in Star China decided to spin-off its China Regulatory Commission TV from News Corp. in 2010. business and structure it as a 2016 (NDRC). What does that mean? Star TV China, which was set JV so Chinese investors could

AVCJ Private Equity & Venture Forum A: CMC was founded in 2010. up a joint venture (JV), was in come in. CMC and FountainVest Australia & New Zealand 2016 There weren’t many renminbi- distress at that time. We changed Partners invested in the JV and 2-4 March 2016, Sydney avcjausnz.com denominated funds in the space; the management team and took the company public in most of them were US dollar restructured the operational Hong Kong within two years. funds. To raise a domestic fund, model. Last year, we took the full During the holding period, we AVCJ Private Equity & Venture Forum you were required to register ownership of the company. The helped IMAX China develop a China 2016 with the NDRC, and with its business is making impressive new business line – building film 9-10 March 2016, Beijing avcjchina.com certification you can raise capital profits now and we will consider “The internet theatres in luxury homes. We also from large Chinese financial listing it next year. Although the jointly launched a film-focused AVCJ Private Equity & Venture Forum institutions. When we registered, deal came from the renminbi is becoming fund that invests in local movie Indonesia 2016 we had to pick sectors we fund, we converted renminbi production and distribution. 14 April 2016, Jakarta avcjindonesia.com were looking at. For example, to US dollars to make this the most manufacturing, broadcasting investment. It was the same with Q: How have you built up your critical channel AVCJ Private Equity & Venture Forum and transportation, you name it. the DreamWorks Animation JV in team? Japan 2016 We wanted to focus mainly on 2012. Our primary focus remains for content A: The composition of our team media and entertainment, has changed a lot since CMC’s 22-23 June 2016, Tokyo avcjjapan.com media and entertainment, and so we became the first firm to but traditional movie and distribution” inception. When we started, the manage a renminbi fund focused TV businesses are no longer key people were from SMG and AVCJ Private Equity & Venture Forum on the cultural industry. attractive to us. A firm has to masses. With this in mind, we are they had a lot of experience USA 2016 demonstrate its potential to looking at emerging companies in content production and 13 July 2016, New York avcjusa.com Q: How has CMC diversified its LP operate along the entire value with brand value, such as online business operations in the media base since then? chain – from content creation to music operators and virtual industry. Over the past five years, AVCJ Private Equity & Venture Forum A: We closed our first renminbi distribution. It’s a totally different reality (VR) technology-based we have expanded the team Singapore 2016 fund at RMB2 billion ($315 model from the past. lifestyle products. to 20 – and 90% of them were 20-21 July 2016, Singapore avcjsingapore.com million), with contributions previously investment managers from China Development Bank Q: CMC also has invested in start- Q: CMC has formed in TMT or working elsewhere in AVCJ Private Equity & Venture Forum Capital, Shanghai Dongfang ups in areas such as education partnerships with the the financial sector. We haven’t Philippines 2016 Huijin Cultural Fund (a holding and online food-ordering. likes of FremantleMedia, hired new people from SMG September 2016, Manila avcjphilippines.com company of Shanghai Media What is the thesis? IMAX and Warner Brothers or any other traditional media Group, SMG), an investment fund A: Over the last two years, we Entertainment. How do you company. In today’s world, the

AVCJ Priva te Equity & Venture Forum unit owned by China Merchants have developed two more core help them expand in China? internet is becoming the most Korea 2016 Bank, and Wenhui Xinmin United focuses – lifestyle and internet A: In China’s media and critical channel for content September 2016, Seoul avcjkorea.com Press Group, among others. The and mobile. The technology, entertainment industry, it distribution, helped by deeper fund was fully deployed by 2013. media and telecom (TMT) takes a long time to build up mobile internet penetration. 29th Annual Then we raised $350 million for sector is very broad and what experience and networks. It’s a That’s also one of the reasons 2016 Private Equity & Venture Forum our first US dollar fund in early interests us is that a lot of very local business. International of why I founded another new Hong Kong 2014, after spending six months content is created across mobile companies usually find it hard company – Whaley Technology. 15-17 November 2016 avcjforum.com in the market. It has a diversified platforms. So we have invested to pursue greenfield projects in It develops internet-enabled LP base comprising fund-of- in examination prep platform China because they have yet to TVs and competes with the likes

AVCJ Private Equity & Venture Forum funds as well as six corporations Yuantiku as well as start-ups develop professional systems of Xiaomi. We see ourselves India 2016 from the US, Japan and Australia. operating in the online-to-offline to run these businesses. We becoming the largest content 6-7 December 2016, Mumbai avcjindia.com (O2O) space, like Ele.me. We have the domain expertise distributor in this space, as there Q: What kind of deals was CMC also believe every consumption and resources to them. For will be a variety of content looking at in the early days? business is a branding process, in example, we know how to use that can be aggregated on the SPONSORSHIP ENQUIRIES: Registration Enquiries: A: In our debut renminbi fund, we order to draw attention from the our advertising techniques to Whaley platform. Darryl Mag Jayla Tam Join your peers avcj.com @avcj t: +852 3411 4919 t: +852 3411 4935 Number 40 | Volume 28 | October 27 2015 | avcj.com 37 e: [email protected] e: [email protected] CONTRIBUTED ARTICLE [email protected] Perception vs reality Chinese GPs have generated more volatile quarterly returns than their global peers, but a portfolio of China funds offers a surprisingly good risk-return profile, say INSEAD’s Claudia Zeisberger and Michael Prahl

THE RECENT EXTREME VOLATILITY CHINA in PE that China is an unstable and risky market non-intermediated deal flow, or multiple has experienced in its public equity markets, as for the asset class. Although at a regional level arbitrage in pre-IPO investments. well as its currency devaluation and a number this sentiment holds partially true, as PE funds In fact, the often heard argument that of downward GDP revisions have put risk at the across Asia (including China data) of the same private equity is a superior way to invest into forefront of investors’ minds. These concerns vintages have produced an 8.3% pooled mean emerging economies over public equity markets extend to private equity where many investors IRR with high volatility – our findings suggest a is supported by comparing Chinese PE returns around the world, and even on the ground in significantly better risk adjusted return for China. with returns on public equity as measured by the China, have formed a view that returns have been lower and riskier than those generated by managers in developed Western markets. Quarterly returns (MIRR) Chinese vs Global PE

Indeed, while quarterly global PE 15 performance has fluctuated during the last three years, returns from Chinese private equity have 12 been significantly more volatile over the same 9 period. During the year and-a-half prior to the % 6 first quarter of 2015, this volatility translated into 3 higher returns relative to the global industry while Chinese private equity underperformed 0 during most of 2012 and early 2013. -3 Yet when these volatile short-term returns Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 are assessed across the life of a fund, we see a China Global smoothing effect to performance and a sharp reduction in volatility, challenging conventional wisdom.

Outperformers Benchmark IRR quartiles (vintages 2005-2012) by region In the latest Private Equity Navigator – a biannual analysis of the global PE industry produced by 29 INSEAD in partnership with eFront’s Pevara – we 24 find that Chinese PE funds have performed well 19 relative to their global peers for fund vintages 14 2005-2012. In fact, examining returns for this 9 period, the 48 institutional-grade Chinese funds IRR 4 considered in the study have outperformed, -1 generating a pooled mean IRR of 12.5% -6 -11 compared to 9.9% for the industry globally. Funds 16 of the same vintages investing in North America, Global Europe North America Asia China Europe and Asia have generated pooled mean 1st quartile 2nd quartile 3rd quartile 4th quartile Pooled mean IRRs of 9.98%, 10.2% and 8.3%, respectively. Further, the range of returns between the best and the worst-performing funds in our sample (bounded by the 95th and 5th percentile funds A number of explanations can be offered for MSCI China Index. Over the eight years ended to remove outliers) by region – representing a these results. First of all, Chinese GDP has grown December 2014, the MSCI China Index has simple measure of volatility – is the narrowest at an annual rate of 8-10% over much of the past provided returns of 5.9% compared to an 11.4% for China. The country has a high of 28.2% and decade, and this has allowed private equity funds MIRR for Chinese private equity. (MIRR can be a low of minus 2.56%, while Europe has the to back successful entrepreneurs and invest in used for comparison with public markets as it largest range including the best-performing (top winning companies expanding at a multiple of accounts for the cost of capital until investment quartile at 30%) as well as the worst performing the average market rate. The size of the economy and assumes reasonable re-investment rates.) funds (minus 14.4%). versus its maturity also creates pockets for As discussed, Chinese private equity returns The latter finding is especially instructive arbitrage, be it the early identification of new have been more volatile than global returns on given the perception among global investors trends, roll-ups and fast expansion strategies, an annual basis, yet this volatility is dwarfed by

38 avcj.com | October 27 2015 | Volume 28 | Number 40 CONTRIBUTED ARTICLE [email protected]

that seen in the public markets. PE and public equities returns China Massive swings produced highly variable annual returns in public equity of 66.24% in 80 2007, minus 50.83% in 2008, and 62.63% in 2009. 60 MIRR as of March 31, 2015 Over the same period, Chinese PE returns were 40 due to a lag in PE reporting significantly less volatile, with MIRRs of 12.91%, 20

minus 11.25% and 24.40%, respectively in those % three years. Note, however, that this is partly due 0 to private equity firms’ infrequent, conservative -20 -40 MSCi China index as of and delayed valuations, while public markets August 31, 2015 reflect real-time returns. -60 2007 2008 2009 2010 2011 2012 2013 2014 Where’s the cash? MSCI China index MIRR There is another observation on these returns that might chime with the aforementioned negative perceptions held by some investors. Compared to Western markets, Chinese private have returned only 0.46x or just 30% of the the moment, however, long-term investors in a equity returns include a significantly higher overall reported returns. portfolio of institutional quality PE funds in China portion of unrealized returns. Assuming that the unrealized returns do should feel vindicated in their strategy. While exits in Europe and in particular North have a basis in reality – marked to market on the America have approached record levels in recent basis of either partial exits, follow on investment Claudia Zeisberger is senior affiliate professor years thanks to favorable market conditions, the rounds (venture in particular) or performance of decision sciences and entrepreneurship and same pace of realizations has not materialized of listed comparable companies – the recent family enterprise at INSEAD and academic in China. For example, pooled multiple returns headwinds in China’s public markets suggest director of the Global Private Equity Initiative for North American PE funds for the 2005-2012 that these unrealized returns are at risk of being (GPEI). Michael Prahl is a distinguished fellow vintages are 1.41x total value to paid-in (TVPI) corrected downwards. with the GPEI and adjunct professor for versus 1.57x for China. However, North American At the end of the day, LPs rate GPs based on entrepreneurship and family enterprise. For more funds have realized half of that value, distributing cash-on-cash returns, meaning the jury is still information, go to: http://centres.insead.edu/ 0.76x of invested capital, while Chinese funds out on China’s recent fund performance. For global-private-equity-initiative.

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