Asia’s News Source avcj.com October 13 2015 Volume 28 Number 38

EDITOR’S VIEWPOINT Singapore vs Hong Kong: Data don’t tell the story Page 3 NEWS AGIC, Anchor, Gaja, IDG, Kalaari, Motilal Oswal Page 4 ANALYSIS China technology deals dominate third quarter Page 10 DEAL OF THE WEEK Electra plays the long game with India’s Zensar Page 12 FUNDS Venturra unites tech start-up veterans Page 13 PROFILE The super solution? Tomoya Shiraishi of Phronesis Partners Australian venture capitalists seek to bring super funds back into fold Page 6 Page 14

DEAL OF THE WEEK FUNDS

Serving up synergy Funding the future Dianping-Meituan merger opens doors Page 12 Lighthouse bets on Indian aspirations Page 13 

CIV2015HK The Future of Venture 6 Nov 2015    

Key Topics: Designing the Future of Venture Local Stories Revealed: China, Israel and India

Unique Venture Models Policy Perspectives

                     Register NOW                                           

Michael Bruck Yoav Z. Chelouche Jeremy Coller Mounir Guen Volker Heisterman Hong Kong Leader Managing Partner Executive Chairman & CIO CEO Managing Director Stanford Research Aviv Venture Coller Capital MVision Yushan Ventures Institute (SRI) Capital

Prof. Kalok Chan Dr. Jeffrey Chi Amir Gal-Or Raz Heiferman Sagi Karni Dean Chairman Founder and Managing Partner Government ICT Authority Consul General of The Chinese University of Singapore Venture Capital & Infinity Group Prime Minister’s Office Israel in Hong Kong and Hong Kong Business School Private Equity Association Government of Israel Macau

Herman Lam James Mawson Prof. Yesha Sivan Dr. Robyn Klingler Vidra Nicholas Yang CEO Founder Executive Director Lecturer Advisor to the Chief Executive Hong Kong Cyberport Mawsonia Coller Institute of King’s College London on Innovation and Technology Management Company Ltd Venture Government of the Hong Kong SAR

Prof. Manhong Mannie Liu Hiro Mizuno Prof. Eli Talmor Ir Allen Yeung Chairman of National Venture Executive Managing Director and CIO Professor Government Chief Information Officer Capital Research Committee Government Pension London Business School Office of the Government The Chinese Society , Japan Chief Information Officer for Management Modernization Government of the Hong Kong SAR    EDITOR’S VIEWPOINT CIV2015HK [email protected]

The Future Managing Editor Tim Burroughs (852) 3411 4909 Associate Editor No comparison Winnie Liu (852) 3411 4907 Staff Writer of Venture Holden Mann (852) 3411 4964 Creative Director Dicky Tang 6 Nov 2015 HONG KONG AND SINGAPORE ARE PITTED Kong start-ups have managed to find footholds Designers as rivals across so many segments of financial in Taiwan and Southeast Asia, they are nowhere Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow     services, why should venture capital be any near the scale of their Singapore counterparts. different? It is a debate shaped by those with At the same time, these Singapore companies Senior Research Manager strong views on the role government policy are not necessarily Singaporean; the country is Helen Lee should play in driving technological innovation. used as a convenient headquarters or jurisdiction Research Associates In Singapore, various steps have been taken of incorporation, while the money is made selling Herbert Yum, Jason Chong, Kaho Mak to encourage venture capital. Government- sneakers to Indonesian consumers. backed funds have in turn helped nurture Since 2012, Singapore has seen VC deals Senior Marketing Manager incubators, seed investors and Series A players, worth $2.1 billion. Yet nearly $1 billion of this was Sally Yip Circulation Administrator with a view to encouraging start-ups and committed to Lazada and Zalora, e-commerce Key Topics: Prudence Lau Designing the Future of Venture bringing in overseas Series B investors. platforms set up by Germany’s Rocket Internet Subscription Sales Executive The early success of these policies has that operate region-wide. Another $275 million Jade Chan inevitably drawn sometimes unfavorable has gone to GrabTaxi, a ride-hailing platform Manager, Delegate Sales Local Stories Revealed: China, Israel and India comparisons with Hong Kong’s relative inaction. that is now present in six countries. The likes Pauline Chen It is against this backdrop that AVCJ frequently of PropertyGuru, Giosis Gmarket, Reebonz and Director, Business Development Unique Venture Models receives inquiries about the levels of venture Antuit – with $310 million in funding between Darryl Mag capital investment in Singapore and Hong Kong, them over the last three years – can also claim a Policy Perspectives as if the difference between the numbers offers wide geographic presence. Manager, Business Development Anil Nathani, Samuel Lau  conclusive proof as to which market is superior. In attracting these companies, Singapore’s However, the situation is too nuanced to be ambitions to become a regional tech hub might Sales Coordinator          Debbie Koo            Register NOW accurately reflected in headline data sets. have been fulfilled. But Hong Kong cannot serve According to AVCJ Research, Singapore as a similar conduit for China, so comparisons are Conference Managers            comfortably surpasses Hong Kong in terms of redundant. Perhaps a better test would be to see Jonathon Cohen, Sarah Doyle,               Conference Administrator VC deal volume and value. In each of 2013, 2014, which market is first to produce one or more truly Amelie Poon     and 2015, Singapore has seen more investment homegrown start-ups – in financial technology or         Conference Coordinator Fiona Keung, Jovial Chung       than the combined total of $411 million for the enterprise software, for example – that manage four years preceding this period. Hong Kong has to capture a global audience. Publishing Director Michael Bruck Yoav Z. Chelouche Jeremy Coller Mounir Guen Volker Heisterman Hong Kong Leader Managing Partner Executive Chairman & CIO CEO Managing Director broken through the $100 million barrier for the Allen Lee Stanford Research Aviv Venture Coller Capital MVision Yushan Ventures Institute (SRI) Capital first time in 2015, but Singapore is way ahead at $676 million. The key difference is Singapore’s position as a Tim Burroughs hub for start-up activity that extends beyond its Managing Editor Hong Kong Headquarter Unit 1401 Devon House, Taikoo Place borders into Southeast Asia. While some Hong Asian Venture Capital Journal 979 King’s Road, Quarry Bay, Hong Kong T. (852) 3411-4900 F. (852) 3411-4999 Venture capital investment - Hong Kong vs. Singapore E. [email protected] Prof. Kalok Chan Dr. Jeffrey Chi Amir Gal-Or Raz Heiferman Sagi Karni URL. avcj.com Dean Chairman Founder and Managing Partner Government ICT Authority Consul General of 800 The Chinese University of Singapore Venture Capital & Infinity Group Prime Minister’s Office Israel in Hong Kong and Beijing Representative Office Hong Kong Business School Private Equity Association Government of Israel Macau 700 No.1-2-(2)-B-A554, 1st Building, Herman Lam James Mawson Prof. Yesha Sivan Dr. Robyn Klingler Vidra Nicholas Yang No.66 Nanshatan, CEO Founder Executive Director Lecturer Advisor to the Chief Executive 600 Chaoyang District, Beijing, Hong Kong Cyberport Mawsonia Coller Institute of King’s College London on Innovation and Technology People’s Republic of China Management Company Ltd Venture Government of the Hong Kong SAR 500 T. (86) 10 5869 6203 F. (86) 10 5869 6205 400 E. [email protected] 300

US$ million 200 100 The Publisher reserves all rights herein. 0 Reproduction in whole or in part is permitted only with the written consent of 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD AVCJ Group Limited. ISSN 1817-1648 Copyright © 2015 Other Singapore Zalora PropertyGuru Reebonz Hong Kong Prof. Manhong Mannie Liu Hiro Mizuno Prof. Eli Talmor Ir Allen Yeung Chairman of National Venture Executive Managing Director and CIO Professor Government Chief Information Officer Lazada GrabTaxi Giosis Gmarket Antuit Capital Research Committee Government Pension London Business School Office of the Government Source: AVCJ Research The Chinese Society Investment Fund, Japan Chief Information Officer for Management Modernization Government of the Hong Kong SAR  

Number 38 | Volume 28 | October 13 2015 | avcj.com 3 NEWS

CMC to raise $1b China (AGIC), a PE firm focused on China-Europe cross- AUSTRALASIA border investments, has reached a first close of media fund $550 million on its debut fund. With a target size CHAMP PE sells Alleasing to China’s CMC Capital Partners, a private equity of $1 billion, the fund will focus on investments in firm set up by Ruigang Li, formerly president the Mittelstand - small and mid-size companies Monash of Shanghai Media Group (SMG), is looking to in Germany, Switzerland and Austria - in the CHAMP Private Equity has sold Alleasing, an raise $1 billion for its second media-focused technology and manufacturing sectors. Australia-based leasing business, to Monash fund. The fund comprises two vehicles, one US Private Capital in a deal said to be worth dollar-denominated fund and the renminbi- CreditEase in first close on A$190 million ($135 million). The purchase was denominated. The strategy for Fund II is supported by financing provided by KKR and consistent with that of its predecessor, focusing Israel fund Highbridge Principal Strategies. CHAMP bought on media, entertainment and technology. CreditEase, a leading Chinese peer-to-peer (P2P) the business in 2008 from Allco Finance Group, Li set up CMC in 2010. The firm claims to be microcredit lender, has reached a first close of paying A$135 million. China’s first media and entertainment-focused $30 million on its debut Israel-focused fund. The CreditEase Israel Innovation Fund received LP QIC leads $1.3b purchase commitments from high-net-worth individuals who are CreditEase clients. It will invest in of gas storage facility technology start-ups based in Israel and the US. QIC Global Infrastructure Fund has led a consortium to purchase the Iona Gas Storage IDG leads $15m round for Facility in Australia for A$1.78 billion ($1.3 billion). The consortium bought the facility from its healthcare start-up current owner EnergyAustralia, a division of China IDG Capital Partners has led a $15 million Series A Light & Power. round for Zhangshang Tangyi, a Chinese start-up that is developing a health data tracking device Design platform Canva and mobile app for people with diabetes. Existing investors Ping An Venture and Matrix China raises $15m in Series A PE fund approved by the National Development Partners also participated. Canva, an Australian online design platform, and Reform Commission (NDRC). Its RMB2 billion has raised $15 million in a Series A round ($313 million) debut renminbi fund received of funding led by Felicis Ventures alongside commitment from domestic state-owned SOUTH ASIA existing investors Blackbird Ventures and Matrix financial investors, including China Development Partners. Through the company’s cloud-based Bank and China Merchants Bank. The vehicle was Warburg Pincus, Embassy web platform and mobile app, users can pick a fully deployed two years ago. standard layout, drop in fonts and images, then The private equity firm then raised its first in warehousing JV save and download the final design to file. US dollar fund worth $350 million early last year Warburg Pincus and Indian real estate developer after spending six months in the market. Fund- Embassy Group has formed a joint venture to of-funds such as AlpInvest and Adams Street build industrial parks with warehousing facilities GREATER CHINA Partners are among the LPs, as well as corporate in key cities in India. The two parties will invest investors from the US, Japan and Australia. This $250 million in the JV to fund land acquisition Giant to re-list in Shenzhen fund is almost fully deployed. and development. They plan to build and lease CMC recently made a partial exit from IMAX 15-20 million square feet over the next few years. via reverse merger China as the company went public in Hong Kong. Chinese online game developer Giant Interactive In the past year it has also invested in US virtual Aion invests $90m in Group, which was taken private last year by a reality technology developer Jaunt, announced a consortium of PE investors in conjunction with joint venture with Warner Brothers Entertainment India’s Varun Beverages the firm’s CEO, is seeking to re-list in Shenzhen to produce Chinese-language films, and acquired Aion Capital has invested INR6 billion ($90 through a reverse merger with Chongqing New a stake in the consortium that controls Hong million) in India’s Varun Beverages (VBL), a major Century Cruise. Investors include Baring Private Kong broadcaster TVB. drinks manufacturer and bottler for PepsiCo in Equity Asia, Hony Capital and CDH Investments’ South Asia. It will become the company’s largest wealth management platform. external investor. Out of Aion’s total investment, Securities, Khazanah Nasional, China International INR3 billion was committed directly to VBL in PE-backed China Huarong Capital Corp, COFCO, Fosun International and order to refinance existing debt and expand Goldman Sachs. They bought a 22.51% stake for operations, while another INR3 billion was used launches Hong Kong IPO RMB14.54 billion ($2.35 billion) last year. to buy out existing shareholders. Huarong , one of four groups tasked with managing non-performing loans AGIC reaches first close on Abraaj, Aditya Birla to from Chinese state-owned banks, is looking to raise up to $3 billion in a Hong Kong IPO. Existing China-Europe fund build solar platform investors include China Life, Warburg Pincus, CITIC Asia-Germany Industrial Promotion Capital The Abraaj Group has teamed up with

4 avcj.com | October 13 2015 | Volume 28 | Number 38 NEWS

conglomerate Aditya Birla Group to build a Anchor closes second Korea renewable energy platform that will focus on SOUTHEAST ASIA developing solar power plants in India. Neither fund at $850m party has indicated how large the financial Anchor Equity Partners has raised $850 million for Northstar set for $800m commitments might be, simply saying that the its second South Korea-focused fund, less than platform would be “gigawatt scale.” two years after closing Fund I at $500 million. close on Fund IV The final close for Fund II took place in July, but Northstar Group is scheduled to reach a Gaja Capital invests $10m this appears to be the first public confirmation. final close on its fourth fund – which targets Anchor launched the vehicle in May with a target Southeast Asia, with a particular focus on in SportzVillage of $750 million and was able to complete the Indonesia – at approximately $800 million at the Gaja Capital has committed INR650 million ($10 process swiftly due to strong demand from LPs. end of October. The vehicle launched in early million) to Indian fitness education start-up The firm - set up in 2012 by three senior 2014, with a target of around $800 million and a Junior Sports and Services, which manages the members from Goldman Sachs’ principal hard cap of $1 billion, and achieved a first close SportzVillage brand. The company provides investment team in Korea - targets buyout, of $500 million in July of that year. sports event planning and marketing services growth capital and industry consolidation to corporate and institutional clients, operates opportunities. It is perhaps best known for Falcon House targets online platforms that spread awareness of sports teaming up with KKR earlier this year to buy a and fitness issues, and sets up physical education $300m for Fund II and sports programs for schools. Indonesian GP Falcon House Partners is targeting $300 million for its second fund and the Peepul commits $15m to International Finance Corporation (IFC) may once again come on board as an LP. IFC is considering online jeweler Voylla an investment of up to $25 million. It made a Peepul Capital has committed $15 million to commitment of the same size to Falcon House Indian online jewelry and accessory retailer Fund I, which closed in 2013 at $212 million. Voylla. The capital will be used to enhance Voylla’s technology and manufacturing capacity, along Philippines’ PLDT Capital with building brand awareness for the company’s planned offline expansion. backs US start-up PLDT Capital, the recently-formed investment Motilal Oswal invests controlling stake in local mobile e-commerce arm of Philippine Long Distance Telephone company Ticket Monster from US-listed Groupon (PLDT), has committed $10 million to US mobile $13.8m in Kurlon for $360 million. There were also several co- app development platform Phunware and Motilal Oswal Private Equity (MOPE) has invested investors in the deal, including Canada Pension will support expansion in Southeast Asia. The INR900 million ($13.8 million) in Indian mattress Plan Investment Board and Temasek Holdings- company has developed a multiscreen-as-a- maker Kurlon Enterprise. The company will use owned Pavilion Capital. service (Maas) platform that enables customers the capital to grow its manufacturing capacity The bulk of Anchor’s deals fall within a to engage with clients through mobile devices. and deepen its distribution network, along with Korean middle market that investors say is enhancing brand recognition. delivering a rich supply of succession planning Golden Gate leads $3.3m deals, divestments of non-core assets by local Series A for HipVan Sequoia, Kalaari commit conglomerates, and transformation investments in companies that want to expand overseas. AVCJ Golden Gate Ventures has led a S$4.7 million $10m to Grabhouse Research data show that the volume of deals ($3.3 million) Series A round for HipVan, a Sequoia Capital and Kalaari Capital have executed in Korea below $500 million has grown Singapore-based online store for designer committed $10 million in Series B funding to from 142 in 2005 to 371 in 2014. The vast majority furniture. Founded in 2013, HipVan sells designer Indian start-up Cryptopy Technologies, the of these transactions have consistently been in furniture and home decorating products. It developer of rental property listing platform the segment below $200 million. claims to attract more than 150,000 online Grabhouse. The firm, which currently operates in shoppers to its store every month. 11 cities, allows users to search for available rental residences and contact landlords directly. Asia, and Taiwan. He will focus digital consumer, Convergence, Golden Gate enterprise software and healthcare businesses. back MoneySmart Vertex Ventures appoints Elgi Equipments gets $6.5m Personal finance portal MoneySmart has raised India head S$2.8 million ($2 million) in a Series A round led Vertex Ventures, a VC firm controlled by from Nalanda by Singapore Press Holdings (SPH) Media Fund, Singapore’s Temasek Holdings, has appointed Singapore-based Nalanda Capital has bought with participation by Convergence Ventures, OPT Ben Mathias as managing director and head of an approximately 2% stake in compressed-air SEA and Golden Gate Ventures. The firm provides India. He joins from New Enterprise Associates. equipment manufacturer Elgi Equipments for customers with financial advice, and also allows Based out of Vertex’s office in Bangalore, Mathias INR420 million ($6.5 million). Nalanda made its users to compare prices and features for products will be part of the team covering India, Southeast purchase through open market transactions. and apply for them through its platform.

Number 38 | Volume 28 | October 13 2015 | avcj.com 5 COVER STORY [email protected] Toe in the water Australian super funds are showing renewed interests in domestic venture capital, supporting firms that offer flexible structures with co-investment opportunities. Can this approach work for all GPs?

DOMESTIC VENTURE CAPITAL IS NO mid-2000s. However, as the domestic buyout debut fund was an ESVLP. It closed last year well longer toxic to Australian superannuation funds, opportunity grew, these fund-of-funds began above target at A$30 million, with Australian it would appear. Having pared their exposure to to tilt towards private equity. In 2007, HESTA entrepreneurs and Silicon Valley investors the asset class in the wake of the global financial committed to a fund-of-funds that focused accounting for the bulk of LP commitments. The crisis, there are early signs that these institutions specifically on life sciences venture capital. When GP advocates having successful entrepreneurs, are making their way back, with Blackbird the investment period for that mandate expired such as Atlassian founders Mike Cannon-Brookes Ventures and Brandon Capital the beneficiaries. in 2011, it was not renewed, mainly because of and Scott Farquhar, connect with new start- Blackbird closed its second fund at A$200 poor performance across the VC portfolio. ups in order to offer advices and access to their million ($143 million) last month, with First “Fundamentally, we would like to support industry networks. State Super and HOSTPLUS contributing A$110 innovation in Australia because it provides a way The IIF program, under which the government million and A$35 million, respectively. This that we can maintain a competitive advantage matches private sector commitments to VC followed Brandon Capital’s Medical research economically by using our knowledge and funds, was terminated last year, although Commercialization Fund 3, also A$200 million in intellectual capacity. However, a super fund Brandon succeeded in getting support for its size, which received commitments from existing needs to generate returns for its members, and second vehicle. The first two iterations of the investors AustralianSuper and Statewide Super as it is difficult to justify ongoing investment in Medical Research Commercialization Fund closed well as HESTA and HOSTPLUS. venture capital based on the relatively poor track at A$11 million and A$40 million in 2007 and The two funds share two key characteristics: record of the sector to date,” says Andrew Major, 2011, respectively. AustralianSuper and Statewide they are big enough to accommodate the super general manager for unlisted assets at HESTA. Super also backed Fund II. funds’ relatively large check sizes; and they offer HOSTPLUS also scaled back its VC exposure The overwhelming majority of Brandon’s flexibility in structure that suits these investors’ through fund-of-funds in 2011 due to investments have come through a network of appetite for later-stage co-investment. unsatisfactory performance. Neil Stanford, 52 Australian medical research institutes and “If they can follow companies as they become private equity investment manager at HOSPLUS, research hospitals – essentially pipelines for the real assets and put in increasing amounts of attributes this problem to old-style venture early-stage development and commercialization money then it can make a difference,” Chris Nave, capital with small funds. As soon as these of technologies. The VC firm meets with its managing director at Brandon, told AVCJ earlier vehicles were tapped out, managers had to find partners every six weeks and inspects the this year. “Success for this fund may not be just strategic partners or exit. Even if a company did pipeline of innovations. It has first right of refusal the returns. If we create a company and they get well, a VC firm’s holding would end up so diluted on opportunities presented. to fund it through the co-investment mandate, there would be little in terms of return. it might end up receiving investment from their “That’s the old venture funding model and we Flexibility first expansion and listed funds.” don’t want to do any more of that – the returns The flexibility of Fund III appealed to LPs because Blackbird and Brandon’s fundraising success are patchy at best,” says Stanford. “The new style, it allows varied levels of exposure. Up to A$50 raises the question of whether other venture however, allows us to take small early stakes and million of the corpus is earmarked for very capital firms could or should follow their then follow the investment over time before early-stage investments and the remaining approach. Snaring a super fund means a sizeable deciding whether to make further commitments A$150 million is reserved for the technology capital commitment, but can managers handle through a follow-on fund or pro-rata co- commercialization. There is also a co-investment the changes in structure and economics that investment rights. This suits our embryonic vehicle through which LPs can effectively these arrangements involve? co-investment program by taking small steps double-down on select portfolio companies. initially and then being prepared to scale rapidly Blackbird has a similar approach. The fund The disenchanted thereafter.” comprises two vehicles: a A$75 million main fund The fundraising record of Australian VC has It also means HOSTPLUS isn’t presenting new that is used for seed and Series A rounds and a been patchy in recent years. According to AVCJ co-investments “out of the blue” to its board. A$125 million vehicle for follow-on investments Research, VC firms raised $326 million and $168 In the absence of super funds, Australian VC in companies that are managing to achieve scale. million in 2010 and 2011, respectively. The total firms relied on LP contributes from family offices, There is also greater confidence among LPs soared to $466 million the following year, but US venture capital players, and high net worth that they will see meaningful co-investment slipped back to S426 million in 2013 and to $183 individuals (HNWIs). There was also various forms deal flow, with Stanford of HOSTPLUS observing million 12 months later. Thanks to Brandon and of government support, such as the Early Stage that there has been a marked improvement in Blackbird, the 2015 total stands at $394 million. Venture Capital Limited Partnership (ESVLP) – the quality of opportunities. Part of this is global HESTA is typical of many super funds in introduced in 2004 and offer tax breaks to new – the costs of starting a business have fallen that it relied on fund-of-funds to get exposure funds – and the Innovation Investment Fund. dramatically, while modern communications to venture capital from the late 1990s to the Blackbird was set up three years ago and its allow collaboration irrespective of distance and

6 avcj.com | October 13 2015 | Volume 28 | Number 38 COVER STORY [email protected]

location – but some elements are Australian. and Brandon and Blackbird aren’t alone in about a dearth of capital in the market, which “The entrepreneurs we’re seeing are much offering it in venture capital. makes it hard for start-ups that want to raise better – they’re thinking globally from day one in OneVentures is currently raising $100 million Series B and C rounds. Usually they have little terms of their ideas and businesses,” Stanford says. for its second fund, most of which will come option but to seek funding offshore. “Equally important is the new breed of venture from HNWIs and financial institutions. There is a “For companies looking to raise A$3-5 million managers who have created wider ‘ecosystems’ co-investment structure intended to reduce fee it’s really a challenge in Australia, because that to support their investments.” burdens and allow LPs to come in at a later stage, space has historically been filled by traditional This is apparent in many of Blackbird’s and OneVentures’ six existing co-investment venture capital firms. There is just not enough investments. Portfolio companies must develop vehicle are running at an IRR of 99%. But the firm capital available at the moment,” says John solutions for the international market, which refrains from offering this to super funds that Dyson, co-founder of Starfish Ventures. could in theory create opportunities for cross- write large checks on a one-off basis. With initiatives such as the IIF now defunct, border expansion and larger funding rounds. Last “If the fee break is on incremental funding earlier this year the government sought to week, crowd-based design outsourcing platform into the same deal that can work,” says Michelle close the funding gap through changes to the Canva raised $15 million in Series A funding led Deaker, managing director and CEO at significant investor visa (SIV) program. Overseas by US-based Felicis Ventures. Blackbird re-upped OneVentures. “If, however, the manager is trying business people can become eligible for and no longer has to stop at Series B. to manage or place $200 million with a 1% fee, permanent residence in Australia after four years conditional on deploying at least A$5 million into approved local assets, including at least $500,000 Australia VC fundraising and investment in a venture capital or growth private equity fund. 800 60 It estimated about A$150 million in additional capital could flow into the VC funds each year, 50 600 but investors are uncertain as to how much 40 difference it will make. “I think it will be a long, long time before you will see meaningful flows of 400 30 capital into venture,” says Craig Blair, co-founder US$ million 20 Funds/deals and partner at AirTree Ventures. “The challenge 200 is making sure good managers get funded and 10 those business people probably aren’t interested 0 0 in investing in venture capital. They’re doing it 2007 2008 2009 2010 2011 2012 2013 2014 2015 because they have to.” No. of funds Fundraising (US$ million) Rather, the gap will be closed by changes No. of deals Investment (US$ million) within the venture capital ecosystem. The likes Source: AVCJ Research of AirTree, which is looking to upsize from a $60 million to a $150 million fund, are relying on their traditional family office and HNWI LPs to write “We are still going to invest in seed to Series the fee structure is difficult. From our perspective, bigger checks. However, there is an element of A rounds,” explains Rick Baker, co-founder of we could not adequately resource our firm to flexibility in the approach: the new fund will be Blackbird. “But with the bigger fund, we’re able put the work into the portfolio that we would split, Blackbird-style, into one vehicle for Series A to support the founders of these companies for normally put in. And we believe this work drives investments and another for later rounds. longer periods.” performance and consequently returns”. Blue Sky Venture Capital is also considering an Brandon has enjoyed some bumper life Moreover, some VC investors suggest that the top-up fund raised from existing LPs to support sciences exits, generating a 60x return from super funds’ renewed interest in venture capital portfolio companies as they get larger. The firm the sale of Fibrotech last year. It also shared is opportunistic and cannot be counted on for closed its first VC fund at A$10 million last year $200 million in cash – plus the possibility of the long term. Deaker observes that while US LPs and is looking to raise for its first VC fund last year unspecified earn-outs – with GBS Ventures and invest across cycles, super funds tend to step in and is looking to raise A$30 million for Fund II. other investors as Novartis acquired Spinifex and out, and often fail to pick the right moment. If there is any chance of getting a super fund Pharmaceuticals. These sorts of companies may “They left the Australian VC market during the involved, the vehicle would have to be larger not need to be exited so early if super funds are global financial crisis and have only just shown – minimum check sizes tend to be A$50-100 willing to provide the additional capital required signs of returning. They therefore did not have million for most of these LPs – but size is only one to get drugs through clinical trials. exposure to what are arguably strong VC vintage of the considerations. Major of HESTA adds that Brandon was also years,” she says, noting that funds from 2009-2010 “The Blackbird and Brandon funds show that willing to be flexible around the proposed were able to enter deals at better valuations than superannuation funds are happy to re-invest into commitment structure and fee arrangements. today and are consequently showing strong domestic venture capital market, but I think they “In particular, we agreed an annual budget above-market returns. are doing it cautiously,” says Elaine Stead, Blue Sky approach to manage remuneration, rather than Venture’s investment director. “They invested in the traditional fee on committed capital which Capital shortage fund managers who have proven track records, inflates cost in the early It remains to be seen whether the Brandon and which is the difficult part. Australian venture is years of a fund’s life,” he says. Blackbird fundraises are a precursor to more a relatively immature industry if you compare it Co-investment is a reasonably well- super fund activity in the domestic VC space. As into the US. It takes time for fund managers to established concept in Australian private equity it stands, most industry participants complain develop those track records.”

Number 38 | Volume 28 | October 13 2015 | avcj.com 7 28TH ANNUAL

3-5 November 2015 Four Seasons Hotel Hong Kong Global Influencers to speak 3 WEEKS at the Forum include: TO GO REGISTER Charles R. Kaye Howard Marks Co-Chief Executive Officer Co-Chairman NOW! WARBURG PINCUS OAKTREE CAPITAL MANAGEMENT,L.P.

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John Zhao Allan Zeman Chairman & CEO Chairman HONY CAPITAL LAN KWAI FONG GROUP

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With over 170+ speakers TOP 10 ATTENDING COUNTRIES

and 310+ Limited Partners UK China Hong Kong 11% 44% expected, make sure 3% South Korea USA 2% you register for the 28th 9% India Japan Annual AVCJ Private Equity 2% 5% & Venture Forum for 3 days Malaysia 2% Singapore of unrivalled networking 9% opportunities. Australia Other 9% 4%

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3-5 November 2015 3-5 November 2015 Four Seasons Hotel Four Seasons Hotel Hong Kong Hong Kong Global Influencers to speak 3 WEEKS Lead sponsors Asia series sponsor at the Forum include: TO GO REGISTER Charles R. Kaye Howard Marks Co-Chief Executive Officer Co-Chairman NOW! WARBURG PINCUS OAKTREE CAPITAL MANAGEMENT,L.P.

Steve Pagliuca Ravi Thakran Co-sponsors Managing Director Group President, LVMH SOUTH & BAIN CAPITAL SOUTHEAST ASIA AND MIDDLE EAST; Managing Partner, L CAPITAL ASIA

John Zhao Allan Zeman Chairman & CEO Chairman HONY CAPITAL LAN KWAI FONG GROUP

Niklas Zennström CEO and Founding Partner For the full speaker line-up ATOMICO, and and programme details, Legal sponsors LP summit sponsors Co-Founder, SKYPE visit avcjforum.com

TOP 10 ATTENDING COUNTRIES With over 170+ speakers PE leaders’ summit sponsors and 310+ Limited Partners UK China Hong Kong 11% 44% expected, make sure 3% South Korea USA 2% you register for the 28th 9% India Japan Annual AVCJ Private Equity 2% 5% VC summit sponsors VC summit legal sponsor & Venture Forum for 3 days Malaysia 2% Singapore of unrivalled networking 9% Awards sponsors Taxation Workshop Sponsor opportunities. Australia Other 9% 4%

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Join your peers Join your peers avcjforum.com #avcjforum avcjforum.com #avcjforum ANALYSIS [email protected] Digital dreamers 3Q analysis: Early- and growth-stage tech deals dominate the China investment charts; middle market fundraising enjoys a rebound; private equity investors turn to trade sales as the public markets flounder

1) Investment: Tech, tech, and more tech global firms in particular are finding it hard to Nevertheless, aggregate China early- and The $3 billion funding round for China-based get China deals past investment committees growth-stage tech investments surpassed ride-hailing service Didi Kuaidi – one third of wary of the country’s slowing economy as well as even this deal in size. More than $8.8 billion which was announced in the second quarter unpredictability for listed equities. was committed, and while the number of of 2015, and the rest in the third quarter – is Indeed, the impact of China’s sell-off on transactions was unusually large, capital is significant for a number of reasons, aside from markets across the region resulted in PIPE deals concentrated in a relatively small number of the eye watering valuation of around $16 billion. coming in at a multi-year low. Overall investment start-ups. AVCJ Research has records of about 240 First, it is said to be the largest-ever fundraise activity for the quarter reached $29.1 billion, China deals, including 39 of $50 million or more. globally by a private internet start-up. Second, down on the previous three months but still Of these, 26 fall into the early- and growth-stage it was followed by announcements that Didi higher than any other quarter since before the tech category and they are worth $6.9 billion Kuaidi had invested in US-based Lyft and India’s global financial crisis. At $13.5 billion, the buyout between them. Ola, suggesting that Uber’s rivals are lining up total alone is the largest eight years – perhaps Didi Kuadi is by some distance the biggest against it. (News of a commitment to Southeast unsurprising given the quarter saw Asia’s largest- deal, but it is one of 14 worth $100 million Asia’s GrabTaxi emerged a couple of weeks ever buyout as MBK Partners led a consortium in or above. Online travel business Tongcheng before the record-breaking round closed in early the $6.4 billion acquisition of Home Plus, Tesco’s Network Technology received a $967 million September.) And third, it capped a three-month South Korean retail unit. from CITIC Capital, Wanda Group and Tencent period in which early and growth-stage China tech deals dominated the PE landscape. China tech sector share of Asia PE investment The phenomenon of ever larger rounds for companies operating at the nexus of consumer 40,000 and technology has gathered pace over the last two years. The vast majority of these deals are 30,000 classified by AVCJ Research as computer-related, information technology or electronics, plus a little financial services. In the first quarter of 2014, 20,000

early-stage investments across these categories US$ million amounted to $151.3 million, with $822.5 million 10,000 growth-stage transactions – or a combined 16.4% of total private equity deal flow. 0 Over the next four quarters, the amount of 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 capital committed to these transactions steadily China early-stage tech China growth-stage tech Other China Rest of Asia grew, as did the share of overall activity. Then in Source: AVCJ Research the first three months of 2015 – a generally slow period for China PE – it jumped to 61.3% before falling back to 25.7% the following quarter. Still, aggregate deal value was $4.97 billion, a six-fold Largest funds reaching a final close, 3Q 2015 increase on the total for the first quarter of 2014. Fund Name Target market Total capital raised (US$m) During the three months ended September, RRJ Capital Master Fund III Asia/global 4,500.00 early- and growth-stage tech deals accounted for three in every four dollars that went into a China Pacific Equity Partners Fund V Australasia 1,751.90 private equity investment, a stunning statistic IMM Rose Gold Private Equity Fund III South Korea 1,129.20 – although it is worth nothing that the data are Carlyle Japan Partners III Japan 1,038.20 preliminary and an as-yet-undisclosed buyout Shunwei China Internet Fund III China 1,000.00 could redress the balance somewhat. As it stands, the third quarter of 2015 was Anchor Equity Partners Fund II South Korea 850 relatively quiet for non-China deals, with just Everstone Capital Partners III India 730 $2.93 billion transacted. Struggling public Indium V India 700 markets were certainly a factor, with PIPE deals, Unison Capital Partners IV Japan 637.5 for example, dropping to $614.5 million, the lowest quarterly total since the first three months Ascendent Capital Partners II China 600 of 2011. Anecdotal evidence suggests that Source: AVCJ Research

10 avcj.com | October 13 2015 | Volume 28 | Number 38 ANALYSIS [email protected]

Holdings; Warburg Pincus and Legend Capital RRJ Capital closed its third vehicle at $4.5 billion. – the worst single-day loss since 2007 – was re-upped as chauffeured car service provider In each of the other jurisdictions, there enough to push them over the brink. The Hang Ucar raised $800 million; and online food- was encouragement for the middle market. Seng Index ended the quarter down 21%, the ordering platform Ele.me got $630 million from a IMM Private Equity and Anchor Equity Partners BSE Sensex Index fell 5.9%, the Nikkei 225 Index combination of new and existing investors. rounded off their latest South Korean funds at fell 15%, and the ASX 220 Index lost 8%. It remains to be seen if this bullish investor $1.1 billion and $850 million, respectively. In Public market exits, which reached $6.6 billion sentiment on established players in China’s Japan, Unison Capital raised $637 million for its in the second quarter of 2015, came to just $1.4 technology sector can withstand further fourth vehicle and The Carlyle Group got about billion in the third quarter, the lowest total since macroeconomic weakness or public markets $1 billion for its third country-focused fund. the same three months of 2013. chaos. Finally in India, which was the target of some The IPO market was disappointing for much skepticism from the LP community as recently as the same reasons: 34 private equity-backed 2) Fundraising: Seeds of hope beyond China two years ago, Everstone Capital closed its third companies generated collective proceeds of $4.1 Asian private equity fundraising endured its fund – which also has an allocation for India- billion, compared to $19 billion from 89 offerings weakest quarter in nearly two years, with $13. 5 related investments in Southeast Asia – at $730 in the previous three-month period. India was a billion committed to 55 funds, including full and million, while India Value Fund Advisors hit its rare bright spot, with four portfolio companies partial closes. This compares to $15.3 billion for $700 million target for Fund V. going public and raising $299 million, the highest the previous three months. Moving further down the list of fundraises, quarterly total in three years. China saw the sharpest downturn as it should be noted that both Ascendent Capital In all, there were just over 90 private equity fundraising reached $3.8 billion, the lowest Partners ($600 million) and CDIB Capital ($405 exits during the third quarter and the aggregate quarterly total since 2009. Renminbi-denominated million) managed to raise capital for China, proceeds of $12.2 billion represent only a slight decrease on the previous three months. This was because the drop off in public market activity Asia private equity exits by type was counterbalanced by a jump in trade sales. 20,000 200 There were 55 in total and overall deal value came to $6.5 billion, more than twice the figure for the previous quarter. 15,000 150 MBK Partners had a hand in each of the two largest exits: Alongside Goldman Sachs, Owl 10,000

Exits Creek Asset Management and PAG, it offloaded

US$ million 100 a majority stake in Universal Studios Japan to 5,000 Comcast Corporation for $1.5 billion; and Taiwan cable TV provider China Network Systems was 0 50 sold to Morgan Stanley Private Equity Asia and 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q Far EasTone Telecommunications $2.3 billion. 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 It should be stressed that the latter Public market sale Seconadry buyout Share buyback Trade sale No. of exits transaction has not yet closed and two previous Source: AVCJ Research attempts to sell the business in the past five years have come to nothing. However, as a large-scale exit and a buyout by another private equity vehicles have in recent times accounted for the the former taking a merchant banking-style firm – albeit one working in tandem with a local bulk of capital raised and this was the case again, capital-plus-strategic counsel approach and the strategic investor – it is one deal that most of the but only marginally. LPs committed $1.9 billion to latter targeting overseas businesses that serve as industry would like to see completed. Approvals these funds, well short of the average of $6 billion proxies for Chinese growth. for control investments involving PE investors for the previous six quarters. This could be seen to underline the have proved notoriously troublesome in Taiwan. Given these numbers are preliminary and marketability of a differentiated China strategy, Another interesting theme is exits to the renminbi space can be opaque, the situation even in a challenging fundraising environment. domestically-listed Chinese companies. With Jin might not be as bad as it presently appears. Jiang International agreeing to buy 7 Days Inn However, if investors are looking for evidence of 3) Exits: A public markets downturn for RMB8.3 billion ($1.3 billion) – paving an exit deteriorating sentiment in the face of slowing Until mid-way through June, public markets for several PE investors – and NewQuest Capital economic growth and volatility in the public were riding high and private equity firms took Partners and Tsing Capital securing a $524.6 markets, this could be it. advantage, completing a string of exits. This was million exit of China Hydroelectric to Shenzhen Elsewhere, five markets actually posted a the context as, between April and June, public Energy, the total value of China trade sales in quarter-on-quarter increase in private equity market sales surpassed 50% of total exit activity 2015 nearly doubled. fundraising: Australia, Hong Kong, India, Japan for the first time in nearly four years. Of the 40 or so transactions, half involved and South Korea. The first two owe their How times have changed. Since June 12, the mainland-listed buyers. Last year, this share performance to final closes for two sizeable Shanghai Composite Index has fallen 41%, with was 59%, with a scattering of Hong Kong and funds – Pacific Equity Partners completed the last the Shenzhen Component Index, SME Board and US-listed Chinese companies making up the tranche of fundraising for its A$2.1 billion ($1.8 Chinext down by similar amounts. Other markets numbers. It represents a marked turnaround billion) fifth fund, which focuses on Australia and in the region were teetering as summer drew to from just two years ago, when mainland buyers New Zealand, while Hong Kong-headquartered a close and China’s “Black Monday” in late August accounted for fewer than one in five exits.

Number 38 | Volume 28 | October 13 2015 | avcj.com 11 DEAL OF THE WEEK [email protected] / [email protected] Dianping, Meituan find logical solution

CHINESE ONLINE-TO-OFFLINE (O2O) operations in different cities and they have a lot purchasers and branches in 1,100 cities. services platforms Dianping and Meituan first of synergies. Strategically it makes sense.” While Meituan enjoys greater transaction entered into merger talks earlier this year, but The combined entity will have a valuation of volume by virtue of its exposure to lower-tier nothing materialized. They were sitting pretty, around $15 billion, although both companies will cities, Dianping concentrates on tier-one and having closed funding rounds at valuations of $4 retain their respective brands and management two locations. Theirs is the second merger of billion and $7 billion, respectively. structures, and operate independently. rivals in China’s China’s O2O space following the Then a few months ago Meituan returned Founded in 2003, Dianping established unification of ride-hailing app operators Didi to the market seeking more capital at a higher itself as a provider of restaurant reviews and Dache and Kuaidi Dache. valuation. The investor response then group-buying services. Gan says consolidation in various O2O was lukewarm, according to It subsequently introduced sectors, such as food delivery and restaurant industry sources. With China’s additional services such as instant booking platforms, is a norm in the US. For public markets struggling, there payment, restaurant reservations, instance, Groupon acquired OrderUp to boost was a reluctance to commit and take-out delivery. It has its food delivery exposure while hotel-booking even more money to a battle more than 200 million users and site Priceline Group bought online restaurant for market share defined by leverages its presence in 250 reservations service OpenTable. how much they could offer cities nationwide. “It’s a natural evolution – if you can’t stand in subsidies to users and in O2O services: Consolidating Meituan was set up in 2010 until the last minute, you merge with the big commissions to merchants. With as new group-buying sites were ones,” he says. “Look at what happened with the each company said to be burning through $1 emerging at a frenetic pace in China. It trailed three internet portals, Sohu, Sina and Netease. million per day, they agreed to merge. rivals Lashou and WoWo in 2011, but outlasted They couldn’t kill each other and they didn’t “This means a lot of marketing costs and them by keeping its focus on local services – merge, so each one got a small market share. subsidies can be saved,” says J.P. Gan, managing consumer-related offers on hotels, restaurants Then Baidu took their market away. Chinese partner at Qiming Capital Partners, an investor in and cinema tickets – rather than consumer founders have learnt from this and they don’t let Dianping. “There is little overlap between their goods. It has more than 130 million annual active too much ego get in the way of businesses.” Electra plays the long game

AFTER APAX PARTNERS BOUGHT HIS FIRM’S business,” and this gave the management team Apax insisted the deal was all or nothing. 23.2% stake in India-based Zensar Technologies, confidence.” Electra’s long tenure as an investor, and its John Levack, managing director at Electra Electra helped put the corporate governance reluctance to pursue a full exit, is explained by Partners Asia, spent more than six hours thanking mechanisms and management team in place for the nature of the ultimate shareholder, London- the people he had worked with. After all, some Zensar to operate as an independent business. listed Electra Private Equity. The of these relationships had been Over the years it has also played a trust has made a pledge to shareholders that it cultivated over a holding period role in 4-5 bolt-on acquisitions. will achieve annual capital growth of 10-15%, but that lasted 18 years. The company has since Zensar was consistently expanding at a rate of When Electra invested in ridden the wave of growth 12-18%. the business, it was a software in India’s business process “Every six months or so we would sit down, services subsidiary of a struggling outsourcing (BPO) industry, do a review, and conclude that this was a listed computer hardware expanding headcount from business valued at a discount to its peers and manufacturer. The parent, RPG 900 to 8,000. Zensar provides planning to grow at or above the maximum rate Enterprises, used the $9 million Zensar: Outsourcing answer software development services of return Electra is looking for,” says Levack. “We it received from Electra to pay to large corporations, on site or were able to take the view that this is a business off the listed entity’s debt so the business could from facilities in India, and reported revenue of we known well and we understand the risks be wound up. The software services unit then INR26.3 billion ($406.4 million) for 2015, a 13.48% well, so why sell when it is beating the return performed a merger with the remaining shell, year-on-year increase. Net profit was up 11.41% promised to shareholders?” which was renamed Zensar. at INR2.64 billion. The decision to sell was more driven by a “There were consulting reports at the time The exit to Apax, for $129 million, translates change in Electra’s investment strategy that has saying this wasn’t the core activity of the group,” into a 16x return and an IRR of 18% for Electra. resulted in a reduction in exposure to Asia. The Levack recalls. “We were able to say, ‘It is a great Even then, the firm was of two minds about firm’s regional portfolio, which dates back to growth area, we have put our money where selling – Levack’s recommendation was for 1995, has generated a 5x return with a couple of our mouth is, and we want to help build the Electra to offload only half of its holding, but small positions remaining

12 avcj.com | October 13 2015 | Volume 28 | Number 38 FUNDS [email protected] Lighthouse eyes consumer evolution

INDIA’S MIDDLE CLASS MAY BE GROWING, facilities. It represents an improvement in living firm felt confident to pursue the deal. but its increasingly prosperous consumers have standards, but not an overall change in lifestyles. Krishnaswami stresses that this strategy is not entirely embraced the aspirational lifestyles Lighthouse is also betting that growing not a new invention for the firm; it developed seen in Western countries. Families only a few prosperity will lead to fundamental shifts through Lighthouse’s experience with its first generations out of poverty still feel pressure to in consumer tastes. While this could mean fund. The success of that vehicle – it has already make sure their most basic needs are met before increasing interest in lifestyle products, the firm returned about 50% of invested capital with six of engaging in discretionary consumption. sees other sectors as potential beneficiaries as its 10 portfolio companies still unsold, and is on “You’ll hear people say this phrase, ‘Roti well. This philosophy has carried track for a 2.5x return – has made kapda aur makan.’ Roti means bread, kapda aur over from Fund I, illustrated the second fund more attractive. makan is clothing and housing,” says Mukund by portfolio companies such New investors joining the Krishnaswami, managing partner at midmarket- as education services and fund include the International focused Lighthouse Funds India. “Think of the management provider iDiscoveri Finance Corporation (IFC) and base level of Maslow’s hierarchy. People focus on Education. the Overseas Private Investment the things they need most.” For Fund II, the GP wants to Corporation (OPIC). With plenty For its second India 2020 Fund, which use market research to target of Fund I LPs choosing to re-up, recently closed at $138 million, Lighthouse plans more specific opportunities. Bikaji Mukund Krishnaswami Lighthouse far exceeded its $125 to capitalize both on consumers’ concern for Foods, a snack maker to which million target. practical needs and their desire to build better Lighthouse committed INR900 million in 2014 In addition to the firm’s investment approach, lives for their families. from the new fund, demonstrates this refined Krishnaswami believes management stability has Cera Sanitaryware, a maker of sinks, approach. Lighthouse felt that rising consumer helped attract investors. “There’s been a lot of washbasins, faucets, and toilets, is an example interest in food quality standards meant that turnover in funds, and we’ve managed to have of the former approach. The GP invested INR706 India’s branded foods sector was due for strong very limited turnover, and no turnover at the top,” million ($10.9 million) this January, in the belief growth. Based on its research and a successful he says. “I think that stability and consistency is that people will look to upgrade their sanitary earlier investment in cookie maker UNIBIC, the something that people like to see.” Venturra taps SE Asia experience

SOUTHEAST ASIA HAS PROVEN FERTILE at Monk’s Hill Ventures and the third managing it gets to scale rapidly, enters the next stage as soil for internet start-ups, with a wide range of director of Venturra. “We can bring the founders quickly as possible, and give it the extra runway locally launched ventures – but the still-nascent together, they can exchange best practices, and without having to shop around for another set of VC scene has so far provided relatively little learn from each other.” investors.” support for these businesses. Recently launched LDV’s 10 portfolio companies include Even with this follow-on portion reserved, the Venturra Capital aims to change that trend. Bridestory, an Indonesia-based online wedding large fund size and small expected commitments Having closed its first fund at $150 million marketplace that the firm backed in March 2015. – $2-5 million is planned on average – allow this month, the GP plans to bring its unique Another of Jung’s former firms, for considerable flexibility in background to bear in helping Series A and B Rocket Internet, led that round; choice of investments. Venturra stage companies expand across Southeast Asia. Jung set up Rocket’s Southeast plans to invest in a broad range Venturra has a distinctive pedigree thanks to Asia e-commerce platforms of technology companies that its ties to Lippo Group. Not only is Lippo the new Lazada and Zalora. seek to overcome the challenges fund’s largest LP, but two of the three managing Venturra’s management presented by Southeast Asia’s partners have connections to the company: Rudy team points to this investment varied geography. Ramawy, formerly managing partner of Lippo and entrepreneurial experience “Indonesia represents a huge Digital Ventures (LDV) and country director of as a distinguishing factor from Venturra: The three founders opportunity for technology- Google Indonesia, and John Riady, director of the competing GPs. Another is that powered companies because Lippo Group. In addition, Venturra has taken on a significant portion of the fund is set aside for there are a lot more inefficiencies and pain points the existing portfolio of LDV, giving it a sizable follow-on investments, a relatively uncommon they can solve,” says Ramawy. “My experience network right out of the gate. approach in Southeast Asia that allows for quick, has been to build companies with nationwide Despite these connections, the founders strategic capital deployments. distribution in Indonesia, and Stefan has been stress that Lippo has no more emphasis than “It’s our strategy to not just provide seed or able to see different companies scale at different any other LP. “It is an advantage that we already Series A capital, but also follow on with the Series rates across Southeast Asia. And access to the have a portfolio,” says Stefan Jung, former partner B,” says Ramawy. “We can work with a start-up so Lippo network gives us a unique advantage.”

Number 38 | Volume 28 | October 13 2015 | avcj.com 13 PROFILE [email protected] Growth imperative Having worked on one of Japan’s biggest-ever deals with Permira, Tomoya Shiraishi returned to his small- cap growth buyout roots with Phronesis Partners – with a bit of venture philanthropy in between

AFTER FOUR YEARS FOCUSING ON MEGA- at Hitotsubashi University in the 1980s. His class Between 1995 and 1999, 13 buyout or transactions, Tomoya Shiraishi wanted to return examined case studies of VC investments in turnaround deals were announced in Japan, to Japan’s small and mid-cap buyout space. Silicon Valley, and it wasn’t long before he got according to AVCJ Research. Over the next four But the interlude between his departure from direct exposure to the asset class – as a member years the total rose to 146. Capital committed Permira and the establishment of Phronesis of the graduate intake at Jafco, he spent three across all private equity deals reached $15.3 Partners – which pursues this strategy – lasted years with the investment team in Japan before billion during this period, a five-fold increase on from 2009 until 2014. being dispatched to the Menlo Park office. the aggregate figure for 1995-1999. Shiraishi put his plans on hold in the wake “I received on-the-job training as to how Jafco was not operating at the scale of of the 2011 Great East Japan Earthquake, which investments were made, the practical support its foreign peers, and while there were a triggered a major tsunami that in turn caused side, and the value-add,” Shiraishi observes. number of turnaround investments, the firm a meltdown at the Fukushima Daiichi Nuclear “My backbone as a private equity professional also participated in management buyouts, Power Plant. There were nearly 15,900 deaths and developed in the US.” succession-planning deals, and carve-outs around 229,000 people were displaced from their homes. The World Bank put the total economic cost of the earthquake at $235 billion, making it “I received on-the-job training the costliest natural disaster in history. as to how investments were “I thought that as a private equity professional I could dedicate myself to supporting regional made, the practical support businesses in financial and managerial areas,” Shiraishi explains. side, and the value-add. My This resulted in the creation of Social backbone as a private equity Investment Partners (SIP) in conjunction with several other Japanese private equity professional developed in executives. The organization targets businesses that are sustainable and have a social impact, the US” with a particular emphasis on education, youth employment, childcare and female It was the early 1990s, before the emergence from publicly-traded conglomerates. These empowerment, and community development. of the dotcom era, and investors focused included metal coatings specialist Tocalo, the It launched the JPY100 million ($1 million) Japan on high-tech manufacturing and software. first privatization in Japan led by a financial Venture Philanthropy Fund in 2013 with the Jafco investees included Novellus Systems, a sponsor. Working with company management, support of the Nippon Foundation. semiconductor components producer that Jafco bought out majority owner Nippon Steel The fund’s first commitment was to a non- went public in 1988 and was acquired by Lam in 2001 and then launched a tender offer for the profit that provides after-school care for primary Research for $3.3 billion in 2011. remaining shares. school students, with programs led by “citizen Four years in the US were followed by another “It was also one of the first cases of a re-listing teachers.” SIP agreed to provide JPY20 million six in Singapore, where Shiraishi was responsible of one of these companies,” Shiraishi adds. “After in financing plus managerial assistance over for direct investments in Southeast Asia, Australia, four years we had grown revenue by about 1.4x a three-year period as the business looks to Taiwan and China. Then, in 1998, came the call to and increased the EBITDA by about 4x. We listed expand. The investment thesis has two strands: return to Japan: Jafco was entering the buyout the company on the First Section of the filling a gap in the market and encouraging more business and it wanted Shiraishi to serve as CIO Exchange. Our return was around 10x.” women to return to work after having children. of the new team. “Since we invested, revenues have grown Up until this point, Japanese private equity The big buyout five-fold,” Shiraishi says. “As for the social impact, had been characterized by growth-stage deals, Over the next few years, more global PE firms you can look at the increasing numbers of kids but the spate of bankruptcies that followed established a presence in Japan and Shiraishi and citizen teachers, but the real beneficiaries are the Asian financial crisis created an opening was recruited as Permira’s country head in 2005. the mothers. The employment ratio for mothers for foreign turnaround investors. A Ripplewood One of the attractions was the firm’s international is now increasing in those areas.” Holdings-led consortium made the initial network, in terms of the resources it had at its breakthrough, agreeing a $1.15 billion acquisition disposal and the fact that Japanese companies To the Valley of collapsed Long Term Credit Bank of Japan in were becoming more global and therefore The notion of private equity as a source of 1999. The likes of Lone Star Funds and Cerberus required a different kind operational support. strategic as well as financial support first Capital Management soon followed with their As part of a team responsible for investing a became apparent to Shiraishi as a law student own financial services investments. single global fund, Shiraishi could only focus on

14 avcj.com | October 13 2015 | Volume 28 | Number 38 PROFILE [email protected]

the very largest of transactions. This often meant in restaurant chain Skylark failed to make money contribute to economic growth. The private working on the Japanese element of deals led by on the deal, while Tokyo Star Bank defaulted on equity firm is targeting a final close of JPY10 other offices, but Shiraishi had the opportunity its debts and was acquired by creditors. billion over the next 12 months, with SMRJ to take pole position on the acquisition of Tokyo- Shiraishi notes that Permira considered a accounting for no more than JPY2.5 billion. headquartered Arysta LifeScience. number of other large investments in Japan Phronesis will buy companies with enterprise At JPY250 billion (then $2.2 billion), it remains but could not identify an investment thesis valuations of JPY2-6 billion and implement the fifth-largest corporate private equity buyout that justified the mooted valuations. “Financial strategic and operational improvements. Shiraishi ever seen in Japan and the biggest undertaken liquidity was high, globally and in Japan,” he says. estimates there are more than 300 small-cap by a single firm. Financing was required in US “In the case of Arysta, we had been studying the buyout funds in the US but only a handful dollars and yen to digest the $1 billion-plus debt company and the industry for two years ahead in Japan. Meanwhile, domestic companies load, while Arysta itself was very international. of the auction. We had done our homework and often lack the caliber of people required to The company was the number 10 player in developed a good angle to increase the value professionalize systems and management, global agrochemicals, generating $1 billion in post-investment.” and maintain competitiveness in a changing annual revenue from a portfolio of more than commercial environment. 150 insecticides, weed killers and plant-nutrition Practical thought Over half of Phronesis’ deals are likely to products sold across 125 countries. As of 2013, Arysta’s revenue had grown to $1.5 involve succession planning, with ageing “The due diligence was quite international,” billion and the business was sold to US chemicals founders turning to third-party buyers as they says Shiraishi. “Permira had 15-20 professionals producer Platform Specialty Products for about have no one within the family to assume control working on this one transaction from the $3.51 billion towards the end of the following of their businesses. Many of these sit among beginning through to the closing. To lead this year. By this point, Shiraishi was busy developing Japan’s more than 4,000 listed companies, so army was an education for me. I could not have Phronesis alongside co-founder and co-CEO privatizations should be commonplace. got this with Jafco or with another Japanese Takahisa Koitabashi, previously deputy head of “Overall, the market is underserved, especially private equity firm.” I-Sigma Capital’s corporate rehabilitation fund. for small-cap companies, which make up three- Three of Japan’s five largest private equity Phronesis reached a first close of JPY3 billion quarters of the Japanese economy in terms of buyouts, including Arysta, were announced in on its debut vehicle, New Paradigm Fund I, in employment and GDP,” Shiraishi adds. “If we can 2006 or 2007. That period saw more than 1,000 July of this year. Half the capital came from the achieve sustainable growth for these businesses deals worth $29.2 billion, roughly equal to the Organization for Small & Medium Enterprises then our returns would be maximized. We also previous five years combined. The other two of and Regional Innovation (SMRJ), a government want PE to be recognized in Japan as a value those three did not turn out as planned: investors agency that supports many funds expected to creator rather than a vulture or cost-cutter.”

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