Asia’s News Source avcj.com July 21 2015 Volume 28 Number 27

EDITOR’S VIEWPOINT Private equity secures Hong Kong tax break Page 3

NEWS , Fairfax, Fortune, Fountainvest, Jafco, New Horizon, Recruit, SAIF, Snow Leopard, Softbank, TPG, Tsinghua Unigroup Page 4

DEAL OF THE WEEK Blumes delivers for India’s RoadRunnr Page 12

FUNDS Shunwei raises $1b for China technology deals Page 13

PORTFOLIO Divine intervention Lunar Capital beefs up China’s Yonghong China’s angel are pushing for deals but they still lack maturity Page 7 Page 14

FOCUS DEAL OF THE WEEK

Super-sized in India Social transactions PE investors pursue scale with fast food Page 11 Singapore’s Fastacash bags fresh round Page 12 June 2015

Ascendent Capital Partners II, L.P.

US$600,000,000.00

UBS acted as sole global placement agent

Suite 1609, 16/F, Jardine House, 1 Connaught Place, Central, Hong Kong Suite 2210-2211, 22/F, One ICC, 999 Middle Huai Hai Road, Xuhui District, Shanghai June 2015 EDITOR’S VIEWPOINT [email protected]

Managing Editor Tim Burroughs (852) 3411 4909 Staff Writers Andrew Woodman (852) 3411 4852 Winnie Liu (852) 3411 4907 Breakthrough Holden Mann (852) 3411 4964 Creative Director Dicky Tang Designers Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow

Senior Research Manager THE MOVE TO EXTEND THE PROFIT TAX and now they have it. Helen Lee exemption for offshore funds in Hong Kong Second, the exemption applies to managers Research Associates Herbert Yum, Jason Chong, to include private equity has been more than licensed by the Securities and Futures Kaho Mak two years in the making. After various lobbying Commission (SFC) and to “qualifying” unlicensed Senior Marketing Manager efforts, plans to extend the exemption – already managers. The initial proposal was limited to Sally Yip enjoyed by the hedge fund industry – were licensed managers only, given the government’s Circulation Administrator announced in 2013 and reaffirmed in 2014. Last understandable concerns about handing an Prudence Lau week the required amendment to the Inland exemption to managers without retaining the Subscription Sales Executive Revenue Ordinance came into force. ability to ensure they are who they say they are. Jade Chan Although few were surprised by the However, only half the managers operating in Manager, Delegate Sales announcement, the small print makes for Hong Kong are currently licensed. Pauline Chen interesting reading. It suggests the Hong Kong The Development Council Director, Business Development government has taken on board representations (FSDC) expressed a desire for a mechanism that Darryl Mag made by various industry groups and bodes well could include unlicensed managers as well, but Manager, Business Development for the regulatory battles to come; not least the many industry participants thought it would Anil Nathani, Samuel Lau proposed open-ended investment company take time to put in place a system with which Sales Coordinator (OEIC) structure through which managers could the government was comfortable. While certain Debbie Koo raise locally-domiciled funds. groups, including pension funds and sovereign Ascendent Capital Partners II, L.P. Conference Managers The exemption means that PE firms with wealth funds, cannot undergo the qualifying test Jonathon Cohen, Sarah Doyle, funds domiciled offshore no longer have to for unlicensed managers, most of those that can Conference Administrator set up structures designed to avoid triggering should be able to pass it. Amelie Poon permanent establishment in Hong Kong and Similarly, private equity firms will not enjoy Conference Coordinator Fiona Keung, Jovial Chung becoming liable for local tax. No more will a completely trouble-free existence in Hong GPs have to make trips to Macau to make key Kong: the inland revenue department continues Publishing Director decisions relating to the operation of a fund. to carry out audits on managers and there are Allen Lee With a few exceptions, the exemption also fears that untaxed capital gains, for which there is applies to special purpose vehicles under the currently no legal definition, could be redefined control of fund managers. This is important as taxable business income in certain cases. But US$600,000,000.00 Incisive Media because it facilitates access to Hong Kong’s tax the exemption is a positive first step. Unit 1401 Devon House, Taikoo Place treaty network: funds must meet local substance Next on the agenda are OEICs. These are 979 King’s Road, Quarry Bay, Hong Kong requirements to qualify for treaty benefits and unlikely to supplant limited partnerships as T. (852) 3411-4900 this could be done without risking local tax private equity’s structure of choice, although F. (852) 3411-4999 E. [email protected] liability. successful implementation could lead to long URL. avcj.com

By encouraging more activity to take place sought-after adjustments to Hong Kong’s limited Beijing Representative Office in Hong Kong, the government hopes to partnership legislation. Then the territory can No.1-2-(2)-B-A554, 1st Building, No.66 Nanshatan, stimulate demand for local asset management, properly face down the challenge of Singapore, Chaoyang District, Beijing, investment and advisory services. It would be a which has taken the lead in terms of tax People’s Republic of China T. (86) 10 5869 6203 fillip for the financial services sector as a whole, treatment, clear regulation and fund domiciling. F. (86) 10 5869 6205 which employs 230,000 people – 6% of the total At stake is not so much the opportunity to E. [email protected] workforce – and contributes 16% of GDP. bring established offshore funds – most of which UBS acted as sole global placement agent Evidence that policymakers have taken on are domiciled in the Cayman Islands – onshore, The Publisher reserves all rights herein. Reproduction in whole or board the concerns of industry participants is as meeting the needs of mainland managers in part is permitted only with the written consent of AVCJ Group Limited. twofold. First, the tax exemption is enshrined taking their first steps into international markets. ISSN 1817-1648 Copyright © 2015 in a full legislative amendment rather than regulatory guidance. The latter course may have taken less time but the practice notes commonly used are not legally binding and Tim Burroughs could be subject to differing interpretations by Managing Editor regulators. PE practitioners wanted certainty Asian Journal Suite 1609, 16/F, Jardine House, 1 Connaught Place, Central, Hong Kong Suite 2210-2211, 22/F, One ICC, 999 Middle Huai Hai Road, Xuhui District, Shanghai Number 27 | Volume 28 | July 21 2015 | avcj.com 3 NEWS

AUSTRALASIA China Modern Dairy buys to provide loans for small and medium-sized KKR, CDH $245m JV stake enterprises. Australian tech founder KKR and CDH Investments have agreed to sell TPG leads Series C for their stake in Success Dairy to China Modern launches $37m VC fund Dairy Holdings (CMDH) in exchange for HK$1.9 wealth management firm Victor Jiang, founder of Australian professional billion ($245 million) of CMDH stock. CMDH TPG Capital has led a $41 million Series C services platform Skillsapien, is targeting A$50 will issue 477 million shares to KKR and CDH as round of funding for Sinowel Enterprise Group, million ($37 million) for his new Sapien Ventures payment for the transaction. The price for the a Chinese third-party wealth management fund. He wants to raise a significant amount of shares has been set at HK$4 each. Once the deal firm. China Everbright, KPCB and Keytone capital from Chinese investors. has concluded, CMDH will own 100% of Success Ventures also participated. Founded in 2006, Dairy, with KKR and CDH fully exiting their stake Sinowel provides wealth management, asset in the venture. The agreement is expected to management and consumer services for GREATER CHINA close by July 16. Chinese high-net-worth individuals. Shenzhen Fortune leads FountainVest in $32m $100m round for Yoho round for healthcare app Fortune Capital has led a $100 million Series FountainVest Partners has led a RMB200 million D round for online fashion magazine and ($32 million) round of funding for Xingren.com, a e-commerce platform Yoho. CMC Capital and Chinese mobile app for doctors to communicate Telescope Capital also took part alongside existing with patients. Existing investors investors SAIF Partners China and Vertex Venture. and Lightspeed China Partners also participated. Founded in 2013, Xingren has more than 130,000 Alibaba forms fund to certified doctors registered on its platform. support mobile app-makers Fosun leads $25m round has established a RMB1 billion Success Dairy is a joint venture formed by ($161 million) venture capital fund to support CMDH, KKR and CDH in 2013. The company runs for US StyleSeat third-party mobile app developers. It has also two farms in Shandong province, with about Fosun Kinzon Capital, the -based launched a RMB1 billion low-interest loan 16,000 cattle between them. Operations of the VC arm of Chinese conglomerate Fosun program offered via Ant Financial, Alibaba farms include production, processing and sale International, has led a $25 million Series B round Group’s online financial services affiliate. of milk, along with breeding, raising and sale of of funding for StyleSeat, a US-based beauty dairy cattle. services booking app. Lightspeed Venture Tsinghua Unigroup invests When Success Dairy was established, KKR Partners, Cowboy Ventures and Slow Ventures and CDH were also investors in CMDH, having also participated. $100m in Acadine together committed $202 million to the business China’s Tsinghua Unigroup International has in 2008. KKR exited most of its holding when MediaTek backs Walden invested $100 million for a minority stake in CMDH listed in Hong Kong in 2013, and sold Acadine Technologies, a Hong Kong-based start- its remaining stake in the company to China Riverwood fund up developing mobile operating systems (OS) Mengniu Dairy last year. CDH still holds a small Gaintech, a unit of Taiwanese fabless for mobile, wearable and internet-of-Things (IoT) stake in CMDH. semiconductor producer MediaTek, has devices. Unigroup is a unit of Tsinghua Holdings, committed $10 million to the latest fund which is controlled by Tsinghua University. launched by early-stage tech venture capital finance management mobile app developer, has firm Walden Riverwood Ventures. The fund is Hong Kong introduces tax raised $80 million in an extended Series B round seeking to raise $325 million. US-based Walden led by New Horizon Capital. Ally Bridge Group Riverwood Ventures was formed by Lip-Bu exemption for PE and GX Capital – alongside existing investors Tan and Michael Marks, founders of Walden The Hong Kong government has extended China Broadband Capital, CICC Capital, IDG International and Riverwood Capital. the profits tax exemption for offshore funds to Capital Partners, CDH Investments and Qiming include private equity. The exemption means Venture Partners – also participated. that PE firms with funds domiciled offshore no NORTH ASIA longer have to set up structures designed to Greenwoods backs internet avoid triggering permanent establishment in Cath Kidston buys back Hong Kong and becoming liable for local tax. finance site Rongzi Greenwoods Investment has led a RMB200 Japan business Personal finance app Wacai million ($32 million) of funding for Cath Kidston, the UK lifestyle retailer controlled Rongzi.com, a Chinese internet finance platform, by Baring Private Equity Asia and TA Associates, secures $80m with participation from New Access Capital. The has bought back its Japan operations – its Hangzhou Wacai Science, a Chinese personal company enables offline financial institutions largest outside the UK – from local conglomerate

4 avcj.com | July 21 2015 | Volume 28 | Number 27 NEWS

TSI holdings for an undisclosed sum. Baring a GPs see potential in SE Asia committing INR20 million ($360,000) in a seed substantial stake in Cath Kidston from existing round in 2012, and then investing $1 million in majority shareholder TA in July last year with a mid-market Series A round in 2014. view to expanding its Asia business. Southeast Asia will see more mid-market opportunities, industry participants told the AVCJ Goldman Sachs commits hires Ryotaro Fujii Singapore Forum, although the onus remains on GPs to forge partnerships with entrepreneurs. $10m to Azure as head of Japan “We are seeing entrepreneurs who have built up Goldman Sachs has invested INR650 million ($10 Permira has chosen former KKR deal-maker the business and their family members are not million) in Indian restaurant chain operator Azure Ryotaro Fujii as managing director and head interested in continuing to own it and that lends Hospitality. Azure, which owns several restaurant of Japan. Yoichiro Furuse has been made itself to a mid-market buyout strategy,” said Peter brands including pan-Asian chain Mamagoto, chairman of Japan. While at KKR, Fujii helped Amour, CEO of AIF Capital. Indian street food maker Rollmaal and Thai food close a number of high-profile deals including chain Speedy Chow, will use the funds to expand Intelligence Holdings and Panasonic Healthcare. its operations in India and into overseas markets. SoftBank backs US ad Call center software analytics start-up provider raises $5m Japan’s SoftBank Corp. has led a $20m Series B Indian call center software developer Ameyo has round of funding for US-based ad analytics start- raised $5 million in Series A funding from PE firm up Cinarra Systems. Cinarra has also launched Forum Synergies. Ameyo, which offers cloud- joint business operations with SoftBank in based and software-as-a-service (SAAS) platforms Japan. The capital will help the company grow for contact center operations and sales teams, its product engineering team and expand its will use the funds to expand into the US and to business with operators overseas. improve its platform. In addition to succession planning, change Jafco invests $2.5m in of control situations arise from helping SAIF Partners hires ex- overleveraged companies with their debt traffic analytics tool burdens and supporting entrepreneurs that Freecharge CEO Japanese venture capital firm Jafco has require capital and expertise to upgrade Alok Goel, former CEO for Indian mobile recharge invested JPY3 million ($2.5 million) in Wacul, operations and expand overseas. Cross-border service FreeCharge, has joined private equity firm a Tokyo-based start-up that offers website opportunities are driven by integration within SAIF Partners as its new managing director. Goel improvement consulting. The company runs Southeast Asia, but Emmett Thomas, head of Asia was CEO of bus ticketing website redBus before AI Analyst, an access analytics tool for websites at Advantage Partners, noted that they also relate joining FreeCharge. His new role will be to look which automatically suggests improvements to to ties with wider global markets. into SAIF’s early-stage investments. websites. Advantage opened an office in Hong Kong in 2008 in order to help Japanese companies access Snow Leopard invests Recruit commits $7.5m to other Asian markets and also bring regional firms into Japan. CHAMP Private Equity, meanwhile, $1.6m in QuikWallet US-based HackerRank set up a base in Singapore - also in 2008 - to LivQuik, the Mumbai-based developer of mobile Japan’s Recruit Holdings has paid $7.5 million capitalize on closer links between Asia and its payment app QuikWallet, has raised $1.6 million for a stake in HackerRank, a US technical home market of Australia. “We can add value from existing backer Snow Leopard Technology recruitment platform owned by Interviewstreet, in terms of helping these companies go into Ventures. The company will use the funds via its $20 million corporate venture capital new markets,” said Shane Gong, a director with to expand its team and add more merchant fund - HR Technology Fund. HackerRank has CHAMP in Singapore. partners. It currently works with around 1,000 two businesses lines: an online engineering restaurants and local merchants. community where coders can test their skills; and a suite of services for HR professionals seeking its purchase through its subsidiary Fairfax India, out technology talent. which raised $1 billion earlier this year in a SOUTHEAST ASIA combined IPO and private placement. SOUTH ASIA PE-owned UTAC files for Accel leads Series B for $350m US IPO MySmartPrice Fairfax offers to buy 26% UTAC Holdings, the Singapore-based precision Accel Partners has led a $10 million Series engineering firm owned by TPG Capital and stake in IIFL B round for Indian online price comparison , is looking to raise as Canada-based Fairfax Financial Holdings has and discovery platform MySmartPrice. Helion much as $350 million in its US IPO. The PE firms offered to buy a 26% stake in Carlyle-backed Ventures also took part in the round. The two privatized UTAC through a $1.25 billion leveraged financial services company IIFL Holdings Limited firms previously supported MySmartPrice buyout in 2007, which included around $725 for INR16 billion ($255 million). Fairfax will make through two previous funding rounds, first million in debt.

Number 27 | Volume 28 | July 21 2015 | avcj.com 5 ESG FORUM Co-hosted by: 2015 18 September | Renaissance Hong Kong Harbour View Hotel SAVE US$200 Book before

31 July 2015 Mitigate risk and maximize exit returns with responsible investing The first event of its kind in the region, the inaugural AVCJ PRI Responsible Investment Forum will provide a platform for education, benchmarking and the exchange of ideas on how GPs operating in Asia can incorporate Environmental, Social and Governance (ESG) principles across the companies in their portfolio.

Ken Mehlman Keynote Member & Global Head of Public Affairs speaker KKR

Leading GPs and LPs confirmed are: Adam Black Darren Massara Ed Norton Partner, Head of Managing Partner Senior Advisor, ESG Sustainability NEWQUEST CAPITAL TPG CAPITAL DOUGHTY HANSON & PARTNERS CO PRIVATE EQUITY

View the full list of speakers at avcjesg.com

Registration Enquiries: Sponsorship Enquiries: Pauline Chen T: +852 3411 4936 Darryl Mag T: +852 3411 4919 E: [email protected] E: [email protected] Enquiry

Supporting Organisations

Join your peers avcjesg.com #avcjesg ESG FORUM Co-hosted by: COVER STORY 2015 [email protected] 18 September | Renaissance Hong Kong Harbour View Hotel SAVE US$200 Book before

31 July 2015 Angels get their wings Angel investors, both unsophisticated amateurs and industry-savvy professionals, are flooding into China’s Mitigate risk and tech sector in search of stellar returns. Everything looks great as long as the market keeps on going up maximize exit returns LEI JUN IS A CLASSIC PRODUCT OF THE In an industry awash with capital, individual up businesses in industry verticals around the with responsible virtuous cycle in Chinese technology. Having angel investors, angel funds operated by BAT – that have kick-started the virtuous cycle. started out as an employee at software developer groups of friends and seed funds are looking Using stock options or the proceeds of selling Kingsoft Holdings, he became an angel , for deals. Some have reached a level of maturity their businesses to the BAT, these entrepreneurs investing then an entrepreneur, and finally a venture comparable to Shunwei and are managing third- are now providing capital and expertise to a third capitalist. party capital, coming up against the traditional generation. The first event of its kind in the region, the Lei spent 20 years at Kingsoft, 10 of them VC firms. It is as if everyone wants to be an Joe Wu is one of them. He was CEO of as CEO, and stepped down in 2007, shortly entrepreneur and every entrepreneur wants to Chinese Android app marketplace 91 Wireless inaugural AVCJ PRI Responsible Investment after taking the company public in Hong Kong. become an investor. But what happens when the until the company was purchased by Baidu This signaled the start of the angel phase and bull market turns? for $1.85 billion two years ago. Since then Wu Forum will provide a platform for education, a focus on three themes he thought likely to “People who have a technology background has become an active , backing benchmarking and the exchange of drive the next generation of internet start-ups: should be more suitable candidates to be angel start-ups such as Hong Kong logistics service e-commerce, social networking and mobile. investors, given their wide networks and the GoGoVan. ideas on how GPs operating in Asia can Early targets included social networking site industry experience they can bring to the start- There are thousands of executives still with incorporate Environmental, Social and YY, clothing retailer Vancl, and mobile browser established internet firms that want to make UCWeb. YY listed in the US, while UCWeb was angel investments on the side, while thousands Governance (ESG) principles across the acquired by Alibaba Group. “It is all about co- more have on industry expertise to call upon but companies in their portfolio. Industry participants say Lei has an innate want to participate anyway. Amateur investors ability to spot companies with potential. He investing but not might only write three to four checks per year, is also known for concentrating on industries just observing and but the more active angels are known to back he understands and working alongside 20-25 different start-ups. entrepreneurs he knows well. “If you work with investing in the follow- More than 2,500 angel funds and incubators Ken Mehlman Lei Jun, you know he has strong opinions on have formed in the last two years, many run by Keynote Member & Global Head of Public Affairs product development and business strategy. up rounds. I think investors who call upon friends or traditional VC speaker Even if he doesn’t have a majority stake, he has angel investors like firms for capital. Shaw Wang, co-founder of Baidu, KKR strong views that may differ from those of the left his position in 2011 and set up Unity Ventures entrepreneur,” one early-stage investor says. “But I that too; they like us with few other tech professionals. Crystal Stream think he has changed a bit in recent years.” Capital was founded in 2013 and raised a $100 Growth-stage VC firms like to work with Lei, to put money to work million fund from the likes of ex-Qunar CEO Leading GPs and LPs confirmed are: providing financing to start-ups he has seeded. alongside them” – Chris Evdemon Chenchao Zhuang and Hillhouse Capital. It is But the man himself has described angel managed by former Baidu executive Mengqiu Adam Black Darren Massara Ed Norton investing as merely a hobby. In 2009, he founded Wang. There is also Rice Capital, which was Partner, Head of Managing Partner Senior Advisor, ESG smart phone brand Xiaomi, which has since ups,” says Tuck Lye Koh, who set up Shunwei with set up by several former Alibaba workmates. Sustainability NEWQUEST CAPITAL TPG CAPITAL become one of the world’s most sought-after Lei and now serves as CEO. “It’s very difficult to It helps that the costs are low. The DOUGHTY HANSON & PARTNERS start-ups with a valuation of $45 billion in its be a good angel investor. Only few of them can government is willing to waive property rental CO PRIVATE EQUITY most recent round of funding. Lei’s angel activity become fully institutionalized and stand out in fees in order to support incubators and then has been replaced by an institutional platform, the market.” it is relatively easy to back a start-up without View the full list of speakers at avcjesg.com Partners. The firm recently raised committing too much money. No wonder $1 billion for its third US dollar fund. Origin of the species some industry participants think the angel Six years ago, before the likes of Xiaomi The evolution of China’s angel ecosystem differs community is becoming as overpopulated as its Registration Enquiries: Sponsorship Enquiries: broke through, there were only a handful of from the US in that the first generation of internet VC counterpart. William Bao Bean, an investment Pauline Chen T: +852 3411 4936 Darryl Mag T: +852 3411 4919 sophisticated angel investors in China – among entrepreneurs did not turn their companies partner at SOS Ventures and managing director Enquiry them, Xu Xiaoping, Cai Wensheng and Xue over to professional management and focus on of Chinaccelerator, notes that valuations for E: [email protected] E: [email protected] Manzi, as well as Lei. But their success has helped nurturing a new wave of start-ups. The founders angel-stage companies has gone up 4x in the last propel the market to new heights. At one end of Alibaba, Tencent Holdings and Baidu (the BAT) 18 months, with pre-money valuations soaring Supporting Organisations of the spectrum, entrepreneurs, cash rich from remain at the helm of their companies, building from $500,000 to an average of $2 million. exiting their initial ventures, are putting money them into even bigger behemoths. “In the past there were very few early- back to the ecosystem; at the other, investors Rather, it is the second generation – founders stage investors and there was no such thing with no tech background are flocking into the who worked at those first-generation companies as a pre-Series A round. The average Series A space, drawn by the ever-rising valuations. before striking out on their own and setting investment in China was about $10 million and Join your peers 7 avcjesg.com #avcjesg Number 27 | Volume 28 | July 21 2015 | avcj.com COVER STORY [email protected]

the absence of sustainable structures; founders China PE and VC investment by stage receive inconsistent messages and within the 20,000 funds themselves team volatility is rife. For example, one of the co-founders of Rice Bank

15,000 Capital is understood to be about to leave the firm. “Many of these angel funds are not so 10,000 institutionalized. Everyone thinks it is a pretty

US$ million easy game but once they get into early-stage 5,000 deals they realize it’s a tiring and challenging business,” says one VC investor. “Once you’ve 0 spent all your $100-$200 million in capital from 2010 2011 2012 2013 2014 2015 friends and family, what are you going to do? It Start-up/early stage Expansion/ won’t really impact the portfolio companies – if Source: AVCJ Research they are doing well they can raise capital from traditional VCs – but for angel funds there is uncertainty. It all depends on whether the firm wants to be a one-time fund manager or a repeat Early and growth stage deal volume manager.” 800

700 Long-term game The line between angel and early-stage venture 600 capital is becoming blurred as technological 500 advances enable a greenfield idea to crystallize

Deals 400 into a functional start-up within a condensed timeframe. This means early-stage investors are 300 likely to participate in everything from angel and 200 seed to Series A rounds. 100 “About 20 years ago, the time it took for a US 2010 2011 2012 2013 2014 2015 start-up to reach a Series A round was actually Start-up/early stage Expansion/growth capital quite long, perhaps 1-2 years after the angel Source: AVCJ Research round. With mobile technology, start-ups can change dramatically in the space of 2-3 weeks,” says Peng Cheng, managing director at TusPark it was almost impossible for start-ups to raise entrepreneur is blurred as they try to impose their Ventures, an early-stage VC firm under Tsinghua $2-4 million before Series A. There was a hole in own ideas as to what the companies are going to University. “We want to position ourselves as an the market, but now it has been filled. We are be. “It can be very good if the person has the right early-stage investor. One defining point is that we seeing later-stage funds coming down to do the idea. But investors in the West usually don’t tell back start-ups that have completed commercial pre-A rounds, spraying money all over the place. entrepreneurs what to do,” Bean notes. registration, so they have actual business activity.” That has also helped drive up valuations,” Bean In this context, some Chinese angel investors Investors adopting institutionalized structures explains. pursue strict economic terms that would be – funds with a formal lifespan, a clear delineation seen as unfair by many in Western start-up between GP and LP, and so on – also gravitate Demanding stakeholders communities. They may demand 30-40% of towards the early-stage where companies are It is difficult to gauge the full extent of angel the total equity in an angel round and insist on more proven. activity in China, largely due to a lack of liquidation preferences that guarantee a certain When Andrew Teoh, who previously worked transparency. In the US it is common for a handful level of return. Founders that are unfamiliar with in corporate strategy department in Alibaba, to as many as 20 angels to team up and invest Western norms – or are so desperate for capital founded Ameba Capital with the former in a company, each one writing a relatively small they agree to almost any terms – often simply go CFO of Kingsoft, he wanted to be the first check. China relies on friends’ referrals and so it along with it. institutionalized investor in start-ups. Ameba is not unusual to find a small number of angels “However, with more angel investors entering raised $25 million for its debut fund, and closed concentrating their capital on a relatively narrow the market, founders have a wider variety of its second vehicle three months ago. Apart from selection of companies and making follow-on options and they can negotiate favorable terms. renminbi fund-of-funds, the LP base includes investments. Investor mentality is also different. If you only have one term sheet then you will entrepreneurs previously backed by the GP. Whereas in Silicon Valley angels invest in business accept it. But if you have five term sheets, and They have sold their businesses but retain ties plans, in China they are backing teams. If one three of them have restricted terms and two are a with Ameba and Fund II is likely to fund these start-up doesn’t work out, they will support the bit fairer, you can pick one of the fairer ones,” says entrepreneurs’ next generation of start-ups. same entrepreneur on his next initiative. Chris Evdemon, a Silicon Valley-based partner “I come from an institutionalized background As a result of these dynamics, Chinese angels at Innovation Works, which makes early-stage helping clients manage their money. When I was tend to want a higher degree of operational investments in China. at Alibaba I also invested in other funds. I think if influence start-ups. The line between investor and Another characteristic of local angel funds is you want to build a long-term brand, you have

8 avcj.com | July 21 2015 | Volume 28 | Number 27 COVER STORY [email protected]

to be institutionalized,” says Teoh. “Early-stage in $200,000-300, 000,” says Anna Fang, partner A matter of liquidity investment is very risky. For me, the larger the and CEO at ZhenFund. “We are more like a micro In the past, angel investors backed start-ups all number of people involved in the round the VC fund that provides a lot of portfolio services to the way through to IPO, but with valuations often better, because I can get more help from other companies, including hiring staff, marketing, and now so high in the Series B and C rounds, early- investors.” legal and financial advisory services.” stage investors have more exit opportunities. Much like Lei Jun with Shunwei, Xu Xiaoping, In order to generate , Fang stresses There are plenty of growth-stage VC firms willing who co-founded US-listed New Oriental the importance of cultivating a differentiated to buy their positions, although other investors Education, is following an institutionalized path image within the start-up community. ZhenFund are getting involved as well as moving early through ZhenFund. The firm has about $230 receives 300 emails per day from entrepreneurs becomes a theme all the way along the VC value million in : three US that want funding for their businesses. chain. Mutual funds and hedge funds are just as dollar funds and three parallel renminbi funds; Xu Innovation Works, which was set up by likely to seek out pre-IPO investments. and Sequoia Capital were the sole LPs in the first ex- China head Kaifu Lee in 2009 as an The liquidity events the greater the amount of two renminbi and dollar vehicles. early-stage incubation and seed capital provider, capital pumped back into the angel ecosystem Since 2011, the vast majority of deals have has also developed its business model. A group – and in this way the virtuous cycle is sustained. involved ZhenFund rather than Xu deploying of 10-15 founders backed by the firm have exited The phenomenon sounds great in theory but his personal capital. While he remains the largest their ventures in the last six years and become it only works in practice as long as the market LP, Fund III saw participation from international angel investors. In order to tap into this group’s continues to perform. Should the valuation groups such as family offices and VC fund- networks, Innovation Works raises side funds bubble in the tech sector burst or deflate, of-funds Horsely Bridge Partners. Meanwhile, that invest alongside these entrepreneurs. The suddenly the “amateur” investors flooding into Tencent and Gopher Asset Management are incubation program has been discontinued. the space will lose their appetite and start-ups among the investors in the third renminbi “These angel investors’ deal flows are very will suffer. It is only then that they we will know vehicle. interesting for us. They invest in businesses they whether the more institutional players have “We differ from incubator and accelerators understand and we prefer to participate from the staying power. in that we don’t support companies in batches, seed round. When angel investors stop there, we “Right now valuations are very expensive and so there is no routine start-up program. can continue through the Series A. It is all about many start-ups are easily raising a lot of money,” Furthermore, we don’t provide space and our co-investing but not just observing and investing says SOS Ventures’ Bean. “When the market check sizes are much bigger. On average we in the follow-up rounds. I think angel investors corrects, a lot of companies will be unable to invest between $300,000 and $1 million per deal like that too; they like us to put money to work raise again and die. And valuations will go back at the seed stage, but a lot of seed funds only put alongside them,” says Evdemon. down.”

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To subscribe, call Sally Yip at +(852) 3411 4921 or email [email protected] avcj.com   headquartered Heritage International Guernsey – offering a Fund Managers Limited, was a panelist Internationaland the only Fund Western Managers delegate Limited, on the was a panelist and the only Western Guernsey – offering a GP/LP session. gateway to the UK for delegate on the GP/LP session. gateway to the UK for He Hesaid: said: “Guernsey “Guernsey has recently has recently Chinese clients enteredentered into ainto number a number of agreements of agreements Chinese clients andand Memoranda Memoranda of Understanding of Understanding withwith various various bodies bodies in China in China and is and is BY WENDY WENG, GUERNSEY FINANCE’S CHINA REPRESENTATIVE ideally placed to forge a long standing BY WENDY WENG, GUERNSEY FINANCE’S CHINA REPRESENTATIVE ideally placed to forge a long standing relationshiprelationship with withthe private the private equity equity industry in China.” industry in China.” Due to the regulatory restrictions GuernseyGuernsey has morehas more than than 50 50 Due to the regulatory restrictions Heritage is engaged with a number of (including foreign exchange restrictions), years’ years’experience experience of ofproviding providing (including foreign exchange restrictions), GuernseyHeritage domiciled is engaged investment with fundsa number of ChineseChinese investors investors areare usually not not investingGuernsey into Chinadomiciled and is investment also working funds fi nancial nancial services services to toclients clients from able to invest offshore other than via able to invest offshore other than via withinvesting Chinese fundinto managersChina and developing is also working around the world. the Qualified Domestic Institutional from around the world. the Qualifi ed Domestic Institutional fundwith and Chinese projects managers to tap intodeveloping InvestorsInvestors (QDII) (QDII) regime. regime. 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China (AMAC) and the China Association Frequent air links to UK Commission,of Private Equity signed (CAPE). a Memorandum The Island has a proven operating Same24 time square zone miles as UK Guernsey specialises in domiciling and of Understanding (MoU) with the China model where global investment houses EnglishPopulation speaking 60,000+ servicing closed-ended funds investing SecuritiesAt the 6th Regulatory Global Private Commission Equity Forum (CSRC) use legally robust and fi scally neutral British Pound into alternative asset classes, such as private in Novemberin Beijing in 2013. December In addition, 2014, Mark Guernsey 60 miles from England structures, such as companies and Huntley, Managing Director of the equity, real estate, (renewable) energy and has grown its links with both the Asset 25 miles from France partnerships,infrastructure to hold focused a wide on range the UK of market. Guernsey-headquartered Heritage assets spread around the world. Management Association of China Frequent air links to UK (AMAC) and the China Association of www.guernseyfinance.com | [email protected] | +44 (0) 1481 720071 Same time zone as UK Guernsey specialises in domiciling and Private Equity (CAPE). English speaking servicing closed-ended funds investing into At the 6th Global Private Equity Forum in British Pound alternative15203 GF AVCJ asset Advertorials classes, v2.indd such 1 as private 21/07/2015 15:06 equity, real estate, (renewable) energy and Beijing in December 2014, Mark Huntley, infrastructure focused on the UK market. Managing Director of the Guernsey-

15203 GF AVCJ Advertorials.indd 1 01/07/2015 09:36 FOCUS [email protected] Hungry for growth India’s quick service restaurant (QSR) space is poised for massive growth, but translating that into private equity returns is a challenge. Logistics and real estate are the primary obstacles to achieving scale

THIS WEEK BURGER KING OPENED ITS vertically-integrated supply chains, which are strengths of GRFH has been the company’s focus 23rd outlet in India, just eight months after the difficult for new entrants to replicate. As such, on home delivery, which has gone a long way to first restaurant opened for business in New many previous PE investments in the space have improve the economics of its outlets. Delhi. The US burger chain, which is owned by focused on solving this piece of the puzzle first. “The cost of rental in India as percentage of 3G Capital, arrived in the country through a This was the case with SEAF India Agribusiness sales is very high so if you want to make a more partnership with Everstone Capital. The local GP Fund’s decision to buy a minority stake in Guha viable model then home delivery becomes a very has an exclusive 25-year master franchise to lead Roy Food Joint & Hotel (GRFH), which has important component,” Mathur says. “Because the roll-out. operated two QSR brands – traditional Indian the cost of doing home delivery is a fraction of “3G saw Everstone not just as a PE investor food chain Only Alibaba and fried chicken brand the cost of rental, almost 30% of the company’s but as a business with strong execution Baked & Fried – since 2008. revenue is from home delivery.” capabilities.” says Sameer Sain, co-founder of “The supply chain was what was attractive Everstone. “The idea was that we would not about the format,” says Hemendra Mathur, Disruption impact only build the business from scratch but that we managing director with the fund. “The founder This is part of reason why new entrants have would fund the project, and that was attractive had put all his effort into setting up his own prioritized logistics. Companies like Faaso’s Food to 3G.” supply chain with a central kitchen in Delhi that Service, which raised $20 million from Lightbox The deal is something of a poster child for the can serve 80-100 outlets.” Ventures and existing investor Sequoia Capital in quick service restaurant (QSR) industry in India. Burger King has since been followed by other US brands like Carl’s Jr. and Wendy’s, which are “QSR is about getting hundreds of transactions in looking to make inroads, albeit on a smaller scale. A handful of local players, with VC backing, are every store on a daily basis. If you can’t do that it also targeting the space. Despite the hype, Sain emphasizes the is a waste of time. You have to dig deep for value importance of distilling the noise from the reality and dig deep for scale” - Sameer Sain that India’s QSR space is still very nascent. This is largely due to issues involving logistics and real estate costs, and investors’ ability to capitalize In this way the company was able to control February, differ from regular QSR chains in that on the opportunity depends on their ability to the quality of products and raw materials: it had it is supported by an app-based food delivery overcome these obstacles. According to market ovens for baking bread, a chicken-slaughtering service. Faaso’s claims that 65% of its business research firm Crisil, QSR was worth INR60 billion line, and spice-grinding machines. Furthermore, is online, with the app processing some 50,000 ($960 million) last year and represents around GRFH could cut costs and offer its menu at an orders a month. 2-3% of India’s food economy. It is tipped to be attractive price point – a vital consideration in the A similar approach has been taken by Box8, worth INR177 billion by 2017. quest to achieve scale. which received a $3.5 million Series A round of The private equity role in this is difficult to Everstone’s Sain also stresses the importance funding led by in March. Like GRFH, gauge – AVCJ Research does not track Indian QSR of having effective supply chains. “Scale only it operates a centralized kitchen as well as a investment specifically – but looking at data for comes if you can offer value and India is a very call center and 22 delivery outlets across the the broader restaurant industry, deal activity is value on conscious market,” he says. “QSR is about Mumbai. The business claims to process over still fairly limited. So far this year, $21 million has getting hundreds of transactions in every store 2,000 transactions per day via both its mobile been transacted over three deals, compared to on daily basis. If you can’t do that, it is a waste and web platforms. $104 million and six investments in 2014. of time. You have to dig deep for value and dig While foreign franchises like Burger King will deep for scale, and for that you really have to continue to have a place in India OSR’s market. Links in the chain build a strong supply chain.” Sanjay Mehta, an angel investor and early While QSR may be growing fast, it is still Another issue that comes with scale is the backer of Box8, believes there is a lot of scope dominated by just handful of foreigner players. availability real estate. QSR outlets often need for disruptive start-ups to carve out a significant Crisil found that foreign brands had a 63% share to be based in dense urban areas but these chunk of this fast-growing market. of the market in 2013, led by Domino’s Pizza on locations often fail to meet electricity and “I anticipate we will see a least a dozen local 20%, with Subway (12%), McDonald’s (11%), KFC sanitation requirements. Mall locations offer QSR brands getting creative in the next 10 years (9%) and Pizza Hut (8%) trailing behind. This only better facilities but they don’t have the same kind and solving some of these operational issues,” represents the organized market; around 80% of of footfall. says Mehta. “It is comparable to the e-commerce the food industry is still unorganized. Inevitably, the strongest locations command space 10 years ago, the journey for India’s QSR The multinationals’ big advantage lies in their premium prices. Mathur notes that the one of the companies has just begun.”

Number 27 | Volume 28 | July 21 2015 | avcj.com 11 DEAL OF THE WEEK [email protected] / [email protected] Blumes re-ups with RoadRunnr

WITH THE MEGA-ROUNDS RAISED BY THE services market has exploded in India,” explains can get the right kind of manpower in the team, likes of Snapdeal and Flipkart grabbing headlines Adit Parekh, a principal with Blume.“It all relates scale up supply, and then we will look to expand over the past 18 months, the e-commerce space back to e-commerce, and the drive for more into more cities,” says Parekh. has been at the vanguard of India’s venture convenience and lower cost.” RoadRunnr is currently focused on high- capital boom. But as well as offering a platform The platform provides delivery services for density urban centers like Mumbai, New Delhi, for a new generation tech start-ups, online retail business customers including online and offline Gurgaon and Hyderabad, but will gradually has also helped spawn a burgeoning ecosystem retailers and restaurants. Clients can use an app branch out into smaller areas. Meanwhile, the of related services in e-payments and last-mile to order deliveries, which are processed through courier fleet is dominated by motorcycles and logistics. a network of smart phone- scooters but there are plans to enlarge the Blume Ventures’s most recent connected couriers to find the platform and offer other modes of transport such return investment – Bangalore- closest one. as bicycles and trucks. based logistics start-up The business model is RoadRunnr is not the only player in the space. RoadRunnr – falls into the latter comparable to existing sharing It competes with Grab, which recently raised category. The company was set economy applications, such as $1 million from Oliphans Capital. Then there is up by former Flipkart employees Indian taxi booking app Ola – also grocery delivery app Grofers and logistics Mohit Kumar and Arpit Dave which was also backed by Blume marketplace Porter; both are VC-backed. It is earlier this year. Blume was one RoadRunnr: Delivery dash – with RoadRunnr providing possible that ride-sharing platforms like Ola of the seed investors alongside a technology platform that and US counterpart Uber may also expand into Nexus Venture Partners; both decided to re-up matches a network of independent operators logistics, but Parekh says he is not concerned. for the RoadRunnr’s $11 million Series A round with client demand. The start-up will use this “We don’t know Uber’s plans but we have last week. latest round of funding to bolster its team of seen Ola branch out into food delivery with Ola “The company started out as food delivery engineers and build out its platform to keep pace Cafe,” he observes. “However, I think the transport platform but has now extended into laundry, with rising demand. and logistics services is a big enough market in groceries and courier services, as the home “This investment is mainly so the company India, at least for the next four or five years.” Fastacash brings payments everywhere

DIGITAL NETWORKS ARE REMAKING them, rather than launching a C2C service to take Though Fastacash currently focuses on communication patterns across the world; on the existing financial players,” says Tallent. person-to-person transactions, it is considering where people living abroad once relied on postal The company’s partners include Visa Europe adding merchant payment capabilities. There services and analog telephone lines, now their and DBS Bank. It wants to have 15 by the end of is some precedent for adding the service – it loved ones are just an instant message away. this year and 50 within 2-3 years. already supports mobile phone recharge through Singapore’s Fastacash Fastacash hopes to take Ping Pay – and the new funding provides the believes that money transfers advantage of the booming trade company the financial support to develop it. can be handled as casually as in remittance payments from “When people use messaging channels communication. The company, expatriates living abroad to their and social networks, we want to bring them which recently raised $15 million home countries. The World Bank transaction capability over that communication in Series B funding from Rising estimates that $685 billion will channel,” says Tallent. “That can take the form of Dragon Singapore, Life.SREDA be transferred across borders a person-to-person payment, or a person-to- and UVM 2 Venture Investments, this year, with 50% of the traffic merchant payment.” develops platforms to transfer Fastacash: Digital dollars directed at Asia. That represents a That universal payment application is the money through social networks. major opportunity for Fastacash. end goal. Rather than forcing customers to deal For example, Ping Pay, developed with India’s Axis “Our bet is, do we believe that any piece of that with complicated online payment systems, Bank, allows users to request or send payments $685 billion is going to move through social?” the company wants to make payments as easy over Facebook, Whatsapp, Twitter, SMS and email. says Tallent. “And our financial plan is based on and commonplace as answering a phone. Vince Tallent, Fastacash’s chairman and CEO, assuming that if half a percent of that moves “We’re building a platform that sits strategically says that it made sense to work with existing through social, we will get to profitability.” between the financial world and the social world,” financial institutions rather than trying to Volume is critical for Fastacash to become says Tallent. “We’re trying to help bridge those compete with them. “The quickest way to scale profitable, since it generates revenue through two worlds, to help the end users to transact was to partner with the right people across the transaction fees. Currently the company handles exactly where they are, where they’re living and globe, and become a technology partner to more than one million transactions per day. breathing every day.”

12 avcj.com | July 21 2015 | Volume 28 | Number 27 FUNDS [email protected] Shunwei raises $1b, eyes growth deals

THE LINE BETWEEN VENTURE AND firms, provide additional capital to portfolio “Internet penetration rate is relatively high growth capital in China has always been blurred, companies that have evolved from early-stage in major Chinese cities but it’s still low in small and in recent years it has become more so into growth investments. towns and villages,” Koh says, explaining the rural as start-ups raise ever larger private rounds. “Based on what we have accumulated over internet theme. “We will see more consumer Nevertheless, based on AVCJ Research’s records, the last few years in terms of industry resources internet activity arising from the rural areas over with $1 billion at its disposal across two funds, and knowledge, we have the the next few years.” Shunwei Capital Partners has accumulated more capability to invest in early- and In addition to the US dollar dry powder in one go than any other China- growth-stage companies,” says funds, Shunwei raised RMB1 billion focused VC firm before it. Tuck Lye Koh, co-founder and CEO ($160 million) for its first renminbi The GP reached the milestone while barely of Shunwei. “The new opportunity fund earlier this year, which should breaking a sweat. Buoyed by strong demand fund will not only make follow-on facilitate exits on the domestic from existing LPs, Shunwei spent just a few investments in existing portfolio public markets. However, Koh says months in the market with Shunwei China companies, but also invest in most VC investments will still come Internet Fund III and Shunwei China Internet new companies that are raising from US dollar vehicles. Opportunity Fund II, which between them expansion rounds.” “The entire renminbi ecosystem comprise the firm’s third US dollar-denominated Set up in 2011 by Lei Jun, Shunwei: Fund fortune will take years to achieve the fund. Regulatory filings indicate that each vehicle founder of Chinese smart-phone similar level of maturity as on the was seeking $500 million. maker Xiaomi, Shunwei has backed over 100 US dollar funds side. The size of renminbi funds The fundraising effort is nearly twice the size companies since its inception, covering every is generally quite small now. If start-ups want to that of the second fund: Shunwei China Internet segment in the internet and technology raise large private rounds, they will have difficulty Fund II and Shunwei China Opportunity Fund sector. Fund III, which is about to make its first in the domestic market,” Koh explains. “On the closed in mid-2014 at $315 million and $210 commitment, will have a more concentrated exit front, I anticipate that Chinese regulators million, respectively. Opportunity funds, which focus, with mobile internet, intelligent hardware will relax the current rules to make it easier for have become increasingly popular among VC and rural internet of particular interest. foreign-invested companies to list onshore.”

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AVCJ Group Ltd. AVCJ Group Ltd. AVCJ Group Ltd. Unit 1401-03, Devon House, Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong Unit 1401-03, Devon House, Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong Unit 1401-03, Devon House, Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong Tel: (852) 3411-4900 Fax: (852) 3411-4999 Tel: (852) 3411-4900 Fax: (852) 3411-4999 Tel: (852) 3411-4900 Fax: (852) 3411-4999 asianfn.com/journal_regionalreports.aspx Email: [email protected] Website: avcj.com Email: [email protected] Website: avcj.com Email: [email protected] Website: avcj.com PORTFOLIO [email protected] Leading the herd Lunar has spent the last two years building Yonghong’s regional beef jerky brand into a national contender. The firm hopes to show the possibilities for progress that come with control deals

IN 2013, THE MANAGEMENT TEAM AT areas of the market are created equal, and Lunar of the snack food industry overall, highlighting Guizhou Yonghong had a problem. Not with the knew it had to narrow its choices in order to find promising segments. This first phase led the team business itself – the company, then nearing the a segment in which a local company could have to consider a beef jerky player. end of its third decade, was one of the leaders in room to maneuver. The more focused second phase of the China’s crowded beef products market, and its “For some of the niche sectors, like survey started in 2012, with a mapping out of the Niutou brand of beef jerky was a regional favorite. carbonated beverages, there’s a global foreign industry and the identification of several hundred But the three founders, who were all in their 60s, player, like Pepsi, and they basically set the rule players. From this group, Lunar shortlisted the top were looking to retire, and couldn’t find a suitable for the whole industry,” says Jerry Mao, co-head five candidates and visited each one. Yonghong replacement to carry on the work after they left. of the PE firm’s investment and corporate finance stood out because of its long history and its focus It was a classic succession dilemma, team. “But there are still a lot of niche sectors, like on quality. and a golden opportunity for Lunar Capital beef jerky, nut-based snacks and others, where “In the past, a lot of people competed on cost, Management, which was considering there’s no global leading player.” and on the price. Basically, whoever provided the entering China’s snack food sector. The firm’s representatives met with management numerous times over the course of a year, trying Growth in China’s snack food market to convince them that Lunar was a different 600 kind of PE investor: one that had plans for the company beyond making a quick buck. 500 “What we’re trying to do is to move away 400 from this environment in China where everyone 300 is simply looking for what’s hot now, which RMB billion 200 may or may not be hot three or four years from now,” says Derek Sulger, managing partner at 100 Lunar. “We’re trying to look at where we can 0 buy sustainable businesses that will outlast the generations. That’s what people are going to be 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E looking to own and buy in China, from this point Source: Frost & Sullivan forward.” The courting paid off in April 2013, when Lunar bought a 70% stake in Yonghong for $50 The beef jerky market held additional appeal lowest price in this industry would have the deal million. Now the GP is trying to show the truth because of its high fragmentation. While there volume. But now people really focus more on the of its words, through helping this well-known are regional leaders – including Yonghong, of product quality,” says Mao. “Yonghong, over the company grow even further through expansion course – with 500 brands of jerky being sold past 30 years, has never had a quality problem into new regions and sales platforms. If Lunar nationwide there is still plenty of competition before, which is quite rare in the snack food can continue to boost Yonghong’s standing, the and no one dominant player. This was welcome industry, especially in the beef jerky sector.” private equity firm will have a strong success news to Lunar, since it meant there were story for future clients – and China will have a consolidation opportunities by which its investee The case for control strong national brand that is poised to hook a company could break out of the pack. Key to the firm’s considerations was that the new generation of consumers. “We like to buy strong regional consumer company needed to offer the chance to take brands that have reached a plateau for a couple a majority stake. Unlike many China-focused Well researched of years, because that’s where we can help build investors, Lunar sees control as a necessity to be Lunar’s interest in beef jerky was no random on the founders’ success and leverage our ability able to effect the kind of changes a company choice. The private equity firm looked at several to further grow the business outside of their needs. It also believes that having control over criteria when deciding on a sector to target for its core markets or expand into new distribution major decisions means it can avoid the risk that investment. opportunities, such as modern trade or comes with sitting in the passenger seat while One of the most important was the e-commerce,” says Y.R. Cheng, the Yonghong deal somebody else makes a company’s choices. opportunity to get involved in a strong consumer chairman and head of operations at Lunar. “That However, handing over control to a group market segment. China’s snack food sector fit was very much the case with Yonghong as well.” of outsiders is not always palatable to an older this bill. It has shown solid, if not spectacular The story of Lunar’s involvement with generation of Chinese owners. To overcome the growth over the past five years, and is projected Yonghong begins years before the investment. In skepticism of the company’s founders, Lunar had to continue its steady rise in the future. But not all 2011 the private equity firm undertook a survey to show that it understood the market and knew

14 avcj.com | July 21 2015 | Volume 28 | Number 27 PORTFOLIO [email protected]

the challenges facing the company. This was presence. Lunar’s Cheng says that this is not In this space, again, the revamping efforts when the long preparation paid off. meant to supplant the existing brand, but have paid off, with Yonghong’s sales to Wal-Mart “It’s extremely hard to find these rather to avoid cannibalizing its offline sales and increasing more than 200% in 2014. In eastern opportunities if you’re just looking at it as competing with itself on price. China, the company’s presence has increased an investor,” says Sulger. “But if you’re deeply “Expanding online allows us is to differentiate as well, with sales increasing 150% year to date embedded in the industry, that’s how you the product offering. You have to be very in 2015. know who the companies are, who owns them, competitive when you sell online, with all sorts At the moment, Lunar is exploring bolt-on what the dynamic is behind them. Our value of promotions and pricing schemes,” he explains. acquisitions for Yonghong. Obvious candidates proposition is quite simple; we get to know all “For a lot of companies this creates a challenge, would include another company in the highly these companies as industry peers, and we say to because they often corrupt the offline pricing fragmented beef jerky sector, but the PE firm them, we’re a great partner to have if you want to integrity and dump inventory. We encouraged is also considering acquiring companies in professionalize your business, continue to grow the development of a completely different other segments, such as dried fruits and nuts. your revenue, and become more profitable.” product line, with a different look and slightly The possibilities for synergy in this space are Having taken control, Lunar set out to build different flavor, that allows us more flexibility to considerable; although these foods obviously the company into a true national brand. There be price competitive on pricing.” differ considerably on the supply side, the were a few obstacles to achieving this goal; for Yonghong has embraced a number distribution pathways are very similar, allowing one thing, the company’s primary brand Niutou, of outreach efforts, including WeChat for consolidation opportunities. while beloved in China’s north and northeast, advertisements and online discounts. Its “You are dealing with many of the same including Yonghong’s home province of Guizhou, aggressive tactics have paid off; the company purchasing managers and distributors had not made much of a splash in other areas. recently achieved the number one ranking across many products, who can sell to other The flavor was considered too dry and too spicy in T-Mall’s snack food category recently, after supermarkets,” says Shen. “In China the snack food for western and southern tastes. clearing 30,000 units and generating more than category is very broad, but the distributor who’s Yonghong has addressed the taste issue by RMB400,000 in sales over a three-day period. doing snack food will also be doing beef jerky, introducing new flavors, based on Taiwanese Bin Shen, Lunar’s snack food investment chocolate, potato chips, all sorts of things.” and Singaporean recipes. It has also added a manager, says a modern company must be jerky stick, in an attempt to appeal to younger prepared to make an investment in order to see Exit options consumers who want a quick bite after playing success in online sales. While the firm is not working on an exit yet, sports or a workout. “The key to getting successful e-commerce there are, as always, considerations in play. The flavor issue was relatively obvious, sales is to attract traffic, because it’s more One possibility is an IPO, either in Hong Kong compared to concerns with the product’s expensive than in the past to attract customers,” or the mainland. Mao says the PE firm would packaging, which had remained relatively unchanged since the early 1990s. There was only one size and style available, a large bag with “We’re trying to look at where we can buy individually wrapped single servings inside. It was seen as old fashioned and inconvenient for sustainable businesses that will outlast the individuals to buy for themselves. Lunar felt that more could be done to reposition the brand as a generations. That’s what people are going to be healthy source of protein, and not just a snack. looking to own and buy in China, from this point “The old packaging was tailored towards old consumers, and was not appealing to young forward” – Derek Sulger consumers, a key consumer base for more healthy beef jerky products,” says Dragon Sun, a veteran of Mars and Budweiser in China who was he says. “I think the market research shows that want to make sure that wherever it is offered, hired by Lunar after the takeover to serve as CEO right now, it takes about RMB40 to attract one the investors would understand the business. A of Yonghong. “So we needed to strike a balance online customer to your store. So you have to trade sale is also possible. There are many in the – to retain the packaging that appealed to legacy generate during the customer lifetime more than market that have caught up to Lunar’s thinking customers, while attracting consumers from the RMB40 of margin in order to break even.” and are eying snack food for its stability and younger demographic.” Lunar has been attentive to offline sales as growth prospects. Another PE firm, or a food and The company is innovating its packaging in well, working to build the brand’s awareness beverage conglomerate, could make a play. a number of ways. Along with the jerky stick, outside of its regional base. The key to this has Mao adds that Lunar is not worried about its it has introduced smaller packages for sale in been reaching out to modern retail channels, ability to sell the company. The logic that led the convenience stores, and has also produced a including hypermarkets such as Wal-Mart, PE firm to acquire the business will lead others to special packaging style meant only for sale at Carrefour and RT Mart. it as well. airports and tourist destinations. This package In the case of one national hypermarket “Strong consumer businesses, whether snack features images of Guizhou province, promoting chain, Lunar proved to be invaluable, thanks foods or others, never go out of style,” he explains. the product’s regional identity. to an internal partner who helped to set up a “There will be cyclicality that provides you the Yonghong has even introduced a new strategic partnership between Yonghong and chance to acquire at certain times, knowing that product meant only for online sales, in an the chain. This allowed the company to sell its there are always financial sponsors, global firms, attempt to separate its newly created online products directly to the store rather than going domestic conglomerates and others keen to own brand identity from its well-established offline through the normal network of distributors. sustainable strong brands.”

Number 27 | Volume 28 | July 21 2015 | avcj.com 15 Private Equity & Venture Forum Philippines 2015 Brochure now 2 September, Fairmont Makati Hotel, Manila AVAILABLE, download at avcjphilippines.com

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